ESG reporting requirements are coming, and they're coming fast. Many medium-sized companies in the EU will already be obligated to compile ESG reports starting in 2025!
The primary objective of environmental, social, and governance reporting is to ensure transparency. Companies will thus need to have an overview of how their business activities impact on the environment and society and how they themselves are being run. This will entail deriving strategies, implementing corresponding measures, and monitoring their effectiveness based on suitable KPIs.
The creation of a materiality assessment is an important milestone on the road to developing an ESG strategy. In this article, you’ll learn what exactly a materiality assessment is, why it's important, and how you can create one.
What is a materiality assessment?
A materiality assessment is an essential tool that enables your company to identify its key subjects and interested stakeholders, along with their respective requirements and expectations. In the financial sector, it's mainly used during the creation of annual financial statements. The aim of a materiality assessment is to pinpoint all the aspects of your business that can affect your company's bottom line or might be of particular interest to those who read your annual accounts.
In short, it constitutes the core of your ESG strategy. Without a materiality assessment, you won’t be able to put together coherent, audit-ready ESG reporting.
The main reason why this assessment is so essential is because it helps you assess the impact your company has in economic, ecological, and social terms. On this basis, you can define sustainability goals and identify the ESG measures that are most relevant to your organization.
How to conduct a materiality assessment
Step 1: Identify all your stakeholders
Start by identifying all of your company's stakeholders. It's also a good idea to divide different types of stakeholders into corresponding groups. For example:
- Business: Customers, competitors, suppliers, investors, banks, insurance companies, etc.
- Society: Consumers, policy makers, media, public authorities, communities, local residents, etc.
- Internal stakeholders: Employees, managers, supervisory board, unions, etc.
- Interest groups: NGOs, associations, environmental organizations, etc.
In the subsequent steps, the idea is to obtain as broad an assessment of your stakeholders as possible in connection with the ESG topics relevant to your company and the areas where your interests coincide.
Step 2: Evaluate your stakeholders based on their relevance
You can then prioritize your stakeholders in terms of their relevance (e.g., 1 = low, 2 = medium, 3 = high). After all, they don’t all have the same importance to your company and won’t be affected by your sustainability measures in the same ways. Ask yourself the following:
- How does each stakeholder group impact your company and its ability to achieve its sustainability goals?
- Will that group be affected by your ESG efforts?
Step 3: Survey your most important stakeholders
Now it's time to engage your key stakeholders in surveys, conversations, online questionnaires, and workshops. The more thorough and meticulous you are in the process, the better the results will be. The goal here is to find out which ESG subjects are top of mind for your stakeholders.
Step 4: Assess your findings using a materiality matrix
A materiality matrix will help you evaluate the results you've gathered. It makes it possible to compare and connect your stakeholders’ requirements. The matrix's graphical format will also help you visualize action areas like climate protection and carbon emissions, resource management, and social responsibility. You’ll then be able to develop specific objectives and strategic measures for your company.
