Today, private sector players are subject to a number of legal obligations in several countries. These relate to their CSR obligations, particularly in the area of non-financial reporting. There are a number of tools available to support companies in their compliance efforts, including materiality analyses.
Regulations, requests and gaming standards
Drawing up a materiality matrix is an effective tool to comply with the legal obligations to which companies are subject. Here are some examples of legal obligations and international references that may impact the production of a non-financial materiality matrix:
- International reporting standards
International standards provide guidelines for producing extra-financial reports. For example, companies can refer to the GRI (Global Reporting Initiative) Standards and the ISO 26000 Guidelines on Corporate Social Responsibility. These standards often encourage identifying material issues for the business.
- Extra-financial questionnaires and European guidelines
Extra-financial questionnaires such as those of the DJSI require a materiality exercise. This has become standard practice for Fortune 500 companies over the past fifteen years. Companies often feel far too focused on too many time-consuming questionnaires. Materiality helps streamline and rationalize responses.
Most importantly, European directives such as the NFRD and soon the CSRD impose CSR compliance rules on companies. All European Union countries have introduced guidelines or laws requiring companies to prepare non-financial reports. These reports cover various aspects, including social and environmental responsibility. These guidelines may require the preparation of a non-financial materiality matrix. This will enable us to identify and prioritize relevant social, environmental and governance issues.
- Sector-specific requirements, other than government guidelines
Some specific business sectors may have regulatory requirements or voluntary standards that require companies to identify and communicate relevant non-financial issues. For example, in the energy sector there may be regulations on transparency and communication on environmental and social issues.
Financial regulators in some countries are demanding greater transparency on non-financial risks, especially in the areas of climate change and governance. This may encourage companies to conduct materiality analyzes and report transparently on the issues identified.
In recent decades, conducting a materiality analysis has become a must. It helps structure the CSR strategy of companies that are becoming increasingly smaller and less subject to legal obligations. It is a practice that is spreading across the business world.
Definition of materiality analysis
Materiality analysis is an important exercise in building a company’s sustainability ambition. This instrument will guide the structuring of non-financial reporting. This analysis, recommended by the GRI, consists, for example, of identifying and prioritizing sustainable development issues in a coherent manner, involving all company stakeholders (employees, suppliers, subcontractors, customers, civil society, etc.) throughout the exercise concerned. One of the results is a matrix format, which is the visual and concrete result of prioritizing sustainability issues. The exercise is complex. But it ensures that the company’s priorities are aligned with those of its stakeholders. Although the visual result of the matrix is simple, we recommend good management of this exercise, which should be carried out in several key stages.
Identifying the ESG criteria Calibrating a materiality matrix
Social and climate-related developments confirm the role that the private sector can play in helping to limit social risks. But not every company can commit to every issue. Depending on their activities, they must prioritize action areas where companies can actually influence.
Role of international benchmarks
Conducting a materiality assessment starts with developing a list of ESG (environment, social and society, governance) issues that the company could work on in light of its operations. To do this, the materiality analysis is based on the double prioritization of each topic. In other words, the company’s position is just as important as that of its internal and external stakeholders.
To remain as relevant and consistent as possible when identifying issues, it is advisable to refer to international standards such as the GRI or the Sustainability Accounting Standards Board (SASB). The European Financial Reporting Advisory Group (EFRAG) also helps ensure that the list of proposed ESG issues meets regulators’ expectations and includes environmental, social and social aspects. Industry-specific topics can be added to the list of topics, such as the Global Real Estate Sustainability Benchmark (GRESB). For example, the GRESB is mainly specific to the real estate sector.
Target number of ESG issues in materiality matrix
Once an exhaustive list of ESG issues has been developed, we recommend narrowing it down as much as possible. A list of approximately 50 problems is recommended. This can be divided into categories such as: climate, human resources, financial risks, ethics, health, innovation, etc. Issues should be as specific as possible to the company and how issues can be activated later, renewing the company’s strategies and activities.
Involving stakeholders in the collection of materiality data
A materiality analysis not only enables us to develop a coherent sustainability strategy. This exercise also ensures full transparency of the commitments towards internal stakeholders (employees, trade union representatives, works councils, etc.) and external stakeholders (suppliers, customers, investors, civil society, etc.). This instrument makes it possible to enter into a dialogue that takes into account the expectations of stakeholders. Collecting information and setting priorities can take different forms: questionnaires, one-on-one discussions, group discussions, etc. In general, we recommend the combination of different formats to circulate and connect perspectives, and align stakeholders’ perspectives as best as possible.
When a questionnaire is distributed, more and more digital tools offer simple formats and methods to collect feedback. The questionnaire must be simple, accessible and quick, so that it can be answered efficiently and adequately. Educational content should build confidence in the respondent and can be added to provide stakeholders with the background information needed to appropriately take a position and prioritize issues.
Performing data analyses
Once data collection is complete, it is time to move on to the data analysis phase. This phase ensures that ESG issues are properly prioritized. This will then serve as a basis for defining or confirming a sustainability ambition that will later be linked to an appropriate action plan.
The calculation methodology is specific to each organization: which weighting should be chosen? What additional data might be useful for triangulating analyses? Expertise and experience in performing these exercises are essential in this critical phase. At Ksapa we have experience in carrying out more than 100 materiality assessments. That’s why we know it’s more of an art than an exact science to define the most robust calibration aligned with best market practices.
Designing a materiality matrix
The materiality matrix ultimately looks like a visual tool that prioritizes an organization’s ESG issues. Some images can be super creative, although the most basic layout can look like a cloud of dots, where one dot equals one problem. The x-axis generally represents the expectations of external stakeholders. The y-axis represents internal stakeholder expectations. Ultimately, it is important to visually organize a relative prioritization of ESG issues. This view will help ensure alignment among internal and external stakeholders on what priorities the company should focus its sustainability transformation efforts on.
Taking into account the concept of double materiality
Since 2019, with the introduction of the EU-KRFD, the concept of “dual materiality” has become mainstream in the EU markets. Dual materiality takes into account the relative importance of the issues at stake as well as sectoral exposure. This ensures that the company’s transformation efforts are commensurate with its sectoral contribution. If an issue like decarbonizing the economy was material a decade ago, the company could set itself a goal. The decarbonization target could reach 20% over five years. Double materiality means that material challenges must be prioritized, both from a company perspective and from an industry positioning perspective. So while decarbonization remains essential from a business perspective, the theme must be calibrated against a benchmark prescribed by science and its industry regulations. The company can then impose double materiality and conclude with a 50% decarbonization of scope 1 over a period of 3 years. It will justify its choice on the basis of its sector and the available scientific knowledge.
Using a materiality to define a sustainability strategy
The results of the materiality analysis support internal coordination when building a sustainability strategy. It can also be shared with external stakeholders, especially those who participated. This demonstrates the company’s commitment and allows gathering stakeholder input into the sustainability strategy: objectives, programs, KPIs, collaborative efforts with other stakeholders.
Going beyond the materiality analysis
To ensure that the sustainability strategy is relevant and reflects the results of the materiality analysis, Ksapa recommends drawing up a three-year roadmap. This is divided into several phases:
- Formulate a three-year roadmap with milestones and interim key performance indicators
- Engage stakeholders, both internal and external, on a regular basis and share both progress and challenges
- Update the materiality matrix every three years
Ksapa provides support and expertise throughout the entire process. Ksapa provides recommendations on priorities, objectives, actions to be taken and communication strategy.