Photo by shansekala on iStock
April 2, 2024
Key Points
- Materiality assessments are part of a larger cycle of effective sustainability and business management.
- Materiality is more than a reporting exercise—the insights on impacts, risks, and opportunities surfaced through a materiality assessment empower companies to improve performance.
- It also provides business leaders with an opportunity to review and update their governance, management, and strategy related to material topics as well as to reflect on improvements to the impact identification and assessment process.
- A strong stakeholder engagement strategy that includes both regular stakeholder interaction and robust documentation is necessary to support both materiality assessment and ongoing impact management.
Materiality assessments have long been an integral part of leading companies’ sustainability management. With the transposition of CSRD into law and the proliferation of other mandatory reporting requirements, more and more companies are taking on this important exercise.
At the same time, regulators and standard-setters continue to converge on a unified perspective of what good looks like, which has led to a rise in expectations around assessment depth and rigor. As a result, both established and newly formed sustainability teams, in partnership with colleagues across the organization, are putting a tremendous amount of effort into identifying material sustainability topics and documenting relevant impacts, risks, and opportunities (or “IROs” for short).
It is only natural that once the exercise is complete, topics have crossed the materiality threshold, and new IROs have emerged for management team consideration, teams are left wondering: “So now what?”
There are several immediate next steps that most companies should undertake for the purposes of disclosure:
1. Review Documentation.
Companies can ensure the assessment has been well documented for assurance purposes, including records of all key decisions made, scoring rationale, and supporting evidence. It is prudent for the team executing the assessment to meet with the audit and compliance functions as needed to answer any remaining questions and ensure you are well-prepared for the assurance process. If you haven’t already, consider using this moment to develop a standard operating procedure for future assessments.
2. Understand positioning.
It is important to undertake a management review to understand current positioning vis-à-vis relevant voluntary and mandatory reporting requirements. This includes understanding the governance, policies, management systems, targets, and metrics current and planned related to each material topic.
3. Engage executive leadership and relevant board members and committees.
Mandatory reporting requirements have clarified expectations of how sustainability is governed within an organization, including responsibilities at the board level. Boards should be prepared to sign off on assessment results and oversee sustainability performance and related disclosures. Ideally, a board champion kept relevant committees apprised of progress (e.g., dedicated ESG committee, Audit or Risk Committee) during the materiality process. If not, the board will need to be briefed on both the process and results and in some cases, training may be required to ensure sufficient understanding for effective long-term oversight.
4. Develop or clarify your reporting and communications strategy.
The plethora of mandatory disclosure across different jurisdictions makes it even more important to understand the audience and clarify boundaries for each type of sustainability communication. Topics that are not “material” under a given law but are important to communicate for other reasons (e.g., to support employee engagement) may need to be separated from mandatory disclosures and conveyed through other communications channels. Carefully choosing where and how to communicate can help to enhance clarity, consistency, and comparability of reporting, as well as manage regulatory compliance and litigation risks. It also is important to review and align your communication internally and externally to ensure a consistent, authentic narrative that covers both alignment with your business strategy and a strong understanding of stakeholder needs and expectations.
In addition, even for companies with well-established sustainability programs, the completion of a materiality assessment offers an opportunity for strategic reflection. Companies can take this moment to explore where gaps in knowledge remain, how governance supports objectives, and whether current investments are sufficient for both the company and its stakeholders to thrive now and in the future.
At BSR we recommend companies consider these five additional activities:
1. Reflect on stakeholder engagement strategy: A materiality assessment relies on a strong understanding of both the company’s impacts on its stakeholders and stakeholder information needs. While it can be useful to engage stakeholders during this point-in-time exercise, it is equally, if not more, important to promote the kind of meaningful, ongoing engagement that ensures a real-time understanding of stakeholder perspectives. Now is a moment to reflect on how well you know your stakeholders, the effectiveness of the engagement mechanisms you currently have in place, and the way that information gained through stakeholder engagement flows throughout the organization and into the hands of decision-makers. Consider setting up a stakeholder advisory council or making an investment to map and track ongoing stakeholder interaction. Continuously surfacing, addressing, and documenting stakeholder concerns throughout the organization will make for both better management and better reporting.
2. Assess current management and residual risks: In many cases, materiality assessments focus more on inherent risks and potential impacts prior to mitigation to determine which topics are relevant for reporting. If you haven’t looked at residual risks, considering the controls you already have in place, now is the time to do so. Reflect on whether you’re comfortable with the remaining risks to people, the environment, and the business post mitigation and where you have leverage to address remaining gaps.
3. Update policies and review cross-functional governance: Did the materiality assessment surface an impact or risk that is not yet covered by your existing policies? Now is a good time for a refresh. It’s also a good moment to ensure that all topics have clear ownership and accountability for performance is well defined from day-to-day operations up through the board. Ensure risks are appropriately documented in the risk register. Reflect on whether team members have the skills required to manage and oversee the topics in question and work to fill gaps with training and/or investments in new staff.
4. Refresh targets and reconfirm roadmaps for long-term impact: The materiality assessment often leads to a better understanding of a company’s performance relative to both internal and external stakeholder expectations. The CSRD’s focus on short-, medium-, and long-term impacts requires companies to consider how performance will be managed now and in the future. This is therefore a moment to reflect on where your long-term goals and supporting targets hit the mark and where it would be helpful to refresh or establish new commitments. Have you surfaced trends or emerging issues that might merit an adjustment to your level of ambition? What are the important cross-connections between your activities (e.g., climate mitigation and equity), and how can your activities in these areas reinforce each other? Do you have targets in place that no longer seem relevant? Would it be beneficial to use a strategic foresight tool like futures scenarios to further stress test your approach?
5. Identify areas where you need to go deeper: Understanding all actual and potential impacts, risks, and opportunities across the full value chain in the short, medium, and long term is a tall order. You will inevitably discover areas where you feel you need additional data to have a clearer view of how a topic shows up for your organization. Whether you need a site-level human rights impact assessment or a better understanding of your nature impacts and dependencies, now is the time to think about filling priority gaps. The goal here is not a complete inventory of every possible risk, but rather to sharpen our focus where it matters—more deeply understanding a priority topic or gaining a greater understanding of topics that could be material depending on more information.
This is of course only a subset of the possibilities a company could choose to pursue, and there is no one-size-fits-all approach. If you still aren’t sure how to move forward or would like to discuss what’s right for your organization, please don’t hesitate to reach out to us at BSR. Wherever you are in your sustainability journey, we’d love to help!
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