What are "material" ESG factors?

Material ESG factors are the factors most critical to your organization. They directly inform what is reported and managed. Historically "material" factors have been assessed on their impact on enterprise value or financial materiality.

Standards and frameworks have varying definitions of materiality to guide the identification of factors and material information; for example, the International Financial Reporting Standards (IFRS) Foundation's International Accounting Standards note that "information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity."2

While the International Sustainability Standards Board (ISSB) Sustainability Disclosure Standards use the same definition of material as IFRS Accounting Standards, we're starting to see "double materiality" approaches emerge through frameworks and initiatives, including the EU's European Sustainability Reporting Standards as a regulated approach to identifying material information.

Double materiality encompasses financial materiality and impact materiality.

Impact materiality looks at your organization's impact on the world (society and the environment) either directly through your operations, or indirectly in your value chain. This double materiality concept reflects that ESG impacts, dependencies, risks and opportunities can be material to an organization from either an impact perspective, a financial perspective or both.

Exposure to different ESG factors and the subsequent impacts, dependencies, risks and opportunities they pose depends on the type of business your organization is engaged in. For example, if your organization operates in an industry highly or moderately dependent on nature as a resource or is a service provider somewhere across the supply chain, such as forestry and agriculture, electricity, construction, water utilities and mining, your exposure to certain environmental risks and opportunities would likely be greater compared to organizations in sectors such as financial services or communications.3

How do you identify material factors?

Material factors are highly influenced by an organization's purpose, mission and strategy, the nature of its business, relevant regulatory requirements, sustainability drivers, stakeholder and customer expectations, industry issues and societal expectations. If undertaking a double materiality assessment, you are considering material factors through the two lenses: their impact on your organization and their impact on society and the environment.

To define and understand which factors are material to your organization, you need to understand the breadth and composition of your operations and value chain (including the stakeholders with whom you work, serve and support), identify your ESG-related factors, then identify impacts, dependencies, risks and opportunities associated with those factors, and perform a materiality assessment. This includes engaging with relevant internal and external stakeholders to understand actual and potential impacts and their significance.

We use tools and techniques including targeted stakeholder workshops and interviews with internal and/or external participants, peer benchmarking and research, and decision analysis tools to undertake materiality assessments and prioritize ESG factors. Your identified material factors should then be communicated to your key stakeholders through things such as your annual report or annual sustainability report. While many ESG standards and frameworks recommend or require the use of a materiality matrix to identify and disclose material ESG factors (Figure 2 below), we are increasingly seeing material factors visualized as a list or table (Table 1 below).

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Jacobs Solutions Inc. published this content on 04 April 2024 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 04 April 2024 13:04:13 UTC.