Materiality Assessments in ESG: A Tool for Strategic Insight

In this article, guest writer and end-to-end ESG strategy specialist Parag Chaturvedi advises companies on how to use materiality assessment to reflect their unique sustainability journeys.

In recent years, businesses and their stakeholders have been drawn to an important question: how can environmental, social, and governance (ESG) considerations shape financial performance and resilience? Amid an evolving regulatory landscape and growing pressures from investors and consumers alike, materiality assessments have emerged as essential tools for pinpointing ESG factors most pertinent to a company’s operations and stakeholders. More than a mere box-ticking exercise, materiality assessments offer firms a strategic lens through which to view the sustainability megatrends that will likely influence their future.

Building a robust Environmental, Social, and Governance (ESG) program begins with a blank sheet of paper, one that must be thoughtfully filled to reflect a company's unique sustainability journey. A materiality assessment is the essential first step in this process, pinpointing the specific risks and opportunities a company must address to create meaningful impact. This assessment lays the foundation for ESG programs by identifying the most pressing issues to report on and manage, thereby setting a strategic direction for sustainability efforts and reporting practices.

The Roots of Materiality: From Accounting to ESG

The concept of materiality is nothing new in the world of business. Originating in accounting, “materiality” traditionally refers to financial items that are significant enough to influence a user’s economic decisions. For decades, this principle has guided financial reporting standards, such as the Generally Accepted Accounting Principles (GAAP), which identify it as one of the core tenets of prudent, objective, and consistent reporting.

It was not until the early 2000s, however, that investors began to scrutinize companies on more than just financial metrics. As sustainability issues—from climate change to labour practices—gained prominence, institutional investors realised these topics could drive long-term value creation and should therefore feature in portfolio management discussions. This led to a new question: which sustainability issues are “material” enough to report on, and how should they be measured?

To answer this, frameworks emerged, most notably the SASB (now under the International Sustainability Standards Board, ISSB) and the Global Reporting Initiative (GRI). Both aimed to standardise ESG reporting but diverged in their approach. SASB applied a “financial materiality” lens, asking: how do sustainability topics impact a company’s performance? GRI, in contrast, championed “impact materiality,” which looks at how a company’s activities affect the world around it. Today, most ESG materiality assessments are a blend of these approaches, aiming to balance financial relevance with broader societal impact.

The European Union is driving a transformative shift in corporate sustainability reporting through a comprehensive package of capital market reforms aligned with the Green Deal. This ambitious policy framework aims to cut EU-wide carbon emissions by 55% by 2030 and to reach net-zero emissions by 2050. A structural feature of these reforms, the Corporate Sustainability Reporting Directive (CSRD), will dramatically increase both the volume and rigor of sustainability information disclosed by companies, setting a new global standard for corporate transparency and accountability in sustainability.

At the heart of CSRD reporting requirements lies the European Sustainability Reporting Standards (ESRS), which outline a robust set of qualitative and quantitative ESG disclosures. Unique to the ESRS is its dual emphasis on “double materiality,” combining "impact materiality" and "financial materiality." This means that companies must assess not only the financial impacts of sustainability issues on their operations but also their impacts on people, the environment, and society. A company’s specific ESRS reporting obligations will largely depend on the results of its double materiality assessment, requiring organizations to evaluate sustainability topics through this dual lens.

For companies already familiar with materiality assessments, some elements of the ESRS approach may seem recognizable. However, the EU’s framework prescribes a level of specificity and rigor that goes beyond standard practices. To comply with ESRS standards, companies will need to adapt existing assessment processes significantly, implementing thorough value chain risk analyses, detailed value chain mapping, impact remediability assessments, and rigorous documentation to substantiate their double materiality determinations.

Choosing the Materiality Perspective

The first step in an ESG materiality assessment is to establish which perspective(s) the company will use. This decision can shape not only the outcome of the assessment but also how well it aligns with the company’s strategic objectives. Typically, there are three perspectives to consider: the business case, societal impact, and stakeholder view.

The business case perspective is straightforward: an ESG topic is material if it impacts the firm’s financial performance. As ESG reporting has become more rigorous, 57.6% of companies now apply this perspective to quantify ESG risks and opportunities.

A second approach, societal impact, recognises a topic as material if it significantly affects society, the environment, or the economy. Less commonly applied (11.5% of companies), this view embodies the “inside out” effect, assessing how corporate activities touch the wider world.

The stakeholder view, though seemingly clear, poses challenges. If external stakeholders are asked to evaluate topics based on either financial or societal impact, responses might overlap with the other two perspectives. In practice, 54.8% of companies still seek to incorporate external stakeholder views, though defining the questions for stakeholders remains a point of contention.

From Concept to Implementation

After selecting the materiality perspective, firms must identify the ESG topics that matter most to them, gathering insights from various stakeholders. This often begins with a review of topics included in established ESG frameworks. However, companies must customise these topics to their unique context, ensuring the chosen terminology resonates internally and externally.

Next, firms must choose their information sources. The right sources depend on the perspective in use: internal teams and business partners inform the business case, while community representatives and NGOs guide the societal impact perspective. Gathering data on stakeholder perspectives through direct engagement—surveys, interviews, and even text analysis—enables companies to assign materiality scores to each ESG topic.

The Materiality Matrix and Beyond

Most companies summarise their findings in a materiality matrix, a chart mapping ESG topics based on their perceived importance. While this matrix offers a snapshot of priorities, its simplicity has limitations. For instance, it often downplays conflicting priorities between internal and external stakeholders, glossing over the very tensions companies must manage.

