Materiality In essence, materiality is a way to decide what matters most to your organization, and what you can leverage for sustained success. The more relevant the issue, the higher the materiality. Issues that come under ESG can have a huge impact on profitability and your organization’s licence to operate, states McKinsey. This makes ESG fundamental to corporate strategy. It is never an add on, and is always (when done right), an asset to business performance, stakeholder trust, and the maintenance of a de-risked investment strategy.
According to the Corporate Governance Institute (CGI), the ESG focus areas vary by industry, sector, geography, local laws and other relevant factors. To help you navigate the maze, there are a number of materiality frameworks that companies can use to help them perform materiality analysis. For instance, when performing materiality assessments, organizations can utilise globally applicable standards such as GRI (Global Reporting initiative), and SASB (The Sustainability Accounting Standards Board) fraamework. GRI is focussed on stakeholder impact, while SASB is focused on ESG risk management pertaining to investors. Of course, the priorities will often overlap in a good ESG strategy.
There has also been great progress in recent years on creating a common reporting standard/baseline for ESG issues by the ISSB (International Sustainable Standards Board). In fact, the ISSB standards aim to harmonise and subsume existing frameworks like SASB and GRI, as well as for climate reporting, to align with the concepts laid out in the TCFD and TNFD, the Task forces on Climate and Nature related Financial Disclosures respectively.
ESG materiality frameworks allow you to identify relevant material issues that need reporting to both your internal and external stakeholders. Many of these standards have what’s called ‘Materiality Finder’ tools so that companies can report on broad ‘cross-cutting’ issues that likely effect all companies, as well as reporting metrics that deal with more sector-specific issues. This gives companies a real shot at tackling the issues that will actually move the needle for both sustainable success and prudent risk management.
This ‘cross-cutting’ approach and sector support is the basis of the EU CSRD standards. The Corporate Sustainability Reporting Directive, which comes under ESRS (European Sustainability Reporting Standards). The ESRS is a great example for any company of the broad areas that ESG reporting effects, namely: Governance, Strategy, impact, risk & opportunity management, and metrics and targets. ESRS also mandates a double materiality approach to assessing relevant issues, and this is certainly the future of ESG materiality and corporate reporting more widely adopted across the globe.
The ESG materiality process actually evolved from financial concepts, and the term materiality is part of long-standing accounting practices. For example, The Generally Accepted Accounting Principles (GAAP) standard, ensures issues are included in financial statements that may have a bearing on economic decisions related to the business. Double materiality goes further, in that it considers financial impacts of ESG factors on an organizations financial value, while also looking outward to consider how business operations affect different groups of stakeholders. Stakeholders are any group that have a vested interest in your activities. This may be determined geographically, or it may be economically, socially or environmentally determined. Stakeholders can include investors, your employees, customers, supply chain partners, as well as other workers, community members and pressure groups. Materiality essentially ensures you can align your sustainability strategy with your business strategy and the expectations of relevant stakeholders. The table below is outlining just a few examples of stakeholders and how their concerns may need to be considered by your organization.
| Stakeholders | Interest | How to tackle/engage |
|---|---|---|
| Employees | Career progression and equality of opportunity. | Company policies on hiring and DE&I. |
| Investors | Short term and long-term financial success, while impact investors will also require impact, be it social or environment, as it pertains to their investment philosophy. | Impact strategy & reporting, to align with Investor reporting standards for aligned objectives. Utilize ESG materiality maps, such as those provided by S&P Global. |
| Customers | Sustainable products that are also affordable or that serve a niche market. | Communications that show how ESG is woven into product lifecycles. |
| Supply chain partners | Aligning climate strategies or risk management alignment, to boost impact and vendor trust. | Industry standards and best practice, Supplier Code of Conduct creation in collaboration with partners. |
| Community members | Preserving or enhancing local environment or ensuring positive social impact. | Supporting local initiatives and/or global campaigns. |
| Pressure Groups | Sector or geographically specific groups may lobby or wish to converse on pertinent issues that you are tackling or not tackling, e.g. climate action for Energy sector, or enhancing diverse talent in various sectors. | Regular Dialogue, questionnaires, surveys to understand the desires and motives of different groups. |
Once you have identified broad ESG issues that are relevant to your business, the next step is to involve stakeholders to hone your list of issues. A crucial part of ESG materiality assessments is first identifying your stakeholders. In fact, an ongoing dialogue with relevant stakeholders will enable you to evolve your business and ESG strategy to keep it optimised for sustained success. Material issues that affect one stakeholder group may be irrelevant to another group, and yet both groups will need to see that you understand their priorities. A great way to communicate the nuances of materiality to your stakeholders is by using heat maps to show low, medium and high priority, broken down at stakeholder level. The widely used, ‘Quadrants’ method categorises issues into what needs tackling, and what needs communicating internally and externally. The result of this approach and assessment is called, a materiality matrix.
Organisations can choose to create multiple matrices, so each stakeholder can see through the complexity to what matters most to them. Each matrix can be organised to reflect environmental impact, economic impact and social impact. The possibilities are endless, says NYU Stern in its Materiality Whitepaper.
Stakeholder engagement can help your business optimise the resources it puts into tackling each material issue, ensuring your ESG report reflects the work that matters most to each group.
The tool offered by AGS, Diginex used the approach of ranking issues and then focussing on those stakeholders whose impact is highest. It may be that different divisions of your business can focus on one stakeholder specific issue, while another division tackles another, as long as this forms part of a cohesive ESG strategy. All of this will earn you trust from stakeholders, gain diverse perspectives, and drive innovation in solutions.
ESG materiality is a core component of any effective corporate strategy, enhancing risk and opportunity management, optimising capital allocation, and improving disclosures. Approaching business from a double materiality perspective also enables accelerated innovation by leveraging ESG trends, and getting ahead of risks, by turning them into growth opportunities. Effective ESG materiality is key to accruing long term trust from your customers, investors, and the support and energy of the people that make your business vision possible.
