Take a holistic approach to materiality

Published: 12 October 2023

5 minute read

Deciding what information is material can be difficult; what may be material to one person, may not be to another. It is subjective and requires boards and management to use judgement about what matters most. It is intrinsically linked to business model and strategy.

In practice, many companies and their advisors told us they typically view materiality through three broad, separate lenses:

  • Quantitative financial thresholds – Most companies have a set monetary threshold for correcting errors and disclosure of significant transactions. These often align or are based on a similar approach to their auditor’s disclosed materiality figure, for example, using a percentage of profit before tax or net assets. Like auditors, some companies applied lower thresholds to specific balances depending on their nature or context. Explaining why these thresholds are applied gives investors an important insight.
  • Qualitative financial aspects – Companies rarely have a formal process or guidelines for determining what is qualitatively material financial information. Instead, companies typically have an informal ‘gut feeling’ understanding of ‘what’s important’ for framing narrative reporting. Some companies noted using disclosure committees or ‘fair, balanced, and understandable’ assessments to review narrative.
  • Sustainability-related information – Many companies reported having separate, sustainability-related materiality assessments. These often gather a range of stakeholders’ viewpoints and may consider double materiality. Companies often use an external advisor for these assessments and disclose the results as materiality matrices in sustainability reports.

Some companies apply a double materiality assessment, which considers both the financial implications to the company and also the impacts of the company’s actions on the environment and society. This may be required by certain sustainability reporting frameworks.

Each of these broad lenses can have a role. Quantitative thresholds, for example, can be a key element of financial reporting controls. However, individually, they cannot tell the whole story of what’s important to the business. Materiality means connecting wider considerations, such as strategy, risks and controls. Looking at just one perspective in isolation can cause companies to miss interdependencies and potentially lead to duplication of effort.

Investors are interested in how management and the board think about these issues holistically. It feeds into their investment decision-making. These practical tips may help companies take a more holistic view and align with investor information needs.

Get the right people together

"It all starts with good governance. The board needs to have a grip on what’s material to stakeholders"


Joining-up viewpoints and bringing together diverse teams across the organisation helps with connecting issues. It also serves as a completeness check, reducing the risk of missing something crucial. Doing this early can be beneficial for meeting future reporting timelines.

Companies noted success when setting up a cross-organisation materiality working group including representatives from areas such as finance, operations, sustainability, HR, commercial and procurement. Involvement and oversight from your audit committee can be helpful as well.

"Materiality assessments need to be embedded into all aspects of the business from the board down. The board needs to drive it."


Leverage and connect what you’re already doing

Most companies are already doing some degree of formal and informal materiality assessments, often through a mixture of top-down and bottom-up processes. Take stock of what is already being done and assess for gaps.

It may be helpful to ask:

  • How are you considering materiality at present? What formal and informal processes do you have? What controls do you have in place at present?
  • Where are the gaps? Are there any controls or topics, such as qualitative financial and/or sustainability-related issues we may have overlooked?
  • Which teams are involved? Can your teams be better linked up, for example through business partnering?
  • Are you taking a holistic approach to materiality? Have you considered how aspects, such as strategic, operational, HR, commercial and financial link? Have you ranked how issues compare?
  • How are you overlaying and assessing qualitative and quantitative considerations to connect issues, as well as narrowing down topics?

Leveraging your existing processes and using a cross-organisation working group to fill in and connect gaps will help build up a holistic view of what issues matter.

Narrow to your real priorities

"Limiting and ranking the risks is important. Otherwise, you can’t tell which are key to the business."


Your assessment is likely to identify a long list of potential issues for narrative reporting. However, not all issues will be equal. Some will be prioritised over others.

Investors are interested in the focused list that management and the board are actually spending their time on across the short, medium and longer term. They find it worrying when long lists of risks are disclosed, as it suggests the board’s capacity is potentially stretched too thin.

Understanding the relative ranking of issues is also important to investors. It’s often hard for them to understand how importance issues in a sustainability-related materiality matrix compare to operational issues – and what your company would prioritise in the face of limited funding and/or cash flow restrictions.

Questions that may help include:

  • How many issues have you identified? Which of these are the key ones for management and the board? Which issues are lower priority?
  • Have you ranked the issues realistically against each other? Where are the trade-offs between them?
  • How do the priorities identified reflect your business plans and budgets?

"Users want to understand management’s view. It’s building conviction – what I want is for it to tell me what management believes is most important. And then decide if you believe it or not."


Challenge your assessment

Challenge the results of your assessment. Taking both a top-down and bottom-up approach may help. The first will highlight any issues with consistency and connectivity to your broader strategy, while the second provides a completeness check.

Several companies noted their audit committee regularly reviews and challenges their auditor’s materiality assessment. Extending this to your own materiality assessment can also be helpful. The following questions may be a useful starting point:

Top-down questions:

  • How do these issues connect to your business model and strategy, commitments, and future plans?
  • How consistent are the issues highlighted with those the board is discussing, as well as the metrics and data they review? With internal budgets and your risk registers?
  • Are the messages consistent with what you’re communicating externally, for example at investor days?
  • How are you leveraging planning cycles to update views?

Bottom-up questions:

  • How well do these issues reflect actual business operations? What are staff worried about?
  • What data points are used to manage the business at operational levels?
  • What are investors asking during AGMs and investor days?
  • Have you spoken to the right stakeholders? Have you missed any issues they think are key?
  • What are your peers talking about? How does this differ from what you’re focusing on? How do your benchmarks and KPIs compare?

"If the market has a different view than management, it’s important to ask – do they have a point? Is it something we haven’t seen or that management maybe doesn’t want to see?"

Non-executive director

Document and communicate your assessment

The outputs from your materiality assessment can be very valuable for use internally and externally. They can be a useful input into strategic, operational and financial planning. They can serve as an internal communication tool by providing employees with a wider understanding of management and the board's key priorities. Audit committees may find them a useful framing tool when considering overall reporting, as well as when discussing the materiality level set by external auditors. You may wish to include disclosure in your ARA explaining your approach to materiality.

For audit materiality, "Good practice is for committees to discuss the materiality level set and evaluate this in view of their knowledge of the business to determine its appropriateness, challenging the audit team where necessary"

FRC Audit Quality Thematic Review Materiality

Regularly horizon scan

"What’s material today might change in 12- or 24-months’ time. You can’t just work off your old materiality assessment, it needs to be current. It needs to be part of a cultural change for companies to do materiality assessments so they’re regular and not dated."


Materiality is fluid and subject to change. What impacts investor decision-making will change over time. Some noted cases of companies that were potentially causing environmental harm, that had led to investors actively engaging with these companies and, in some cases, disposing of shares. Others have stopped investing in certain sectors.

Keeping a regular eye on public sentiment can be helpful for understanding what issues may be of interest to your investors. Boards may find it useful to proactively reach out to investors and other stakeholders regularly.

Assessing materiality is not an easy task, but it is a worthwhile one. By taking a holistic view of the company, its strategy and operations, your management and board can identify issues not only of interest to investors, but that help them to run the business more effectively and sustainably. It can also positively feed into the development and refinement of your controls and processes.

This is part three of a four-part series Applying a materiality mindset.