So, I’ve made it to the halfway point of the alphabet with this article and this week’s topic is an increasingly important one – materiality assessments. These are rising in importance as materiality assessments are the starting point for determining requirements for two key disclosure standards: the International Sustainability Standards Board (ISSB) standards, which are likely to be mandatory in UK and are already live or being implemented in other jurisdictions, and the European Sustainable Reporting Standards (ESRS), which have already started a phased implementation under CSRD. We’ll come to both of those in a while.
In simple terms, a materiality assessment is a way of determining what sustainability issues are most relevant and important to your business. Whether you are impacted by the above regulations or not, a materiality assessment should be something that you do in order to prioritise your work and ensure effort is directed at things that matter most. Having said that, it is often the case that sustainability actions have started in a business without such an exercise having been carried out; even if your company has been active on sustainability for a while it is worth checking to see if a robust assessment has been undertaken recently and otherwise implementing or updating it.
Turning back to the regulations, and to complicate things, ISSB and CSRD define materiality in two different ways. The ISSB, under the auspices of the IFRS (who define international accounting standards globally), is focused on the needs of investors and are interested in those issues that could impact a company’s financial wellbeing. As a result, they define materiality as being “judged on the basis of whether omitting, misstating or obscuring that information could reasonably be expected to influence decisions of primary users of general purpose financial reports”. This is usually therefore termed “financial materiality”. EFRAG, the standard setters for CSRD, are interested in representing a wider range of stakeholders, not just investors, so they define materiality as what impacts a company, but also what impacts the company creates on people and the environment, this latter being referred to as “impact materiality”. The approach taken by CSRD to consider both financial and impact materiality is termed “double materiality”. The good news is that the definition of financial materiality is common, so if you comply with disclosures relating to ISSB on financial materiality you will also be complying with that part of the CSRD.
Both regulations say that you should conduct a materiality assessment and then select the topics you should disclose information about based on the results of that assessment. Climate is singled out has being a topic that is always material and therefore is mandatory to report on under ISSB and close to mandatory in CSRD. CSRD is also prescriptive on how to report on nine other topic areas but for this article I won’t go into more detail. Suffice it to say that this is an area where it really does benefit to call in experts like CEN Group, who understand the detail and how to ensure you are conducting the assessment in the right way and disclosing accordingly.
Your materiality assessment should take account of relevant stakeholders. Typically, this would include investors, customers, suppliers, the board or ELT, and employees more generally, but can also be expanded to cover input from civic organisations, NGOs and academic research. Discussions or surveys are used to get each group to assess which topics are considered important, considering all areas of environment, social and governance. These results are then consolidated and usually plotted on a chart to show severity/magnitude on one axis and likelihood on the other. The top right-hand corner will be those issues that will be deemed material, but how far down the chart you define as material will depend on you and your determination of threshold materiality.
This scoring framework and presentation will be familiar to organisations through their risk management framework. It can be helpful to use that same methodology (making sure you check it meets the needs of ISSB/CSRD as appropriate) as then allows for an easier incorporation of sustainability risks from the materiality assessment exercise into the existing corporate risk framework. It’s also worth saying that a sustainability materiality assessment should not be just about risk, but should also consider opportunities too.
If this sounds like a box ticking exercise to keep regulators happy, I would urge you to think differently. All the regulations are really saying is to have a formal rigorous process for deciding what are important sustainability issues for your business, ensuring that you get input from a wide range of stakeholders, and ensuring you publish information against those issues so there is transparency. As such, it really is a sensible place to start any sustainability strategy.
Once the materiality assessment is complete, the second stage is to determine what information needs to be disclosed - that is beyond the scope of this article, not least because what is expected will vary according to which standards apply to you and what industry you are in. I mentioned earlier that the ISSB standards are not yet mandatory, and the UK is currently consulting on implementation with a likelihood of adoption for 2026 reporting. The ESRS within CSRD have started to be required from this year and will be further rolled out over a number of years to more and more companies, including non-European companies who have operations in or revenue from Europe. Whether and when you are in scope depends on your turnover and your company structure, so you may not be in scope now, but you may be in coming years, especially if your European turnover increases or you make an acquisition. It is worth adding that the ESRS is actually the reporting standard that will be used to meet the requirements of the EU Corporate Sustainability Reporting Directive, or CSRD, so sometimes you will see these acronyms used interchangeably! Assessing whether you are in scope and what it means is another area where you may benefit from external expertise like CEN Group. There is also a helpful article on the CEN website that sets out more details on the implications for UK companies: What does the CSRD mean for UK companies?
Finally bear in mind that your materiality assessment is not static, fixed in time forever and a day. Your business may change, with different products or divisions growing at different rates or acquisitions or divestments happening, with your view on what is material changing as a result. Similarly, the views of your stakeholder may change, often because of a greater understanding of a topic, as more information becomes available on the consequences of impacts or the likelihood of them occurring, or from technological changes. As a result, it is recommended to review the materiality assessment annually and re-do it at least every three years.
If you haven’t already undertaken a materiality assessment, I would suggest you follow the ESRS approach particularly if you know or think you may be in scope in the coming years. By doing this you will also pretty much tick the ISSB requirements and be ready for them too. If you want to delve a little deeper, CEN Group have just published a more technical article about what the ESRS/CSRD requirements are, which goes beyond just the materiality assessment itself and looks at the topics covered and data points required for disclosure, as well as detailing the CEN Group approach in this important area. You can find it here: The scope of work required for CSRD.
Overall, this is more than just meeting the regulations - it is about really understanding what topics matter to your stakeholders and building your plans and disclosures accordingly. The materiality assessment itself should not be overly complex or time consuming, and done well, it will put your sustainability plans on a firm footing that you will benefit from for years ahead.
About the Author
Chris is a senior strategic leader with over 25 years’ commercial experience including sales, marketing, strategic planning and major business change initiatives at AkzoNobel and ICI. He has a wide knowledge of sustainability and how to integrate this into business having held senior sustainability roles at AkzoNobel for 12 years, including as Global Sustainability Director Decorative Paints and AkzoNobel Planet Possible Programme Manager. Chris is now an independent sustainability consultant and a pension trustee director.
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