The structure of sustainability reporting is based on preparing a report in accordance with the European Sustainability Reporting Standards (ESRS). Alongside the ESRS, implementation guidelines have been developed, which provide more in-depth explanations of the methodology for proceeding. Documents containing these guidelines can be downloaded from the EFRAG website, which serves as the European Financial Reporting Advisory Group. EFRAG is an organization established by the European Commission in 2001.
Materiality Assessment
Materiality assessment is the process of identifying and evaluating those issues that are most significant for an organization in the context of ESG (Environmental, Social, Governance) reporting. In ESG reporting, materiality assessment is essential because it helps companies understand which aspects related to environmental protection, social responsibility, and corporate governance are most important to stakeholders and the organization itself. The materiality assessment consists of two elements: impact analysis and financial analysis.
Stages of Materiality Assessment
The ESRS does not specify how the materiality assessment process should be conducted or designed. This is because no single process would fit all types of business activities, organizational structures, operational locations, or value chains at higher or lower levels. It is the responsibility of each entity to understand its business in a way that allows it to identify those elements it especially wants to highlight in the report.
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Issue Identification – Identifying a wide range of ESG issues that may impact the company’s activities or interest its stakeholders. This could include issues such as CO₂ emissions, diversity and inclusion, human rights, risk management, and financial transparency.
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Stakeholder Consultation – Gathering feedback from key stakeholders, such as customers, employees, investors, suppliers, and local communities. This helps in better understanding their expectations and assessing which issues are most important to them.
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Impact Assessment – Assessing how specific ESG issues affect the organization’s operations and its ability to generate value. This stage also involves analyzing potential risks and benefits associated with specific issues.
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Developing a Materiality Matrix – The results of the assessment are often presented in a materiality matrix, which displays ESG issues according to their impact on the organization and their importance to stakeholders. The most significant issues are usually located in the upper right corner of the matrix.
Types of Materiality Analysis
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Financial Materiality Financial materiality focuses on those issues that may have a direct impact on the organization’s financial results. From a reporting perspective, this means identifying and reporting on those ESG factors that could influence revenues, costs, risk, asset value, or financial liquidity.
Examples:
- CO₂ emission regulations that may impact operational costs.
- Climate change affecting resource availability, which could increase production costs.
- Reputational issues arising from unethical business practices that may affect brand value and lead to customer loss.
Financial materiality is often more aligned with traditional accounting standards and is applied in a one-sided approach, where the focus is on issues affecting the organization’s financial condition.
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Impact Materiality Impact materiality focuses on issues that have a significant impact on society and the environment, regardless of whether they directly influence the organization’s financial results. This approach considers the broader social and ecological context of a company’s activities, taking into account its responsibility for sustainable development.
Examples:
- Greenhouse gas emissions and their impact on climate change.
- Effects on local communities and adherence to human rights throughout the supply chain.
- Waste production and its impact on the natural environment.
Impact materiality assumes a two-sided approach: not only considering which ESG issues affect the organization but also how the organization impacts environmental and social issues.