Does the world really need more materiality assessments?
4 MINUTE READ | WORDS BY JULIA HOGLUND
With 49 000 companies preparing for the new EU sustainability reporting rules, many of them will need to undertake an ESG materiality assessment for the first time. It is time we ask the question: is it worth it?
First and foremost: I believe there is definitely a place for materiality assessments as a process. But I know I am not alone when questioning whether or not their growth and wider adoption as a strategic assessment tool is really what was needed. Through discussions with colleagues, customers and fellow sustainability professionals – two questions have emerged:
When does materiality actually create value for navigation and decision-making in the sustainability agenda?
When should we avoid it to bypass another tick-box process when there are faster ways to get us to where we need to be?
I believe it is time to reassess the purpose of materiality, and its role in the next phases of corporate and ESG strategy development.
A materiality assessment, (or ESG issues prioritisation as it is called in some contexts to avoid any confusion with financial materiality), is an exercise where businesses prioritise environmental, social and governance issues based on their impact on the business and the importance to stakeholders. Usually plotted out in a two dimensional matrix, its purpose is to navigate a company in the complex jungle of prioritising resources into ESG efforts based on where they will have the greatest financial return whilst making a positive impact on society and the environment. This means that in a materiality process, companies face the complex challenge of comparing the importance of everything from water, discrimination, climate, human rights and business ethics.
I’ve been lucky enough to be part of something like 50 ESG materiality processes in my sustainability profession so far. I have seen the clear value it delivers in terms of understanding stakeholder expectations and for having fruitful conversations with business leaders. But undertaking a materiality assessment is neither simple, scientific nor cheap, and in some situations provides the receiving end with an output they could have sketched on their napkin at lunch.
Regardless of whether a company decides to use internal resources or external consultants for this purpose, it is a process that requires extensive research, internal and external stakeholder dialogues, surveys, management workshops and sign-off by the board of directors. Outsourcing this process is therefore tempting, but it can come with a price tag ranging between €50k - €200k, depending on scope of course.
Putting it into context - 49,000 companies in the EU are now preparing for the Corporate Sustainability Disclosure Regulation (CSRD), where a description of the process and outcome of a materiality assessment is included as a mandatory disclosure in the draft standard. So if we say the average price of an assessment is $100k, we can estimate approximately €5 billion to be spent on materiality assessments within the next 2 years. A thrilling number for any Big 4 partner out there, but a potential waste of resources for scarce mid-market sustainability budgets.
These figures trigger a quite provocative yet essential question:
In the midst of the decade of action - is it time for us to stop prioritising issues and just get on with it?
I guess there is no simple answer to this, but I believe we need to be more critical of when and how a materiality process achieves a desirable outcome, and when and how it doesn’t.
When materiality doesn’t work:
1. To identify impacts
This is usually how a materiality assessment is pitched: “it will inform the biggest ESG impact, risks and opportunities across the value chain”. But let’s face it - the topics identified and prioritised in a materiality assessment are usually high-level and frankly quite generic. We need to get far more granular than this in order to inform where the biggest risks and opportunities are, and what to do about it. Take the issue of “Climate change”, for example. In order to have a meaningful strategic conversation, one would at least have to break climate change into operational emissions (Scope 1 and 2), value chain emissions (Scope 3), physical climate risk (e.g. flooding) and transitional risk (e.g. carbon-pricing).
2. To get a jump-start
Time is last thing the we have in order to solve the climate, nature and growing inequality crisis. I have worked with many privately owned businesses that are behind on the sustainability agenda, looking to catch-up with the market and accelerate their transition. I would have been laughed at by these entrepreneurial founders for suggesting a full-blown and in their words “highly academic” materiality assessment. Instead, what seems to work is a quick priority exercise with a selected handful of external and internal stakeholders (including shareholders) to separate priority from hygiene issues, and allocate the rest of the budget on developing actionable roadmaps.
3. To align with regulations and raters
As ESG reporting is becoming more standardised, the purpose of materiality to guide reporting is becoming less useful. We are seeing new ESG disclosure regulations and stock-market requirements in the EU, US, UK and Asia, and standard-setters such as the International Accounting Standards Board (ISSB) and the Global Reporting Initiative (GRI), are working hard to identify what this means in terms of sector-specific material ESG issues. And not to mention the ESG raters and ranker who all have different views of what issues are material for different sectors– but I leave this topic for a separate debate.
When materiality seems to be adding value:
1. For awareness-building
I believe there is a role that materiality assessments can play for companies' in the beginning of their sustainability journeys to better come to grips with the expectations and the wide range of issues the agenda covers. The most valuable outcomes of many materiality projects I have been part of has been to bring leaders together from across the business to improve their understanding of stakeholder expectations, and to discuss strategic implications.
2. To inform and sense-check strategy
I am a strong believer in stakeholder dialogues to refresh and sense-check strategic directions. But the output of this is not a strategy in itself, rather a considerations for existing or future strategy development on issues that have grown in importance for internal and external stakeholders and issues that are on the horizon.
3. To tailor communications
Materiality assessments can still play an important role for identifying the issues that different stakeholders are most keen to read about, in order to inform corporate reporting and tailor content and mode of communication to the receiver. Let’s just not confuse it with strategy.
4. Single-issue assessments
Undertaking a materiality assessment for one issue, such as climate change or human rights, has proven successful as it better supports decision-making and prioritisation. With a single-issue focus, there is space to deep-dive into the issues importance and impacts across the entire value chain, with a ‘double materiality’ lens of impact on business performance vs impact on society. We are already seeing this take place through the TCFD (Task-force on Climate related Financial Disclosures) and HRIA’s (Human Rights Impact Assessments), where the entire value chain is assessed for salient risks, opportunities and impacts across all functions of the business. I believe we will see more of this in the future.
Materiality as we have seen it in the past two decades, and the consulting worlds’ capitalisation of it, should not go by unchallenged.
So, how do we make it worthwhile?
I believe we will see the role of ESG materiality take two different shapes in the future:
Simplified high-level materiality assessments – quicker prioritisation exercises with some stakeholder engagement to identify priority E, S and G issues for the business
Deep-dive assessments for priority issues (such as climate, nature, human rights) – a separate assessment with deeper stakeholder engagement to truly uncover risks and impacts of an issue across the entire value network
Again, materiality does have a role to play, but the focus should be on improving the process and using it with more judgement. Businesses need to be careful to not approach it in a standardised and formulaic way, and advisors need to make it fit for purpose and truly valuable for their clients. Without the right dosage and with a one size fits all mindset, I am concerned about the huge amount of money that will be spent on a process that sometimes does little to advance the actual work of making companies more sustainable. When the climate, nature and equity crisis are so urgent, does the world really need more materiality assessments? If they are done right, then on balance yes. But not just for the sake of box-ticking disclosures.
Julia Hoglund
Sustainability and ESG Director
Julia leads our team of consultants on technical and regulatory issues ranging from climate to human rights, and ratings and reporting alignment to double Materiality.
Get in touch
To sharpen your ESG focus, SB+CO’s sustainability experts help your company select potential material issues, identify relevant stakeholder groups and draft a stakeholder map.