Identifying Your Sustainability Reporting Topics: Conduct a Materiality Assessment

To create a sustainability report you need to decide what to include.  The list of potential topics for inclusion in the sustainability report is extensive, and organizations cannot, and should not be expected to, report on each topic.  Instead, the focus needs to be on identifying the sustainability-related issues and topics that are most material to the financial sustainability of the business and which have the biggest influence on the social and environmental impact of the organization’s business activities on the human rights of its stakeholders.  As such, the next step in the reporting process is the important materiality assessment.  Traditional materiality assessment was limited to financial matters; however, it seems clear that in the future organizations will be expected to practice “double materiality” and look beyond their own financial survival to understand how their activities are both promoting the human rights of their stakeholders and, of course, violating the human rights of their stakeholder or impeding their ability to realize their human rights. 

One of the long-standing challenges associated with using the concept of “materiality” has been that there have been, and continue to be, differing concepts of materiality relevant to sustainability-related reporting.[1]  Under the GRI reporting framework, information is considered material and should be included in a report if it “may reasonably be considered important for reflecting the organization’s economic, environmental and social impacts, or influencing the decisions of stakeholders.”  The International Integrated Reporting Framework, which was influential for a long time but is no longer active after being absorbed into the ISSB, deemed information to be material if “it is of such relevance and importance that it could substantively influence the assessments of providers of financial capital with regard to the organization’s ability to create value over the short, medium and long term.”  For SEC reporting purposes and under the SASB standards, information is deemed to be material if there is “a substantial likelihood” that a “reasonable investor” would view the information as “significantly alter[ing] the ‘total mix’ of information made available.”[2]

Materiality should be approached from a risk-based perspective: events and circumstances that might place the organization’s financial performance at risk, and actions by the organization and its business partners that might place the realization of their human rights by others at risk.  Using  and understanding this perspective makes it easy to appreciate why climate change (and climate action in response) has driven the evolution of sustainability reporting: adverse climate events can cripple the financial performance of an organization and the failure of an organization to implement processes to remediate the adverse environmental consequences of their production activities and the products they sell can undermine the recognized human right to a clean, healthy, and sustainable environment in the communities in which the organization operates.  While the material topics for each organization are unique and should be derived through an open and transparent process, organizations can and should learn from industry benchmarks, reports published by peers, and the topics that have been covered in detail in the relevant sustainability reporting frameworks and standards, as discussed further below in the context of deciding on which matters to be included in the report.  

In determining materiality and what should be covered in the sustainability report and how, consideration needs to be given to the input received from the organization’s external stakeholders (i.e., customers, investors, value chain members, and community members).  It has been observed that identifying poor quality and the costs associated with poor quality is a vital part of “triple bottom line” reporting and in order to do this organizations must engage with each of their important stakeholders to understand the essence of the relationships with those stakeholders and what the stakeholders are looking for as indicators of value, integrity and quality.[3]  This means that organizations need to take a hard and honest look at their impact on the communities in which they operate and quality of their relationships with employees, the products and services they offer to customers, their actions in the neighborhoods where their facilities are located and footprint of their operations on the environment. 

In a publication focusing on how small businesses can utilize the GRI standards, the GRI and the International Organization of Employers recommended that sustainability reports should identify the company’s stakeholders and explain how the company has responded to their reasonable expectations and interests.[4]  This should be done by describing and mapping the stakeholders to whom the company considers itself accountable and discussing the process and outcomes of the company’s stakeholder engagement processes.  The sustainability report should identify and describe the key interests of the various stakeholder groups and show how the company has responded to stakeholder concerns, policies, and relevant standards. 

