Materiality Matters- But How to Determine?
ESG implementation is a journey and a long term process. Companies that adopt ESG and prepare reports just for the sake of compliance and reporting purposes often tend to greenwash their ESG performance. The process of ESG adoption with an aim of “doing good” requires long term commitment, innovation, investment and above all behavioural/ mindset changes.
One key concept in the development and implementation of ESG initiatives is stakeholder materiality. The term refers to the extent to which a particular issue is relevant or significant to company’s stakeholders. In other words, it is a measure of the importance of an issue and the potential impact it may have on their interests. Another important concept is “Double Materiality” which means that ESG performance can be both a risk and an opportunity. This means that a company’s ESG performance can have an impact on both its financial performance and non- financial outcomes (for example reputation) , and that addressing ESG issues can both mitigate risks and create opportunities for the company.
For example, a company that has a strong track record of environmental stewardship may be able to reduce its costs by implementing energy-efficient practices or by sourcing materials from sustainable sources. These actions can not only benefit the environment, but they can also improve the company’s bottom line by reducing its operating costs.
At the same time, a company’s ESG performance has an impact on its reputation and the way it is perceived by stakeholders. This is particularly important in today’s business environment, where consumers, investors, and other stakeholders are increasingly seeking out companies that align with their values and are committed to sustainability. Strong ESG profile helps in differentiating a from its competitors and attract a more loyal customer base.
The concept of double materiality is particularly more relevant in the context of ESG investing, which is an investment strategy that focuses on companies with strong ESG performance. ESG investors seek out companies that have a positive impact on the environment and society, as well as those that are well-governed and have a strong track record of ethical conduct. These investors believe that companies with strong ESG performance are better positioned to navigate the challenges and opportunities of the modern business environment and may offer a higher level of risk-adjusted return over the long term. However, the concept of double materiality can be well applied even by corporates for investing in different ESG initiatives which can expose the company to risks and/or opportunities resulting into financial as well as non- financial impacts.
Now let us discuss the ways of determining the materiality. One approach is to conduct a stakeholder materiality assessment, which involves engaging with stakeholders to identify and prioritize the issues that are most relevant and important to them. This can be done through a variety of market research methods, such as surveys, focus groups, and interviews.
By conducting market research companies can understand what stakeholders, including consumers and investors, value when it comes to sustainability. Surveying stakeholders to ask about their priorities when it comes to purchasing products or investing in companies, as well as analysing data on sales of products that are marketed as being sustainable provides lot of valuable data. By analysing this data and understanding what stakeholders care about when it comes to sustainability, companies can tailor their ESG initiatives to align with these values, which can help to create a positive brand image and improve their reputation.
In addition to surveying stakeholders, companies can also gather data on the environmental and social impacts of their operations through the use of metrics specified by different frameworks. These frameworks, such as the Global Reporting Initiative (GRI) or the Sustainability Accounting Standards Board (SASB), provide guidelines for companies to measure and report on their environmental and social performance. By gathering this data and reporting on it publicly, companies can demonstrate their commitment to sustainability and transparency, which can be appealing to stakeholders.
Another way to identify materiality is to analyse the company’s operations and value chain activities which cause the greatest impact on the environment and society. For example, a company that operates in chemical industry may prioritize initiatives related to reducing its waste thereby targeting to mitigate its negative impact on the environment , while a company in fast moving consumer goods industry that relies heavily on a global supply chain may prioritize initiatives related to labour rights and working conditions.
Furthermore, companies should assess potential external risks and opportunities related to their ESG initiatives using PESTLE analysis. For example, a company that is considering implementing a program to reduce its greenhouse gas emissions may discover that there is a significant compliance and financial risk associated with not taking action on climate change. On the other hand, a company that is considering investing in renewable energy may find that there is a significant opportunity for cost savings, market growth and improved reputation by making this investment.
Some companies may have to focus more on the environment and some on social indicators depending on their context. This may involve setting specific goals and targets, such as reducing greenhouse gas emissions or increasing the diversity of the company’s workforce. It may also involve implementing policies and practices to address specific issues, such as improving supply chain transparency or promoting ethical business conduct.
In a nutshell, the process of identifying and addressing stakeholder materiality is an important aspect of ESG initiatives, as it helps companies to prioritise their efforts and ensure that they are addressing the issues that are most relevant and important to their stakeholders.
Dr Nisha Kohli
CEO and Founder of CorpStage