How can your business decide between E, S and G?
What do natural disasters, sexual harassment and cybersecurity have in common?
They are all environmental, social, and governance (ESG) issues. And last year, each one moved markets. Today, investors want companies to proactively demonstrate how ESG concerns are guiding decision-making and business strategy. "Checking the box" with sustainability reporting is no longer enough.
And yet, when it comes to discussing material ESG issues, a vast majority of C-suite executives and board members are still uninterested or dismissive, failing to see how they’re already affecting the bottom line.
So, with (1) a growing tide of ESG risks and opportunities to navigate, (2) internal roadblocks and lack of buy-in for addressing sustainability, and (3) external stakeholders making demands with quick turnarounds, where does a company begin? The answer is not really new or high-tech, but it is a tried and true approach and the perfect place for a company to start its ESG journey — materiality. Applying materiality to sustainability (commonly known as conducting a materiality assessment) helps to uncover the most salient ESG issues to a business and its stakeholders.
In order to demystify this process and equip teams for complex, evolving sustainability conversations, I have broken down the main steps to conduct a holistic materiality assessment. If companies can begin to level-set on ESG and embrace systems thinking, we might just start to see a more sustainable, long-term view of financial planning influence Wall Street.
Materiality is ground-zero for demonstrating how ESG issues align with strategic corporate objectives, and a materiality assessment’s value is in its process, not its output. The final output (PDF), while necessary for transparent reporting and communications, is only valuable because of the honest, difficult conversations you will have along the way.
By engaging leaders across your business (think procurement, investor relations [IR], legal, product development and beyond) in addition to local communities, activists, investors and customers, materiality assessments are simultaneously a tool to raise awareness, gain insight and provoke change management. Now, to the meat of it all.
Start with scope
Before kicking off any materiality project, assess your objective. Do you plan to inform strategic company direction, guide reporting, mitigate risk or a combination of all three? Reporting and strategy are not the same. Reports look backwards; strategy and risk mitigation look ahead. The data collected, topics prioritized and stakeholders engaged will vary accordingly.
Next, define your primary audience. Are investors, employees, raters and rankers, or customers your most important stakeholders? This answer will inform which definition of materiality (or combination of definitions) you will apply. Common definitions come from the International Integrated Reporting Council (IIRC), Sustainability Accounting Standards Board (SASB) and Global Reporting Initiative (GRI).
IIRC and SASB both focus on the information needs of investors, while GRI focuses on the information needs of all stakeholders. This choice will define the scope of your information needs and affect the parameters of your analysis.
With a definition in mind, determine the appropriate balance of qualitative and quantitative data collection, criteria to assess the relative importance of issues (this will be paramount to your analysis and is often where clarity is lost in the materiality assessment process) and define your universe of potentially material issues.
Be careful not to make these decisions in isolation. Engaging business leads from HR, Risk and other groups from scope definition will help ensure your materiality assessment reflects company culture as a whole — especially if they’re engaged from the beginning. Your colleagues may not consider their daily work in the context of human rights or climate change, but their deep insight in diverse business areas is essential to moving the needle on these complex issues. By level-setting on objectives, process and terminology at the start, you can benefit from higher quality inputs and increased buy in down the line.
The bottom line: Aim to create a tool tailored to the unique needs and objectives of your company.
Next, collect your inputs
Interviews are a common place to start. While the number of stakeholders interviewed will vary based on scope and company size, the process for engaging stakeholders is fairly standard:
Identify a list of internal and external stakeholders
Develop a discussion guide with 3-4 general questions and 5-10 individual or function specific questions to send prior to the interview
Keep interviews conversational — no need to stick to a script
Focus on strengths and weaknesses, company performance and competitive positioning
Finally, consider bringing in a third-party interviewer. In my experience, the level of candor significantly increases if the interviewer is not a company representative. You are collecting important information to inform future business model and market strategy decisions; think through the best way to draw out this information.
Embrace systems thinking throughout this process. Robust stakeholder engagement will help create a holistic, inclusive view. When determining which stakeholders to interview or survey, consider your full ecosystem: internal (employees, management and subject matter experts) and external (clients, advocacy organizations, innovators, investors, etc.). This is your opportunity to develop a more complete view of your material issues, make better decisions moving forward and signal to your stakeholders that you highly value their input.
Cultivating cross-functional understanding (and potential allies!) for change management begins with thoughtful data collection.
Analysis is art, not science
There is no perfect way to assess your inputs. Your assessment will gain credibility, though, when you demonstrate transparency and rigor. No matter how you score and rank relative importance of issues, be sure to explain and document how you categorize issues and assign value.
Not all inputs will have clear metrics. Even with quantitative assessment practices, you’re still evaluating qualitative inputs. Materiality is an inherently subjective endeavor; this should be acknowledged rather than disguised throughout your work.
Analyze results in the context of your business’ long-term value proposition; there is no single solution.
Your work is going on display
Materiality assessment results should be displayed in a way that is easily understood, reveals trends and patterns, and informs discussion of its output. To satisfy these stipulations, it is typically presented as a two-by-two matrix with coloring and sizing variances and directional markers applied as relevant.
Manual refinement plays an important role as the tool is not perfect, but merely a systematic approach to highly qualitative and subjective issues. Once refinement is complete, provide a final version of the materiality matrix accompanied by a narrative explaining the results and interpreting their significance to the company in question.
Keep in mind that you are creating a visual that not only guides reporting and/or strategic planning, but also incites conversation and connections. Your IR group proactively can navigate investor questionnaires. Your sales team will have clear talking points to build client relationships. You can also consider personalization; your facilities team could benefit from a version highlighting specific environmental issues.
It may feel overwhelming at times, but deciding to conduct an assessment (and gaining internal buy-in to do so) is often the hardest step. But, in the end, you will have the information to navigate between E, S and G.