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What is materiality and how does it affect companies?

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

But what is materiality, what is its link to sustainability strategies, and why is it so much talked about?

If you are not yet familiar with this term, do not know exactly what it is used for and how a materiality analysis is carried out, this article is for you.

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

When we talk about materiality we refer to all the environmental, social and governance (ESG) aspects which have a substantial impactpositive or negative, on the company's profitability and in their stakeholders.

Materiality should be the foundation of any rigorous sustainability strategy and therefore material issues are those that merit proper management and, where applicable, reporting.

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

Materiality is a strategic tool that facilitates decision-making. Therefore, any company that wants to remain competitive and is interested in creating value for society, regardless of its size or the sector in which it operates, should carry out a materiality analysis on a regular basis.

What are the main benefits of materiality analysis?

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

The main ones can be summarised in three points:

1.Prioritising and focusing the strategy

Materiality provides valuable information that allows identify issues for follow-up, minimise risks and refocus strategy prioritising the major impact issues in the business and that are more relevant to stakeholders. This helps to maximise resource allocation and minimise efforts.

2.Anticipating trends and improving competitiveness

Through analysis, the company can spotting emerging trends and best practice in the sector, so materiality is an important critical resource for improving competitiveness. Material issues, properly managed, are the levers for creating long-term value for society and should therefore influence decisions about the supply of products and services and, in addition, serve as a guide in defining a differential value proposition with respect to the competition.

3. Promoting transparency and dialogue with stakeholders

Materiality analysis provides an opportunity to establish a dialogue with key stakeholders, to identify the issues that are of most concern to them and for which the company will be held accountable. Materiality therefore contributes to improving stakeholder relations and transparency of the company.

What are the most critical aspects of the analysis?

The most critical aspect of the analysis is undoubtedly the definition of its scope. Materiality is a relative concept that is highly context-specific and, in the case of large companies and multinationals, material issues can vary significantly from country to country. It may even be difficult to identify a single materiality matrix, even if there are many commonalities between subsidiaries.

Secondly, stakeholder engagement requires time and resources.  Engaging stakeholders - especially external stakeholders - can seem like a daunting task, so many companies are tempted to leave them to one side and create a materiality matrix simply to comply with reporting obligations.  

Undoubtedly, the richness that the participation of key stakeholders adds to the quality of the analysis more than compensates for the effort.  

Thirdly, the company's management must be involved. Once the strategic and cross-cutting nature of materiality is recognised, the responsibility for the analysis cannot rest solely with the Sustainability Department, but requires the involvement of all areas of the company and must be embedded in the commitment, vision and validation of management.

Fourth, prioritisation of material issues is key. Companies that have conducted several materiality assessments know that material issues grow as new priorities, regulations or trends emerge.

For both management and reporting on the impact generated to be easily understood, and thus add value to stakeholders, prioritisation of material issues plays a key role.   

Finally, materiality is a variable concept. Materiality is a time-varying concept, so while there is no commonly accepted standard for how often the analysis should be performed, it is worthwhile to carry it out on a regular basis.

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

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