Materiality analysis: what topics do companies disclose in sustainability reports?

September 14, 2023
Sustainability in Business
Companies in many industry sectors publish annual sustainability reports detailing sustainability-related initiatives and metrics across Environment, Social, and Governance (ESG) dimensions. These reports typically follow one of the voluntary standards, like the GRI or SASB standards. As part of sustainability reporting, a description of the process for materiality analysis and the resulting prioritization of material topics often is the foundation of the disclosure particularly for those companies reporting in reference to or in accordance with GRI standards.

Companies in many industry sectors publish annual sustainability reports detailing sustainability-related initiatives and metrics across Environment, Social, and Governance (ESG) dimensions. These reports typically follow one of the voluntary standards, like the GRI or SASB standards. As part of sustainability reporting, a description of the process for materiality analysis and the resulting prioritization of material topics often is the foundation of the disclosure particularly for those companies reporting in reference to or in accordance with GRI standards.

GRI introduced materiality analysis for sustainability in its standards initially issued in 2016 and updated in 2021. It comprises a broad stakeholder engagement process used to generate and prioritize a list of topics that matter to both the business and external stakeholders (including investors, local communities, supply chains, and others). Companies generally embrace a prioritization framework based on importance/relevance to the business, and importance/relevance to the external stakeholders. Plans to address those that emerge as high-priority topics are then integrated into the business’s operational plans. The outcomes of today’s materiality analyses, thus, represent a disaggregated perspective of the sustainability matters relevant to each company according to the nature of the business, and to its external stakeholders.

In The ESG App, we collected sustainability reports across a number of sectors and companies. Using a sample of our data, we conducted an analysis of material topics disclosed by these companies based on their 2022 sustainability reports. Discarding some topics that we consider as core to the business, for example, innovation, economic performance, and management efficiency, we group the remaining topics based on whether their primary objectives are related to one of the Environment, Social, or Governance dimensions. As an illustration, climate change and GHG emissions-related topics fall within the Environmental group. Employee and talent-related topics fall within the Social group, while ethics, transparency or corporate conduct topics fall within the Governance group.

Percent of sustainability material topics reported by companies by industry sector

Our result shows that Environment and Social topics represent the majority of topics across sectors. It covers over 80% of topics for Materials and Energy companies and over 70% of topics across the remaining sectors. The Finance sector highlights more Governance-related topics than others, while for Technology companies, Social topics represent close to half of all topics of matter. Environmental matters are most salient for the Energy sector but also is revealed to be important for the Materials sector.

What are the top Environment, Social, and Governance topics identified by companies in each category? For each sector, the material topics reported by companies differ in their phrasing and in the frequency with which a certain topic is mentioned. For the Automobile industry, for example, “Climate change” is the most mentioned category of topics, and it includes phrasing of topics such as

Emissions”, as a more specific topic within the broader Environment category, is second in the frequency of being mentioned, and this includes phrasing such as

Employees” comes third in the mentioned frequency, and the topics include

Comparing this with the Energy sector, we find that the ranking of the most mentioned topics differs slightly but also has some overlap. First in place as the most frequently mentioned topic for the Energy sector is “Emissions”, which includes concerns about “Achieving net-zero emissions” and “GHG emissions - our operations” / “GHG emissions - our products”. Second ranked in the frequency of being mentioned is “Employees” as energy companies are particularly concerned about the “Risk of major accidents” and “Leading in personnel safety”. The third category, perhaps surprisingly, is “Nature” with multiple companies expressing heightened awareness and concerns about “biodiversity and habitat”, “land-use”, and “conservation”.

Companies in each sector report their material topics based on the materiality assessment process that they undertake. We aggregate these topics to present a sector-level perspective on the topics that companies deem as material in sustainability. This perspective should then be compared with regulatory segmentation such as those outlined in the Corporate Sustainability Reporting Directive (CSRD), and also with those that the financing community uses when constructing various ESG metrics and indices. These multi-stakeholder voices help to ensure that the appropriate materiality concerns relevant to each industry and to sustainability are captured and appropriately evaluated for their impact and financial materiality.

Furthermore, the perspective that companies take in the current materiality assessment is often from the vantage point of prioritization for business planning. Since the publication of the CSRD and its Annex 1 including the ESRS standards, it is clear that companies should report material topics (or “sustainability matters”) based on an assessment of “relevance”, which means “the significance of the information in relation to the matter it depicts” or “its decision-usefulness..for the primary users of general purpose financial information…and/or for those users whose interest is on the undertaking’s impact”. The reporting of a particular “sustainability matter” also should reflect its “severity” and “likelihood”. Thus, as the implementation of CSRD rolls out in 2024, companies should re-evaluate their materiality assessments to ensure that they are compliant with the requirements of the new regulations and that they are able to sufficiently support the claims of their chosen material topics.

As a final caveat, we note that our numerical analysis is based on the number of material topics reported by a sample of the companies in our data. It does not measure the amount of effort a company puts into analyzing and addressing the topics. Thus, this analysis weighs each topic equally and this obviously is a major shortcoming as some topics may be related to another topic stated just slightly differently (e.g., people and talent development). Some topics may also take significantly more effort (e.g., biodiversity and energy transition) than others. For more information about this and about our product/services, visit our website and contact us.

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