What is an ESG materiality assessment?

Apr 24, 2023 | ESG

An ESG materiality assessment isn’t just a check-the-box exercise – it’s an important tool for shaping your ESG budget and focusing your effort.

Some international sustainability frameworks propose more than 30 ESG related topics that a company might choose to disclose on. Companies are not expected to manage, mitigate, remediate and report on all topics, only those that are ‘material’ to their business – or only those topics that are relevant.

How does a company determine which ESG topics are relevant?

This is the objective of a materiality assessment: To determine which of the topics are significant to your business and should therefore be managed and disclosed on.

There are two perspectives or lenses that an organisation can apply when considering ‘relevancy’ in relation to each ESG topic:

  1. Does this topic impact, or have the potential to impact, our financial performance? This is an ‘outside-in’ lens, and it considers the impact the world has on the company. The newly published International Sustainability Standards Board standards are now considered the leading framework for considering financially related ESG impacts.
  2. Do we, as an organisation, create or have the potential to create, impacts regarding this topic? This is an ‘inside-out’ lens, and it considers what impact the company has on the world.

When a company assesses impacts from both angles, this is referred to as ‘double materiality’.

Let’s take the topic of ‘water’, as an example.

An outside-in lens might consider, among other things, the impact the rising cost of water could have on the company’s consolidated revenue, while an inside-out lens would consider whether the organisation is drawing water in drought-prone regions and therefore contributing to water scarcity, and / or whether it contributes to water pollution (among other things).

We can see by this example that sometimes the line is blurred between external and internal impacts; an organisation that relies heavily on water for production and operates in a water scarce region is having an actual external impact, with the potential for internal impacts if water scarcity eventually prevents it from operating at maximum capacity.

An organisation in this predicament would determine that ‘water’ is a material ESG topic because it poses a great deal of risk to financial performance. It might consider implementing water reduction, re-use and efficiency processes, or begin to manage itself out of its reliance on water altogether.

Now we can see how a materiality assessment can be of great benefit to an organisation as a risk management and opportunity exercise.

While a company alone can determine its internal material ESG topics, companies that wish to undertake a double materiality assessment must engage stakeholders as part of the process, according to best practice. Stakeholder engagement is a key component of a materiality assessment under the Global Reporting Initiative (GRI), which is the leading framework for considering ESG topics from an external impacts lens.

Companies are expected to explain how they determined their material topics to comply with international best practice reporting standards.

I have a quick and easy yet comprehensive process for undertaking materiality assessments according to best practice standards. Ask me how I can help.