What’s the deal with materiality?
By: Marimar Torreblanca
Tags: Consulting, Esg Investing, Materiality, Esg, Finance

June 1st, 2020

This week, I want to give a simple intro to materiality analyses or assessments and explain why they are important for companies who want to build their ESG strategy from scratch (or even improve an existing strategy).

First, what is a materiality analysis?

In a nutshell, it is the process of identifying and prioritizing the most “material” (or important) environmental, social, or corporate governance issues for both your stakeholders and your organization. To do this, all stakeholders (or at least a good representative sample of them) should be consulted.

Once these material issues are defined, your sustainability and overall strategy can take them into account to make sure you are both optimizing your positive impact on all stakeholders and minimizing your negative influence and potential risks on all fronts.

Why should you do a materiality analysis?

As regulators and investors are increasingly asking companies and funds or platforms to report on their ESG initiatives and key performance indicators, it is important for you to understand what you should report on. It is pretty much impossible to report on every single ESG topic that can be covered by an entity. It would take a massive amount of time, and the returns on that process would not be great (since many of these items would not be material for your stakeholders). Therefore, finding out what you should focus on not only helps to define your future efforts, but also allows you to be effective when communicating with your stakeholders and optimize your reporting efforts.

If this is not a good enough reason for you to consider doing this exercise, let me just say that materiality analyses many times highlight trends or items that may have a relevant impact on your operations in the future (even before your management team or board was thinking about them). Materiality matrices, when well built, can therefore be considered a strategic tool for a business in an evolving industry.

How are materiality analyses done?

There is no one size fits all way to do this. It depends on how deep you want to go, which in turn depends on how much your organization cares about this effort. It also varies depending on who your stakeholders are, how you are used to communicating with them (how easy it is to do so), and how fast you want the analysis to be done.

Broadly speaking, the organization first needs to build a list of ESG topics it believes should be tested for relevance in this exercise. A good way to do this is the management, the ESG committee, or whoever is the key person inside the organization driving this effort needs to think about the business cycle/model and where it may impact environmental, social, and governance topics. The GRI and SASB offers some industry specific materiality standards that can help too.

Once this preliminary list is ready, then in one way or another, you (or whoever is coordinating this project), needs to contact a representative sample of each stakeholder group that was identified and ask them to prioritize the items in the list. Also be open to hear about different items that may not be in the list but may be relevant to the stakeholders. The process needs to have a feedback loop for the list in the end to be truly comprehensive.

As all stakeholders show their priorities, the organization can build a materiality matrix. Here again there are different ways to analyze and present the information. The end goal is to show what impact these items have on all (both internal and external) stakeholders vs the influence on the stakeholders’ assessments and decisions. The GRI suggests the following format:

As with all x/y charts, we can think of four different quadrants within the chart (top right would be the most material items, bottom left emergent items, bottom right would be urgent items, and top left would be general but less relevant items to consider).

Some other organizations also suggest a chart where the x axis shows the impact on or relevance for external stakeholders and the y axis shows the impact on or relevance for internal stakeholders. This would again offer a different interpretation possibility (and see how aligned internal and external stakeholders are on material issues).

Here are some examples from two well-known Mexican corporates:

Cemex

Coca-Cola FEMSA

How frequently must materiality analyses change?

I promised to make this intro brief and simple. The subject is somewhat dense, so bear with me on one more thing which is very important: materiality is dynamic. This means, whatever appears as material today, will not necessarily be material tomorrow. Circumstances change, people change, thus materiality changes.

Materiality exercises must be done ideally every couple of years, and no later than every 3–4 years. Also, if something big and disruptive happens (ahem, COVID-19), industries that are affected should revisit their materiality assessments. I know this is time consuming, and at Miranda ESG we are more than happy to help streamline the process.

I will stop here now, as I believe the main points have been made. But if you still have questions on materiality, please don’t hesitate to reach out. I’ll be more than happy to discuss this at depth with you. And as usual, if there is anything we can help you with, please reach out.

Best,

Marimar

Partner, Miranda ESG

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