Many companies are identifying how their activities affect society and the environment, but measuring that impact remains a challenge.
Published: February 12, 2025
Some jurisdictions such as the EU are beginning to ask companies to report under the principle of double materiality, which considers both a company’s internal value creation and external impact on the environment and society.
Data from the S&P Global Corporate Sustainability Assessment shows that about two-thirds of companies publicly disclose their process for determining materiality. About half (48%) of assessed companies globally say their approach is based on double materiality.
Companies consider climate transition and physical risks to be a top material issue from the perspective of both internal value creation and impact on external stakeholders.
Of the companies that identify issues that are material to external stakeholders, fewer than half (46%) have developed metrics for tracking how their business activity materially impacts the environment and society.
Materiality as a reporting principle has evolved from a narrow focus on financial value to a broader approach that reflects a company’s impact on stakeholders other than investors. One of the strongest endorsements of this evolution came in 2019, when the CEOs of about 200 of the largest US companies declared that “companies should deliver long-term value to all of their stakeholders – customers, employees, suppliers, the communities in which they operate, and shareholders.”
In subsequent years, the World Economic Forum (WEF) highlighted the “dynamic” nature of materiality, and the European Financial Reporting Advisory Group (EFRAG), which is the technical advisor to the European Commission on sustainability standards, described materiality as having a “double” nature. These features are built into the concept of “double materiality” implemented in the Corporate Sustainability Reporting Directive and European Sustainability Reporting Standards (ESRS), which define a range of climate and sustainability disclosures that large and listed companies in Europe need to report as of 2025.1 Following the standards debate closely, S&P Global Sustainable1 revised its own approach to materiality in 2024 to reflect its dual and dynamic nature.
Some companies have reported on value creation as well as their impact on society and the environment in annual financial and sustainability reporting for decades. However, double materiality challenges companies to be more explicit about external impact and to pay closer attention to the interrelation between impact on society or the environment and impact on the reporting enterprise itself.
To take stock of how corporate thinking and practice around materiality is evolving, the S&P Global Corporate Sustainability Assessment (CSA) assesses companies on their processes for determining materiality, including whether their process is transparent and publicly disclosed and how they measure their impact on external stakeholders. CSA data can also tell us which issues companies view as material in terms of value creation or impact on society and the environment. The CSA is an annual evaluation of corporate sustainability practices, and companies’ annual feedback on materiality depicts an evolving sustainability agenda.
At a high level, analysis of CSA data shows that materiality determination remains a black box at some companies. About 67% of assessed companies publicly report their process for determining materiality. About half (48%) of assessed companies said that their process is based on the principle of double materiality. Companies appear to be in the early stages of developing methods for quantifying their external impact, especially in areas outside environmental impact. Of the subset of companies that identified issues that are material from an external stakeholder perspective, 46% described what metrics they use to measure their related impact on external stakeholders. This means that many companies able to identify what issues are most important to their external stakeholders are not taking the next step of measuring how they impact those stakeholders.
Good practice in determining materiality has been developed over the last two decades into a step-by-step process as recommended by the Global Reporting Initiative (GRI Material Topics 2021), EFRAG and other organizations. It involves a combination of desk research, expert advice and stakeholder engagement. The engagement of stakeholders has become more principles-based and systematic, implying also active investor engagement as promoted by initiatives such as the Principles for Responsible Investment (PRI).
At its core, materiality determination involves dealing with qualitative and quantitative information often related to complex issues and requires the exercise of judgement. For these reasons, investors and other stakeholders place importance on knowing what process companies have followed in determining materiality. Transparency about the process builds confidence about informed decision-making and accountability.
That transparency is far from ubiquitous, however. Out of 6,793 companies assessed in the 2024 CSA, 67% publicly disclosed their materiality analysis process, while the remaining 23% do not describe publicly how they determine what is material to their business.
Sectors that appear more transparent about their process are ones known for their environmental impact and that feel direct stakeholder pressure to report on matters such as climate. These include the utilities, consumer staples and materials sectors. Consumer-facing sectors such as healthcare, financials and communication services have comparatively low levels of reporting on their materiality determination processes. From a regional perspective, North America had the lowest level of disclosure on the materiality determination process at 47%.
Of the 4,551 assessed companies that do report on their materiality determination process, most (78%) involve external stakeholders to identify what issues are material. Most (70%) also prioritize their material issues using a materiality matrix or similar methodology. About 48% confirmed that their analysis is based on the principle of double materiality.
Discussions around the assessment of impacts, materiality and implications for a reporting enterprise have often borrowed ideas from risk management, including concepts like magnitude, scope, scale and probability or likelihood. Identifying the most significant risks is often a convenient starting point for prioritization in a materiality determination process. One global reference here is the annual Global Risks Report by the WEF. Looking back at the last decade, two headline themes that the WEF often identified as being among the top global risks were climate and extreme weather events as well as cybersecurity and the implications of new digital technologies. Beyond these, common economic and social themes included the cost of living, infectious diseases, terrorist attacks, societal polarization and interstate conflict.
In the CSA’s materiality section, companies are asked to give feedback on what issues they view as most material from an enterprise value creation perspective and from the perspective of impact on external stakeholders, i.e. society and the environment, reflecting a double materiality approach.
In the 2024 CSA, 4,592 companies provided information on the material issues they consider most important for value creation — the inward flowing or internal impact side of materiality. Less than half that number (1,902) responded to the section asking companies to identify top material issues related to external stakeholders or the outward flowing side, another indication that companies are still in the early stages of adopting a double materiality mindset.
The material issues that companies view as important from an internal impact perspective include issues that have direct implications for financial performance and value — matters such as governance and compliance, product and service-related issues, employees and their health, as well as climate risks.
