Materiality

Materiality is not a vote on what an organisation would like to discuss. It is a disciplined decision about what cannot responsibly be ignored.

Materiality became more precise - and more contested - when major reporting standards formalised different lenses. IFRS S1, issued in 2023, asks companies to disclose sustainability-related risks and opportunities that could reasonably be expected to affect cash flows, access to finance or cost of capital.

European Sustainability Reporting Standards require a double-materiality assessment, considering both financial effects and the organisation's impacts on people and the environment. The same word now sits inside related but distinct decisions.

Financial materiality looks from the outside world towards the organisation. Drought, regulation, ecosystem decline, labour disruption or changing demand may affect enterprise value. Impact materiality looks from the organisation and its value chain towards people and the environment.

Unsafe work or deforestation can be significant because of the severity of the impact even before the issue produces a measurable financial consequence for the company.

Double materiality holds both perspectives. The lenses can overlap: forest loss may create ecological harm and later generate legal, market or supply risk. They do not have to overlap for the matter to deserve attention. Treating financial consequence as the only test can exclude severe impacts borne by people with little ability to transmit those costs back to the company.

Materiality is therefore purpose-dependent but not arbitrary. Different reporting frameworks serve different users and objectives, yet a company cannot simply choose the issues it prefers. The process should identify the applicable lens, examine evidence, consider scale, scope, likelihood and irremediability where relevant, and document the judgement.

A matter does not become immaterial because it is uncomfortable, difficult to measure or absent from a stakeholder survey.

Stakeholder input is important but should be interpreted carefully. A popularity ranking can privilege groups with greater access, information and organisational power. Severely affected workers, smallholders or communities may be less visible, less confident in formal consultations or excluded from the language in which the assessment is conducted.

Materiality analysis must actively seek affected perspectives and combine them with human-rights, environmental and scientific evidence.

The familiar materiality matrix can create false precision. Topics are scored, plotted and separated by a threshold, sometimes on the basis of incomparable data and subjective averages. The visual may imply that a one-point difference represents a defensible boundary between material and immaterial.

The tool can support discussion, but it does not replace judgement, documentation or scrutiny of how scores were produced.

Materiality is also dynamic. Climate science, regulation, business models, stakeholder expectations and conditions in the value chain change. A matter below a threshold today can become material as exposure grows or evidence improves. Conversely, an effective response may reduce risk without erasing the underlying impact. Regular review should focus on changed conditions, not simply repeat the same workshop.

Boundaries are critical. Impacts may occur through suppliers, use of products, land acquisition, finance or business relationships outside direct operations. A narrow organisational boundary can make a significant issue disappear from the assessment while leaving the real-world impact unchanged. Due diligence and value-chain analysis provide evidence that materiality processes should use.

The output should influence decisions. If a topic is declared material but does not affect governance, strategy, targets, resource allocation, risk management or reporting, the assessment has become a communications exercise. Equally, not every important issue requires the same response or disclosure.

Materiality prioritises attention; it does not grant permission to ignore legal duties or fundamental rights below a reporting threshold.

Used well, materiality protects organisations from two opposite errors: reporting everything without judgement, and reporting only what is convenient. It makes significance explicit and forces the decision-maker to explain whose decisions or impacts count, which evidence was used and why the boundary was drawn where it was.

Practical application

Begin by separating the purposes of the assessment. Identify applicable reporting standards and legal requirements, then build an evidence base from enterprise-risk analysis, due diligence, impact data, science and engagement with affected stakeholders. Evaluate matters using transparent criteria and retain a record of disagreements, uncertainty and threshold decisions.

The final list should be tested against action. For each material matter, specify the decision it changes, the accountable governance body, the relevant targets and the disclosure required. Review the assessment when the business, evidence or value-chain context changes, not only on a fixed reporting cycle.

Why it matters

Materiality determines which sustainability issues receive board attention, resources, targets and public disclosure. Weak materiality processes can make severe impacts invisible or reduce sustainability to financially convenient topics. Strong processes connect significance to governance and make selective reporting harder to disguise as prioritisation.

Common misconception

Materiality is often treated as a survey-led ranking of the topics stakeholders or managers consider important. Surveys can inform the process, but materiality is an evidence-based judgement against a defined reporting or impact lens. Popularity, convenience and materiality are not the same.

Connections

Theory of Change identifies the outcomes and assumptions a programme needs to monitor. Materiality determines which matters are significant enough to shape organisational decisions and disclosure. The quality of that judgement depends heavily on the next concept: who is recognised as a stakeholder, whose evidence carries weight and how affected people participate.

A question worth asking

Which issue would your organisation classify differently if materiality were assessed from the perspective of the people most affected rather than the people with the greatest influence over the report?

Selected references

- IFRS Foundation. 2023. IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information.

- Global Reporting Initiative. 2021. GRI 3: Material Topics 2021.

- European Commission. 2023. Commission Delegated Regulation (EU) 2023/2772: European Sustainability Reporting Standards.

- EFRAG. 2024. Implementation Guidance 1: Materiality Assessment.

- Puroila, J. and Mäkelä, H. 2019. Matter of Opinion: Exploring the Socio-Political Nature of Materiality Disclosures in Sustainability Reporting. Accounting, Auditing and Accountability Journal 32(4): 1043-1072.