Getting more from your materiality assessment in the new ESG era
Scope. Analysis. Outputs
by Gus MacFarlane and Sam Rogers,
Now is the time to revamp your materiality assessment. While sustainability practitioners have been applying various approaches for over a decade, many companies are still failing to realise the full potential of the process.
Getting this right is more important than ever in the face of increasing focus on ESG performance from investors and others, shifting post-COVID economic priorities and evolving transparency requirements from European regulators and global reporting standard setters.
In this article, we set out how you can leverage the process to both revamp your sustainability strategy and inform more meaningful, impact-focused sustainability reporting.
Scope: See the bigger picture
At the outset, consider building the following elements into your process:
- Adopt a more integrated approach. Don’t just focus on ‘traditional ESG’ issues. Pulling in operational, financial and strategic business elements can help to kickstart your journey towards integrated strategy, management and reporting. Similarly, don’t be overly constrained by conventional reporting frameworks. While these are important reference points, use the process as an opportunity to generate unique insight into your company, the external environment and key stakeholders
- Integrate top-down and bottom-up perspectives. Building a balanced picture requires bottom-up (e.g. localised / regional / operational) and top-down (e.g. corporate-level / strategic) perspectives. Consider undertaking regional / business unit assessments to feed into and support your corporate-level analysis
- Look beyond your direct impacts. Global businesses are coming under increasing pressure to consider broader value chain risks and impacts. Most notably, this includes the ‘elephant in the room’ of Scope 3 GHG emissions. Refocus your assessment to explicitly integrate more holistic upstream and downstream perspectives.
- Get more from your conversations. Use internal engagement sessions to support organisation-wide buy-in and accountability around ESG. Similarly, use external engagement sessions to support mutual-education and relationship-building. Don’t just focus on the views of your investors as you seek to meet their ESG expectations. Other stakeholder groups – including local communities, employees, customers and civil society – are often better placed to provide early warning of emerging issues
- Drill down into the data. The integration of public and proprietary data sets (e.g. country-specific ESG data) and or unstructured data (e.g. NLP) can help to inject greater objectivity into the process and provide important context regarding your inherent risks
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Analysis: Move beyond prioritisation to generate new insight
Next, turn your attention to enhancing the analytical richness of the process. Elements to consider include:
- The anticipated timeframe in which an impact is likely to manifest. This will support more nuanced issue – and management – prioritisation
- Enhanced impact ‘mapping’ to identify the internal functions/business units and stakeholders who impact, and/or are impacted by, each of your material issues
- The likelihood of each impact occurring. This will also support impact prioritisation, as well as the closer alignment of the materiality assessment and ERM framework
- The relative level of influence/control your company has over the management of each impact. This will help guide the allocation of resources towards where you can have the most meaningful impact
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Outputs: Translating insight into action
But how does all this translate into action? There are three key areas:
- Reporting outputs: Communicate new insights to your stakeholders, including:
- Narrative on year on year changes, what is driving them and what the implications are – helping move from a ‘box-ticking’ exercise to one that offers genuine analysis
- Not only your current material issues, but what the picture is likely to look like in future – and what is your business doing about it
- What is not material, and why (an area that many companies miss out) undermining the ‘point’ of the materiality concept
- How your material issues relate to – and support – recognised global sustainability frameworks, such as the UN SDGs or UN Guiding Principles
- Risk management: Work with your risk team as part of the assessment to ensure that (1) you are leveraging your Enterprise Risk Management (ERM) results as part of the materiality process; and (2) your materiality process informs – and helps validate – the results of your ERM process. By doing so you can ensure the process supports corporate resilience in the post-COVID context and helps meet obligations under ESG/risk frameworks such as the TCFD
- Strategy: Don’t just use your materiality assessment to inform your reporting. Instead, the materiality process should sit at the heart of – and directly inform – sustainability strategy
The last point is the most important one. In the current environment, it is tempting to rely on immediate investor and ratings agency demands to define your ESG priorities. This is an important starting point, but it is ultimately reactive. Leverage your materiality assessment to set your company on a more proactive, meaningful and company specific trajectory in the new ESG era.