Get Started On ESG Journey With a Materiality Assessment
A formal stakeholder engagement process is fundamental to developing a materiality assessment. ESG expert Ed Micheau outlines the steps involved
An old Chinese proverb states that ‘The best time to plant a tree was 20 years ago — the second-best time is today.’ A new year brings a new opportunity for company leaders to make progress on their sustainability agenda. In addition to the wisdom contained in the Chinese proverb, business leaders will understand the value of planting an acorn, and how they can begin developing a coherent Environmental, Social & Governance (ESG) strategy to help them prepare for inevitable future change.
Over recent years, many businesses have been distracted from the ESG agenda by a series of mega global events — the Covid-19 pandemic, supply chain interruptions, energy security, rampant inflation and a cost-of-living crisis, not to mention an acceleration in digitalisation and hybrid working. For some, good intentions towards developing a more effective sustainability platform have not translated into hard actions and progress.
For those lagging behind, there is a danger of transition risk — being left behind in the wake of sweeping public policy changes in Ireland and at EU level, in addition to changing consumer sentiment towards various parts of the ESG agenda.
Among those businesses leading the way on sustainability, core values towards profitability and value creation are shifting, as indicated by a research report last year from Business in the Community Ireland. The report, which surveyed 185 large firms, found that at a minimum the thinking of most participants now includes a more holistic view on what is meant by ‘value creation’.
While profit remains central as a business value, it is not an exclusive value — the remit is now wider. The old mantra of maximising ‘shareholder profit’ is giving way to maximising ‘stakeholder value’.
For those businesses struggling to get started on the sustainability journey or who are stalled and confused by the complexity of the ESG agenda, or simply overwhelmed by the time and costs involved in transformation, the ESG materiality assessment is a good starting point.
MATERIALITY ASSESSMENT
A materiality assessment is a formal process by which decision makers identify and understand which issues impact the sustainability performance of their business or organisation. The term ‘materiality’ has its roots in financial auditing and is now being employed to describe those nonfinancial items that are also important for a company or a business sector. A material issue can have a major impact
on the financial, economic, reputational or legal aspects of a company, in addition to its relevance to both internal and external stakeholders.
Increasingly, these issues are being incorporated into a company’s future strategy development and planning. With sustainability becoming more important to commercial success, figuring out which issues on the ESG spectrum are most salient or ‘material’ is now considered at board level as a key step to developing a successful strategy. According to Réka Szücs of Deloitte, there are six reasons and benefits as to why companies should conduct a materiality assessment: Big picture — better understanding of a company’s total business performance.
Transformation — materiality can inform business strategy to be more sustainable.
Buy-in — identify issues relevant to stakeholders to improve stakeholder engagement.
Retention and recruitment — demonstrate to employees that a company is serious about sustainability. Opportunities — open up new areas of co-operation both in business and with stakeholders. Preparation — Start preparing for the EU’s upcoming ‘Corporate Sustainability Reporting Directive,’ which commences for large companies from FY2024.
So how to get started? A formal stakeholder engagement process is fundamental to developing a materiality assessment. There are many ways to design such a process, but a standard check list includes:
Identify internal and external stakeholders. Conduct initial stakeholder outreach.
Identify and prioritise what you want to measure. Design a materiality survey / questionnaire. Launch your survey and collect insights, including follow-up.