When we discuss the topic of materiality, several questions naturally arise. What is materiality? What is the approach to materiality? Which reporting framework ( GRI or IIRC ) is the correct one to use?
All these questions are relevant. Their answers have evolved over the regulation, and standards will continue to do so. Therefore, when discussing materiality assessment, it is important to clarify the term materiality first. The origins of the term lie in accounting, where materiality is defined in financial context by the financial accounting standards board (FASB) as:
“The omission or misstatement of an item in a financial report is material if, in light of surrounding circumstances, the magnitude of the item is such that it is probable that the judgment of a reasonable person relying upon the report would have been changed or influenced by the inclusion or correction of the item.” (FASB, 2018, p.9).
The essence of this definition lies in the omission of items that influence decision-making. However, this definition does not yet state the temporal aspect of materiality.
An issue arises, and it is the switch to non-financial materiality and the fact that stakeholders might confuse it with its accounting counterpart. Material aspects are those issues that could have a major impact on a company's performance (Forstater et al., 2006).
Often issues are not considered material as long as it remains unconnected to the business strategy.
Materiality definitions do not explicitly include sustainability and business ethics issues discussed in non-financial reporting.
The materiality topic must be of importance in the long term and be systematic.
A discussion must exist on the identification and prioritization of material topics.
This lack of holistic methods could also be caused by the fact that materiality assessment is often seen as a subprocess of sustainability reporting.
A wide pre-selection of key performance indicators (KPI) is critical for materiality assessments.
Materiality assessments fail to consider problems in equally measuring each aspect (Puroila and Mäkelä, 2019).
“Black box” is caused largely due to lack of disclosure, as not all companies are as transparent about it.
The interval in which a materiality assessment is conducted, as this is not prescribed by any method. However, most businesses do them between once a year and every three years.
Many assessments are based on GRI: importance to internal stakeholders versus importance to external stakeholders. The hospitality industry suffers from a lack of accessible and holistic tools.
Sustainability non-industry experts have little knowledge of the operationalization of the hospitality activities.
Hard to prioritize stakeholders and what weight should be assigned to them, how many stakeholders are needed, and how many topics it should contain.
The lack of standards in materiality assessment methods is an issue.
Surveys for elicitation from external stakeholders is a common practice. However, questions are often ambiguous and there is a low response rate resulting in opaque results, where there is little control of whether the result shows what the participant meant.
The use of a materiality assessment tool can improve the scope of the analysis and the results.
Where to start?
Identification process. Assess sustainability strategy, analyze documentation, identify topics, and pre-measure topics.
Planning: determine stakeholders, prioritize and pick stakeholders, decide on a strategy.
Data collection from stakeholders: conduct survey, perform media analysis, and use technology.
Conduct qualitative analysis
Validation process
Common sources of information in materiality assessment are risk analysis tool, Focus Groups , Manual analysis, Interviews, or the Datamaran tool.
This study proposes a practical and structured approach for performing materiality analysis, integrating the well-known Global Reporting Initiative (GRI) materiality matrix and a new “adequacy matrix”. The purpose of the GRI materiality matrix is to prioritize sustainability issues in terms of relevance to both companies and stakeholders. The adequacy matrix supports the evaluation of the transparency and effectiveness of corporate sustainability (CS) communication.
The GRI G4 - Materiality changed in the Standards The meaning of ‘impact’. In the GRI Standards, unless otherwise stated, ‘impact’ refers to the effect an organization has on the economy, the environment, and/or society, which in turn can indicate its contribution (positive or negative) to sustainable development. The main aim of the clarifications is to ensure that when the businesses are determining material topics, they considers a holistic view of its impacts on the economy, the environment, and society regardless the impacts that have immediate consequences from a business perspective or not.
Scientific papers are focused on the importance of engagement to ensure a good and effective disclosure.
Font et al. (2016) suggest four different frameworks to clarify the reasons for engagement. Whether is reputation and risk management theory, resource-based view of the firm to maximize their competitive advantage, Stakeholder Theory where businesses act in response to stakeholder needs either in a preventive or a proactive way and the Creating Shared Value (CSV) where the aims is to create engagement with a differentiation strategy.
CSRD - What is the double materiality mentioned in the upcoming regulation?
The EU sustainability reporting standards need to be consistent with the ambition of the European Green Deal and with Europe's existing legal framework, the Sustainable Finance Disclosure Regulation (SFDR) and the Taxonomy Regulation.
"need to cover not just the risks to companies but also the impacts of companies on society and the environment (the so-called ‘double materiality' principle)".
Policy making Understanding the materiality matrix limitations, potential unconscious bias, and education needs can help executives and managers to establish internal policies that help drive meaningful analysis including business stakeholders and nature. Eventually reach do not harm goals and drive innovation in corporate sustainability. Distinguishing a policy’s internal structure, external structure, and policy context allows us to formulate policies that have a higher probability to achieve policy objectives.
Some examples of sustainability topics evaluated in hospitality materiality analysis are:
Reduced climate impact through reduced GHG emissions
Reduced waste, energy consumption, water consumption and increased recycling/ reuse
Increased use of sustainable materials
Environmental certification of buildings and hotel operations
Climate adaptation of buildings
Biodiversity
Employees and suppliers
Business ethics and anti-corruption
Guests and communities
Purchase of locally produced
Purchase of vegetarian, and vegan food
Wellbeing, guests, and visitors
Technology implementation
Blockchain for transparency Vechain VeChain (VET) is a blockchain platform that seeks to enhance supply chain management processes with specialized functions. It uses tamper-proof distributed ledger technology to determine the authenticity and quality of products purchased by platform users. Datamaran This software analytics platform helps businesses to identify and monitor external risks. It is used by companies such as JLL.
The importance and effect of stakeholder engagement affect the decisions about the materiality and the consequences that this principle has on the report itself. For stakeholder groups who are struggling to be heard and involved in the decision-making and information processes of companies to which they are linked. This should be taken seriously by owners and operators. Without real engagement, we are missing a fundamental element in the processes of transparency and disclosure. Regular materiality cycles offer a natural moment to engage our stakeholders and hear their voices. It is important to have direct contact and capture their opinion firsthand. This essentially demonstrates our proactive listening approach. Materiality also allows you to focus and target these values, and prove that you are creating value. This helps preserve your license to operate and protect the long-term sustainability of the business.”
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