Is Subjectivity Undermining Materiality?

This informal CPD article, ‘Is Subjectivity Undermining Materiality' was provided by FBRH Consultants, who aim to help businesses gain value by operating in much cleverer, sustainable ways.

Best Practices for Objective Assessments

In the realm of ESG/ sustainability reporting, the materiality process plays a crucial role in identifying and prioritizing ESG/ sustainability issues that have significant impacts on a company's performance and stakeholder interests. However, the inherent subjectivity in this process can pose challenges and undermine the effectiveness of ESG/ sustainability strategies. Subjectivity arises from human judgment, interpretation, and biases, which can lead to inconsistency, lack of transparency, and misalignment with stakeholder expectations. As companies strive to navigate the ever-evolving landscape of ESG/ sustainability, understanding and mitigating the impact of subjectivity on materiality assessments becomes a paramount concern.

Subjectivity has the potential to skew the materiality process, creating an environment where key ESG/ sustainability issues may be either overlooked or inflated in importance. When ESG/ sustainability teams and stakeholders interpret and weigh the significance of different issues differently, it can lead to divergent priorities. As a result, some critical ESG/ Sustainability issues may be underrepresented or neglected entirely in ESG/ sustainability reporting, while other less impactful issues might receive undue attention. Such misalignment can result in a disconnect between the company's ESG/ sustainability efforts and the concerns of stakeholders, thereby eroding trust and credibility.

Moreover, subjectivity in materiality assessments can hinder the comparability of ESG/ sustainability reports across companies and industries. Without a standardized and objective approach to identify material issues, it becomes challenging to benchmark performance, assess industry peers, and track progress towards ESG/ sustainability goals. Investors, customers, and other stakeholders seeking consistent and reliable ESG/ Sustainability data may find it challenging to make informed decisions when materiality varies significantly from one company to another. This lack of comparability hampers the establishment of industry-wide best practices and impedes collective efforts to address global ESG/ sustainability challenges.

Data driven, transparent approach

To address the issue of subjectivity, companies must adopt a data-driven and transparent approach to materiality assessments. By leveraging established ESG/ sustainability reporting frameworks like the Global Reporting Initiative (GRI), SASB, and TCFD, organizations can align their assessments with industry standards and demonstrate a commitment to objective reporting. These frameworks provide a structured methodology and indicators that guide the identification and evaluation of material issues, promoting consistency and enhancing comparability.

Engaging Stakeholders and experts: A Key Strategy for Balanced Assessments

Involving a diverse group of stakeholders in the materiality assessment process is another essential strategy to mitigate subjectivity. By engaging investors, customers, employees, NGOs, and community representatives, companies can gain a more comprehensive view of the most relevant ESG/ sustainability issues. Stakeholder engagement fosters a sense of ownership and inclusion, increasing the likelihood that identified material issues truly align with the interests and concerns of all relevant parties.

The organization should consider consulting credible independent experts, such as national human rights institutions, human rights and environmental defenders, trade unions, and other members of civil society.

Regular reviews ensure that materiality remains dynamic, relevant, and aligned

Moreover, companies should conduct periodic reviews of their materiality assessments to account for changes in the business landscape, stakeholder expectations, and emerging ESG/ Sustainability issues. ESG/ sustainability is an ever-evolving field, and what may be material today may not be so tomorrow. Regular reviews ensure that materiality remains dynamic, relevant, and aligned with the company's strategic objectives and external expectations.

The Global Reporting initiative (GRI) and the materiality process

GRI, the ESG/ sustainability framework used by 78% of the world’s largest 250 companies for reporting, facilitates the materiality process in two important ways:

1. The four step materiality process.

• Step 1. Understand the organization’s context
• Step 2. Identify actual and potential impacts
• Step 3. Assess the significance of the impacts
• Step 4. Prioritize the most significant impacts for reporting 

This four step process addresses the expectations of intergovernmental instruments such as the OECD and the UNCG and helps companies identify significant impacts (on the economy, environment and people and their human rights). Used properly companies can identify significant impacts throughout their value chain and address planetary boundaries through the sustainability context principle.

2. Sector Disclosures. The power of the GRI Sector Standards lies in two very important aspects:

• A list of a sector's most significant impacts is clearly defined in the public interest through a transparent, multi-stakeholder approach (academia, business, experts, governments etc.) which includes a period of public comment.
• Companies are required to either show how they are taking action related to these significant impacts, or provide the reason why they consider (a significant impact) not applicable for them (depends on their value chain position). This level of transparency is an extremely powerful driver for change. 

Using the GRI sector disclosure is a requirement. It is also a requirement that companies use the four-step process (or any other recognised tool) to identify material issues. Because every company is configured in a different way, the materiality process must demonstrate that their clear focus was their operations and value chain.

Subjectivity is an inherent challenge in the materiality process and its impact on ESG/ sustainability reporting cannot be ignored

However, with a commitment to transparency, data-driven analysis, stakeholder engagement, and alignment with established reporting frameworks, companies can navigate the complexities of subjectivity and enhance the effectiveness of their ESG/ sustainability strategies. Striking the right balance between objectivity and stakeholder relevance is the key to unlocking the true potential of materiality assessments and fostering a sustainable future for all.

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