2025 is the year to internalize how to conduct a materiality assessment, an essential effort for sustainability reporting and compliance. Materiality assessment and compliance can feel like a long, rocky road, and knowing where to start is half the battle. However, by understanding the importance of process documentation, stakeholder engagement, and ongoing sustainability management, companies can better educate teams, clarify strategic focus, and integrate materiality assessments into operations and reporting, ensuring a continuous and valuable process.
And as a growing number of companies are complying with the Corporate Sustainability Reporting Directive (CSRD) as well as internationally used voluntary standards such as GRI and IFRS, the importance of a materiality assessment is only growing.
The Importance of Materiality Assessments
Materiality assessments are crucial for identifying relevant areas for sustainability reporting, helping companies understand which environmental, social, and governance issues are most critical to the organization and its stakeholders. This step ensures that the strategy is focused on the issues that will have the greatest impact on the business and society.
Types of Materiality
Double Materiality: This requires companies to assess both the impact of their activities on the environment and society and the financial risks and opportunities arising from sustainability issues. Double materiality is required under the European Sustainability Reporting Standards (ESRS).
- Impact Materiality: Focuses on the impact a company has on the environment and society. If you are reporting to the Global Reporting Initiative (GRI) anywhere in the world, then you are required to do an impact materiality assessment.
- Financial Materiality: Centers on risks and opportunities that could affect a company's financial performance. The International Financial Reporting Standards (IFRS) are focused on financial materiality to understand your company’s risks and opportunities.
Navigating the Regulatory Landscape
Sustainable regulations and reporting standards can differ depending on the region where your company operates. This means that companies would need to adapt their strategy based on the guidelines of the IFRS, CRSD, or whichever regulation impacts the location the company conducts their business. Awareness about regional regulations and how to navigate these regulations is key to effectively managing a company's environmental impact, abating potential risks, ensuring legal compliance, and maintaining a positive reputation among stakeholders. Understanding these regulations is a crucial step for maintaining competitiveness and reputation in the market.
For more information on how each global jurisdiction is impacted by CSRD and GRI, read our blog article 2025: The Countdown to Mandatory Sustainability Reporting Begins.
Take Note of the Process
A materiality assessment is about more than just the results - it is about the process. Process documentation is key to completing an assessment and reporting to the CSRD. Though companies do need to know their impacts, it is equally important to document the process to show how the company reached their conclusions. This can also aid in engaging stakeholders, educating the team, and make information available for when companies are asked to elaborate on their sustainability reports.
Materiality assessments under CSRD will be subject to assurance, where auditors are tasked with scrutinizing the process. They are going to look at not just your final reporting of your disclosures, but also how you conducted the materiality assessment. The CSRD requires double materiality assessments every year, so understanding the process can lead to a more efficient reporting effort.
The Interplay of Impact and Financial Materiality
It is important to understand the full value chain to assess impacts, risks, opportunities and dependencies. Knowing your operations all the way from supply chain to company operations to end of life is important for calculating the full scope of your impacts, risks, and opportunities.
Impact and financial aspects cannot be “netted” out. A negative impact remains material even if it doesn't pose a financial risk. For example, if a company has high standards in place for preventing ecosystem damage due to chemical runoff, that risk must still be noted. The potential for ecosystem damage still exists, even with high safety standards. The “positive” impacts of high safety standards and the “negative” impacts of potential environmental damage do not cancel out, but rather must both be noted and included in the final materiality assessment
Integrating Sustainability
Sustainability is an ongoing process, similar to financial reporting. A materiality assessment and compliance is not a one-off ticket item where once you finish the report, you never have to do it again. Instead, sustainability is an ongoing initiative that involves yearly compliance and stakeholder engagement.
Sustainability should also continue to grow within the company. By integrating sustainability into all departments, and not exclusively managed by a dedicated team, ensures that everyone in the company can engage in the company sustainability strategy and compliance. This would help with budgeting issues that many companies encounter when integrating sustainability. As other teams already have information relevant to sustainability reporting, especially finance.
