Why every business needs a materiality assessment

More and more companies are coming under pressure to show not just that they fully understand their environmental, social and governance (ESG) impacts, but that they have plans in place to mitigate them.

For any business wishing to respond to that pressure – which comes from employees, customers, suppliers, shareholders and local communities, but in particular from investors and regulators – the most effective way to start the ball rolling is with a materiality assessment.

This enables any organisation to identify the ESG considerations that most directly impinge on its operations, which in turn will allow for the creation of plans to reduce or nullify those impacts. For any business embarking on the development of an ESG strategy, a materiality assessment is therefore the starting point.

Defining ESG materiality

The purpose of a materiality assessment is to identify the ‘material’ ESG issues that affect a business – those that will have an impact on its stakeholders, society in general, the business itself and, crucially, the bottom line.

While a traditional financial materiality assessment is an evaluation of the concerns and issues that might impact on the financial health of an organisation, an ESG materiality assessment identifies non-financial aspects that can have a negative effect on a business, its wider stakeholders and the environment, as well as its financial performance and long-term sustainability.

With its in-depth evaluation of wider business impacts, an ESG materiality assessment is, in fact, increasingly being seen as a more all-encompassing risk management tool than a financial materiality assessment. These days, for many investors, the effective management of ESG risks is a proxy for responsible business management as a whole.

Importantly, ESG assessments also incorporate the concept of ‘double materiality’, so that while financial materiality looks inwardly to consider how a company’s activities and decision-making influence business value over time, ESG materiality looks outward to evaluate how a company’s business model and activities affect people and planet.

Once a materiality assessment has been carried out, any business is in a much better position to identify, assess and prioritise the sustainability topics that are most important to itself and its stakeholder groups. Understanding both of these considerations then allows for the development of a ‘materiality matrix’ that gives some kind of priority order to ESG issues according to their importance to the business and stakeholders.

This matrix can in turn be used not only to develop an ESG strategy but to measure performance and progress over time, and to help companies meet emerging reporting requirements, including the European Union’s Corporate Sustainability Reporting Directive.

How to ensure a watertight materiality assessment

Whatever ESG reporting requirements are being met, and whatever framework is being used, it is important to establish a rigorous process for conducting an effective materiality assessment.

In particular, any company embarking on the process should:

• ensure board level engagement

• set up an internal cross-functional team with ownership of, and accountability for, the process

• engage employees and all key functions throughout

• identify other key stakeholders that ought to be involved

• analyse the nature of the business, location of operations, and complexity of the supply chain

• thoroughly cover environmental impacts such as GHG emissions, carbon footprint and biodiversity

• make sure social issues such as human rights and community engagement are not ignored

• bring in governance aspects such as corruption and transparency

• consider working with an independent third party to add rigour and external verification

Making use of the assessment

Once you have your assessment findings, use them to develop an ESG strategy and roadmap. You will need to conduct a review and gap analysis of existing governance policies and procedures to see what needs to change, and you must also identify and agree time-bound metrics and KPIs. These can then be used to track performance and measure improvement over time, and to meet any reporting obligations.

How we can help

At GoodCorporation, we are able to draw on more than 20 years of experience across various sectors and jurisdictions to help clients carry out their own ESG materiality assessments. Once this has been done, we use the results to advise on the development of ESG strategies that are backed up with KPIs and measurement metrics, allowing progress to be monitored and reported over the short, medium and long term.