Is Your ESG Materiality Assessment, Material?
“Materiality” has been relevant for the investment community for some time. Items that are ‘material’ are those that an investor may consider important when making an investment decision or those issues that may have an impact on the financial wellbeing of an organization. Over the past decade, sustainability issues have become more material and intertwined with business decisions, including those that are related to environmental, social, and governance (ESG). Conducting an ESG materiality assessment is a productive exercise that can be a simple or complex assessment. The objective of the assessment is to understand your priority issues and manage each accordingly to ensure there’s limited impact to an organization’s business outcomes.
As you are conducting your own materiality assessment (even if it’s a simple one), take note of a few of these pointers:
Cater the material issues to your project: There is a line list of items that can be assessed, and their importance will rank differently based on the project, proponent, and stakeholders. Some material outcomes for environmental issues can include GHG emissions, water use, noise, and contamination; for social they can include child labour and workforce rights, Indigenous rights, stakeholder relations, community affordability; and for governance they can include audit procedures, board composition, fraud, corruption, among others. Be thoughtful about the material issues that you assess (many issues may come from feedback provided by the representative samples chosen – see #3).
Rank your material issues with two lenses: As you examine all the ESG-related material issues, it will be critical to rank each in relevance to the corporation and relevance to stakeholders. In doing so, a ranking can be done in a spreadsheet with weightings to each or simply on a matrix with ‘importance to stakeholders’ on the Y axis, and ‘importance to business success’ on the X axis, with high, medium, and low rankings.
Representative samples are important: While conducting a materiality assessment, advice will be solicited from affected stakeholders (for relevance to stakeholders) and internal corporate representatives (for relevance to the corporation). Ensure that the sample being queried represents a broad swath of the population and the most knowledgeable corporate representatives. One of the most challenging issues facing materiality assessments is a limited internal understanding of the material business issues.
Document the assessment process: A materiality assessment is conducted at a point in time. But project impacts change and so do the stakeholders involved. To understand the outcomes of the assessment long term, it is wise to document who contributed, what engagement took place to collect the information, and the date it was undertaken.
Take note of double materiality: Sustainability issues have dual impact – those that affect the corporation and the effect of the corporations’ activities on people and the environment. This means that the materiality goes beyond the impact on financial strength and looks at the environmental and social externalities.
The concept of materiality has evolved, encompassing traditional financial considerations alongside sustainability issues. Whether simple or complex, it is crucial to identify and prioritize these issues to mitigate or limit potential impacts on an organization’s business.