Understanding the Materiality Assessment – and why it’s the essential first step in your ESG journey

Andries Verschelden Co-founder & CEO
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What is Materiality in ESG

Materiality, in environmental, social, and corporate governance (ESG), refers to 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 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 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 a 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 socio-economic 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 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 company’s internal and external stakeholders. Individual stakeholder and aggregated or company-wide results are plotted onto 2 x 2 Materiality Matrix which serves 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. 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. Software also allows for companies to easily update their Materiality Matrix as often as needed, and as business dynamics change.

Dynamic ESG 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 login 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 to make a business case to senior executives about why and how to address ESG, for reporting requirements, to facilitate sustainability target setting with 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 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 are 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.

For a demo of our ESG Performance Software Platform and to understand how our experienced team of ESG resources can help guide your ESG success schedule some time to talk with our team or book a quick tour of our software platform.