Does your company need to complete a materiality assessment?
If you’re submitting your first ESG (Environmental, Social, Governance) report, it might be tempting to simply choose a standards framework, report the metrics that are included in the guidance for your industry, and call it a day. It’s true that years of expert research have gone into selecting those metrics, and that aligning with industry standards makes it easy for investors and other stakeholders to compare your ESG performance with that of your peers. However, while going into the ESG reporting process to check the box or stay compliant can be a good place to start, it’ll only take you so far. The true value of ESG reporting is in identifying risks and opportunities related to current and emerging sustainability issues that help your company gain a competitive advantage. To unlock that potential, you need to take an in-depth look at your value chain and regulatory environment, learn what your stakeholders care about, and identify the ways that sustainability issues could impact your business now or in the future. In other words, you need to conduct a materiality assessment.
What is a materiality assessment?
Let’s start by defining materiality. Before it was introduced to the sustainability context by the Global Reporting Initiative (GRI) in 2006, the concept of materiality was used in financial accounting to provide a threshold above which missing or incorrect information would have an impact on the decision-making of information users. If a piece of information was material, that meant it was important and relevant enough to include in financial reports. The same definition applies in the ESG reporting context today. Thus, a materiality assessment is the process of identifying the sustainability issues that are important and relevant enough to include in your sustainability report.
What are the steps for completing a materiality assessment?
While the form your materiality assessment takes will depend on your industry, where your company is in its sustainability journey, and the resources available to you, there are 3 important steps:
First, develop an understanding of your company’s sustainability and regulatory context, what peer companies are reporting, and the guidance of different ESG reporting frameworks for your industry.
Next, conduct a Value Chain Assessment (VCA) to identify sustainability impacts throughout your value chain — looking both upstream (material sourcing + procurement) and downstream (marketing, sales & product end life). Depending on how you are defining materiality you could identify 1) areas where sustainability impacts present risks or opportunities for your business, 2) positive or negative impacts (called externalities) your business is having on society and the environment, or both! (That’s called double materiality.)
Third is the very-important stakeholder engagement process. You’ll identify the broad range of people who are impacted by your company — vendors, investors, partners, employees, community-members, etc. — and conduct interviews and surveys to get their insights around the issues that matter most to them.
Through this process, you’ll develop an exhaustive list of sustainability issues which you’ll then prioritize according to their impact on your business and importance to stakeholders. If you’d like more detail around how to conduct a materiality assessment, I recommend checking out my e-book on setting and operationalizing ESG strategy!
How long will this take?
Companies should prepare to invest at least 2 months in this process, but it could take longer depending on the stakeholders you need to hear from and how you’ll engage them. If you’re early in your sustainability journey, consider doing a lighter-touch assessment for the first year and making it more robust over time. By the way, materiality assessments are not a one-and-done type operation. Because sustainability issues and stakeholder perspectives are constantly evolving, best practice for enterprise companies is to conduct formal assessments every 2 years. If you’re smaller, you should still revisit your materiality information at least as frequently, but the scale and scale of the process can vary (for example, surveying stakeholders on a specific sustainability issue that has become relevant or surveying a subset of stakeholders whose opinion is of special import, like employees).
Does my company really need to complete a materiality assessment?
If you’re planning to report on ESG issues, then you should complete a materiality assessment. Here are 3 reasons why doing so will have a positive impact on the long term success of your business and sustainability program:
Unlock ESG’s potential: The benefits of sustainability initiatives begin to accrue when they are incorporated into and improve the efficacy of existing processes — namely around risk, but also including product / service design, operations, and human resource management. This is only possible if the sustainability areas you’re focusing and reporting on are truly integral to your company.
Ensure stakeholders concerns are represented: If you don’t complete regular stakeholder engagement around sustainability issues, you’ll be surprised later by negative feedback that seemingly comes out of nowhere. Examples of this include the protests at Harvard University in 2018 to push the school to divest from fossil fuels, which led to negative press and (presumably) financial losses when the school phased out the funds in question several years later.
Get a leg up on addressing requests: Since your company cannot be everything to everybody, the materiality assessment will create a filter for inbound ESG requests from stakeholders.
How can I get started?
Having a thorough understanding of the process is a good first step. I recommend taking a look at this resource on setting ESG strategy as a starting point. After that, you can started on laying the groundwork for your materiality assessment by researching the reports of peer companies and understanding the guidance of different ESG standards organizations like GRI, SASB, TCFD, and the SDGs.
If you have any questions I’d love to support you! You can schedule an introductory call with me here.
