Climate, water, human rights, data privacy, diversity, waste, supply chains. The list of sustainability topics a company could address is long, and no one can tackle them all at once. So how do you decide where to focus? That’s the question a materiality assessment answers. At its core materiality is about figuring out what matters most.
What is a materiality assessment?
A materiality assessment is a structured way of identifying and prioritizing sustainability topics that are most significant for a company. These are the topics that deserve its attention, its budget, and a place in its reporting. “Material” simply means “important enough to matter” to a business, to the people and environment the business affects, or both.
A good assessment answers three questions:
- Which sustainability topics are relevant to a company like ours?
- Which of those are truly significant, and why?
- What should we do about them?
The output is usually a short list of priority topics, backed by evidence, that guides strategy, goal-setting, and reporting.
Goals of materiality assessments
The main goal is focus. A materiality assessment helps a company stop trying to do a little bit of everything and start putting effort where it counts. It also gives leadership a shared, evidence-based view of sustainability risks and opportunities, makes sure the company reports on what readers need to know rather than what’s easy to talk about, brings stakeholder voices (employees, customers, investors, local communities, suppliers) into decisions, and meets the expectations of regulations and reporting frameworks.
Three types of materiality
The right type of materiality depends on who a company is reporting to and why.
Financial materiality looks from the outside in. It asks how sustainability issues affect a company’s finances. For example, could water shortages disrupt our factors? Could new carbon rules raise our costs? This is the view investors care most about.
Impact materiality looks from the inside out. It asks how a company affects people and the environment. Think of pollution from operations, working conditions in the supply chain, or effects on local communities. A topic can be material here even if it isn’t affecting the bottom line today.
Double materiality combines both. A topic is material if it’s significant from the financial view, the impact view, or both. The two are often connected. An impact on the world today (such as heavy water use in a drought-prone region) frequently becomes a financial issue tomorrow (fines, lost permits, damaged reputation). Double materiality gives the most complete picture, and it’s what European rules require.
Which frameworks and regulations use each type?
Which type a company uses often depends on the rules and standards it follows, since each is built on a particular view of materiality.
- Double materiality is required by the EU’s Corporate Sustainability Reporting Directive (CSRD). Its reporting standards, the European Sustainability Reporting Standards (ESRS), define how the assessment must be done and the assessment is the foundation of the entire report.
- Financial materiality is the basis of the ISSB standards (IFRS S1 and S2), which a growing number of countries, including the UK, Australia, Brazil, and Japan are building into national rules. SASB, TCFD, and California’s climate risk disclosure law take the same investor-focused view.
- Impact materiality is the basis of the GRI standards, the most widely used voluntary sustainability standards in the world.
These rules are still changing. The EU has recently narrowed which companies CSRD covers and simplified its requirements, and in the US, the picture varies by state, so it’s worth checking the current status for your company’s size and location. Even companies outside of the scope of any regulation feel the effects. If you sell to large customers, borrow from banks, or have investors, chances are someone is already asking you for sustainability information shaped by these frameworks.
For companies that aren’t covered by a specific rule, the choice usually follows the audience. Those reporting mainly to investors tend to focus on financial materiality, while those reporting to a broader group of stakeholders tend to focus on impact materiality.
How materiality assessments have evolved
The concept of materiality comes from financial accounting, where information is considered material if leaving it out could influence an investor’s decision. Over time, investors recognized that issues like climate change, workplace safety, and supply chain practices could affect a company’s performance too, and they began asking for that information. Meanwhile, customers, employees, and communities were asking their own questions about how companies affect the world around them. Companies needed a way to decide which topics to report on, so they borrowed the idea of materiality and applied it to sustainability.
Early sustainability materiality assessments followed a familiar pattern. A company would build a long list of topics, send a survey to stakeholders asking them to rate each one’s importance, ask internal leaders to do the same, and plot the results on a grid. “Importance to stakeholders” went on one axis, “importance to the business” on the other, and whatever landed in the top right corner was considered material.
