ESG and materiality: an introduction

‘Materiality’ is an accounting concept that has been widely adapted to support the ESG agenda. It is a concept that will be more familiar to those in the corporate sector or with accounting backgrounds, but it plays a central role in ESG monitoring and reporting.

When deciding what issues a board should be reporting on in relation to climate change, the commercial sector makes use of the concept of materiality. It is a concept that can also be adapted and applied to broader ESG concerns. Not all ESG-related risks will be of equal importance or relevance to an organisation, hence the introduction of the concept of materiality to help establish and agree on the board’s understanding of the seriousness and relevance of a particular action or issue to an organisation.

For those organisations not already required to assess issues of materiality, it will be necessary for the board to agree and share its own definition of materiality and how that informs what ESG factors are measured and reported in light of the definition. It is likely the definition will reflect the aggregate ranking of different ESG issues by different stakeholders, tempered by the decisions of the board as to which ESG-related risks directly threaten the work of the organisation or undermine its agreed values and culture. Developing a definition of materiality should be included in the organisation’s ongoing processes of developing and maintaining a stakeholder map and wider organisational engagement plan.