Materiality analysis - what is material and why?
Anyone who deals with corporate sustainability and plans to make sustainability the linchpin of their corporate strategy will come into contact with the topic of materiality analysis sooner rather than later. This involves looking at ecological as well as social and economic goals. This raises the question of which issues are most important and how they are evaluated. Find out here why a materiality analysis is not only a duty, but also an opportunity for companies.
Background knowledge: Sustainability and materiality
Sustainability reporting has been on the agenda of many companies for years and has now become mandatory for many - or soon will be. In order to understand what the materiality analysis is all about, there are a few technical terms to learn and understand, including
- ESG: Environmental, Social, Governmental - these are the relevant topics.
- CSRDCorporate Sustainability Reporting Directive - a guideline for sustainability reporting.
- ESRS: European Sustainability Reporting Standards - uniform standards according to which European companies report.
Terms like these quickly become second nature, especially for larger corporations, but non-financial reporting is also part of the repertoire of smaller companies, even without a legal obligation. Large capital market-oriented companies have been required to report since 2024. The reporting obligation is being phased in - all other companies will have to report by 2028.
What is a materiality analysis?
Or to put it another way: what is a materiality analysis not? It is not a report that - once created and submitted - does not need to be touched again. Instead, a materiality analysis is a (continuous) process for identifying and evaluating various sustainability issues for a company. In a structured way, companies determine which ESG issues have the greatest impact or are of the greatest financial importance. This allows priorities to be set in order to use resources more efficiently and make strategic decisions for the future.
Why is a materiality analysis necessary?
The materiality analysis makes sustainability manageable. This enables companies to take specific measures that have become necessary as a result of the reporting obligation. This is based on the CSRD.
The materiality analysis is therefore a key component of the reporting requirements. The aim of the analysis is to identify and evaluate various sustainability issues and their relevance for the company and its stakeholders. To this end, impacts, risks and opportunities(IROs ) are examined in more detail. Specifically, the materiality analysis ends with a list or matrix of the key sustainability issues that the company should address. Objectives are formulated and measures and indicators are defined in order to develop a sustainability strategy that contributes to improving sustainability performance. In addition to the strategy, the results can also be used to guide communication, targets and reporting.
Two dimensions: What is the double materiality analysis?
It's all a question of perspective - the EU thought so too. The use of dual materiality now applies. This means that significantly more topics are considered material than before. In order to prioritize, the entire value chain of the company must be considered. All disclosure requirements, including climate-related information, must now be subject to a materiality assessment. ESRS 2 specifies material information to be disclosed and is mandatory for all companies within the scope of the CSRD.
The ESRS divides dual materiality into two categories: Impact materiality(the "inside-out" perspective) and financial materiality (the "outside-in" perspective). Sustainability aspects are examined with regard to the financial opportunities and risks for the company (outside-in) and with regard to the impact of the company's own business activities on people and the environment (inside-out).
For a topic to be considered material and therefore reportable, one of these two criteria must be met. This makes it clear to companies that sustainability aspects must be viewed from two perspectives. They are not only affected, they also bear responsibility for their activities, whether positive or negative. Double materiality must be assessed for each of the sustainability aspects regulated by the ESRS.
Elements of the impact and financial perspective:
The underlying criteria for assessing the significance of the impact are as follows:
- Scale
- Scope
- Irremediable character
It is only necessary to consider possible impacts on these criteria. In the case of negative impacts, their recoverability must be examined. Impacts that have already occurred cannot be evaluated in terms of their probability, as this is already 100 percent. In all other cases, they must be considered in terms of their duration, regardless of whether they are short, medium or long-term.
With regard to financial materiality, the elements were further specified in the form of risks and opportunities. The probability of occurrence and the scope of the consequences also play a role. There are further guidelines that must be observed. This relates to impacts, opportunities and risks that are directly associated with the company's own business activities as well as those along the entire value chain.
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How do you proceed with a materiality analysis?
Changes in regulations lead to new procedures, as all sustainability issues now have to be assessed. Frameworks such as LEAP (Locate, Evaluate, Assess, Prepare) provide guidance for the assessment of dual materiality. 1 In addition to the involvement of stakeholders, a framework can help with implementation in order to obtain information on the business activities in the value chain. The impacts, risks and opportunities of sustainability issues along the value chain can then be described and evaluated accordingly using both the inside-out and outside-in approaches:
- Localize
The aim is to identify the sustainability issues that affect the company. It must be taken into account that various business processes, services and products have an impact on the company's sustainability or are affected by impacts. Identifying the affected areas is therefore of fundamental importance.
- Describe
Key questions can be used to describe the impacts, opportunities and risks. As not one person or department has the knowledge of the entire company on all topics, it is advisable to involve stakeholders in this process. In this way, business relationships along the value chain can be examined.
- Evaluate
The effects must be evaluated and classified on the basis of the knowledge gained. Opportunities and risks must also be clearly categorized.
- Prepare
The presentation and presentation of results and the derivation of measures are key points. The corresponding instructions for action result from the answers to these questions.
The double materiality already covers it, but it should be mentioned that all required sustainability topics must be integrated (see ESRS). This includes non-sector-specific, sector-specific and finally also company-specific sustainability topics.
New Normal: Know the risks and seize the opportunities
The materiality analysis is a tool that you must use to map and analyze your company's activities in all three areas - environmental, social and economic - in both dimensions. This allows you to make statements for the future and makes the sustainability report manageable. Of course, the challenges are individual and while the first step is the most difficult for some, some can be completed in quick succession. Companies must bear in mind that materiality analysis and sustainability reporting will soon be part of the new normal, just like financial reporting. The materiality analysis and the sustainability report are recurring processes that require regular review. This gives companies the opportunity to regularly adjust their strategy and efficiently prioritize resources. After all, those who know their risks and KPIs precisely can make informed decisions, create room for innovation and also strengthen stakeholders' trust in the company.
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