03-08-2025
Governance, economic factors outweigh environmental, social aspects in companies' materiality assessments: report
[SINGAPORE] Listed companies in Australia, Malaysia and Singapore rated environmental and social factors as less important than governance and economic performance in their materiality assessments, indicated a recent report by Governance for Stakeholders and the Sustainable Finance Institute Asia.
The report found that social factors were ranked third in importance, while environmental aspects placed fourth, even though both are frequently mentioned in materiality assessments.
Governance were ranked as the most important, followed by economic performance.
Materiality assessments, which are often disclosed in annual or sustainability reports, are typically carried out by companies to identify and manage their risks and opportunities – especially on environmental, social and governance (ESG) issues that are most significant to their business and stakeholders.
These were the findings from a study conducted by NUS Business School accounting professor Mak Yuen Teen and Baker Tilly Singapore's head of ESG and sustainability Tina Thomas. The study collected data mostly from the FY2022 and FY2023 annual and sustainability reports of companies in the three markets.
It noted that companies should ensure that they are not underestimating the importance of environment and social-related factors, while recognising the importance of governance and economic performance at the same time.
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'There is a risk of blind spots, particularly when it comes to considering the impact of environment-related factors on their business and how their business affects the environment. Companies may view them as issues that may only impact them in the longer term, and their materiality assessments may be based on short-term horizons,' said the report.
The report, however, noted that these findings are only from a smaller dataset of about 180, compared to the 300 originally selected, as many companies did not have clear presentations of their materiality assessments which showed the relative importance of different sustainability-related risks and opportunities (SROs).
The researchers had initially selected 100 companies from each market based on their sector and market capitalisation for the first phase of its study. It later had to drop several of them and included other companies with lower market capitalisation for the second part of its study, which was to assess how SROs were being ranked in relative importance.
Among the three markets, Bursa-listed companies were found to have the clearest presentation of materiality assessment, with 87 per cent of companies disclosing the relative importance of different SROs. Companies listed on the Singapore Exchange (SGX) came in second place at 45 per cent, while only 14 per cent of companies on the Australia Securities Exchange (ASX) did so.
This is because many Bursa-listed companies referenced Bursa Malaysia's sustainability reporting guide which provides guidance on materiality assessment.
Prioritisation of governance and economic factors
The report noted that climate change and emissions, corporate governance, financial performance, human capital and labour management, as well as workplace health and safety were among the top 10 SROs most frequently mentioned in all three markets.
Human capital and labour management, along with workplace health and safety, were the top two most frequently mentioned factors in the materiality assessments of companies listed on Bursa Malaysia and SGX.
However, frequency did not translate to importance in some of these disclosures.
Environmental factors were ranked first only among Australia-listed companies in the agriculture, forestry and fishing sector, as well as SGX-listed companies in the electricity, gas, steam and air conditioning supply sector.
One possible reason for the lower prioritisation of environmental risks and opportunities could be due to the perceived difficulty in setting meaningful and achievable targets, noted the report.
'Climate and environmental targets are often viewed as complex, costly to implement, and offering limited short-term financial returns. As a result, the perceived burden of target-setting may influence the prioritisation process itself – suggesting that, rather than prioritisation leading to target-setting, the inverse may be true: the difficulty of setting targets can suppress the perceived materiality of certain issues,' it said.
Companies' boards also tend to prioritise topics related to governance and ethics, and pay closer to material factors that have high stakeholder interest and high business impact.
'Boards often seek assurance that clear metrics and achievable targets can be developed for these topics, favouring those that offer more immediate or tangible implementation pathways,' added the report.
The report urged boards to be more engaged with materiality assessment to ensure that companies do not have blind spots, especially over environment-related factors that may not significantly impact the company in the short term.
It added that boards have an important role to ensure that companies' management carefully consider the importance of different SROs over short, medium and long-term horizons.
Investors must also play a role in demanding better disclosures of material SROs, and questioning the prioritisation of material SROs and how they are addressed by companies.
Nonetheless, the report noted that the data was collected from disclosures made before regulators in Australia, Malaysia and Singapore mandated that companies climate disclosures be aligned with standards set by the International Sustainability Standards Board (ISSB).
A materiality reassessment aligned with ISSB standards may result in a reprioritisation of sustainability topics within corporate disclosures.
'This is due to the specific focus of these standards on financial materiality, which highlights sustainability-related risks and opportunities that are likely to influence enterprise value and investor decision-making,' the report said.
However, it added that companies that present both financially material and impact material topics will benefit from a more holistic and balanced approach in their disclosures.
This is because they would remain responsive to evolving regulatory requirements while continuing to reflect broader stakeholder concerns.
'Topics currently deemed to have high-impact materiality or negative externalities to people, environment, or non-financial stakeholders may evolve into financially material concerns as sector-specific or regional regulations emerge, potentially exposing companies to compliance costs or other financial consequences tied to previously unpriced externalities,' said the report.
It also added that companies should factor global economic shocks into their materiality assessments, and not just confine the process to traditional ESG domains. This is due to the ongoing geopolitical and economic uncertainties with the United States imposing widespread tariffs and weakening global trade and international cooperation.
'This calls for more adaptive, forward-looking assessments that integrate geopolitical risk, scenario planning and the resilience of business models in a fragmented world,' it said.
