Understanding the Materiality Assessment – and why it’s the essential first step in your ESG journey
What is Materiality in ESG
Materiality, in environmental, social, and corporate governance (ESG), refers to the business importance, financial significant, and stakeholder value of a specific ESG topic. Understanding materiality is a critical early component in crafting a lasting and successful ESG strategy for your company. The ESG Materiality Assessment is the exercise that helps your stakeholders prioritize and focus on what is actually material.
With so many potential business-critical ESG topics, it can be almost impossible to focus on all and still perform optimally – this is where the Materiality Assessment proves essential. For example, SASB tracks 77 different industries specific ESG topics and GRI is built around a 34-topic standard.
Given the proliferation of possible ESG topics and lack of a common definition of what constitutes as an ESG topic, companies need to focus and/or refine their ESG strategy around the most important and material ESG topics for their unique operations, rather than attempt to tackle too many at once. Given the sheer volume of possible areas of impact across ESG, the best way to rank and prioritize which domains should be tackled first is to conduct a Materiality Assessment.
Common Material ESG Topics:
What is an ESG Materiality Assessment
The Materiality Assessment is the essential first step in every ESG journey. In conducting a Materiality Assessment, key stakeholders assess and rank the relative importance of selected ESG topics for deciding where to focus your ESG program and building out a comprehensive strategic framework.
How to Conduct a Materiality Assessment
Given the rapid pace of socioeconomic and environmental change, and similarly evolving business dynamics, companies should conduct a Materiality Assessment or review their existing one every year. It can be a lengthy and time-consuming process, however, it’s essential to conduct at regular intervals. Many companies rely on external consultants or software to guide this process, while larger companies with in-house ESG and sustainability teams might opt to manage the process themselves.
Defining your key stakeholders
Typically, the ESG Materiality Assessment is a multi-stakeholder assessment; think of your internal stakeholders, such as employees, senior management, and board members; and external stakeholders, such as customers, suppliers, investors, distributors, communities, and regulators. Before conducting the Materiality Assessment, companies must define who will take part in the activity, e.g. the stakeholders and invite them to take part in the process.
In conducting the Materiality Assessment each stakeholder is asked to consider two essential scores per ESG topic: 1) the topic’s current or potential impact on the company’s business success over the next 3-5 years and 2) the topic’s importance to the company’s internal and external stakeholders. Individual stakeholder and aggregated or company-wide results are plotted onto a 2 x 2 Materiality Matrix which serves as an actionable starting point for building an ESG strategy around priorities that align with what truly matters to your business.
The ESG Materiality Matrix:
How Software Can Streamline Materiality
While the traditional process of conducting a Materiality Assessment can be time-consuming, Materiality Assessment Software streamlines this process by automating collecting and collating inputs; gone are the days-long workshops, post-it notes exercises, and waiting for the aggregated and finessed results. The software empowers companies to quickly produce a decision-making framework for ESG.
Automating the Materiality Assessment with a dynamic software tool helps companies keep on top of the changes that affect material issues long after the matrix is complete. The software also allows companies to easily update their Materiality Matrix as often as needed, and as business dynamics change.
Growing Demand for ESG Materiality Assessment
Companies have been conducting ESG “materiality” assessments in support of their ESG disclosures for years. An ESG materiality assessment gives businesses a data-driven process for focusing their ESG strategies without which they’d simply be guessing about what factors to prioritize in launching an ESG program. It also serves as a useful tool to identify areas of priority from the perspective of a company’s internal and external stakeholders, including shareholders, employees, customers, vendors, and community members. As investors sharpen their scrutiny of companies’ stated ESG initiatives and reporting and take into account those ESG metrics before making any investment decisions, it is therefore crucial for businesses to conduct a materiality assessment and add the topical factors to their long-term strategy. Regulating groups are also doubling down on their attempts to bring about ESG reform via litigation geared towards marketing and other representations. A well-conducted ESG materiality assessment serves as a key step in a company’s process of understanding the ESG risks and opportunities relevant to its business and stakeholders, and in managing possible ESG-related legal liability risks.
Dynamic Materiality Assessment Software
Good.Lab’s ESG Performance Software includes a straightforward ESG domain evaluation and prioritization Materiality Assessment tool that allows for unlimited stakeholders. Each stakeholder is invited to log in to an online system where they will see a list of 17 essential topics that make up Good.Lab’s ESG Framework. Each ESG topic is research-backed and based on leading industry standards for an easy place to get started and includes accessible descriptions of each ESG topic for stakeholders that aren’t as familiar.
As a stakeholder enters inputs, Good.Lab’s ESG Performance Software aggregates the data in real-time based on a proprietary algorithm and plots it onto a Materiality Matrix. System Administrators, typically the ESG/Sustainability lead within a company or an external consultant guiding the process, can then access a consolidated view of company-wide results and drill-down into data for a specific ESG domain, by one or more companies or subsidiaries, or one or more stakeholders to view results for a particular group, such as the executive team or sales to understand what matters most to each functional area. Consultants can view data from multiple companies they are working for and easily switch between customers or group multiple customers together for comparison. Private Equity firms can access a rolled-up view of their portfolio companies for presentation to investors.
How to Use the Results of a Materiality Assessment
The results and data from the Materiality Assessment can inform wider corporate strategy and make a business case to senior executives about why and how to address ESG, for reporting requirements, to facilitate sustainability target settingwith leadership, and ultimately to build an action plan for driving ESG performance.
The ESG Materiality Assessment can also deliver benefits such as:
Prioritizing resources for the ESG topics that matter most to the business and its stakeholders
Focusing efforts on the ESG topics most likely to improve performance
Identifying trends that may affect long-term value creation
Identifying opportunities for new product lines and customer preferences
Highlighting areas of ESG and future risks
What’s the Next
Traditional ESG Materiality Assessment processes require time, effort, and resources, however, by automating this first step with software, companies can quickly move on to start using the data to inform their ESG strategy.
The next step in the ESG journey after completing a Materiality Assessment is to perform Sustainability Benchmarking of customers, competitors, and relevant peers to assess program scope, performance targets, and relevant metrics. Companies looking to activate their ESG strategy can leverage Good.Lab’s ESG Targets Database to assess with competitors is doing on critical ESG domains that impact performance. If you’re ready to launch your ESG Strategy, or your Materiality Assessment has possibly gone stale, it’s time to refresh your data and reprioritize with our team.
Disclaimer: Good.Lab does not provide tax, legal, or accounting advice through this website. Our goal is to provide timely, research-informed material prepared by subject-matter experts and is for informational purposes only. All external references are linked directly in the text to trusted third-party sources.
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