Leaders of the organization, as well as members of the sustainability reporting team, need to engage with representatives of those stakeholders to ensure that they understand the approach that the organization is willing to take, and the organization’s need to balance disclosure against the need to protect sensitive and strategically important information.  In fact, stakeholder engagement should be welcomed as an opportunity to collaborate with stakeholders and build their expectations into the overall sustainability strategies and initiatives of the organization.  In general, stakeholder engagement can take several forms including focus groups, public consultations, surveys, or interviews, and stakeholders should be asked both open and closed questions about sustainability issues, risks, and opportunities to elicit the broadest amount of feedback possible.  Engagement mechanisms and examples of key interest for specific stakeholder groups include:

• Customers may be engaged through meetings and customer visits/audit and their key interests may include quality of products, reliability of supply and product pricing.
• Employees may be engaged through periodic performance reviews, management committees, surveys, Intranet/newsletters, site meeting and community and wellness meetings and their interests may include workplace health and safety and career development.
• Governmental officials and regulators may be engaged through meetings, reports, site visits and submissions and their key interests may include safety of products and compliance.
• Shareholders and investment community members may be engaged through periodic reports filed in compliance with regulatory requirements (including financial results performance), annual shareholders’ meetings, corporate website and investor briefings and forums and their key interests may include financial performance, governance, and innovation.
• Local communities may be engaged through industry bodies, educational institutions, charities and staff engagement in local events and their key interests may include community impacts, education, product access, infrastructure, and support for services.
• Suppliers may be engaged through site visits/audits and meetings and their key interests may include business ethics, compliance, and quality/reliability.

The authors of the GRI publication referred to above urged companies to take into account current topics and issues that represent significant risks for the organization and its areas of operation; the main sustainability interests, topics and indicators raised by stakeholders; the main topics and future challenges for the organization’s sector or region as reported by peers, competitors or expert bodies with recognized credentials in the field; and relevant laws, regulations, international agreements or voluntary agreements with strategic significance to the organization and its stakeholders.  The engagement process and the identification of key interests of each of the company’s stakeholders provides the basis for the disclosure and reporting committee to identify and recommend to the entire board for approval a list of the issues that are most material to the organization for strategic development and sustainability reporting.  These issues become the centerpiece of the organization of the sustainability report.  Examples of material issues that might be selected include the following:

• Employee health and safety: Ensuring our employees work in a safe environment, which meets or exceeds relevant regulatory expectations, addresses health and safety concerns as they arise and mitigates opportunities for reoccurrence of incidents.
• Product quality and safety to customers: Choosing materials from quality sources, complying with current “good manufacturing practice”, and delivering fit-for-purpose, safe products to customers that adhere to, or exceed strict regulatory standards in all jurisdictions served by the company.
• Corruption and bribery: Business must be conducted with transparency, and free from unethical persuasion in every aspect of the company’s business from identifying product sources, through development of new products, transactions with regulatory bodies and sale to customers.
• Ethical purchasing and human rights in the supply chain: Responsibility to partners to ensure our product line is free from human rights concerns such as forced labor and trafficking, unsafe labor standards and unfair treatment.
• Compliance: Responsibility to drive compliance with legal and regulatory requirements applicable to our global business including training programs, continuous improvement and striving for best practice.
• Resource use and waste management: Includes energy usage during manufacture and logistics, water usage and waste as a by-product of manufacture.

The materiality assessment is intended to identify the sustainability-related topics that are relevant for the specific organization as it prepares to report; however, the results of the assessment should be compared to data that might be available regarding what peer organizations have opted to cover in their reports.  For example, evidence regarding the topics commonly covered in sustainability reports can be derived from a survey of ESG and sustainability policies published in September 2023 by the GRI and a consortium that included King’s College London and the University of Edinburgh.[5]  Key findings included[6]:

• An increasing number of policies invoked the SDGs, with the most referenced SDGs being SDG 8: Decent work and economic growth receives the most explicit mentions; SDG 12: Responsible consumption and production; and SDG 3: Good health and well-being.  SDG 9: Industry innovation and infrastructure had the fewest explicit references in the analyzed policies.[7]
• Assessing the relative focus of policies in terms of environmental (“E”), social (“S”), and governance (“G”) themes, the research found a clear dominance of E focus over time, followed by an S focus and then a G focus.  E-focused policies tended to refer to issues regarding climate change, energy, waste, and water; G-focused policies referred to audit, internal control, and risk management; and S-focused policies largely focused on compensation.
• There was a strong upward trend over time of references to the GRI Standards in the policies, with the most dominant standard in terms of references being GRI 2: General Disclosures, which covers the organizational profile of businesses, business strategy, ethics, integrity, governance, management approach, reporting practices and stakeholder engagement, followed by two environment-related standards: GRI 305: Emissions, which includes references to key issues regarding greenhouse gases and ozone depleting substances, and GRI 303: Water and Effluents, which includes issues regarding water supplies, water costs, and water discharge impacts.[8]

