What Is An ESG Materiality Assessment?

To put it simply, ESG materiality assessment is a tool that helps you identify and prioritize ESG issues of crucial importance to your business. A materiality assessment can also be an exercise in stakeholder management. A materiality assessment helps your business identify and understand the significance of specific ESG and sustainability topics. This kind of assessment requires businesses to look at a variety of factors through two particular lenses:

1. Potential impact on your organization

The word ‘impact’ here refers to both positive and negative impacts. Don’t only pay attention to the risks, potential losses, or other adverse outcomes of not adopting a specific strategy. You must also focus on the opportunities your business can uncover throughout the process. An example is attracting the best talent because your company made changes to promote and improve employee health and well-being.

For example, you could be thinking of undertaking indoor plants as a sustainability project. Through this framework, you’ll ask yourself, “what impact will this have on my organization?” This example won’t bring a significantly impactful change to your organization’s operations.

However, if the government passes new industry legislation that requires your organization to comply, it could have a considerable impact. ESG materiality assessments take these topics and rank them by relative importance.

2. Importance to stakeholders

Identifying and selecting stakeholders from diverse backgrounds is important while performing a materiality assessment. Examples include board members, investors, employees, vendors, service providers, and other parts of the supply chain. Your stakeholders can also expand into local communities, NGOs, industry trade groups, social advocacy groups, etc.

The more stakeholders you engage with, the more you’ll broaden the scope of your assessment. Each stakeholder will provide new perspectives and different insights into opportunities you may not have thought of.

Let’s go back to the indoor plant’s example. You might not consider indoor plants a very impactful change. But if it makes a significant difference to your employees, if they gain satisfaction and enjoyment from this change, it is an easy win for your business.

How To Conduct An ESG Materiality Assessment?

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A well-planned and smooth materiality assessment includes the following steps:

1. Identifying stakeholders

List both the internal and external players affected by your company’s operations. Stakeholders can include employees, industry partners, board members, vendors, and the community members in the city your business operates.

2. Understand the ESG issues that matter the most to your organization and stakeholders

ESG is broad. Demonstrating leadership on all commitments is impossible. Therefore, it is important to prioritize the topics most important to stakeholders. This helps you deliver the right goals and strike a chord with those most engaged with your business.

3. Do your homework

After identifying your stakeholders and choosing the ESG priorities, start with research. Look up current industry standards. Review ESG reports from peers to understand how others within your industry perform.

4. Measurements

Now it’s time to think about the key sustainability indicators you need to measure. Are you trying to keep a tab on economic indicators such as business profits or turnover? Are you trying to measure your company’s environmental impact by tracking carbon emissions and waste management practices?

5. Review and analyze

After you obtain all the relevant data, you need to analyze and plan. If the data suggests that stakeholders value some indicators more than others, you might want to adjust your ESG commitments accordingly. A materiality matrix is a useful tool for exactly this purpose. The matrix allows you to graph indicators by their impact on your business and its ESG issues. This way, you can better understand what has the most impact on your business and stakeholders. When you prioritize, you can plan.

6. Act on insights

Show your stakeholders that you’re not just merely verbally committing to ESG issues. Show them action. Share with them the results of your survey in a sustainability report. Use the report to engage in conversations about what more your business can do.

Why Companies Need Materiality Assessments

A materiality assessment offers a guide or blueprint for your company’s ESG strategy. It helps you prioritize topics that need your attention by creating a compelling case for projects that you previously might have dismissed as too costly or not having enough proof of results.

For instance, you decide to get a LEED certification for your business’s headquarters. A materiality assessment will assist you in shaping the case for employees’ health and wellness benefits, positive impacts on the local community, attractiveness to potential investors, increased marketability, and more. By documenting and illustrating these benefits, you can dismiss possible reservations about project costs.

A materiality assessment can also improve your organization’s communication strategies. During your research, you’ll come across topics and projects that each of your stakeholder groups holds important. Therefore, you’ll be able to provide each of your stakeholder groups with information they consider the most essential.

By showing stakeholders that your company cares about and shares their interests and priorities, their engagement with your organization will increase. This will, in turn, fundamentally improve satisfaction and strengthen results.

A materiality assessment ranks the importance and potential impact of long-term risks on your business rather than just the short-term risks. When you’re aware of the issues your stakeholder consider priorities, you’ll be able to approach your EGS strategy more proactively.

ESG materiality reporting is not just the right thing for businesses to do. It’s the smart thing. Voluntarily reporting on an ESG materiality assessment sets up your business for future success. With the looming climate crisis, consumers and stakeholders are now starting to make purchasing and investing decisions based on company ethics and ESG performance. Therefore, your company must match the pace of consumers and stakeholders and demonstrate your ESG commitments.