Organizations across all sectors are keen to reduce their corporate footprint on greenhouse gas emissions and lesser-publicized issues like water use and emerging contaminants that may not have reached mainstream consciousness.
They are also keen to evidence the action they’re taking and the results they achieve. As businesses advance their environmental, social and governance (ESG) approach from compliance-led reporting to strategic integration, reporting on the impact of your ESG strategy becomes essential.
An ESG materiality assessment can be a sensible first step in this process, enabling organizations to focus their ESG programs. The breadth of issues under the ESG umbrella can make it challenging to decide what to prioritize; an ESG materiality assessment can be invaluable in refining your strategy to give it the laser focus it needs.
What is an ESG Materiality Assessment?
Materiality assessment in ESG, in simple terms, means identifying the most pressing ESG priorities for your business.
By helping you understand the relative importance of various ESG issues for your organization, an ESG materiality assessment can enable you to focus action where it is most needed and can have the most impact.
Ratings agency S&P points out that “Some ESG factors may only have the potential to yield a financial impact. Some others may have limited financial impact while the impact on stakeholders is high.” It’s therefore important to consider both these aspects of materiality when reviewing the implications of ESG issues and strategies.
What Is Double Materiality ESG?
You may hear the term “double materiality ESG.” This refers to ESG materiality assessments and rankings that take into account the financial and wider impacts of a business’s social and environmental performance.
In practical terms, this means not just assessing the financial risks or costs of, say, a poor record on greenhouse gas emissions but also the softer impacts, such as reputational and societal ones. It means looking at ESG issues through a purely financial lens and through the eyes of a stakeholder.
A report released in 2021 by MIT’s Sloan School of Management and London Business School highlighted, as the Financial Times points out, “big discrepancies in ESG measurements, persistent data quality problems, and problems in assessing company ratings against financial performance.”
This subjectivity in ESG disclosures and claims is one strong argument for “double materiality ESG”; prioritization and assessment that marries stakeholder sentiment with tangible, financial impacts.
However, as the Financial Times goes on to report, this double materiality approach isn’t universally welcomed. Currently, “regulators remain divided on the route to take” with the US-based global financial reporting body IFRS appearing to favour the “single materiality” position and the European Commission erring towards the wider, “double materiality” approach.
Why Do You Need To Do an ESG Materiality Assessment?
As we’ve noted, ESG is a vast topic, ranging from social to societal to sustainability issues. Organizations wishing to accelerate their ESG performance sometimes struggle to organize their efforts, leading to suboptimal, disjointed programs that don’t achieve their potential.
An ESG materiality assessment can bring focus to your approach and confidence that your time and resources are being spent in the areas where they are most valued and will have the most impact.
Benefits of an ESG Materiality Assessment for Your Organization
- Pinpoint the areas of ESG that have the largest impact on your business’s financial performance and public perception
- Improve stakeholder engagement and relationships, ensuring corporate ESG strategy is in line with stakeholder demand
- Identify the financial and other risks of taking action (or of inaction)
- Stay abreast of ESG trends; a materiality assessment will highlight emerging issues and consistent themes
- Get a step ahead of nascent environmental, social and governance risks; a vital consideration in this fast-moving arena where threats are ever-changing
- Weigh up the relative benefits of acting on some issues over others
- Make the business case for investment in priority ESG activities
- Create a baseline for ESG performance measurement
- Align your ESG reporting and stakeholder communications with the “top of mind” issues your survey identifies
- Finesse your ESG program, enabling faster and better outcomes
Benefits of an ESG Materiality Assessment for your Stakeholders
Stakeholders in all areas — customers, investors, employees and suppliers — are consulted and involved in your ESG strategy, improving engagement and buy-in.
- Issues of prime importance to stakeholders — such as your impact on the local environment or sustainable supply chain practices — are highlighted for prioritization.
- Resulting ESG strategies positively impact stakeholders; for instance, recognizing that your organization is at risk of talent shortages due to paying uncompetitive salaries will lead to better wages and a virtuous cycle for the local economy.
How To Conduct an ESG Materiality Assessment
Your next logical question might be: how do you conduct a materiality assessment for ESG?
Our nine steps provide a roadmap for anyone wanting to carry out an ESG materiality assessment.
9 Steps to a Successful ESG Materiality Assessment
- Define the scope and aims of your materiality assessment. What will you define as “material”? Who will you canvas for views? Will you consider financial impacts or just stakeholder opinion?
- Identify the internal and external stakeholders you will approach
- Identify potential issues for inclusion. Start with a comprehensive list, then refine it to ensure nothing is overlooked
- Group, prioritize and cut down the issues to create a final shortlist
- Design the survey you will use to gather stakeholder feedback
- Consider testing your materiality survey internally before sharing with stakeholders
- Launch the ESG materiality assessment survey to stakeholders
- Analyze your findings
- Prioritize action based on your materiality survey outcomes
Importantly, don’t forget to provide feedback to your stakeholders during and after the process. Nobody likes to feel they have invested time in sharing their views, only to see nothing in response. Keep close to stakeholders throughout the process to ensure their ongoing buy-in.
If you are considering financial impact as well as stakeholder views, you will need to weave this into your materiality assessment process to ensure you tick the box on double materiality.
Align Corporate Strategy With Your ESG Priorities
An ESG materiality assessment can focus your efforts, build a business case for investment in ESG projects, increase stakeholder buy-in and ultimately deliver more effective ESG programs for your organization.
In an area where external imperatives, regulations, legislation and public priorities are constantly evolving, a materiality assessment can bring clarity and purpose to your ESG efforts, minimizing uncertainty and subjectivity.
As a corporate leader, you doubtlessly feel under pressure to spearhead your organizational stance and results on ESG. But mitigating the risks and capitalizing on the opportunities of ESG demands that you understand the issues to take decisive action.
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