Materiality Assessment: A Strategic Tool to Drive Your Organization’s Sustainability Agenda
Sustainability has become a crucial metric of a company’s health and materiality serves as a valuable tool for measuring it. Not all ESG issues matter equally, and a materiality assessment process is an essential strategic exercise aimed at engaging both internal as well as external stakeholders like employees, customers, suppliers, investors, shareholders, and local communities to find out what environmental, social, and governance (ESG) issues are important to them. This approach enables companies, regardless of their goals, maturity, or resources, to identify, rank, and evaluate ESG issues that could affect their operations, stakeholders, and regulatory compliance. Considering materiality assessment as a critical part of decision-making is essential for ensuring long-term sustainability
What is a materiality assessment?
The GRI standard defines material topics as “topics that represent the organization’s most significant impacts on the economy, environment, and people, including impacts on their human rights ”. The process to identify these material topics and their associated impacts is materiality assessment. In a nutshell, a topic (priority area) or information is considered material, if it influences the decision-making of the stakeholders who consume it. This definition emphasizes not just the topics considered material, but also who these stakeholders are.
Why should organizations undertake a materiality assessment - from mandate to voluntary
One of the key questions organizations ask, is whether a materiality assessment matters and whether they should invest time and energy into performing a detailed assessment versus picking the standard recommendation topics for their industry segment (or based on common understanding within the organization?). The clear answer is – Yes, Materiality matters. Several research over the years have mapped company performance for material and immaterial ESG categories and found that companies that focus on highly material issues are more likely to have a better financial performance as well.
Several global frameworks and guidelines encourage or require companies to assess material issues for sustainability reporting and corporate disclosure. Here are some key mandates and frameworks
Global Reporting Initiative (GRI):
The GRI considers a broader range of stakeholders and focuses on issues that contribute to overall sustainable development and these call for a double materiality approach. It is mandatory to report the process of determining material topics and a list of material topics per GRI.
Sustainability Accounting Standards Board (SASB):
SASB provides industry-specific standards for sustainability disclosure. While not mandatory, companies, especially those listed on stock exchanges in the United States, are increasingly using SASB standards to enhance their reporting on material sustainability issues relevant to their industries.
EU Corporate Sustainability Reporting Directive (CSRD):
The CSRD is a comprehensive sustainability reporting directive which requires companies to report against mandatory EU sustainability reporting standards (ESRS) and provides a detailed guideline on materiality methodology and approach to determine material topics .
Stock Exchange Requirements:
Some stock exchanges globally, like the London Stock Exchange and Euronext, have listing requirements that mandate or strongly encourage companies to report on their sustainability practices, including material ESG issues. The Securities and Exchange Board of India (SEBI) has mandated sustainability reporting by means of Business Responsibility and Sustainability Report (BRSR) for the top 1000 listed companies in India and materiality assessment is a key disclosure topic as part of the reporting exercise.
While these mandates and frameworks provide guidance, the adoption and enforcement of materiality assessments varies by region and industry. Many companies also perform materiality assessments voluntarily as part of their commitment to corporate responsibility and sustainability, recognizing the importance of addressing key issues for long-term success and stakeholder trust.
The benefits of performing a materiality assessment and using it as a strategic starting point for the organization’s sustainability journey are multi-fold.
1. Strategic Decision Making – Identifying and prioritizing material issues enables organizations to make informed decisions, focusing resources on areas that have the most significant impact on their operations and stakeholders.
2. Risk Management – Materiality assessments help in recognizing and addressing potential risks associated with ESG considerations, reducing the likelihood of negative impacts on the business.
3. Enhanced Stakeholders Relations – By understanding and addressing issues that matter to most stakeholders, organizations can build trust and credibility. Transparent reporting on material topics demonstrates a commitment to responsible business practices.
4. Brand Reputation – Proactively addressing material issues contributes to a positive brand reputation. Demonstrating commitment to sustainability and responsible practices can enhance the image of the organization among customers, employees, and the wider community.
How can we help?
Materiality assessment is one of the crucial steps in determining and ranking the most important concerns at Tech Mahindra. Post consultation with our stakeholders, we examine the status of our material topics once a year and, if necessary, update some parts of the materiality matrix. The Chief Sustainability Officer and senior management of our organization approve the materiality evaluation, which is incorporated into the Enterprise Risk Management process.
Tech Mahindra’s 5 step approach to materiality uses best practices across the industry and as outlined in the various standards and frameworks. We work closely with our customers to help them identify the right methodology, stakeholder set and the impact assessment of these topics to arrive at the final materiality matrix. We also guide our customers to leverage the results of the materiality assessment as a strategic tool for guiding further decision making on the sustainability front across the organization.
