Leveraging Materiality Assessments to Prioritize ESG Topics

Environmental, Social, and Governance (ESG) issues have become increasingly important for businesses in recent years. Stakeholders, including investors, regulators, customers, and employees, demand that companies address environmental sustainability and social responsibility concerns in all manner. However, with so many potential ESG topics to consider, it can be challenging for companies to determine which ones to prioritize. This is where the materiality assessment comes in.

This post will introduce and explore the importance of ESG materiality assessments for companies looking to prioritize their ESG topics. We will discuss how materiality assessments work, their benefits and how the results can help companies create a more effective and impactful ESG strategy.

Materiality is a critical concept in financial accounting that refers to the significance an internal or external issue could have on a company’s financial performance or reputation. In ESG, materiality refers to the potential impact of ESG factors on a company’s financial performance and long-term value creation. Identifying material ESG topics is crucial for effective ESG management. It helps companies focus on the most significant ESG challenges they face and ensures that they are using their resources effectively and efficiently to address them.

Materiality assessments are the process by which companies identify and prioritize ESG topics based on their potential impact on the business and its stakeholders. They can be especially helpful for companies just starting on their ESG journey. By prioritizing the most significant ESG topics early on, companies can establish a strong foundation for their ESG strategy and focus their resources on addressing the ESG topics that are most important to their business and stakeholders.

The ESG materiality assessment is typically conducted as a multi-stakeholder survey to maximize the assessment’s impact. Therefore, it is important to establish relevant stakeholders who have an interest or influence in a company’s activities and can provide valuable insight into the issues that are most important to them. Stakeholders such as employees, customers, investors, suppliers, regulators, communities, or NGOs can be within or outside the organization.

The materiality assessment invites a shortlist of stakeholders to evaluate the importance of a particular ESG topic’s level of impact on the business and level of stakeholder importance via a questionnaire. The results are plotted onto a materiality matrix for further analysis. The X-axis measures the issue’s impact on the company’s business, while the Y-axis measures the level of stakeholder concern or interest in the issue.

Once material ESG topics have been identified, the next step is to aggregate all responses and prioritize them based on their impact on the business and stakeholders. Prioritization involves balancing factors such as the potential impact on environmental and societal outcomes, financial performance, regulatory compliance, and stakeholder expectations and interests. The process of prioritizing dimensions can vary depending on the methodology and criteria used, but companies should consider the size and scope of their business, as well as the potential impact of an ESG topic on their financial performance.

There are several additional assessments that businesses can use to further identify which ESG factors to consider in ESG program management, including:

Reporting on material ESG topics is essential for demonstrating transparency and accountability. Sharing the results of the materiality assessment, e.g., the approach, how ESG topics were considered, how data was analyzed, and the resulting level of importance for each ESG topic, can help companies build trust with their stakeholders and create a positive reputation for the organization. Companies can enhance their ESG reporting by providing meaningful narratives accompanying materiality assessment results, such as how certain ESG topics affect their business strategy and performance and future actions they expect to take to improve the ESG performance.

ESG reporting should generally be tailored to the needs of the business’s various stakeholders. It should incorporate quantitative data, qualitative information, and contextualization of significant ESG topics wherever relevant. Standardized frameworks and reporting standards such as GRI, SASB, or TCFD can provide a useful guide. Most importantly, consistent, reliable, and comparable data can help stakeholders to truly understand the business’s ESG performance and progress.

Several companies have successfully integrated materiality into their ESG reporting and corporate strategy. For example, Unilever’s Sustainable Living Plan prioritizes environmental and social issues such as improving health and well-being, reducing environmental impact, and enhancing livelihoods. Novo Nordisk has established clear criteria for identifying material ESG factors based on their financial, operational, and reputational risks. Meanwhile, Danone prioritizes specific ESG topics based on their impact on stakeholder needs and interests. These companies’ efforts provide valuable examples of how ESG materiality can be incorporated into a business’s reporting and strategy, helping them to make progress toward a more sustainable and equitable future.

ESG materiality is a key concept in ESG reporting and management, enabling businesses to focus on the most significant environmental, social, and governance challenges they face. By identifying and prioritizing material ESG topics, businesses can use their resources more effectively to create long-term value for their stakeholders and the environment. Transparent, meaningful reporting on these issues is critical for building trust and demonstrating accountability to stakeholders.