Creating a Materiality Matrix: Essential Steps for Success

A materiality matrix is an essential tool that organisations use to identify and prioritise the Environmental, Social, and Governance (ESG) issues most significant to their operations and stakeholders. It helps determine which issues should be addressed and reported on based on their potential impact on the organisation and their relevance to stakeholders.

 Steps to Construct a Materiality Matrix

1.   Identify Relevant Issues: Identify a wide range of potential ESG issues relevant to your business. These might include climate change, labor practices, human rights, regulatory compliance, community impact, and more.

2.   Engage Stakeholders: Consult stakeholders such as employees, customers, investors, regulators, and community members to understand their perspectives on the importance of these issues.

3.   Assess Impact: Evaluate the impact of each issue on your business operations, financial performance, and long-term strategy.

4.   Plot the Matrix: Plot the issues on a two-dimensional matrix: (i) X-axis: Significance of the issue to the business; and (ii) Y-axis: Importance of the issue to stakeholders.

5.   Prioritise Issues: Focus on the issues that fall into the high importance/high impact quadrant for action and reporting.

The first two steps are important and require a lot of collaboration between multiple stakeholders. Surveys can be a powerful tool in determining key issues for a materiality matrix by systematically gathering and analyzing input from a wide range of stakeholders.

• Broad Engagement: Surveys gather input from diverse stakeholders, ensuring a comprehensive assessment.

• Quantitative Data: Surveys provide quantitative data that can be analyzed statistically to identify trends, common concerns, and priority issues.

• Prioritisation: By asking stakeholders to rank or rate the importance of various issues, surveys help prioritise which issues are most critical to different stakeholder groups.

Emerging Issues: Surveys can include open-ended questions that allow stakeholders to mention issues that may not have been previously considered.

Validation: Surveys can validate preliminary findings by seeking stakeholder feedback on key issues. 

Tip -> People in your company with good relationships with stakeholders should lead the interview/survey process. For example - A salesperson ideally should handle the customer.

Now let’s understand the key blocks of a matrix structure

• Top-Right Quadrant (High Importance to Both), these are the issues that are crucial for both business success and stakeholders, and thus should be prioritised in strategy and actions.

• Top-Left Quadrant (High Importance to Stakeholders, Lower to Business), issues in this quadrant are highly important to stakeholders but have a relatively lower immediate impact on business success. These should be monitored and managed effectively.

• Bottom-Right Quadrant (High Importance to Business, Lower to Stakeholders), these issues are critical to business success but are of lower priority to stakeholders. These should be managed to ensure business continuity and internal efficiency.

• Bottom-Left Quadrant (Lower Importance to Both), issues in this quadrant have a lower priority for both stakeholders and business success. They require less focus but should not be completely ignored.

Let's look at two examples of what companies are reflecting in their materiality matrix

The matrix below is from Arvind Fashion Limited. This matrix is divided into two axes: The X-axis represents the importance of these issues to Arvind Fashion’s stakeholders, while the Y-axis represents the significance of these issues to “Arvind Fashion Ltd."

High-priority issues include corporate governance, ethics, brand reputation, diversity, compliance, and employee development. Moderate priorities are employee satisfaction, safety, wages, transport optimisation, and product safety. Lower priorities involve climate change, chemical management, and packaging. Emerging issues include sustainable product innovation, ethical sourcing, and waste management.

The material issue to a bank that has an international presence looks very different. Below is the materiality matrix of Bank of America. 

PRO TIP : Go to SASB, identify your sector, and check for material issues listed there.

Building a robust materiality matrix helps ensure that your strategic priorities align with what matters most to your stakeholders.