Also not to be forgotten is the intended audience for the sustainability report.  Certainly, materiality standards should be followed to ensure that legal and regulatory requirements are satisfied, but reporting is a valuable tool for molding and building the reputation and brand of the organization.  As such, public opinion should be considered as an important barometer of how companies should prioritize the behaviors they take with respect to key stakeholders.  For several years, JUST Capital’s research team has conducted focus group conversations and other surveys with a diverse and representative mix of Americans across the US to define and assess “justness” in corporate behavior, asking them to talk about what issues and actions matter most of them when it comes to their expectations about what is a “just” business.  The major themes from the responses of the survey group are distilled into statements that the researchers call “Issues”, and JUST publishes annual rankings of the Issues based on the probability that an individual would choose an Issue (and the expected behavior of a company in relation to the Issue) as most important to defining a just company.[9]  JUST identified 20 Issues in both 2022 and 2023—which were categorized into five stakeholder categories: workers, communities, customers, shareholders (governance), and the environment.[10]

The results for both years were striking and unambiguous: the public prioritizes treatment of workers when assessing if a particular business is “just”.  Four of the five worker-related behaviors were among the top six behaviors in both years, and second highest behavior (“creating jobs in the US”) was also closely related to actions with respect to improving the situation of workers even though it was categorized as community-related.  The total probability that a worker-related issue would be judged as most important was 44.2% in 2022 and 42.1% in 2023, priorities that far outpaced the other categories of behaviors: in second was “communities” with 18.3% in 2022 and 17.7% in 2023 and, interestingly, the total probability that an environment-related issue would be judged as most important was just 11.8% in 2022 and 10.7% in 2023.  The findings were relatively consistent across demographic (i.e., age, gender, racial category, income group, and whether or not someone was an active investor) and political groups[11] and provided guidance to companies that when developing their ESG-related priorities and commitments attention needed to be paid to the overwhelming public sentiment for businesses to prioritize fair wages, health and safety, career advancement, and work-life balance for workers.[12]  The JUST rankings are also distinguishable from other attempts to score and rank companies on ESG performance because its rankings are weighted to take into account exactly what matters to the public from year-to-year.      

Larger organizations have scanned proposals from shareholder activists for help in creating their list of potential reporting topics.  In recent years, public companies have frequently been required to respond to call for changes in corporate policies and activities with respect to political and lobbying activity, sustainability reporting, gender pay gap reporting, and child labor issues.[13]  In many cases, these companies have been able to calm the concerns of activists, sometimes getting them to withdraw their proposals, by promising to provide fuller disclosure; however, once a commitment is made to expanded disclosure the company needs to fulfill its promises and allocate sufficient resources to the effort since activists will be watching closely to ensure that their expectations are satisfied.  When formulating voluntary sustainability-related disclosures it is important to engage with activists to ensure that they understand the approach that the organization is willing to take and the company’s need to balance disclosure against the need to protect sensitive and strategically important information.

Stakeholder engagement, review of peer reports, surveys of public opinion are all important tools for determining materiality.  Other methods for making sure that the organization does not miss something during the materiality assessment include  external assurance, although that is generally beyond the resources for a small business just beginning with sustainability reporting; checklist comparisons (e.g. GRI sector supplement checklists, internal checklists, and indicator questionnaire checklists); discussions with key subject matter experts, alignment of organizational strategy with the sustainability reporting indicators; benchmarking the trend of best practices; discussions among members of an internal sustainability board; and surveying organizational managers about key sustainability issues.[14]

To learn more about conducting a materiality assessment in connection with preparing a sustainability report, see my new book on Preparing a Sustainability Report.

Notes

[1] N. Cleveland, D. Lynn and S. Pike, “Sustainability Reporting: The Lawyer’s Response”, Business Law Today (January 2015).

