Materiality

Information is considered material if its inclusion or exclusion could significantly affect stakeholders’ judgments. In accounting, it is a concept from Generally Accepted Accounting Principles (GAAP) that asks whether omissions or misstatements in financial reporting would influence the economic decisions of users.¹² This is often called the Materiality Threshold, or the limen at which financial information becomes significant enough to potentially influence the decisions of users of financial statements, such as investors, stakeholders, or auditors. Both quantitative and qualitative factors are involved in setting and applying these thresholds, and there is substantial professional judgment involved.​³

Materiality Thresholds²³
Quantitative thresholds provide a numerical basis for determining whether a misstatement or omission is material or not. For example, a company may decide that if an incident affects their gross revenue by 1%, they will inform stakeholders about it. That percentage can be anything that the company decides, for instance, their threshold may be 5% of post tax net profits, or 3% of EBITDA, etc.

Qualitative thresholds reflect circumstances where the nature or context of an item makes it significant, even if the amount involved is not large, and typical examples include information that may lead to a different rating by analysts if they knew about it, information that will affect whether the organisation has to comply with different regulations (say a small change in numbers that would lead to an Indian company needing to comply with Section 135 of the Companies Act, 2013, which prescribes the quantitative floors for which companies must participate in mandated CSR). Other issues that may be considered are likely to be changes in earnings trends, changes in key ratios, anything that has an impact on the company’s reputation, or any other situation that involves a change in stakeholder risk perception.

Materiality thresholds ensure financial information is decision-useful for stakeholders. Regulatory frameworks require professional accountants and auditors to apply judgment and not just formulas in deciding what is material. This ensures that both the letter and spirit of decision-useful disclosure is respected for investors and other users

Another thing to note is that material issues are not static- they change over time with shifts in business models, regulations, stakeholder expectations, or major events.

Materiality in ESG⁴⁵
Materiality in ESG determines which sustainability topics are most relevant not just to financial stakeholders, but to broader stakeholder groups including employees, communities, regulators, and civil society. Unlike accounting, ESG materiality often considers both quantitative metrics (such as emissions, water use, or injured employees per year) and qualitative factors (like reputation, regulatory compliance, or community relationships).

Double Materiality⁶⁷
Double materiality means looking at two types of materiality while making decisions:

1. Financial Materiality: how ESG issues impact the company’s finances and operations; and
2. Impact Materiality: the company’s influence on the environment and society, such as its carbon footprint, labor practices, or community impact (even if those impacts do not affect financial performance).

Materiality assessments allow organisations to understand which matters are important, or material, for their stakeholders.

How to do a Materiality Assessment⁸⁹
Frameworks like SEBI’s BRSR in India or the EU’s CSRD mandate ongoing materiality assessments and transparent disclosures for regulated companies, and they also want to know how the company has determined what is material.¹⁰¹¹¹²

1. Define objectives and scope: why is the assessment being done?
2. Identify and prioritise stakeholders: list all stakeholders, map how they are affected by the issue or project, and for each, explain how they can influence the company.
3. List potentially material topics: make a list of all topics that are material for the company and the different stakeholders (whether for financial or ESG materiality assessment).
4. Stakeholder engagement: understand through discussions, interviews, questionnaires, or any other such participative method what different stakeholders think about the issues at hand.
5. Materiality matrix: Score and rank topics by their importance to stakeholders (vertical axis) and their impact on the business (horizontal axis). The most important issues will naturally find themselves at the top right of the matrix, and the visual display will help prioritise the critical issues. At this point, it is important to understand whether the issue is time critical or issue critical, or both. Once you do have a handle on this, you can act on the most crucial matters.
6. Review: Review your findings, make any corrections as required- for example, perhaps there is a vocal stakeholder who is not as important in the scheme of things for your company, but a quiet one who is very important, so adjust your findings accordingly.
7. Act: Now you have your reporting priorities sorted, so go ahead and report. Make sure to review your materiality matrix annually, or whenever anything out of the ordinary occurs (if it requires an EGM, it also requires a review of your matrix).

Here’s an example of materiality matrix:

Materiality matrix of a hospital group:

Topic	Stakeholder Interest	Business Impact	Example/Notes
Patient Safety and Quality	Very High	Very High	Reduction of harm, regulatory compliance, central to brand trust
Data Security & Patient Privacy	Very High	High	Digital records, ransomware risk, GDPR/HIPAA provokes stakeholder concern
Affordability & Access to Care	High	High	Press, patient, regulator & government pressure for inclusive access
Staff Wellbeing & Retention	High	High	Burnout, turnover, COVID-19 impact, unionization risk
Infection Prevention	High	High	COVID-19, MRSA, and other healthcare-associated infections
GHG Emissions/Energy Use	Medium	High	Hospital operations, energy/waste, regulatory/PR risk
Responsible Procurement	Medium	Medium	Ethical sourcing of drugs, equipment; supply chain resilience
Community Health Initiatives	High	Medium	Vaccination, awareness programs raise reputation, stakeholder goodwill
Diversity, Equity & Inclusion	Medium-High	Medium	Workforce diversity, bias reduction, EEO/anti-discrimination focus
Medical Research Ethics	Medium	Medium	Consent, transparency, clinical trial reputation
Water Use & Waste Management	Medium	Medium	Medical waste, recycling, water conservation efforts

Pitfalls
While doing the above, make sure to avoid the most common pitfalls, which are:

1. Not involving external stakeholders (relying only on internal voices leads to bias).​
2. Poor documentation or lack of transparency in why and how topics were prioritised.​
3. Treating materiality as a one-off exercise instead of reviewing it annually or when major events occur.​
4. Not linking materiality to company strategy; using it only for reporting/compliance, not real decision-making.​

Embedding materiality into an organisation’s core functions protects it from Financial and ESG related risks (I just call them FESG in my head nowadays), and using materiality-informed strategy will lead to better-than-competition, more resilient long term performance, as well as improved reputation: materiality is the bedrock of value creation and risk avoidance. This is why organisations should pay attention to it.

Sources

1. What Is Materiality in Accounting? | HBS Online
2. Materiality in Finance | Business Literacy Institute
3. Materiality in Accounting | Trullion
4. What is ESG Materiality? | Lisam Systems
5. What Does ESG Materiality Mean? | Corporate Governance Institute
6. Double Materiality in ESG & Sustainability Explained | Quentic
7. Unpacking the Double Materiality Assessment Under CSRD | Deloitte
8. A Guide to ESG Materiality Assessments | Wellington Management
9. Materiality Assessment: Definition, Guidelines, and Examples | WifOR
10. Sustainability Reporting in India under SEBI’s BRSR Framework: A Primer | IRIS Carbon
11. Linking the GRI Standards and the SEBI BRSR Framework | GRI
12. BUSINESS RESPONSIBILITY & SUSTAINABILITY REPORTING by Listed Entities | SEBI