By Professor Mak Yuen Teen and Tina Thomas
Materiality assessment is a critical step for effective management of sustainability-related risks and opportunities (SROs) and disclosure of sustainability-related information that is useful for investors and other stakeholders, including for stakeholder accountability.
The materiality assessment enables an entity to identify and prioritise sustainability aspects for the entity. It helps the entity determine which topics or indicators have significant actual or potential economic, environmental or societal impacts caused by or impacting the organisation.
The results of the materiality assessment are an important input into strategic planning, goal-setting and reporting.
This report, titled “Climate first…or last?”, authored by Professor Mak Yuen Teen and Tina Thomas and published by Sustainable Finance Institute Asia and Governance for Stakeholders, examines materiality assessment of SROs by predominantly large companies from 10 sectors which are listed on Australia Securities Exchange (ASX), Bursa Malaysia (BM) and Singapore Exchange (SGX).
While the report is based on data mostly from the FY2022 or FY2023 annual reports and sustainability reports, and from company websites, the latest information was also used to determine whether there have been significant changes.
Based on 300 companies in the three markets, Bursa-listed companies had the clearest presentation of the materiality assessment as 87% disclosed this using a materiality matrix that shows the relative importance of different SROs. SGX-listed issuers were some way behind at 45% but ahead of ASX-listed companies which was at just 14%.
In terms of sources that were used to identify SROs, ASX-listed companies were more likely to use internal and external stakeholders, compared to SGX-listed companies, followed by Bursa-listed companies. For external stakeholders, ASX-listed companies were much more likely to engage with non-governmental organisations (NGOs) and civil society organisations (CSOs) compared to Bursa-listed and SGX-listed companies.
A further analysis of 180 listed companies in the three markets which provided clear and comparable materiality matrices found that Human Capital and Labour Management, along with Workplace Health and Safety, emerged as the two most frequently disclosed material SROs among companies listed on BM and SGX. For both markets, Ethical and Sustainable Supply Chain and Climate Change and Emissions were the third most commonly reported material topics, respectively. These patterns may be related to the industrial composition of the sampled companies.
However, for ASX-listed companies, Community Relations was the most frequently mentioned, followed by Climate Change & Emissions and then Corporate Governance. The importance of Community Relations as a material SRO for ASX-listed companies is consistent with higher external stakeholder engagement, particularly engagement with NGOs and CSOs, for these companies.
However, while “social” factors and, to some extent, “environment” factors were frequently mentioned, they were only ranked third and fourth overall respectively for each market and for most sectors in each market based on relative importance. In general, governance factors were ranked as most important, followed by economic factors.
Our data was collected before sustainability standard-setting bodies such as the International Sustainability Standards Board (ISSB) and the EFRAG, and regulators in a number of countries, adopted a “climate first” approach for sustainability reporting. A “climate first” approach to sustainability reporting may increase the relative importance that companies place on environment-related SROs. Nevertheless, company boards should be alert to blind spots related to climate-related risks and opportunities.
Boards of directors should ask the following 10 questions about their materiality assessment to better ensure that it is robust and that the most important factors are linked to strategy, goal setting and reporting.
- What is the process and methodology for identifying material sustainability-related risks and opportunities (SROs)?
- Which internal and external stakeholders are involved, how are they identified, and how are they engaged in the process? Are stakeholders prioritised?
- Have we considered the context of our business when undertaking the materiality assessment?
- Are short-term, medium-term and long-term horizons considered when assessing the materiality of sustainability-related risks and opportunities?
- Have we benchmarked our materiality assessment against our peers, standards and other external sources? Are any frameworks such as Sustainability Accounting Standards Board (SASB) and Global Reporting Initiaitve (GRI) used? Are there any local regulations relating to choosing material topics?
- Are we missing blind spots in our materiality assessment?
- How often is the materiality assessment undertaken and refreshed?
- Are the results of our materiality assessment linked to strategic planning, risk management, goal-setting and reporting?
- How is the corporate materiality assessment rolled out throughout the group and how are variances in material SROs in different parts of the business and geographies considered?
- Is the materiality assessment that is disclosed useful to help stakeholders understand the most material SROs?
We will be participating in two hybrid events to discuss the report, one to be hosted by Asia School of Business Executive Education Centre in Kuala Lumpur on 8 September for directors and senior executives in Malaysia, and another to be hosted by Institute of Singapore Chartered Accountants (ISCA) on 19 September for Board Masterclass participants.
The full report can be downloaded from here:
