By Andrea Thompson
A successful sustainability strategy starts with a materiality assessment. A materiality assessment is a structured way to identify the issues your stakeholders care about, as well as what’s important to your business. It helps you to engage your stakeholders and focus your strategy on what matters. The process starts with an examination of the 17 United Nations Sustainable Development Goals (SDGs). But does the process work? Or is it time for a revamp?
A good sustainability strategy needs a framework. SDG materiality assessments offer a systematic approach to identify and prioritise the most relevant goals for your business to align with your context and stakeholder expectations.
While materiality assessments have significant potential to drive positive change, we also need to acknowledge their limitations. We look at the pros and cons of the SDG materiality assessment process, and suggest it’s time to revamp the approach to materiality by embracing double materiality.
OVERVIEW OF SDG MATERIALITY ASSESSMENT
SDG materiality assessments allow you to evaluate how significant each of the 17 SDGs are within a company’s operations and value chain. The process typically includes stakeholder engagement, mapping sustainability issues to relevant SDGs, assessing materiality based on impact and potential influence, and integrating material SDGs into the business strategy.
You can follow these steps in the order that words for you. For example, some companies draft a list of sustainability issues before engaging with stakeholders.
1. Stakeholder Engagement
Engaging with stakeholders is a crucial step. Stakeholders include employees, customers, suppliers, investors, NGOs, and local communities, among others. Their perspectives and concerns can help you prioritise the most relevant SDGs for your unique context.
According to the Sustainable Business Council (SBC), engaging with stakeholders throughout the process is crucial for successful materiality assessments (SBC, 2023).
2. Identify Sustainability Issues
Next, conduct an in-depth review of sustainability issues relevant to your industry and value chain. Data from internal and external sources, such as annual sustainability reports, academic research, and industry publications, can be help identify these issues. Tools and mapping applications such as SASB’s materiality finder can help to determine what is important.
By mapping the identified sustainability issues to the corresponding SDGs, you can recognise the goals most relevant to your operations and that have the potential for transformative impacts.
3. Assessing Materiality
Once the mapping is complete, you need to prioritise the SDGs based on how significantly the issues are likely to impact your company’s stakeholders and the environment, as well as their potential to influence decision-making and performance.
You can use three methods for materiality assessment: surveys, one-on-one conversations, and workshops.
In the materiality assessment,quantitative and qualitative indicators can be used to evaluate the impact and relevance of each SDG.
4. Integrate Material SDGs into Business Strategy & Share the Results
Once the material SDGs are identified, you will integrate them into your company’s overall business strategy. This involves aligning sustainability goals with core business objectives, setting targets, and developing action plans to drive progress. Share the results with stakeholders, the public and other interested parties.
For an example, check out how NZ Post integrated materiality insights into their organisation in conjunction with their rebranding and strategic vision. You can see materiality issues embedded throughout their Integrated Report.
BENEFITS AND CHALLENGES OF SDG MATERIALITY ASSESSMENT
- Focused Sustainability Efforts: By prioritising material SDGs, you can concentrate your efforts and resources on areas where you can make the most substantial positive impact.
- Enhanced Stakeholder Engagement: Engaging with stakeholders fosters trust and long-lasting partnerships.
- Support Strategy Development. Materiality supports you develop your organisation’s sustainability and business strategy.Enhanced Business Resilience: Materiality assessments help you to identify and address sustainability risks and opportunities, enhancing business resilience.
- Relevant and Useful Reporting: Once materiality has informed strategy development, you can then use it to support the development of regular internal and external reporting to track progress.
- Complexity and Subjectivity: Materiality assessments involve multiple perspectives and criteria, making the process subjective and potentially challenging to reach a consensus.
- Missing Impacts on Sustainable Development: To identify issues material to enterprise value, you first have to identify your organisation’s material impacts on sustainable development. (GRI, 2021)
- Facilitating Greenwashing: The lack of a common materiality definition (Flower, 2015) allows room for managerial discretion. Materiality assessments are conducted by the organisation itself without standardised methodologies, which may lead to greenwashing (Garst, 2022),Failure to Identify
- Emerging Sustainability Issues: The process tends to prioritise issues that are directly visible or have immediate stakeholder interest. Issues like biodiversity, which may not be immediately evident or understood, risk being overlooked despite their significant objective importance.
- Data Availability and Quality: Successful materiality assessments reply heavily on robust data analysis (Toitū). However, obtaining reliable data on certain issues, especially those related to indirect impacts or complex systems like biodiversity, can be challenging.
The Embedding Project sums up the criticisms of materiality assessments:
“Here’s the problem: materiality assessments that focus on perceived importance very often fail to identify emerging sustainability issues and business risks, fail to direct attention towards your company’s biggest impacts and greatest opportunities to contribute to positive systems change, and as a result, struggle to meaningfully inform business strategy. In what other part of the strategy process do we look out the window and ask who is carrying the largest placard?” (Embedding Project, Materiality Assessments: why it’s time for a new approach)
THE DOUBLE MATERIALITY CHALLENGE
Companies are facing a new challenge in their sustainability journey: double materiality. This concept emphasises not only the impacts of environmental, social, and governance issues (ESG) on companies (financial materiality) but also the impacts of companies on people and the planet (impact materiality). Double materiality is a holistic approach and is gaining momentum, as the EU’s new Corporate Sustainability Reporting Directive has embraced it.
Two key players are leading the charge in setting the standards for double materiality: the ISSB (International Sustainability Standards Board) and the Global Reporting Initiative (GRI).
The ISSB, overseen by the IFRS Foundation, released the first two global standards in June 2023: IFRS S1 (general requirements for disclosure of sustainability-related financial information) and IFRS S2 (climate-related disclosures). These standards prescribe the disclosure of ESG factors that influence enterprise value, focusing on financial materiality.
The GRI sets the standard for disclosure of a company’s impacts on the systems around them (impact materiality). The updated GRI Universal Standards came into effect on January 1, 2023, and define material topics as those that “represent the organization’s most significant impacts on the economy, environment, and people, including impacts on their human rights”.
Context and impact are both very important in the updated standards. You must now understand your company’s environmental and social context; identify actual and potential impacts on people and the planet; assess the significance of the impacts (instead of importance and significance to stakeholders); and prioritise on that basis.
Source: Biodiversity and Finance
So, what does this mean for companies? The challenge is to move from an ‘inside-out’ approach, solely considering the importance of sustainability issues to stakeholders, to an ‘outside-in’ approach, identifying impacts on people and the planet.
In double materiality, a company will report both on how its business is affected by sustainability issues (quadrants 2 and 4) and how its activities impact society and the environment (quadrants 1 and 3).
Double materiality offers an exciting opportunity to redefine how businesses measure their success. By integrating double materiality into their reporting, companies can showcase their commitment to both financial prosperity and positive societal and environmental impacts. It’s a chance to walk the talk and embrace sustainability in its entirety — an opportunity not to be missed in today’s world of conscious consumers and stakeholder-driven businesses.