6 steps to your ESG materiality assessment

Business landscapes evolve in response to growing societal concerns about sustainability. More and more companies are reporting on Environmental, Social, and Governance (ESG) issues voluntarily or due to legal requirements. For many of them, this raises one question: how do I identify and prioritize the most relevant ESG topics in my company? This is where materiality assessment enters the picture – as it provides a strategic approach that allows businesses to understand and manage their ESG risks and opportunities.

What is a materiality assessment?

A materiality assessment is a tool for identifying and prioritizing the ESG (Environmental, Social, and Governance) topics that are most relevant to a business's operations and stakeholders.

The materiality assessment is no new tool – it has already been introduced in financial reporting. These financial materiality assessments concentrate solely on economic impacts. In contrast, an ESG materiality assessment considers broader implications, such as environmental conservation, social responsibility, ethical governance, etc.

How can an ESG materiality assessment be useful for companies? Here are three reasons:

1. Regulatory pressure: An assessment of material ESG issues is required in many ESG reporting standards, including the Global Reporting Initiative (GRI) Standards, the European Sustainability Reporting Standards (ESRS), and the IFRS Sustainability Disclosure Standards (IFRS S). Therefore, conducting an ESG assessment helps to comply with (mandatory) regulations and standards.
   
   

2. Overview of sustainability priorities: An ESG materiality assessment can help to identify and rank the ESG topics that are most pertinent to a company’s operations and strategy. This will help highlight areas of high concern with the potential for positive impact.
   
   

3. Risk identification and prevention: An ESG materiality assessment can help to surface critical ESG topics which, if not managed effectively, could present significant operational, reputational, or regulatory risks to the company.

6 steps to conduct a materiality assessment

There are different ways to approach the process of creating a materiality matrix, and some standards, such as the ESRS, also provide recommendations or guidelines for it. In general, however, the process can be divided into the following six simple steps.

1. Define purpose and scope

First, determine the objectives of the materiality assessment by clarifying what materiality means to your business and considering the key audience of the assessment.

Then, define the organizational boundaries of material topics. Organizational boundaries determine which regions (e.g., countries, markets, etc.), entities (e.g., business units, subsidiaries, partnerships, etc.), and assets (e.g., facilities, vehicles, etc.) are included in the materiality assessment. This is of particular importance for large corporations with multiple subsidiaries, joint ventures, and associated companies.

2. Specify potential material topics

To create a list of potential material topics, analyze different sources, e.g., media reporting, internal data, external peer review, ratings and rankings, general ESG trends, etc.

Material topics can include all environmental, social, and governance areas. These may include, for example:

• Environmental: GHG emissions, waste management, biodiversity conservation, etc.

• Social: Human rights, business ethics, occupational health and safety, etc.

• Governance: Bribery and corruption, data privacy and security, corporate resilience, etc.

It is also advisable to involve business units outside the sustainability team, such as risk management or senior management. This provides a broader perspective and deeper understanding of trends affecting the business.

Then, aggregate similar material topics in order to cluster them into a smaller amount of higher-level categories. This allows the list of potential material topics to be more concise and limited to a few major categories.

3. Identify stakeholders

Find out which external and internal stakeholders you should engage with to obtain the most insightful input. Stakeholders’ insights may reveal priorities that business leaders could possibly not be aware of.

Focus on those stakeholders whose impact is highest while taking into account both the impact stakeholders have on your business and the impact your business has on them.

4. Collect and analyze insights

Consult the relevant stakeholders and interest groups for each topic and rank the topics according to their importance to them.

Then, analyze each topic's significance to the company and assess the actual and potential ESG impacts of each topic to understand the implications of the issue. Think about how important each topic is to the company in terms of implementing your company's strategy, managing present and potential future risks, pursuing market opportunities, and developing new products. Use the same thresholds as corporate risk management does when determining materiality, and base your determination on the impact on the company's ability to create value.

5. Prioritize material topics

ESG issues should be ranked and prioritized in order to make your report concise and meaningful. Prioritize material topics based on the strategic importance to the business and stakeholders and the ESG impact of each topic.

For that, define thresholds or cut-off points for determining which topics will be considered material. Make sure every material topic is linked to a relevant business function.

Business assessment and stakeholder assessment can be merged into a materiality matrix. The x-axis shows the priorities of the company and the y-axis the priorities of the stakeholders. Issues in the upper right corner of the matrix are the most relevant ones for both the company and your stakeholders — and thus should be at the top of your list of material ESG issues.

6. Integrate insights into ESG strategy

The insights about material ESG topics help to build an organization’s sustainability strategy and shape it for the future. Therefore, the results of the materiality assessment should be presented and explained in detail to the board of directors. Derive recommendations for ESG actions that the board can implement.

Additionally, constant communication with stakeholders regarding the strategy's objectives and progress is essential to its successful implementation. Make sure you stay in touch with your identified stakeholders to get feedback and suggestions for improvement on your material ESG topics.

How software can facilitate ESG materiality assessments

Materiality analysis can be a time-consuming and tough process. Software can facilitate the realization of materiality assessments – especially in these areas:

• Data collection:
  Software can help gather a vast amount of ESG data from various sources including company databases, surveys, regulatory filings, and external databases.

• Stakeholder engagement:
  Software can assist in engaging stakeholders, such as employees, customers, investors, and the broader community. Through online platforms, stakeholders can provide input and feedback on the company's ESG impacts, which can be used in the materiality assessment.

• Benchmarking and reporting:
  Software can also benchmark a company's ESG performance against industry standards or competitors, providing valuable insights into areas for improvement. Additionally, it can generate comprehensive reports on ESG performance, aiding in transparency and communication with stakeholders.

• Automation and efficiency:
  By automating the materiality assessment process, software helps you to save significant time and resources, making the entire process more efficient and accurate.