[2] Id. (citing TSC Indus. v. Northway, Inc., 426 U.S. 438, 449 (1976)).  Cleveland et al. explained that disclosures under the US federal securities laws are a mixed question of law and fact and noted that it is the view of the SEC that the issuer is in the best position to know what is likely to be material to investors and that courts have opined that corporations are not required to disclose a fact merely because a reasonable investor would very much like to know that fact.  Citing Richman v. Goldman Sachs Group, Inc., et al., 10 Civ 3461 (June 21, 2012, United States District Court for the Southern District of New York).  Id.

[3] A. Jackson, K. Boswell, and D. Davis, “Sustainability and Triple Bottom Line Reporting—What is it all about?”, International Journal of Business, Humanities and Technology, 1(3) (November 2011), 58.

[4] Small Business Big Impact: SME Sustainability Reporting from Vision to Action (Amsterdam and Geneva: Stichting Global Reporting Initiative and the International Organization of Employers, 2016), 8-10.  The publication is available for download at www.globalreporting.org.

[5] Carrots & Sticks: Beyond Disclosure in ESG and Sustainability Policy (Annual Report September 2023).  The results were based on an analysis of over 2,463 policies from 132 countries, 76 international and regional organizations, in 38 languages, from 1897 into 2023.

[6] Id. at 9-10.

[7] See A. Gutterman, SDG-Related Reporting (Oakland CA: Sustainable Entrepreneurship Project, 2024).

[8] Using the protocol employed in the report to map the GRI Standards into ESG classification themes, the next four most referenced GRI Standards all fell within the “S” theme: GRI 412: Human Rights Assessment; GRI 404: Training and Education; GRI 402: Labor/Management Relations; and GRI 405: Diversity and Equal Opportunities.  Id. at 41 (Table 6) and 43.  Not surprisingly, there are noticeable variations in references across the top seven targeted business sectors: finance and insurance; management of companies; manufacturing; mining, quarrying and oil and gas extraction; professional, scientific, and technical services; public administration; and transportation and warehousing.  Id. at 45.  For discussion of GRI Standards, see A. Gutterman, Sustainability Reporting Frameworks, Standards, Instruments, and Regulations (Oakland CA: Sustainable Entrepreneurship Project, 2024).

[9] Annual Survey: In a Year of Strikes, Worker Issues Like Wages and Mobility Top the American Public’s Priorities for Companies (Just Capital, 2023).  JUST explained: “Since the public initially tells us that all of these Issues are of high importance, we then conduct a choice modeling exercise as part of our Annual Survey work, enabling us to derive the relative importance of these 20 Issues. From here, we extract a “weight” per Issue that … reflect[s] the probability that an individual would choose that Issue as most important to defining a just company … [and] … [t]hese weights power our analysis of corporate stakeholder performance at the country’s largest companies, including our annual Rankings of America’s Most JUST Companies.”  For illustrative presentation of rankings, see 2024 Rankings (JUST Capital).

[10] Id. and D. Benjamin et al., Research: The ESG Issues That Matter Most to People, Harvard Business Review (July 18, 2023).

[11] There were some differences among groups, as might be expected.  For example, Democratics prioritized the environment more than Republicans, who gave greater weight to customer issues, and younger people assigned greater importance to the environment while older people (who were more likely to be shareholders) cared more about shareholders and governance.

[12] D. Benjamin et al., Research: The ESG Issues That Matter Most to People, Harvard Business Review (July 18, 2023).  JUST provides a description of how it measures individual company performance on each of the issues.  For example, when measuring whether a company pays a fair, living wage (i.e., covering local needs for food, housing, and medical care, and adjusting for cost-of-living increases), JUST refers to a range of data points derived from company filings and other public documents relating to share of US workers earning a family living wage, minimum wage or salary threshold, wage violations, pay relative to industry peers, fair pay rating by industry and job level based on crowdsourced ratings of the company's overall compensation,  CEO-to-median worker pay, race and ethnicity pay gap analysis, and gender pay gap analysis. See Pays a fair, living wage (JUST Capital).

[13] H. Gregory, “Corporate Social Responsibility, Corporate Sustainability and the Role of the Board”, Practical Law Company (July 1, 2017) (Subscription Required), 4.

[14] K. Mink, The Effects of Organizational Structure on Sustainability Report Compliance (Purdue University College of Technology Masters’ Thesis, 2012), 44-45.