How to conduct materiality assessments for Singapore’s sustainability reporting

Materiality assessment forms the cornerstone of effective sustainability reporting under Singapore's IFRS Sustainability Disclosure Standards. Companies must identify and prioritise sustainability-related risks and opportunities that could reasonably be expected to affect their cash flows, access to finance or cost of capital over the short, medium and long term.

Understanding financial materiality in sustainability context

The ISSB standards apply financial materiality concepts to sustainability reporting, focusing on information that is material to primary users of general purpose financial reports - primarily investors and creditors. This differs from broader stakeholder-focused materiality approaches by concentrating on sustainability factors that have financial implications for the reporting entity.

Financial materiality in sustainability context means that sustainability-related risks and opportunities must have the potential to affect enterprise value creation over time. This includes direct financial impacts such as increased costs from carbon pricing, as well as indirect impacts such as reputational risks affecting customer relationships or regulatory risks affecting market access.

Companies must consider both quantitative and qualitative factors when assessing materiality, including the magnitude of potential impacts, probability of occurrence and timing of potential effects. The assessment should consider various scenarios and time horizons to capture the full range of potential material impacts.

Identifying sustainability-related risks and opportunities

The materiality assessment process begins with comprehensive identification of sustainability-related risks and opportunities relevant to the company's business model, industry and operating environment. Companies should consider transition risks related to policy changes, technology developments, market shifts and reputational factors, as well as physical risks from acute and chronic climate change impacts.

Opportunities identification should include resource efficiency improvements, new products and services, market access benefits, resilience building and capital access advantages from strong sustainability performance. The assessment should consider both current and emerging risks and opportunities based on scenario analysis and forward-looking evaluation.

Industry-specific guidance from SASB standards provides valuable starting points for risk and opportunity identification, offering curated lists of sustainability issues that have proven financially material for specific industries. Companies should also consider geographic factors, regulatory environments and stakeholder expectations in their identification process.

Stakeholder input and market intelligence

While the ISSB standards focus on financial materiality, stakeholder input provides valuable insights into sustainability issues that may become financially material over time. Companies should engage with investors, customers, suppliers, employees and other stakeholders to understand their sustainability concerns and expectations.

Market intelligence gathering should include analysis of peer company disclosures, industry reports, regulatory developments and investor communications to identify emerging sustainability issues. Credit rating agency criteria, sustainable finance frameworks and investor engagement priorities provide insights into financially material sustainability factors.

Regular monitoring of sustainability trends, scientific developments and policy changes helps companies identify emerging material issues before they fully manifest in financial impacts. This forward-looking approach enables proactive management of sustainability risks and opportunities.

Quantitative assessment methodologies

Companies should develop quantitative methodologies for assessing the potential financial impacts of identified sustainability risks and opportunities. This may include scenario modeling, sensitivity analysis and stress testing to estimate potential cash flow impacts, capital requirements and valuation effects.

Climate scenario analysis using frameworks such as those developed by the Network for Greening the Financial System (NGFS) helps quantify potential impacts under different climate futures. Companies should consider multiple scenarios including orderly transition, disorderly transition and physical risk scenarios to capture the full range of potential impacts.

Financial modeling should consider both direct costs and revenues, as well as indirect effects such as changes in market demand, competitive positioning and access to capital. Time horizon considerations are crucial, with short-term impacts (0-1 years), medium-term impacts (1-5 years) and long-term impacts (beyond 5 years) requiring different assessment approaches.

Qualitative assessment considerations

Qualitative factors play important roles in materiality assessment, particularly for emerging risks and opportunities that may not yet have quantifiable financial impacts. Companies should consider regulatory trends, technological developments, social changes and environmental factors that could affect future financial performance.

Reputational risks require careful qualitative assessment, considering how sustainability performance could affect brand value, customer loyalty, employee attraction and retention and stakeholder relationships. These factors may not have immediate quantifiable impacts but could significantly affect long-term value creation.

Strategic considerations should include how sustainability issues align with business strategy, competitive advantages and long-term positioning. Issues that affect core business activities or strategic differentiators may be material even if current financial impacts are limited.

Dynamic materiality and regular updates

Materiality is not static and requires regular reassessment to reflect changing business conditions, stakeholder expectations and external environments. Companies should establish formal processes for updating materiality assessments annually or when significant changes occur in business operations or external conditions.

Emerging issues monitoring should include regular scanning of scientific literature, policy developments and market trends to identify new potential material issues. Companies should also monitor peer disclosure practices and investor feedback to understand evolving market expectations for sustainability disclosure.

Documentation of materiality assessment processes and outcomes is important for demonstrating rigor and supporting external assurance activities. Clear documentation also facilitates internal review and improvement of assessment methodologies over time.

Integration with business strategy and planning

Materiality assessment results should be integrated into business strategy development, risk management processes and financial planning activities. Material sustainability issues should be considered in strategic planning, capital allocation decisions and performance management systems.

Risk management integration ensures that identified material sustainability risks are incorporated into enterprise risk registers, monitoring systems and mitigation strategies. This creates formal accountability for managing material sustainability risks alongside traditional business risks.

Performance measurement systems should include key performance indicators for material sustainability issues, enabling regular monitoring and management attention. Target setting and incentive systems should align with materiality assessment outcomes to ensure management focus on the most important sustainability issues.

Documentation and disclosure requirements

The ISSB standards require companies to disclose their materiality assessment processes and outcomes, including how they identify and assess sustainability-related risks and opportunities. Companies must explain the criteria used to determine materiality and provide transparency about their decision-making processes.

Disclosure should include the time horizons considered in materiality assessment, stakeholder input processes and methodologies used for quantitative and qualitative assessment. Companies should also explain how materiality assessment outcomes inform their sustainability strategy and risk management approaches.

Regular updates to materiality assessments should be disclosed, including changes in material issues, assessment methodologies and the rationale for any changes. This provides stakeholders with insights into the evolution of the company's sustainability risk and opportunity profile over time.