What's a materiality assessment — and should you be doing one?

In the broadest sense, material issues are those that have a great impact on a company's ability to do business. In essence, it's simply risk assessment: A firm looks at all the issues that can affect it and identifiesthose that matter most and require attention.

For instance, take a transportation firm. Issues that are relevant, or material, to the success of a trucking company include weather, cost of fuel, wage inflation, insurance costs, competition, demand/supply of shipped products and so on.

But within the realm of sustainability, materiality assessments have taken on additional meaning, particularly with respect to corporate responsibility reporting. Companies are assessing the impact they have on the environment (and vice versa), the economy and society. They also closely examine current and pending governmental/regulatory issues that may affect how they conduct business.

In early generations of sustainability reports, firms could select issues they wanted to discuss withinvestorsand stakeholders. They could highlight recycling efforts, waste reduction or any topic that reflected well on the company. But increasing scrutiny and pressure from outside groups have made the determination of what is "material" significantly less one-sided.

Guidelines for more detailed and uniform reporting of material issues are being developed. Groups supporting more rigorous information include theGlobal Reporting Initiative, CDP,Sustainability Accounting Standards Board,Global Real Estate Sustainability Benchmarkand International Integrated Reporting Council. If you plan to report to SASB or G4 (the fourth generation of the GRI Sustainability Reporting Guidelines), a materiality assessment will be required in 2016.

Even if you have no plans to report on sustainability, such an assessment likely would be valuable to your firm. For example, materiality assessments for firms manufacturing in California would identify water consumption and access to water as critical issues due to continuing drought conditions there. Risk to business is growing. If the drought continues, some manufacturers may be forced to reduce production. Some utilities have been forced to shift to natural gas production to offsethydroelectricity losses. Plus, there has been a growing call to stopfrackingin the state, at least for the duration of the drought.

Bottom line: The corporate sustainability report is no longer a stand-alone PR piece built to enhance brand perception. Rather, it's becoming an integral piece of ongoing risk assessment and quarterly and annual reporting. And sustainability materiality assessments are rapidly becoming a required part of that process, with analysts and investors realizing that these issues can have a huge impact on returns.

Image byalphaspiritvia Shutterstock. This article first appeared atShelton Insights.