To counterbalance this, some companies complement the matrix with detailed tables showing materiality scores per stakeholder group, while others expand the matrix axes to highlight nuanced dimensions of each ESG factor. Regardless, the final materiality matrix is seldom the last word: executive teams may adjust priorities based on internal strategy discussions, illustrating the flexibility and, occasionally, subjectivity inherent in this process.

A Recurring Task in a Shifting Landscape

Materiality, much like sustainability itself, is not static. New regulations, shifts in public opinion, and scientific breakthroughs continuously reshape what is material. Many companies conduct materiality assessments annually, ensuring their reporting reflects up-to-date priorities. Others, particularly those linking materiality to strategic planning, may undertake the process every few years.

Challenges to Consider

Materiality assessments face three key challenges: complexity, uncertainty, and evaluative tension. Sustainability issues are inherently complex, often involving myriad interconnected players. For example, reducing plastic waste requires collaboration across the supply chain, from manufacturers to consumers. This “problem of many hands” complicates assigning responsibility and gauging materiality for each actor involved.

Uncertainty further heightens the challenge. New insights or changing regulations can rapidly alter a topic’s materiality, prompting companies to adopt a long-term view—even when short-term risks might seem more manageable.

Finally, the evaluative nature of sustainability issues means that stakeholders often hold conflicting values. Deciding on materiality inherently reflects a company’s interpretation of these values, and while companies can engage with stakeholders, they must also balance competing priorities.

Future Trends in Materiality Assessments: Technology and Beyond

As sustainability reporting evolves, the concept of materiality is also transforming, driven by advances in technology, shifting regulatory expectations, and growing demands for transparency from stakeholders. In this new landscape, companies are leveraging innovative tools and methodologies to enhance the precision, scope, and relevance of their materiality assessments. Below are some of the key future trends expected to shape materiality in the coming years.

Artificial Intelligence and Data Analytics

Artificial intelligence (AI) and advanced data analytics are increasingly integral to the materiality assessment process. Through AI-powered tools, companies can analyze vast volumes of unstructured data — such as social media, news reports, and stakeholder feedback — to detect emerging risks and opportunities relevant to their operations. Machine learning algorithms can identify patterns in ESG data, revealing insights that may have gone unnoticed in traditional assessments. AI also enhances predictive capabilities, enabling organizations to assess how materiality factors may evolve over time and proactively adjust their strategies. This shift towards datadriven materiality assessments helps companies identify dynamic risks in real-time, enabling more responsive and resilient sustainability strategies.

Enhanced Stakeholder Engagement through Digital Platforms

With increasing stakeholder expectations around transparency, companies are turning to digital platforms to make stakeholder engagement a continuous and collaborative process. These platforms can support interactive surveys, virtual focus groups, and real-time feedback loops, making it easier for companies to capture diverse stakeholder perspectives across geographies and demographics. By digitizing stakeholder engagement, organizations can collect more comprehensive and representative data on materiality topics, ensuring their assessments reflect the interests and concerns of all relevant parties. This approach also promotes transparency, as companies can openly share their materiality process and outcomes with stakeholders, fostering trust and accountability.

Focus on Value Chain and Scope 3 Emissions

Future materiality assessments are likely to extend beyond direct operations to cover broader value chain impacts, particularly Scope 3 emissions, which often constitute the largest portion of a company’s carbon footprint. As regulations like the CSRD mandate deeper value chain mapping and risk analysis, companies will need to evaluate the materiality of sustainability topics across their entire supply chain. This shift is driving increased collaboration between companies and their suppliers, as they work to collect and analyze data on emissions, resource use, and social impacts across the value chain. Advanced digital platforms and IoT technology can facilitate this process by providing real-time data on supplier practices and environmental impacts.

Sector-Specific and Customized Materiality Frameworks

Another trend is the growing demand for sector-specific materiality frameworks that reflect the unique challenges and priorities of different industries. Tailored frameworks allow companies to focus on the most relevant sustainability issues, providing more meaningful insights for stakeholders and improving comparability across peers. For instance, the financial sector might prioritize topics like data security and responsible lending, while the manufacturing sector might focus on circular economy practices and resource efficiency. As regulatory bodies and industry associations develop these specialized frameworks, companies can align their materiality assessments more closely with their strategic objectives.

Greater Emphasis on Social and Human Rights Materiality Materiality

assessments are also expanding to encompass social factors, particularly human rights issues, as companies face growing scrutiny from investors and regulators around their social impacts. This trend is likely to accelerate as frameworks like the EU’s Corporate Sustainability Reporting Directive (CSRD) emphasize both social and environmental dimensions. Organizations are expected to delve deeper into topics such as fair labor practices, diversity and inclusion, community impacts, and customer privacy. Technology solutions, including blockchain, are being explored to provide transparency in supply chains, helping companies to verify ethical sourcing and reduce risks associated with human rights violations.

Integration with Financial Materiality and Strategic Decision-Making

The concept of “double materiality” is gaining prominence, requiring companies to integrate both impact and financial materiality into their reporting. This holistic approach encourages organizations to evaluate sustainability topics not only based on their potential impact on the company’s financial performance but also on their broader impact on society and the environment. In the future, companies may integrate materiality assessments more closely with enterprise risk management (ERM) frameworks, enabling sustainability factors to be considered alongside financial risks in strategic decision-making. This trend reflects the growing recognition that ESG risks are financial risks and that sustainable practices are integral to long-term value creation.

A Strategic Imperative

A materiality assessment should be more than an exercise in corporate responsibility; done right, it is a powerful strategic tool. By identifying and prioritising ESG issues, companies not only comply with reporting standards but gain a sharper view of the trends that will shape their future. In a world where sustainability is synonymous with resilience, the materiality assessment is less a report card than a roadmap.

Parag is a manager at Deloitte India. He advises companies on their end to end ESG strategies, decarbonisation roadmaps, and Carbon markets.