Introduction

ESG is a combination of various intricate topics and it is not necessary that every issue related to environment, social or government will be related to your company. Therefore, it is very important to conduct an ESG material assessment. This assessment helps in understanding the most relevant issues to your company. It is a process that gives weight to the impacts of ESG issues and establishes their importance to both the company and the stakeholders. This assessment provides understanding about future trends and risks or opportunities in the business by analysing and collecting feedback from the stakeholders. With the help of these learnings, the companies can focus on establishing ESG strategies and prioritize goal and target setting. ESG Materiality Assessment is an essential step of the ESG approach.

Uniqueness of Materiality Assessment

In terms of the financial reporting, Materiality emphases on needs of decision making of the invested audience but in terms of ESG reporting, Materiality emphases on broader impacts of stakeholders. Nowadays, the concept of “double materiality” has been eminent in ESG reporting. This concept requires both the influence of ESG strategy on the business value and impacts of the company on the market, environment and people. Double materiality demands companies to report information that is beneficial for investors and stakeholders for e.g. local communities, NGOs, employees, environmental agencies, consumers, etc.

It is believed that consideration of stakeholders and corporate impacts along with the business value, can benefit the company in the identification of risks and opportunities.

Dynamics of Material Assessment

ESG Materiality Assessment should not be a one-time activity. Risks are tend to change with time which makes it difficult to reassess materiality on a regular basis. It is recommended to conduct an ESG Materiality Assessment in every 2-3 years to keep a record of changes in ESG priorities.

Steps to Create Materiality Assessment

Following are the steps to create a materiality assessment for the ESG:

1. Assembly of a Project Team: It is important to appoint a cross-functional team for the materiality assessment. This can help in obtaining seasoned and valuable advice from the leaders of your company. An ESG Materiality Assessment can be successful with the support of C-suite, ESG Steering Committee, Legal, Finance and H.R Teams, etc.
2. Prepare a List of Stakeholders: It is essential to prepare a list of both internal and external stakeholders whose engagement is needed. Both internal and external stakeholders play a key role in giving a complete picture about the risks and opportunities. They will also guide you for the rest of the analysis.
3. Development of List about Initial Material Topics: After selection of the stakeholder group, develop the initial material topics list. There should be reference of a company’s previous materiality works, ESG ratings and benchmarks set by your peers. Consideration of ESG reporting standards, initiatives and frameworks should also be included.
4. Conduct Stakeholder Engagement Initiatives: The next step is to select engagement of the stakeholders. Determination of benefits for the company depends on the resources available, level of maturity about ESG program and existing channels of the stakeholders. For examples, companies can conduct stakeholder surveys or roundtables.
5. Create a Formal Study of the Output: The last step is to create a formal report of the results. This report should include aspects such as data, methodology and observations. It should also include materiality matrix which is a visual representation of different topics about the impacts of the business and role of the stakeholders.

Use of Software in Materiality Assessment

Traditional process of conducting material assessment is very time taking and lengthy. Thus, there are some Materiality Assessment Software streamlines that can automatically collect inputs. This software helps companies to make decisions for ESG quickly. It also helps the company to keep on top of changes that can affect issues related to materials even after the matrix is completed. It allows companies to update their matrix easily due to the changes in business dynamics.

Materiality Matrix

Material Matrix is a visual representation of results assisted by a third party. It is conducted by BDO to provide a better understanding about the issues that are important for the stakeholders. In the material matrix, representation is two-dimensional where the horizontal axis depicts materiality of the issues and the vertical axis depicts materiality topics of the company.

Benefits of ESG Materiality Assessment

Following are some of the benefits of assessing materiality:

• It provides help in the establishment priorities by promoting sustainability and also focusing on the issues having the most substantial impact.
• It assists in setting goals and targets by determining their benefits to the company.
• It builds a stronger value proposition of the company by adding a sustainable value to it and lessening the risks. This improves the continuity of the business.
• It helps in the evaluation of both risks and prospects in short, medium and long term by also taking into consideration the emerging issues of ESG.
• It increases the engagement of the stakeholders and other investors which give various perspectives on the issues and helps in making a successful business strategy.
• It gives an idea about the future trends and expectations of the stakeholders which helps in creating new revenue streams.

Take Away

This is the brief explanation about how materiality assessment acts as a tool to identify the issues relevant to your company. Please let us know through your valuable feedback and the suggestion in the drop box.