Materiality analysis is an indispensable method for a company to identify its material topics and stakeholders with their requirements. Especially companies dealing with sustainability reporting, the Due Diligence Act or topics such as the Code of Conduct quickly realize: There is practically no alternative to conducting such a risk analysis. The not so new method is as efficient as it is indispensable - an overview.

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What is a materiality analysis?

Materiality analysis - sometimes also called "essentiality analysis" - is an indispensable method for your company to identify its significant issues and interested parties (stakeholders) with their requirements and expectations. For a long time, this relatively simple but very effective method was known only to insiders in the financial sector. Here, it is used primarily in the preparation of annual financial statements. The purpose of materiality analysis is to detect all material aspects that could potentially influence the result and at the same time be of particular interest to the readers of the annual financial statements.

Today, materiality analysis is being used more and more frequently and very successfully as part of companies' sustainability strategies. Especially companies dealing with sustainability reporting, the Due Diligence Act or topics such as the Code of Conduct very quickly realize: there is practically no alternative to conducting such a strategic risk analysis.

On the one hand, the materiality analysis helps to identify the key stakeholder groups along with their needs and expectations. At the same time, it also provides your company with those sustainability aspects that are material from your own perspective. Relating both to each other, for example with the help of a materiality matrix, results in a kind of "overall materiality" and resulting fields of action, for example in the areas of emissions and climate protection, management of resources, protection of the environment, animal welfare or social responsibility. The results of this risk analysis are of great importance for the strategic classification and approach of relevant sustainability topics for every company.

The method does not follow a formally defined approach. However, for robust results to define a sustainability strategy, your company should follow a specific process. This includes, above all, the clarification of internal conflicting goals, the involvement of key stakeholders, and the consistent consideration of significant internal and external issues, including the associated risks and opportunities.

For which industries is a materiality analysis suitable?

Conducting a materiality analysis is generally voluntary, but it is strongly recommended - in different contexts - to achieve robust results, for example by the well-known formats for CSR reporting such as GRI (Global Reporting Initiative) or UN Global Compact. As such, it is suitable for companies of all sizes and industries dealing with sustainability issues. Every company and organization will benefit from this method for identifying their sustainability commitments and corresponding areas for action.

What does CSR mean?

CSR (Corporate Social Responsibility) refers to the responsibility that companies have to society through the impact of their business activities. The fields of action resulting from the perception of this responsibility are interpreted as a voluntary contribution to sustainable development. CSR refers to the three pillars of sustainability and thus encompasses all ecological, economic and social aspects of corporate activity.

Materiality analysis also plays a central role in ISO standards for sustainability management. For example, the ISO 26000 Social Responsibility Guideline strongly advises its users to conduct it: "Once an organization has comprehensively determined the areas of action relevant to its decisions and activities, it should carefully consider the identified areas of action and develop an evaluation benchmark that can be used to decide which areas of action are of greatest importance to the organization."

The EU CSR Directive (2014/95/EU), adopted in 2014, requires more than 6,000 companies across Europe to also report on their sustainability activities. On the other hand, it makes the application of the method (here "materiality assessment") with its legal character mandatory. In Germany, for example, this has so far only affected around 600 capital market-oriented large companies and corporate groups. However, small and medium-sized companies are also increasingly making a voluntary commitment to consistently operate sustainably and to report on this as part of their sustainability strategy.

The extent to which a materiality analysis could or will be a legal requirement of the planned supply chain due diligence law is still unclear - but it is undoubtedly necessary.

ISO standards also focus on materiality

Well-known ISO management system standards require something similar, but proceed differently in detail and use different terms. There, it is a matter of identifying the relevant internal and external issues of a company and the relevant interested parties that are inextricably linked to them - materiality is called relevance here. However, companies are only obliged to make such observations in connection with certification.

How does the implementation of a materiality analysis work?

Two core questions serve to identify the really significant sustainability-relevant topics in your company: "What do your stakeholders expect?" and "What are the strategically important sustainability topics from your company's point of view?". The process of a materiality analysis or materiality analysis can look as follows:

  • Identification and assessment of internal and external issues
  • Creation of an evaluation logic
  • Determining the (sustainability) topics to be included in the materiality analysis
  • Exchange of these topics with the interested parties (stakeholders)
  • Creation of a materiality matrix
  • Use or publication as part of the sustainability strategy, for example in the Sustainability Report (GRI) or the Code of Conduct

GRI - Global Reporting Initiative

Internationally recognized guidelines for the preparation of sustainability reports ★ user-friendly tool with concrete instructions for implementation ★

The first step is to identify your stakeholders with their requirements and the relevant internal and external issues of your own company. Stakeholders can be assigned to specific areas, which makes it easier to filter out relevance or materiality, for example:

  • Business: customers, competition, suppliers, investors, banks, insurance companies, etc.
  • Society: consumers, politics, authorities, local communities, residents, etc.
  • Internal interested parties: Employees, management, unions, etc.
  • Advocacy groups: NGOs, associations, environmental groups, etc.

In the second step, an evaluation logic should be created. This is used to assign stakeholder groups and key issues to specific (numerical) values, supplemented by adjectives that allow a more understandable gradation for example:

  • Up to 1 = low
  • Around 2 = medium
  • From 3 = high etc.

Success factors for a good materiality analysis

Material stakeholders

When deciding whether a stakeholder group is material to your company, the most important factors are whether

  • They could have an influence on your company or on the achievement of your corporate goals,
  • It could be influenced by the activities of your company
  • Or both.

The distinction is important for how the interested parties or stakeholders are addressed and involved. For example, engagement can be done through surveys, collaborative workshops, or via social media. Some of the stakeholders such as employees, authorities or suppliers are usually already involved through day-to-day business. Finally, it is important to maintain contact beyond the process of a (first) materiality analysis, also because such an analysis should be subject to regular updating.

Materiality of topics from the perspective of your company

The identification of material internal and external issues is based on the "context of the organization" as it is called in ISO management system standards, for example ISO 14001. This is done by taking into account the stakeholders identified above and in the context of potential risks and opportunities that (may) arise - in the case of ISO 14001, even in connection with the life cycle of your products and/or services.

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The way in which your company carries out the materiality analysis is not specified. However, the process outlined in this article provides a good orientation for this. Above all, this includes identifying and involving the key stakeholders, consistently identifying the material sustainability issues, including consideration of the associated risks and opportunities, and clarifying internal conflicting objectives. The correct creation of a materiality matrix is a good way to visualize the results of the analysis.

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Author
Altan Dayankac

Global Program Manager and Senior Sustainability Manager of DQS Group and international expert on numerous sustainability, climate, environmental, and occupational safety topics. Altan Dayankac also contributes his expertise as an author and moderator to HSE and sustainability committees and at various professional events.

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