David W Duffy explains how companies can use ESG materiality to strengthen stakeholder communication and sharpen business strategy
Environmental, social and governance (ESG) materiality is a metric showing the importance or relevance of a given issue to a company’s ESG strategy. The more relevant the issue, the higher the materiality.
Often, ESG materiality depends on money. Companies will analyse every issue’s materiality relative to its financial impact.
Because ESG is too vast to pursue every principle at once, organisations often need to break down what is in the scope of their ESG strategy and what has to be left out because of its low materiality.
ESG will always mean different things to every organisation. Its focus areas will vary depending on and organisation’s industry, local laws, competition and the borders it operates across.
ESG materiality is a way to prioritise what’s essential for an organisation’s success and disregard what makes little to no difference. Such priorities show that companies are thinking smartly about ESG.
How to measure materiality
To measure an organisation’s ESG materiality they often conduct a materiality assessment.
How companies conduct this varies from place to place, but the common trend is to assess what’s important for the company against what’s important to internal and external stakeholders. The overlap between the two is where companies will identify issues of high materiality, and these issues will be prioritised.
A good ESG materiality assessment is thorough and far-reaching. It analyses every relevant issue and considers its impact on business strategy, all stakeholders and the company’s long-term viability.
The process of identifying material ESG factors involves:
- stakeholder engagement, including communication with investors, customers, employees and communities to understand their ESG concerns and expectations;
- impact assessments that will give clarity on every issue concerning ESG in the organisation;
- creating a materiality matrix plotting the significance of each ESG factor based on its potential impact on the organisation and its importance to stakeholders. This essentially gives materiality a numerical and graphical life, making it easier to use it for decision-making; and
- integrating the findings into strategy, thereby ensuring all high-materiality issues are considered in business plans, risk management and reporting.
The benefits of ESG materiality
A materiality assessment can, first and foremost, support strategic focus. It can inform your organisation about what matters most using logical processes, giving confidence to all involved.
Additionally, because ESG materiality work involves stakeholder engagement, it has the potential to boost communication between stakeholder groups – something that can support business success.
David W Duffy is founder of the Corporate Governance Institute
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