Materiality - What, Why and How
According to the general corporate finance and accounting principles, "Information is material if its omission or misstatement could influence the economic decision of users taken on the basis of the financial statements."
In practice this means that in order to be considered “material”, a factor needs to play a key role in a business’ economic and financial situation. For example, in a company with a turnover of £5,000,000, an omission of £1,000 wouldn’t be considered significant enough to influence the general financial statement, therefore it wouldn’t be classified as “material”.
Within the CSR context things get more complicated as sustainability reporting involves and includes environmental, social and governance (ESG) factors that are usually difficult to estimate from a financial point of view, and whose value is often connected with the intangible interest of investors and stakeholders.
However, with an increasing interest towards a more sustainable and fairer way to do business, corporations need to learn what is relevant or important to their stakeholders, investors and customers, and they need to understand how to communicate all this information effectively.
Being able to communicate sustainability and CSR related activities, impacts and achievements is very important in order to drive engagement and add a real value to a company’s reporting strategy.
The reasons to do a Materiality Assessment go far beyond the need to tick a box on a business’ to do list. It is true that a Materiality Assessment is necessary to adhere to some of the relatively new standards and frameworks in the sustainability reporting area (such as GRI G4), but completing this procedure is important also to move forward towards a successful CSR and sustainability strategy, and to play an effective key role in creating a real social impact and increase the collaboration and communication among sustainability professionals, helping organisations and sustainability entities highlight important factors and identify operational risks.
The first thing to do is identify all the topics that might be important to your internal and external stakeholders and investors, depending on the sector your business is actually active and operating in.
The following step consists of analysing these topics’ significance on both internal and external aspects, in order to understand if:
- your company has the opportunity to influence performances in that aspect and if it represents a significant risk to your company (internal)
- stakeholders, NGOs, investors, are active in that area and might be interested to get involved in your activities (external).
In other words, what needs to be considered is how a factor could practically influence your business and what is directly important to you. Whether it’s disclosing CO2 emissions or human rights and modern slavery related practices, communication plays a vital role in a business’ life and success. Non-financial reporting is not only about data collection, it also involves and requires engagement in order to move forward towards a successful CSR and sustainability strategy. It’s very important to keep in mind that the way organisations disclose and communicate their impacts and achievements will reflect directly on the possibility to boost their reputation and broaden their audience.
SustainIt have helped organisations like the WWT and multinational corporations like Toyota Material Handling understand their sustainability data and identify what is material to them. Make sure you get in touch if you’d like to talk more about how we could help.