With an ever increasing number of ESG concerns and multiple reporting requirements, managing your organization’s sustainability program can be stressful.
Limited time and resources mean you need to focus on the most impactful factors, but how do you know what really matters to your business? That’s where materiality comes in.
By helping you navigate which factors are the most important to your business and stakeholders, materiality allows you to maximize your sustainability efforts. Without it, your ESG program can become lost, tracking less pertinent issues.
In this guide, we’ll help you make sense of this tricky topic, and explain how to conduct a materiality assessment so you know where to concentrate your efforts.
what is ESG materiality?
Basically, materiality provides a way to know what matters and what doesn’t when it comes to ESG. It can help you determine which issues are most relevant – or material – to your business, and what should factor prominently in your ESG program.
Because ESG means different things to every company depending on your industry, geography, and local regulations, you’ll need to conduct a materiality assessment to establish which issues are important.
The idea of an assessment is to identify the factors that are being impacted the most by your organization, as well as those that your stakeholders care most about. To do this, you’ll need to take input from all internal and external stakeholders.
understanding double materiality
In order to appreciate which issues have the most impact for your organization, you might want go a little further to consider double materiality.
Put simply, double materiality is the idea that ESG and sustainability is a two-way street. That means companies should consider:
- how their business is affected by ESG and climate change issues; and
- how their business has an effect on society and the environment
Although the conversation is typically around climate risk, double materiality can relate to any dimension of ESG and with this in mind, it’s important to recognize that stakeholders are more than just financial investors. Local communities and the public as whole are also stakeholders in your business.
If you would like to know more about double materiality and how it can help to evaluate ESG impacts both up and down the value chain, you can read our guide to Demystifying Double Materiality here.
what is a materiality matrix?
A materiality matrix charts the findings of your assessment in an easy-to-digest graph or visual. It takes into consideration the significance of the economic, environmental, and social impacts you have identified and plots them accordingly. A common method of creating this matrix includes:
- Y-axis: Importance to External Stakeholders – this could include environmental organizations, government, local communities, or the wider public.
- X-axis: Impact on Business or Importance to Internal Stakeholders – this could evaluate the impact on your financial or operational success which matters to shareholders, investors, and employees.
Although there are many forms a materiality matrix can take, essentially, it should be a visual representation of the initial list of material topics you have identified and the importance of each topic to the business and stakeholders.
what are the benefits of addressing ESG materiality?
First and foremost, materiality brings strategic focus. It provides a logical process to find which ESG factors impact your organization the most, and where to prioritize resources.
Not only does this provide confidence to stakeholders, but it can also help you develop a more targeted and meaningful sustainability strategy. There are too many factors to address them all, so knowing which ones are key for your organization is essential to creating a successful sustainability program.
For some reporting frameworks, like GRI, a materiality assessment provides the outline for an ESG or sustainability report. It can also help investors to determine how risky the business is and how the organization is being managed.
Finally, a materiality assessment can pave a better path forward with more realistic goals and a feedback loop to measure progress. This allows businesses to plan and take meaningful actions to mitigate the factors that matter most to their business and stakeholders.
how to conduct an ESG materiality assessment
To make informed decisions when dealing with ESG and sustainability planning, you’ll need to conduct a materiality assessment. The following five steps can help you get started:
1. Identify your stakeholders
- A stakeholder is anybody who is directly or indirectly affected by the actions of your organization. Anybody or anything that is affected by the actions of your organization must be taken into consideration
- Internal Stakeholders include people who are in a direct relationship with the organization:
- Employees
- Shareholders
- Board of Directors - External Stakeholders include people who can be affected by the actions of your organization:
- Customers
- Investors
- Regulatory Body/ Government
- Communities
2. Create a stakeholder engagement methodology
- Once the key stakeholders have been identified, your methodology should outline how frequently you will contact them and how you will interact using surveys, telephone interviews, or in-person interviews, etc.
3. Identify your material topics
- An initial review will identify which factors to address in order to structure the assessment. You can segregate issues into Economic, Environmental, Social, or Governance factors for ease of understanding. You can also use previous data, insights from stakeholders, research, or resources such as GRI frameworks and SASB standards.
4. Prepare and launch a survey of stakeholders
- This survey is designed to help determine which material topics matter most to your stakeholders. Rather than guessing which issues your stakeholders care about, it gives clear direction on where they feel your organization should focus
5. Collect survey data and begin analysis
- Once the results are in, organizations can begin analyzing the data and putting the results into their Materiality Matrix
After compiling a materiality assessment and matrix, the next step is to determine if your activities are having a positive or negative impact on each topic, the extent of the impacts, and the steps being taken to reduce the negative impacts and maximize the positive.