Stakeholder Engagement is a Necessity
Engaging with both internal and external stakeholders is crucial, particularly those affected by the company's activities. First, identify internal and external stakeholders, including employees, customers, suppliers, investors, regulators, and local communities. Each group offers a diverse perspective which allows the company to fully account for all stakeholders to get a full picture of both impact materiality and financial materiality. The CSRD does require companies to engage with stakeholders, in particular, they encourage engagement with affected stakeholders, the people or groups that are impacted by the company. The more stakeholder groups involved, the greater the likelihood that you will have a comprehensive report.
- Internal: Employees, managers, company leaders.
- External: Customers, suppliers, community members, investors, regulators, NGOs.
For more information on how to conduct a stakeholder interview, read our blog article How to Conduct a Double Materiality Assessment (DMA) Stakeholder Interview.
Challenges in Conducting Materiality Assessments
Several challenges can hinder the effectiveness of materiality assessments. Whether that be understanding the process of conducting an assessment, difficulties in engaging stakeholders, or the perception of materiality assessments as a one-off exercise, there can be some challenges when it comes to compliance.
Unclear Processes
Some organizations may lack a clear understanding of what a materiality assessment entails or what they are trying to achieve with it. Understanding how to integrate financial, impact, and double materiality is essential for a complete materiality assessment. Without clear guidance, the process can be unclear, superficial and not setting the company up for success.
Difficulty Engaging Stakeholders
Effectively engaging stakeholders is a significant challenge for many organizations and consultants. It can be difficult to conduct stakeholder engagement in a way that is efficient, high-quality, and yields deep insights. This could lead to a gap in stakeholder engagement because companies struggle to integrate it and determine how it can be done efficiently. However, engaging with stakeholders can educate them on the company’s plans for sustainability reporting and compliance therefore ensuring their support, prioritization and continued engagement.
Verifying the Work
While spreadsheets can also be cumbersome, especially for double materiality assessment, they are essential for conducting materiality assessments, as much of the assessment is qualitative. Managing stakeholder engagement and ensuring everything works correctly in a spreadsheet can be a lot of work. However, by engaging with materiality platforms like Socialsuite can help your company stay organized and clarify the information for when the company is audited.
Materiality as a One-Off Exercise
Many businesses treat sustainability reporting as a one-time event rather than an ongoing process. Viewing materiality assessments as a “sprint” rather than an ongoing project can be unsustainable and lead to burnout, which then makes them something companies avoid repeating annually. Treating sustainability reporting as an ongoing process allows for companies to grow their sustainability initiatives
By addressing these challenges, organizations can improve the effectiveness of their materiality assessments and ensure they provide valuable insights for strategic decision-making and sustainability reporting.readsheets for complex double materiality assessments can be cumbersome.
Recommendations
- Education and Awareness: Invest in educating the team (including leadership, stakeholders, employees) about materiality concepts and requirements.
- Strategic Alignment: Link the materiality assessment to overall business strategy and sustainability goals.
- Structured Process: Implement a clear, documented process for conducting materiality assessments.
- Effective Stakeholder Engagement: Develop a robust stakeholder engagement strategy to gather diverse perspectives.
- Technology Solutions: Consider using dedicated materiality management platforms like Socialsuite instead of relying solely on spreadsheets.
- Continuous Improvement: Treat sustainability reporting as an ongoing process, not a one-time event.
- Seek Expert Guidance: Consult with experts or leverage resources to navigate the complexities of materiality assessments.
- Focus on Process Documentation: Document clearly how the assessment process is done to be prepared for assurance.
As regulations expand and become mandatory, materiality assessments grow in importance. Not only do companies experience positive financial feedback in the immediate and long-term, they can also engage community members and stakeholders in creating positive impacts. While there are challenges companies face, like superficial processes and difficulty engaging stakeholders, these challenges can be addressed with education and guidance from Socialsuite. For more information on our materiality management solution, get in touch with us today.
