Over the last two years, S&P Global Sustainable1 has revisited how it determines materiality for different industries and how this affects companies’ S&P Global ESG scores. The revised approach to materiality starts by taking stock of global megatrends that shape the operating environment of a company and its industry. Our approach also takes inspiration from new trends in responsible investment and the sustainability landscape.
Assessing new directions in financial and sustainability disclosure, we recognize the dual nature of materiality in reflecting the inward- and outward-flowing consequences of organizational performance. In this double materiality framework, we view a sustainability issue as material if it has an effect on society or the environment (external or outward impact) and an effect on a company’s value drivers over the short, medium or long term (internal or inward-flowing impact).
In our revisited approach to materiality, we grouped sustainability issues into 22 materiality core subjects and evaluated their impact on a company through both the inward and outward lenses. The inward-looking materiality lens approaches sustainability issues from the perspective of the investor as provider of equity capital. We evaluated the core subjects within industry context by determining their impact on the investee company, including consequences for its value drivers such as sales growth, capital expenditure and cost of capital.
In terms of external impact on society or the environment, the material significance of the core subjects is defined through an analysis of a company’s business activities, business model, products and services. We evaluated impacts considering direct and indirect impact on societal stakeholders and the environment over the short, medium or long term.
For each industry, we mapped core subjects on a matrix with two axes representing external impact on society or the environment and internal impact through risks and opportunities that affect enterprise value creation. We defined the 22 core subjects by mapping them to the 40+ criteria of the S&P Global Corporate Sustainability Assessment (CSA).
Weighting the relative significance of each core subject in the context of an industry involved key tests for determining materiality. These tests, which have been recommended since the 2000s by leading international sustainability disclosure standards ask about the significance of impact on the environment and society as found by the latest science, or the significance of a subject in terms of current societal norms, standards, regulations and laws. In answering the questions that the materiality tests pose, we relied on internal and external data sources. The main internal source is the CSA database, with coverage of over 13,500 companies. For both axes of the matrix — impact on internal enterprise value creation and impact on external stakeholders and the environment — we also considered how a core subject is likely to evolve dynamically over time.
Our two-dimensional assessment results in 62 materiality matrices, one for each industry covered by the S&P Global ESG Scores, that provide a visualization of an industry’s core subjects. Each core subject is represented by a circle, the position of which reflects its score on each of the two axes.
Our materiality assessments are conducted on an ongoing basis and updated as needed considering the dynamic ESG landscape of an industry. The materiality assessment forms the foundation of the weights of the criteria within the CSA and the resulting S&P Global ESG Scores. On an annual basis, the materiality of a core subject for a given industry is reviewed, and accordingly may result in an adjustment to the related criteria weights for that industry within the CSA.
Our materiality findings shape the evolution of the CSA, including the adaptation of the weights of criteria applied in the assessment. Direct company input on what CSA participants believe to be the key areas of risk and opportunity in the sustainability landscape will continue to provide feedback on the defined issues. S&P Global Sustainable1 analysts will also continue to provide a layer of fine tuning to adjust the risk and opportunity considerations behind each industry materiality matrix.