The Importance of Materiality Assessments in Corporate Sustainability Reporting

The landscape of corporate sustainability reporting has changed dramatically in recent years. Gone are the days of marketing-driven reports that lack substance and accountability. Instead, stakeholders such as consumers, investors, and regulators now demand companies to have reliable and verifiable sustainability claims. However, many companies are failing to meet these expectations.

According to a study by IBM, although 95% of companies have environmental, social, and corporate governance (ESG) goals in place, only 10% have made significant progress towards meeting them. Additionally, only 2 out of 10 consumers trust the statements companies make about environmental sustainability. This lack of trust stems from the widespread practice of “greenwashing” in various industries, with nearly three-quarters of executives admitting that most organizations in their industry engage in greenwashing.

To address these concerns, materiality assessments have become crucial for companies to understand what sustainability and ESG goals are most important to their business. Materiality assessments determine the issues that matter most to a company and its stakeholders and guide the reporting and integration into overall business strategy and investment. They also provide a basis for independent assurance by third-party assessors, which is becoming mandatory under the Corporate Sustainability Reporting Directive (CSRD) in Europe.

Previously, there was a lack of standardized methodologies and best practices for materiality assessments in sustainability and ESG reporting. However, recent guidance from the European Financial Reporting Advisory Group (EFRAG) has helped outline best practices, though companies still face challenges in implementing them.

One potential limitation of materiality assessments is the reliance on bad data. Insufficient or inaccurate data can lead to sustainability reports that do not align with corporate goals and fail to provide clear benchmarks for tracking progress. To address these limitations, companies falling under the scope of the CSRD and European Sustainability Reporting Standards (ESRS) must conduct effective materiality assessments that comprehensively analyze impacts, risks, and opportunities across their value chains.

In addition to complying with regulatory requirements, companies must also ensure they meet their environmental health and safety (EHS) compliance obligations. Focusing solely on climate change targets without addressing fundamental compliance obligations can be counterintuitive. It is essential for businesses to understand and comply with all EHS, sustainability, and ESG-related legislation applicable to their operations.

Materiality assessments should also be dynamic and regularly reviewed and updated. This is particularly important during major changes in the company, such as mergers, acquisitions, or expansions into new regions. Companies should ask themselves tough questions about their sustainability and ESG goals, including what is feasible, which goals are prioritized by both the company and its stakeholders, and how progress against those goals can be tracked with reliable and verifiable data.

In an era where greenwashing is being scrutinized, a robust and independently assured materiality assessment is crucial for a company’s regulatory compliance and reputation. Without clear, measurable goals and plans to achieve them, companies risk exposure and liability. It is imperative for companies to prioritize materiality assessments and sweat the details to stay on the right side of sustainability reporting.