These earlier assessments served companies well at the time, and they helped put sustainability on the agenda. But as expectations have grown, some limitations have become clear. Surveys capture what people think is important, which can be shaped by headlines and personal interest, rather than the evidence of what is actually significant. Topics were often rated at a very broad level (“climate change,” “human rights”), which made the results hard to act on, and the findings didn’t always feed into business decisions. In many ways, this approach worked more like a stakeholder-informed ranking of issues than a materiality assessment as the term is understood today.
Today’s approach builds on that foundation with more rigor. A modern assessment identifies impacts, risks, and opportunities across a company’s operations and value chain, and judges each one on evidence, such as how severe an impact is or how large a financial effect could be. Stakeholders still play a vital role, as a source of insight that informs the analysis. The whole process is documented so it can stand up to review by auditors, regulators, and investors.
Why materiality matters for your business
Materiality assessments are often associated with compliance, but most of their value lies elsewhere.
It helps to manage risks before they become problems. A thorough assessment looks across the whole value chain, from raw materials to the end of the product’s life. That’s often where surprises hide, such as a key supplier in a flood-prone region, a labor issue several tiers down, or a regulation on the horizon that will affect your main product. Finding these early is far less costly than responding late.
It uncovers opportunities. The same process that flags risks also highlights openings, such as growing customer demand for lower-carbon products, cost savings from efficiency, access to green financing, or a stronger pitch to job candidates who care about purpose.
It connects sustainability to business strategy. This may be the biggest benefit. The results should tell you where to set targets, where to invest, what to measure, and what to bring to the board. A good assessment makes sustainability part of how the company is run rather than a side project. It also gives you a solid basis for saying “not right now” to topics that aren’t priorities, which is just as valuable.
It builds credibility. When your report focuses on a well-reasoned set of priority topics, and you can show how you got there, stakeholders trust it more. It also helps protect against greenwashing concerns, because you’re reporting on what matters most rather than only on good news.
It strengthens relationships. Talking with employees, customers, suppliers, and local communities as part of the process often surfaces concerns and ideas you wouldn’t hear otherwise.
Should your company conduct one?
For almost every company, yes. It’s especially worthwhile if you’re covered (or may soon be covered) by CSRD, ISSB-based rules, or similar regulations, or if you report using GRI or another framework. The same goes if customers, investors, or lenders are sending you sustainability questionnaires, if you’re building or refreshing a sustainability strategy, or if your last assessment is more than two or three years old or was built around a stakeholder survey.
Even small companies with no reporting obligations can benefit. The assessment can be scaled to fit the size and complexity of the business and the clarity it brings is just as useful for a small team as for a large one.
How often should it be updated?
Most companies do a full refresh every two to three years, with a lighter check-in each year. It’s also worth revisiting after major changes like an acquisition, a new market, a significant new regulation, or a major event in your industry.
Regular updates matter because what’s material changes over time, sometimes quickly. Plastic packaging, AI ethics, and biodiversity were barely on most companies’ radars a decade ago. Topics often start as impacts on people or the environment and later become financial issues as public attention, customer expectations, and regulations catch up. This idea is sometimes called “dynamic materiality.” In practice, it means looking ahead at which topics are likely to grow in importance and keeping an eye on emerging issues between refreshes rather than waiting for the next full cycle.
Conclusion
No company can work on every sustainability topic at once, and a materiality assessment is how it chooses. Whether the starting point is a regulation, a customer request, or a new sustainability strategy, the goal is the same: to understand what matters most and focus effort there. Done well, the value goes well beyond the report. It shows up as clearer priorities, fewer surprises, and a sustainability strategy tied to how the business runs. It also gives everyone, from the board to the people doing the work, a shared understanding of where the company is focusing and why.
Start your materiality assessment today with the team at ADEC ESG. Contact us and we’ll work together to map out your priorities and build a stronger, more resilient strategy for the future.
This blog provides general information and does not constitute the rendering of legal, economic, business, or other professional services or advice. Consult with your advisors regarding the applicability of this content to your specific circumstances.
