ESG materiality assessments remain foundational, but many organizations still struggle to conduct insightful and actionable materiality assessments to inform their short- and long-term ESG strategies. We asked ESG experts how organizations can improve their materiality assessments to make a deeper and more lasting impact. But first, let’s start with the basics.
What Is a Materiality Assessment?
A materiality assessment is the process of determining which environmental, social, and governance concerns are considered material, or important, to an organization, both financially and in terms of their impact on the world.
In an ESG context, materiality refers to financial materiality: how ESG-related risks can impact an organization’s finances. Double materiality is an increasingly popular concept that includes both financial materiality and its inverse, impact materiality — the impact an organization’s activities have on the environment and society.
Materiality assessments form the basis of ESG strategies, so it’s important to get them right. Here’s how.
1. Listen, Engage, and Learn
The strength of a materiality assessment rests upon stakeholder engagement — asking both internal and external stakeholders the right questions.
“People might think of data as a set of numbers,” says Adèle Jackson, climate resilience & ESG associate at Wood. “But conducting interviews and public town halls, and sending out mass emails and asking for input – that’s all data. You can collect things like economic, socioeconomic, and census data from the government, but you can also collect data from individuals.”
Sometimes our biases close us off from seeking input from important stakeholders, so Jackson suggests following the path where it leads: if you’re interviewing stakeholder groups, ask if there is anyone else you should talk to. “If you give people the opportunity to provide you feedback, they often will,” she says. “But you have to be open to criticism in order to improve — you have to check your ego at the door.”
“Part of ESG is equity,” says Candice Bullard, climate strategy manager at Equilibrium, part of FiscalNote. “Providing all levels and status of workers an opportunity to have a voice contributes to diversity, equity, and inclusion goals and sets a solid foundation for ESG efforts.” This is particularly critical since the “S” of ESG typically tends to take the sidelines are more companies focus on carbon and climate.
Bullard suggests that organizations source qualitative data such as surveys and interviews, and quantitative data such as ranking ESG issues or calculating the frequency of media mentions. She recommends doing this both internally with stakeholder interviews, and externally through CSR reports, or news narratives.
Getting the data piece right means having the right tools for the job. “There are a lot of excellent tools vendors have created that can conduct materiality assessments,” says Matthew Ayaerst, sustainability & ESG executive coach at CGI. “But it takes a combination of tools and resources to achieve a comprehensive materiality assessment and mitigation strategy.”
2. Look Forward and Backward
The most effective materiality assessments don’t just focus on what’s happening now; they look back to learn from past decisions and ahead to prepare for what’s to come.
“The whole purpose of a materiality assessment is to mitigate risk,” Jackson explains. “To fully understand the risk and prepare a strategy based on your assessment, you need to take a look behind you and learn from your mistakes; you need to talk to people and understand what you can do better moving forward.”
Organizations must approach a materiality assessment not simply as an analysis of where they are now, but as an opportunity to identify and prioritize upcoming trends and risks that might impact the organization’s stability. This kind of strategic planning is far more accurate and actionable with the right data and technology at your disposal — for example, Equilibrium’s simulation capabilities allow organizations to model the costs of different solutions.
3. Look Around
A materiality assessment is many times a benchmarking exercise for ESG teams, particularly as they progress in their ESG strategy. But the best materiality assessments don’t just benchmark the organization at a particular time and place, they also benchmark it against peers, competitors, and the industry landscape.
“Benchmarking is important because the end goal is continuous improvement,” Ayaerst says. “Materiality of different ESG issues differs from one industry to another, so you need to be benchmarking against peers for relevancy.”
Competitor and industry benchmarking is a key part of an organization’s ESG strategy and overall business plans, allowing them to position themselves uniquely in the market and build distinct competitive advantages. Benchmarking also ensures the ESG issues an organization is considering are contextually relevant.
“Equilibrium’s benchmarking platform uses FiscalNote AI to scour the internet to identify what topics are being talked about by competitors, and the industry,” Bullard says, which in turn helps an organization benchmark itself in context.
4. Understand That Materiality is Dynamic
What is considered material to an organization’s ESG risk and impact is constantly changing. An effective materiality assessment will acknowledge this and layout timeframes for when materiality considerations should be reassessed.
“Planning to plan is important,” Jackson says. “A materiality assessment should be your baseline. In a year or five years or 10 years from now, you’ll look back at your benchmark and see the change over time. If you plan your materiality assessment to be evolving and living, then you can better adapt to those changes.”
With a rapidly changing cultural, geopolitical, regulatory, and environmental landscape, what is not considered material today (or even considered at all) could make headlines overnight and become a key focus tomorrow. An effective materiality assessment is grounded in what is known but has the flexibility to adapt to what is still unknown.
No stakeholder group or ESG team can predict everything, which is why the best way to ensure a materiality assessment remains relevant is to make it a regular exercise, not a one-off. “The realm of ESG is constantly changing,” Bullard says. “In order for companies to stay current, it’s recommended that they refresh their materiality assessment every one or two years.”
Materiality assessments aside, ESG is something that should be monitored frequently — as often as monthly, weekly, or even daily. “Currently corporations only look at ESG issues on a yearly basis, which is incongruous with the fact that externalities are in flux day to day,” Ayaerst says. “ESG teams within corporations need to fully integrate and operationalize material issues into the day-to-day business in order to mitigate these issues on an ongoing basis.”
The True Value of Materiality Assessments
A strong materiality assessment provides the foundation for a successful ESG strategy, so it is essential to get right. But a materiality assessment provides the most value when it functions not simply as a starting point for ESG strategies, but as an integral part of overall business strategy.
In the end, an organization’s ESG activities are its business activities. What is material from an ESG standpoint reflects what is material to the organization as a whole: what they stand for, how they operate, and where they’re going.
In a rapidly changing world, keeping up to date with ESG trends, risks, and opportunities is crucial. Future-proof your organization’s materiality assessments and ESG reporting with Equilibrium, an end-to-end ESG management solution that helps organizations benchmark their ESG progress, monitor external and internal ESG data, and involve key stakeholders in their ESG strategies.