your materiality FAQs, answered

Mar 19

published 3.19.24

The door to embedding environmental and social priorities, a long-standing goal of sustainability teams, has been thrust open. From risk and compliance to legal and finance, mandatory disclosure regulation awakened cross-functional business leaders to a company’s environmental and social priorities and—even more so to how these priorities are identified, defined, reported and assured.

The materiality assessment is a rigorous prioritization exercise for determining what ESG topics are material to a company. It has taken center stage and with that comes great responsibility and great opportunity.

There is the responsibility to ensure that materiality assessments are not solely a tool for disclosure and a “how quickly can I get this done” task with overkill by technology. Technology has a place, but is not the savior. Materiality assessments are an opportunity for intentional, honest conversations with internal and external stakeholders that technology can never replace.

Opportunity lies in the ability to “throw the template out the window”, a mindset we use often at qb. when approaching our ESG work. Risk, compliance, legal and finance we’ll be challenged to reimagine their role—not as the “closed doors” or “naysayers of the company”—but as leaders who embed sustainability and social responsibility into the DNA of the organization. And sustainability teams and consultants will be challenged to design thoughtful, inclusive, diligent exercises that deliver clarity and further nuance to ESG risk, opportunities and ethical imperatives.

Because the true value in materiality assessments is not in disclosure, but in shaping strategic priorities that strengthen the business and deliver long-term value, not only for companies, but for people and our planet.

So, in an effort to foster cohesion and dialogue across business functions, we’re sharing answers to the most common questions we get asked on materiality assessments. My team and I will be rolling these out in parts— starting with the basics: what is a materiality assessment, why is it necessary and who should be involved? Then we’ll get into the “how-tos” of conducting an assessment and what to do with the results from a reporting and strategy lens (TLDR: material topics for reporting and strategy should be differentiated).

If you’d like to learn more about materiality assessments with qb., or add your question to the mix, send me a note at sam@consultqb.com or visit our services page.

Part 1: The Basics

What is a materiality assessment?

A materiality assessment is:

a rigorous prioritization exercise that elicits strategic focus across (what can feel like) an endless world of environmental and social topics.

It is not:

a lever for increasing a company’s ESG or sustainability score (which incentivizes mass disclosure)
a “check the box” compliance practice, or
a tool for solely looking backward (i.e., reporting).

A materiality assessment surfaces which ESG topics are risks, opportunities and ethical imperatives for a company—and which are all three. It’s fundamental to integrating environmental and social priorities into core business decisions and designing a CSR or sustainability strategy.

Why is a materiality assessment needed?

Because a sharp focus, grounded in a clear understanding of stakeholder expectations, makes developing any strategy and (certainly) reporting, less excruciating and the impact more tangible.

The results of your materiality assessment will inform where better risk management and ethical oversight are needed, what innovation and opportunities to incentivize, where to set goals and where you can’t act alone.

You’ll grasp what expertise is missing and needed on your board, across core functions and within your sustainability team.

A materiality assessment signals to stakeholders (whether they are included in this process or watching from the sidelines) that you are applying a high level of rigor to your sustainability efforts and are committed to strategic reporting.

And these days, because of legislation and customer pressure. With evolving regulatory requirements in the US and Europe and increasing pressure from large multinational corporations that have set supply chain targets —public and private companies are expected to have a firm grasp of their environmental and social priorities.

Are there different definitions of materiality?

Yes. And regulators and governing bodies globally subscribe to different definitions. However, all definitions fall into three buckets: financial materiality, impact materiality and double materiality.

Financial materiality is what you’d expect, defining topics as material by their relative influence on a company's fiscal position. Impact materiality assesses relevancy solely through the lens of externalities, asking: what are the most significant impacts a company has on people and our planet? Double materiality takes both (financial and impact materiality) into consideration, plus what you’ll see often referred to as the “inside-out and outside-in” perspective.

Commonly referenced frameworks + standards

Will a company’s material topics change over time?

A resounding yes. The relative materiality of an ESG matter will absolutely change over time. A materiality assessment is meant to be dynamic and evolve as the company and your stakeholders evolve.

Reasons material topics may change and why you may want to consider a materiality “refresh” can be a leadership change, moving from private to public to private again, expanding into new markets and services to shifts in the macroeconomy and global expectations.

Who needs to be involved?

That depends on the definition of materiality selected and the impetus for embarking on this effort. But one thing is certain: engaging employees across, up and down the organization, is a requisite for any valid materiality assessment. Questions to ask as you consider a materiality assessment exercise:

Will the materiality assessment results inform reporting, strategy, or both?
What stakeholder groups will inform your assessment? Whose voice will be the loudest?
Who is most impacted by company investments and decisions?
Is there a rich diversity of perspectives, embodying a diverse spectrum of expertise, attitudes, backgrounds, and geographies?
Is the company willing to engage with stakeholders with less favorable views of the company or any particular ESG topic?
When looking forward, what are the strategic new voices to include?

At qb. we help our clients thoughtfully map, identify and engage internal and external stakeholders for each materiality assessment. Who is on your materiality assessment internal working team and who you engage throughout the exercise matters—it can make or break the results.

What do I get at the end of a materiality assessment?

If done well, you’ll have a ruthlessly prioritized short list of material topics and context for each topic. At the end of your assessment, you should know what topics are solely for monitoring, tracking, and assessing; which are operational risks and of the highest value to the business; which topics are of high interest to your stakeholders and where the company can create the most positive impact; and, of course, what topics are the most important to your stakeholders and the business. The latter will be central to any strategy development process and where fundamental strategic goal setting should start.

To contextualize materiality assessment results at qb., we’ll often use the 2x2 prioritization matrix below, with adjustments made based on the definition of materiality selected and the reason for conducting the assessment.

Most Material: The topics that land in the most material quadrant are of significant importance to key stakeholders and the business. They are often multidimensional, acting as operational risks, ethical or commercial imperatives, and areas for opportunity. These topics will be central to any strategy development process and should be considered for a fundamental strategic goal.

Foundational To Business Success: This quadrant represents topics that are a priority internally. Business leaders understand each topic to be core to success, particularly over the long term, and often require near-term action. Each topic can also propel or derail strategic initiatives depending on how they are managed.

Emergent Opportunities for Impact: These topics are often of high interest to external stakeholders and are where a company can create a positive impact. They may also represent areas where a company may need to define impact, chart a specific pathway, or set of programs to achieve goals. Net-new or innovative approaches may be required to drive change along with incremental strategies and tailored communication for highly engaged stakeholders to demonstrate progress and focus.

Monitor + Manage: Here are your lowest priorities. These topics are actively and continuously monitored, managed, and compliant. The expectation is that you are meeting the minimum standards and are prepared to respond adequately to incidents. And remember all topics on your matrix are material! This listed started with ~70+.

Thanks for reading.