ESG Materiality Assessment – A Strategic Imperative for Business
24th July 2024
Contents
- What is an ESG Materiality Assessment?
- What is Double Materiality?
- Benefits of a Materiality Assessment
- Key Steps in a Materiality Assessment
- What does a Materiality Assessment Include?
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If you’re committing to sustainable business practices, a high-quality ESG materiality assessment is a critical tool as it enables your organisation to identify and prioritise your most pertinent Environmental, Social, and Governance (ESG) factors. It’s important to focus on your most material topics so your efforts can have the most impact where it matters – plus there is not enough time or resources to address every possible sustainability issue. Understanding your ESG risks and opportunities is also helpful in a world of emerging regulation – in Australia, the upcoming mandatory climate-related financial disclosures. In this article, we’ll explore the basics of an ESG materiality assessment, key steps and methodology including the concept of ‘double materiality,’ and the benefits of undertaking an ESG materiality assessment.
What is an ESG Materiality Assessment?
An ESG materiality assessment is a strategic process companies use to identify and prioritise sustainability issues that are most relevant to their operations and stakeholders.
Best practice frameworks, such as Global Reporting Initiative (GRI), make clear that organisations should conduct a materiality assessment to identify their most salient ESG topics. This is done to ensure that sustainability efforts are focussed where the business has the greatest impact (both positive and negative).
A key consideration when conducting a materiality assessment is the methodology you deploy. In the fast-evolving sustainability landscape, best practice is to use a double materiality methodology.
What is Double Materiality?
Double materiality is the impact your business has on its stakeholders and how ESG may impact your business performance. Two leading ESG best practice frameworks, GRI and Sustainability Accounting Standards Board (SASB) explore both sides of materiality, where GRI looks at outward impact (onto stakeholders), SASB looks at inward impact (onto business performance). Taken together, these two standards effectively cover a double materiality lens.
So, what does an ESG materiality assessment consist of? According to GRI, a materiality assessment should involve the following steps:
- Understand the organisation’s context,
- Identify actual and potential impacts,
- Assess the significance of the impact,
- Prioritise the most significant impacts.
Benefits of an ESG Materiality Assessment
There are many benefits of conducting an ESG materiality assessment. These include:
- Prioritising your ESG Efforts: Ensure your ESG efforts are focused on your business’s most salient impacts.
- Strategic Alignment: Align and embed ESG priorities into your overall business strategy.
- Addressing and Mitigating Risk: Identify and mitigate potential risks associated with ESG impacts, through risk management.
- Building Stakeholder Trust: Build trust and credibility with stakeholders’ engagement and considerations.
- ESG Transformation: Enables your leadership and key personnel to upskill and align their understanding around key ESG issues relevant to the business, bringing them along and preparing key people to lead a longer-term transformational change in the organisation.
Key Steps in Conducting an ESG Materiality Assessment
Conducting an ESG materiality assessment is the foundation for your business’s ESG efforts.
To guide this process effectively, several key steps should be taken to ensure objectiveness, inclusiveness and comprehensiveness. Let’s explore these key steps to conduct an ESG materiality assessment.
1. Understand your company’s context
Begin by exploring your industry, business model and purpose, ESG drivers and stakeholder landscape. For more guidance, GRI 3: Material Topics outlines what should be considered when understanding your organisation’s context.
2. Identify actual and potential ESG impacts and conduct stakeholder engagement
Create a long list of all actual and potential ESG impacts, both positive and negative. These actual and potential ESG impacts can consider double materiality and explore inward and outward impacts on your business. A great starting point for your business may be to review your most suited industry standard dictated by GRI and SASB.
Following your long list, it is crucial to consult your stakeholders to understand their concerns and priorities, in terms of ESG impacts.
3. Assess impacts and relevance
Following your stakeholder engagements and identification of ESG impacts, it is important to assess each impact for relevance including negative impacts and positive impacts such as likelihood and scale.
4. Prioritise ESG material topics
By assessing each impact, your business will find your most salient ESG impacts. It is vital to prioritise your material ESG topics, to understand which requires most consideration. This can involve reviewing your ESG material topics and creating a threshold, and therefore, selecting a maximum number of topics.
5. Finalise ESG framework
To ensure the outcomes of your ESG materiality assessment are user-friendly across your business and for key stakeholders, we recommend creating a final ESG framework where you can see at a glance your most material issues.
6. Regular review and update
The sustainability landscape, industry trends and stakeholder expectations are everchanging, that’s why it’s imperative to regularly review and update your ESG material topics. Many businesses aim to conduct a revised materiality assessment annually or biannually.
7. The foundation for your ESG efforts and strategy
To ensure this process is utilised effectively, it is important to integrate the findings and your identified material topics into your organisation’s strategic planning, processes, risk assessment and reporting. This can be achieved through the development of an ESG strategy. For more guidance on developing an ESG strategy or reporting, ‘What is ESG and why is it important?’
What does an ESG Materiality Assessment Include?
A materiality assessment varies by industry, but some common ESG impacts and topics that would be covered in an ESG materiality assessment include:
Environment:
- Climate change and greenhouse gas emissions
- Water usage and conservation
- Biodiversity and ecosystem impacts
- Waste management and recycling
- Pollution prevention and control
Social:
- Labor practices and human rights
- Diversity and inclusion
- Employee health and safety
- Community engagement and development
- Supply chain ethics and fair labour practices
Governance:
- Board composition and independence
- Executive compensation and transparency
- Anti-corruption and bribery policies
- Shareholder rights and engagement
- Ethical business conduct and corporate culture
- ESG Materiality Assessment in Practice
We’ve worked with various clients across different industries to support their ESG materiality assessment processes. Learn about our materiality assessment advisory and development of an inaugural sustainability report and ESG strategy to progress Namoi Cotton and the cotton industry towards a more sustainable future.
Why do an ESG Materiality Assessment?
Amidst the growing drivers and significance of ESG considerations, the adoption of an ESG materiality assessment is emerging as a strategic imperative for future-focused businesses.
The materiality process gives a valuable overarching view of your company’s risk, enabling you to understand and prioritise the material impacts on both your financial performance and reputation. By addressing stakeholder concerns and aligning efforts with actual and potential impacts, your business can navigate the intricate landscape of ESG and leverage the materiality assessment as an effective tool, offering a clear roadmap in committing your business to embed sustainable practices into your core business strategy.
Watch this webinar for an in-depth overview of how to use materiality outcomes to better inform your company’s strategic imperatives.
Need Help With Your ESG Materiality Assessment?
If you’d like to learn more, or need guidance with your ESG strategy or materiality assessment, or broader emissions reduction, target setting and sustainability initiatives, please reach out to our experts we’re here to help.
You can also download our Guide to Double Materiality here. and here you can understand the pros and cons of doing DIY or outsourcing.