Materiality Assessment: The Financial Reporting and Sustainability Reporting Perspectives

Working as a financial auditor was very interesting to me not only because I had to thoroughly understand the internal and external aspects of the industry, stakeholder, and business activities of the clients, but it also exposed me to the importance of keeping up with standards, regulations, and in that way, every finance auditor understands first, the inherent risk and develops a robust audit strategy and plan. Without this complete understanding, it may be tricky to take a realistic approach to audit materiality.

Financial materiality is primarily concerned with information contained in financial statements. It examines whether an omission or misstatement of financial information might have an impact on the economic decisions of users who rely on those financial statements. The auditor relies on a rule of thumb like percentage of a component e.g. revenue, and professional judgement such that the risk of material misstatement is reduced to an acceptable level.

That being said, I find it interesting that these initial approach is applicable for conducting a sustainability assessment, without which, one would not determine the ESG component of the organization that may cause substantial issues for all its stakeholders.

Sustainability materiality, on the other hand, goes beyond financial factors and includes economic, environmental, and social aspects of an organization's operations. It entails recognizing issues that are important to both the organization and its stakeholders in the broader context.

Case Study
Kola Soda, a beverage manufacturing company in my village, uses our community's water resources in its production. Climate change is causing the levels of the village stream to plummet, and there are fears that it will dry up at some point in the future. My village and Kola Soda are now at a crossroads, and it is likely that some pressure groups want Kola Soda to stop using our water.

• low production levels and, as a result, revenue and profitability will drop,

• scarcity of product leading to loss of customers,

• reduction in business operations resulting in laying off of staffs,

• increase in the level of unemployment in the community and it's environs, which can lead to an increase in crime rate.

• opting to patronize suppliers from external locations leading to a high cost of that product. This could give rise to another sustainability issue within the logistics division.

Water is a material aspect of Kola Soda in this scenario, affecting the environment (water shortage), social (pressure from stakeholder groups and other users of this water), and governance (the company's policies, leadership, and management). This will result in;
Conducting a materiality assessment guides an organization's strategic planning and produces a more robust corporate and sustainability strategy for any business.

Sustainably Yours
Chiny
#SustainabilityEnthusisast #Climatechange #ESG