5 Steps To Building A Customized Materiality Assessment
The mandate to broaden reporting on ESG factors is no longer debatable, but which factors to report on – now that is a different story. While climate and emissions may be top priority for a chemicals company, this may not be the most important topic for a marketplace seller of online cars. This is where Materiality Assessments come in. Materiality assessments are tools that help companies hone in on which specific factors matter most to their individual organizations and serve as a roadmap for directing a company’s strategy, targets, disclosures, and reporting.
To get real value out of a materiality assessment, companies need to start with a clear understanding of what they are looking for, and what they are ultimately willing to do with the information. If this is a “starter” assessment, and management and the Board are not yet willing to refine corporate strategy armed with this information, then a narrow scope, based on public frameworks might do the trick.
But, if the organization is ready to use a materiality assessment to inform both reporting and strategy, then a more fulsome assessment with a larger group of stakeholders should be on the table.
With either choice, remember that stakeholders are looking to see that the company has done its due diligence to analyze ESG issues with the greatest potential to impact long-term success and corporate culture as well as to explore any ESG risks associated with its business model.
Identifying Material Topics
“Starter” assessments simply consider the key ESG factors already specified in frameworks like SASB, GRI, and the UN SDGs for their materiality assessment. More formal assessments go further to customize their assessments and identify topics materials to their specific industries and individual companies.
5 Steps to Building a Customized Materiality Assessment
To create a materiality assessment specific to your business:
1. Identify your stakeholders.
Your business has stakeholders both inside and outside of the company. And they don’t always agree on what is most material. You will need to gather insights from both groups to understand what each perceives to be important to the long-term performance and value of the company. Specifically, these constituencies include:
- Internal Stakeholders
- Executive Leadership
- Board Members
- Regional Leaders
- Business Unit Leaders
- Employees
- External Stakeholders
- Customers,
- Investors
- Ratings Agencies
- Trade or Business Associations
2. Conduct stakeholder outreach.
Learning what your stakeholders believe about ESG issues requires an outreach effort. Outreach can be far-reaching and highly scientific. Or it can be more informal, leveraging outreach channels that already exist within a company.
- Formal Outreach Surveys
- These intensive initiatives are generally conducted by outside firms, and the results are reported directly to executive management and the board of directors. The cost of the survey is based on the scope of the study and can range up to $100,000.
- Survey firms include:
- Consulting firms like Riveron [JG2] that specialize in ESG communication and perception studies.
- Big 4 accounting firms. These firms maintain groups that specialize in executing these assessments. They offer assurance practices that validate the disclosed data by aligning an auditor opinion.
- Software groups. Companies can conduct their own surveys using software products from groups like Sphera and IMPACT[JG3] .
- Informal Surveys
- Ideal for a company’s first foray into materiality, these ‘starter’ assessments can be conducted primarily using internal resources.
- For internal stakeholders, reach out through normal vehicles. Employee engagement surveys and conversations with the board and executive team are good places to start. Leverage the SASB and/or or GRI frameworks for a list of factors and see how internal stakeholders react.
- For external stakeholders, reach out to the top 10 or 15 shareholders. Specifically ask ESG compliance officers and portfolio managers what topics are important to them. Then begin informal discussions with top customers around these same topics.
3. Build a materiality roadmap.
Once synthesized, the findings from your outreach efforts will create a roadmap that provides clear direction for your company’s ESG initiatives and its disclosures. Ideally, the roadmap should cover all aspects of ESG. Common material topics within each area include:
- Environmental
- Emissions
- Water Stewardship
- Waste Management
- Social
- Diversity and Inclusion
- Human Rights
- Health and Safety
- Governance
- Board Diversity and Independence
- Board Oversight of ESG
4. Gain board and executive approval and align goals.
A materiality roadmap must guide corporate strategy and targets. It cannot exist solely on paper and it must be embedded in action and fully supported by an organization’s leaders. To incorporate the issues identified in your roadmap, be sure to consider:
- Strategy
- Review any ESG goals around material topics and ensure they are all specifically linked to overall corporate strategy.
- KPIs
- Determine KPIs that tie into executive compensation to support meeting ESG goals.
- Oversight
- Ensure proper oversight of ESG goals by the board and the management team.
5. Go public with the assessment.
Share your materiality assessment results as widely as possible using key communications channels. Most often these are shared on the CSR or ESG website. Here are two good examples:
- Starter Policies:
- Full policies: