Materiality assessment is becoming an increasingly frequent topic of discussion, especially when the focus is directed towards ESG rating and all useful strategies for its improvement. This tool is one of the most important for companies and investors, as it enables them to analyse, measure and plan relevant actions. All of this while always considering the relationship between the company and its stakeholders.
In this article we’ve explored in depth what it is, why it’s so important and how it’s used.
What is materiality assessment?
Materiality assessment is the process of evaluating the perceived importance of financial and non-financial information about a company.
Its main objective is to identify which of this information is relevant to stakeholders, so that decisions can be made to reduce the company’s environmental impact and improve its relationship with society and the local territory.
There are different frameworks for developing materiality assessment, suitable for different types of publics and companies. The most widely used frameworks are those promoted by the Global Reporting Initiative (GRI) and the International Integrated Reporting Council (IIRC).
Generally, the developed process analyses various aspects, such as internal communication, risks, industry standards and trends.
For a materiality assessment to be effective, it’s crucial for companies to involve not only their management but also a good number of stakeholders.
Materiality, materiality assessment and materiality matrix
Materiality describes the importance of certain issues in relation to the effect they might have on investors’ decisions or other corporate actions. In other words, information is considered “material” if it’s relevant enough to influence a decision. This concept is at the heart of materiality assessment.
The final output of the process is the so-called materiality matrix, which “photographs” what emerged during the interviews. The matrix is a graph which places the relevant values for the company on the Y-axis and for the stakeholders on the X-axis.
The values are usually marked with three different colours, indicating Environment, Social and Governance issues.
The importance of materiality analysis
Materiality analysis can help the company in several ways:
- It provides key data to investors, who can detect opportunities and critical issues from the document.
- It helps to make informed operational, strategic or financial business decisions.
- It fosters transparency and accountability, because it informs the company about the information stakeholders consider necessary.
ESG issues play a key role in the engagement and retention of corporate stakeholders and, in a longer-term perspective, in the sustainable development of the company. However, one cannot act blindly: decisions must be made strategically, analysing data in a timely manner and seeking a meeting point between the company leadership’s perception and the actual expectations of its internal and external stakeholders. Materiality analysis is an important tool in this sense: it’s not just a snapshot of the current status quo and expectations, but a true guideline that should always be kept in mind.