3.1 Materiality from an impact perspective
As it goes about its operations and business activities to provide products or services, an organisation creates positive and negative outcomes on people, the environment and the economy.
These outcomes are referred to as impacts, and some will be more significant than others. The purpose of an impact materiality assessment is to identify all of an organisation’s ESG impacts right along its value chain (without undue cost or effort), and assess the significance of each impact to determine whether it is material for reporting.
An organisation undertaking an impact materiality assessment might ask these questions – notice that they are outward looking, examining the impact of the organisation on people and the planet external to it:
What outcomes do we actually have on water?
What outcomes could we potentially have on water?
How do we contribute to the economy of the communities in which we operate?
What are our Scope 1, 2 and 3 emissions?
Do we have fair work contracts in place with our employees?
Are our employees happy at work?
Do we have human rights issues in our supply chain?
3.2 The primary audience of information about impacts
In module 2, we learned that the primary audience of information, and how they would use that information to make judgements, were key factors in determining the materiality of that information.
When determining whether an ESG impact is material, an organisation should consider its stakeholders as its primary audience. Stakeholders are those who can affect or be affected by the organisation. Stakeholders can include, but are not limited to, employees, community groups, consumers, regulatory bodies, and investors. Nature can also be considered a ‘silent stakeholder’, with its views represented through data and research.
It is the significance of the impact on stakeholders that is to be assessed, not the significance of the impact to the organisation. It is best practice to consult with affected or potentially affected stakeholders directly to identify and assess actual or potential impacts.
3.3 Guidance when conducting impact materiality assessments
The Global Reporting Initiative (GRI) provides the most widely adopted framework for assessing ESG impact materiality.
The European Sustainability Reporting Standards, which is the standards that guide organisations that must comply with the Corporate Sustainability Reporting Directive (CSRD), has aligned its requirements for determining and reporting on impact materiality with the GRI framework.
3.4 A simplified process for undertaking a best practice impact materiality assessment.
The organisation will:
- Understand its context by mapping its value chain, considering its business activities, the sectors of those activities, and geographical locations. Recall that an organisation’s value chain includes its supply chain, but is much broader, considering all its business relationships, activities and stakeholders.
- Map all stakeholders along the value chain, including geographical locations and business relationships, such as joint ventures, investors and consumers.
- Identify actual and potential impacts by engaging with stakeholders and experts. To guide the identification of impacts, use the topics provided by the framework most relevant to the organisation’s reasons for managing and disclosing ESG information.
- Assess the significance of the impacts by engaging with stakeholders and experts. The organisation is to set its own thresholds for significance, relying on objective criteria where it can. See Table 1 for the different components that are to be considered when determining significance related to impacts.
Table 1: Factors that help determine the significance of impacts, depending on the type of impact.
- Use judgment to define a cut-off point for material / not material.
- Categorise or group each material impact according to its relevant topic, using the topics provided by the disclosure framework the organisation is reporting against. At this point, the organisation has determined its material topics.
It’s important an organisation maps its impacts back to the topics provided by the disclosure framework it is working to, to gain clarity on which disclosures it is required to make under that framework. For example, ESRS contains the topic ‘pollution’ with the sub-topics ‘water pollution’ and ‘microplastics’. While GRI does not have a topic called ‘pollution’ or these sub-topics, it does have disclosures related to water pollution in its topic ‘Water and Effluents’, and disclosures related to microplastics under its topic ‘Materials’. The organisation could conclude it has the material topic ‘Microplastics’ or ‘Materials’, depending on which framework it uses.
See slide 4 for a summary of the information about impact materiality covered in this module.
3.4 A simplified process for undertaking a best practice impact materiality assessment.
The organisation will:
- Understand its context by mapping its value chain, considering its business activities, the sectors of those activities, and geographical locations. Recall that an organisation’s value chain includes its supply chain, but is much broader, considering all its business relationships, activities and stakeholders.
- Map all stakeholders along the value chain, including geographical locations and business relationships, such as joint ventures, investors and consumers.
- Identify actual and potential impacts by engaging with stakeholders and experts. To guide the identification of impacts, use the topics provided by the framework most relevant to the organisation’s reasons for managing and disclosing ESG information.
- Assess the significance of the impacts by engaging with stakeholders and experts. The organisation is to set its own thresholds for significance, relying on objective criteria where it can. See Table 1 for the different components that are to be considered when determining significance related to impacts.
Table 1: Factors that help determine the significance of impacts, depending on the type of impact.
- Use judgment to define a cut-off point for material / not material.
- Categorise or group each material impact according to its relevant topic, using the topics provided by the disclosure framework the organisation is reporting against. At this point, the organisation has determined its material topics.
It’s important an organisation maps its impacts back to the topics provided by the disclosure framework it is working to, to gain clarity on which disclosures it is required to make under that framework. For example, ESRS contains the topic ‘pollution’ with the sub-topics ‘water pollution’ and ‘microplastics’. While GRI does not have a topic called ‘pollution’ or these sub-topics, it does have disclosures related to water pollution in its topic ‘Water and Effluents’, and disclosures related to microplastics under its topic ‘Materials’. The organisation could conclude it has the material topic ‘Microplastics’ or ‘Materials’, depending on which framework it uses.
See slide 4 for a summary of the information about impact materiality covered in this module.
