What Does
Materiality Mean?
Materiality refers to any issue related to a company’s Environmental, Social, and Governance (ESG) program that has relevance to its finances or its operations.
It is a concept some organizations use to decide where to focus their ESG efforts or what to emphasize in their sustainability reports.
Safeopedia Explains Materiality
Materiality in ESG differs across industries and depends on a particular sector’s risks and opportunities. It is determined through a risk-based approach where a company first assesses its vulnerabilities and then determines the consequences of those risks. This helps them decide which issues need to be monitored from an ESG perspective and which could have a negative impact on the business.
Materiality allows companies to better understand their ESG footprint and develop strategies based on it. It is also an important factor for investors, who often consider materiality reporting before deciding to invest in a company. Materiality also enables companies to have a more transparent relationship with stakeholders regarding how they are improving their ESG performance.
The Importance of ESG Materiality
Research has shown that companies with higher ESG scores perform better in the stock market compared to those with lower scores. Improving ESG performance decreases risk and increases efficiency by making a company less prone to monetary fines and loss of reputation.
Some material factors within a company’s ESG framework include:
- Environmental issues – Carbon emissions, water stress, toxic emissions and waste, electronic waste, adoption of clean technology
- Social issues – Labor management, health and safety, product safety and quality, privacy and data security
- Governance issues – Corruption, stability, tax transparency, business ethics
According to KPMG, about 80% of Fortune 500 companies use materiality in their reporting. Its use has many benefits, including:
- Identifying risks, trends, opportunities, and brand attributes
- Prioritizing sustainability initiatives and ESG issues
- Acting as a standard framework to ensure the ESG strategy is structured and comprehensive
- Improving collaboration within the different departments of the organization
- Providing a clear roadmap for management to make decisions and allocate resources
Types of ESG Materiality
There are two ways to view materiality:
- Financial materiality: issues that impact a company’s ability to generate future cash flow
- Environmental and social materiality: issues in which a company’s business activities affect stakeholders by being detrimental to sustainability
Ready to learn more? Check out our free webinar on How to Successfully Complete an ESG Materiality Assessment!
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