What is materiality and how does it affect companies?

Now that sustainability has become an undisputed priority and that more and more companies are defining their strategies to manage it, more often, we hear about materiality.

But what is materiality? What is your link with sustainability strategies? Why is she being talked about so much?

If you are not yet familiar with this term, you don't know exactly what it is for or how a materiality analysis is carried out, this article is for you.

Let's start at the beginning, that is, by defining what materiality is.

When we talk about materiality We refer to all environmental, social and governance (ESG) aspects that have a substantial impact, positive or negative, on the company's profitability and in their interest groups.

Materiality should be the foundation of any rigorous sustainability strategy and, therefore, material issues are those that deserve to be properly managed, and, where applicable, reported.

Although depending on its scope, the analysis itself has a certain level of complexity, we should not see materiality as an exercise for the few, relevant only to multinationals, for a specific sector or for companies that have the obligation to publish the statement of non-financial information.

Materiality is a strategic tool that facilitates decision-making, Therefore, any company that wants to preserve its competitiveness and that is interested in creating value for society, regardless of its size or the sector in which it operates, should carry out a materiality analysis with some regularity.

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What are the main benefits of materiality analysis?

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Now that we know that materiality is a key concept, both for reporting and for sustainability management, the next step is to understand the benefits of carrying out such an analysis.

The main ones can be summarized in three points:

1.Prioritize and focus the strategy

Materiality provides valuable information that allows identify issues that require monitoring, minimize risks and reorient the strategy prioritizing Issues with the greatest impact in the business and that are more relevant to stakeholders. All of this helps to maximize the allocation of resources and to minimize efforts.

2.Anticipate trends and improve competitiveness

Through analysis, the company can detect emerging trends and the best practices in the sector, so materiality constitutes a critical resource for improving competitiveness. Material issues, properly managed, constitute the levers for creating long-term value for society, so they should influence decisions about the supply of products and services and, in addition, serve as a guide in the definition of a differential value proposition with respect to the competition.

3. Promote transparency and dialogue with interest groups

The materiality analysis offers the opportunity to establish a dialogue with the main interest groups, to identify the issues that concern them most and for which the company must be held accountable. Therefore, materiality contributes to improving the relationship with stakeholders and transparency of the company.

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What are the most critical aspects of the analysis?

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The most critical aspect of the analysis is, without a doubt, the definition of its scope. Materiality is a relative concept that depends a lot on the context, so in the case of large companies and multinationals, material issues can vary significantly from one country to another. It can even be difficult to identify a single materiality matrix, even though there are many common aspects between the different subsidiaries.

Second, stakeholder participation requires time and resources. Involving interest groups - especially external ones - can seem like a titanic task, which is why many companies fall into the temptation to leave them aside and to create a matrix of materiality with the mere objective of complying with reporting obligations.

Without a doubt, the richness that the participation of the main interest groups adds to the quality of the analysis more than compensates for the effort.

Third, the company's management must be involved. Once the strategic and transversal nature of materiality has been recognized, the responsibility for the analysis cannot lie solely with the Sustainability Department, but requires the involvement of all areas of the company and must be imbued with the commitment, vision and validation of management.

Fourth, prioritizing material issues is key. Companies that have carried out several materiality assessments know that material issues grow as new priorities, regulations or trends emerge.

Both for management and for reporting on the impact generated to be easy to understand, and therefore add value to stakeholders, the prioritization of material issues plays a key role.

Finally, materiality is a variable concept. Materiality is a concept that varies over time, so although there is no commonly accepted standard on how often the analysis should be carried out, it is worth carrying it out with some regularity.

From direct experience, we know that there is no single way to carry out a materiality analysis, but if you found it interesting and want to know more about the methodology we have developed to carry out a materiality assessment, do not hesitate to contact us at info@transcendent.es Or consult our blog.