Source materiality: How to approach ESG material disclosure

Source materiality: How to approach ESG material disclosure

EGS risk mitigation is no lie.

How do you make decisions? Gut-feeling? Asking friends or family? Do you write out pros/cons? Or perhaps even conduct your own SWOT analysis?

Finding an approach that works for you to assess questions, challenges and opportunities when planning for the future and living your everyday life is crucial. The same is true for business.

Companies scope, evaluate, monitor and review many issues and massive amounts of data to decide what's relevant and important for the future success of their business. And they use this information to make important decisions. This is called "materiality."

The concept of materiality is well-used in business, financial, legal and regulatory communities. Different purposes, contexts and applications lead to debate around the semantics, but fundamentally, material information is any information which can affect the evaluation and analysis of the issue at hand.

For some issues, such as those related to cost structures or marketing strategies, companies are pretty good at identifying and addressing what’s relevant and material. But for others, such as those related to environmental, social and governance (ESG) topics, approaches for assessing materiality are less mature.

Across ESG, there are complicated and misaligned efforts to assess what's material.

All listed companies have to include analysis of their risks in their financial filings (10K or 20F). ESG issues fit into this, but how do companies decide what’s important?

Interviews? Surveys? Expert analysis? Statistics? A combination?  

In industries such as food and agriculture, ESG materiality approaches are still under development and vary significantly between companies. This has serious consequences because the sector plays a critical role in the most pressing environmental and social challenges of our time — including deforestation, water scarcity and access; climate change; poverty; and, of course, feeding the world’s growing population.

According to the Nature Conservancy, over 40 percent of Earth's ice-free surface is dedicated to agriculture and 87 percent of fish stocks are fully or over-exploited.

The economic impact of food and agriculture is similarly large. McKinsey reported in 2015 that the food and agriculture sector represented $5 trillion in global trade, 40 percent of employment and 10 percent of global spending.

Moreover, the scale continues to grow as many companies are increasingly investing in agriculture and food.

Within this context, mechanisms for determining, and acting on, material issues need to be strengthened, and they need to be coordinated.

To date, there's no agreed-upon approach or process for identifying, understanding and disclosing ESG-related risks and opportunities. Without such processes, companies leave themselves, their stakeholders and value chains exposed to risk. They can also find it difficult to demonstrate where they're doing well.

As such, companies acting more sustainably may not be appropriately rewarded.

This is something that needs to change if we're to get a world where more than 9 billion people are living well, within the boundaries of the planet.

Better processes related to materiality will go a long way toward solving serious issues in the food and agriculture industry — and may even help achieve the Sustainable Development Goals.

The World Business Council for Sustainable Development (WBCSD) is undertaking this work with palpable influence and enthusiasm and recently released a white paper focused on materiality in the food and agriculture sector specifically.

The general idea behind the paper is that more effective application of the concept of materiality in the food and agriculture sector will lead to decision-useful information passing between companies and investors, leading to confident decisions and robust actions that take into account the full array of possibilities — including ESG issues.

Research conducted for the white paper takes those general principles and looks at how 56 publicly traded companies in the food and agriculture sector to identify material ESG information for public disclosure(s).

Through all of this, WBCSD is looking at how the relationship between businesses, investors and material disclosure help encourage more sustainable business outcomes.  

Findings include:

  • There are well-described practices for identifying material ESG issues, but there's significant variation in how companies do so.
  • There's conformity around some ESG issues such as GHG emissions and severe weather.
  • There's a disconnect between sustainability reports and the mainstream annual report.
  • The criteria used by companies to prioritize and address material ESG issues are not clear.

This work has the potential to radically shift corporate governance and investor decision-making to ensure that the most sustainable companies are rewarded by the financial system.

"How do you make decisions?" It's a question worth asking — and WBCSD is helping companies understand how to provide a meaningful answer. 

This project is part of the Conservation and Financial Markets Initiative, a five-year effort of the Gordon and Betty Moore Foundation that aims to leverage the power of mainstream financial markets in order to help drive the food sector away from practices that degrade natural ecosystems. This research and the materiality roundtable series support the next phase of this project whereby over the next three years WBCSD will be developing guidance to help companies identify decision-useful ESG information for disclosure to an audience of investors.