These selections can be compared with what companies indicate are their top material subjects from the perspective of external impact on society and the environment. Company feedback on what is material from the external stakeholder perspective points to direct impacts to people and the environment — namely climate risks (air pollution); products and services; society and community relations; supply chains; and customer relations.
The category of climate physical and transition risks’ stands out as a dominant external impact as well as internal impact. Take the example of datacenters, which highlight both growing energy use impacts and physical vulnerability. Research by S&P Global Sustainable1 has identified datacenters as assets facing high financial costs from climate physical risk: In a medium-high climate change scenario, nearly all the datacenter assets owned by the world’s largest companies face financial impact of 10% or more by the 2090s due to extreme heat, drought and other hazards.
Comparing these perspectives side-by-side, the top internal impacts reflect direct financial consequences in the short, medium and long term, whereas the top external impacts highlight themes where measurement, tracking and assessing the consequences of issues are more complex. Topics that companies consider important from both perspectives relate to product characteristics and the impacts of products, as well as climate risks and opportunities associated with climate-related impacts and dependencies.
Sustainability disclosure standards such as the ESRS expect companies to report on the policies, programs, targets and metrics they use to follow up on the material topics they prioritized.
The CSA asks companies about these topics, and whether progress against targets is linked with executive compensation. Regarding internal impact, many companies report that they have targets for the material issues they identified, the target year, and what progress they have made. Linkage with executive compensation was lower than target-setting in general, however: only 12% of companies reported that they link progress against a target with executive compensation for at least one of the material issues they identified, based on 6,793 companies assessed in the 2024 CSA. While the link between ESG performance and executive pay has been made by a growing number of companies since the 2010s, its effectiveness remains a subject of debate.
Assessing, measuring and managing external impact can be challenging for companies. Less than half of the companies (46%) that identified external stakeholder material issues also disclosed quantitative metrics for measuring external impact, meaning that the other 54% of companies identify material issues from an external perspective but are not taking the next step of measuring their impact.
To take one set of reporting standards as an example, the ESRS ask companies to consider characteristics of their impacts such as scale, scope and “irremediable character” — how difficult it would be to remediate the harm caused by a negative impact.
Our data finds wide variation among sectors. Utilities and consumer staples companies were most likely to report having quantitative metrics for impact assessment under the CSA 2024. These sectors may be able to more easily measure impacts, such as the benefits of communities getting access to electricity and food or negative economic impacts such as the public cost associated with air pollution or unhealthy food. Lower levels of conducting impact assessments are seen in sectors such as healthcare, financials and real estate even though a wealth of public data has been collected by researchers and organizations seeking to measure impacts in these sectors, including health economists, development economists and urban development specialists working on real estate and building questions.
In regional terms, the percentage of companies able to point to metrics for measuring impact on external stakeholders ranges from 67% of companies from Latin America to 28% of companies in North America and Africa. About half of European companies said they have such metrics. These results illustrate the implementation gap some companies face in monitoring impact — the challenge of taking the next steps beyond identifying a material external issue.
Latin America’s position as a leader in this area echoes other research from S&P Global Sustainable1 that found the region had the highest percentage of companies making commitments to protecting biodiversity and avoiding deforestation, two significant forms of managing external impact on the environment. Assessing external impact may be a more common practice among CSA participants from emerging market countries. This is of special interest when examining reporting by businesses on their contribution to the UN’s Sustainable Development Goals (SDGs), which encourages action on environmental and social issues. Assessing external impact is enhanced by stakeholder engagement. Recent research from the World Benchmarking Alliance on the SDG contribution of 2,000 of the world’s most influential companies suggested that companies that engage with affected stakeholders have better performance on human rights and decent work practices.
When it comes to measuring external impact, the CSA asks about output metrics, impact metrics and impact valuation. Assessed companies that disclose external stakeholder material issues can describe their process for measuring external impacts.
For the 869 companies that affirmatively answered the 2024 CSA question on output and impact metrics, output metrics were reported for 90% of the material external impacts companies identified, and impact metrics were disclosed for 59% of the material external impacts. For those that reported having conducted impact assessments to measure their societal or environmental impacts, these assessments could involve quantitative or monetary approaches or a combination of these.
Assessing impact as part of materiality determination builds on more specific investigation into project-level assessment and valuations. Valuation, or economic and financial analysis, of external impact and reporting on this appears to be a practice conducted by few companies. The CSA asks companies that confirm they measure external impact to describe the type of metric they used in valuation. Most of these companies examined environmental and social value and costs, as well as positive impact associated with the providing access to a product or service.
The growing understanding of materiality as a strategic concept that includes internal and external impact shows how sustainability challenges such as climate change find their way into the mainstream of organizational decision-making. The consequences for reporting companies are increasingly financial in nature. For some companies this highlights risks; for others, opportunities, such as clean technology solutions. The latest Global Risks Report by the WEF identified many risks that are significant from the perspective of wider society and the environment. Some of the top risks highlighted by the WEF, such as extreme weather events and biodiversity loss or inequality and the potential adverse outcomes of AI technologies, echo the material issue choices of companies assessed in the CSA.
As decision-makers seek to prioritize and focus where they can create positive impacts and limit negative impacts, investors and regulators are increasingly expecting them not to treat the two sides of materiality in isolation. Guidance from bodies such as the EFRAG and GRI recognizes that the interrelation between external and internal impact is key.
[1] The European Commission plans to propose simplifying several EU sustainability regulations, including the CSRD, in February. The Commission’s stated goal is to reduce the reporting burden for companies, particularly small and medium-sized enterprises.
