Environmental, Social, and Governance (ESG) reporting is an increasingly important consideration for businesses in all industries. The days of ‘profit over all else’ are behind us. This is confirmed through studies, public pressure, and industry executives that come to the same conclusion – customers want to do business with companies that are aware of their impact on the world.
Typically, ESG metrics and progress are presented in an annual report issued by the company. Sometimes sustainability-related (the E in ESG) metrics are reported in a stand-alone sustainability report that will discuss qualitative and quantitative impacts on how a company affects the environment, communities where they do business, and employees.
However, even though 92% of companies in the S&P 500 release annual sustainability reports – there is no defined set of rules to guide reporting. As a result, there is skepticism about the value and quality of what is being reported.
This is particularly relevant when looking at companies in different industries. It can be like comparing apples and oranges – they're inherently different and impact the world differently. For example, a residential developer and a global shipping company will not have similar emissions profiles. However, a developer that focuses on LEED-certified buildings may have data comparable to other developers and be producing better results.
One solution that is gaining popularity is the idea of using materiality in ESG reporting. Materiality defines ESG criteria as most important to a company and places more value on these aspects. It helps remove the barrier between comparing companies by assessing each business individually and rating them using the most relevant issues.
What is The Role of Materiality in ESG Reporting
A recent whitepaper released by the NYU Stern Center for Sustainable Business defines materiality as "issues that can have significant repercussions on the company (both positive and negative)." In this context, materiality can apply to economic, environmental, or social material issues. However, defining what is materially important to a business is still somewhat oblique, as there is no agreed-upon threshold or criteria.
Regardless, most businesses have some key components that can generally be agreed upon as materially important ESG issues. For example, the NYU Stern whitepaper references water scarcity as a key example of economic and sustainable materiality for a beverage company. The beverage company needs large quantities of water to produce its product, so local water insecurity would significantly affect the business. Additionally, the company's water use may create issues for local communities in water-stressed regions.
By placing more value on materiality concerns, we can better understand how sustainable a business is. In addition, determining key materiality issues can provide significant benefits by helping a company identify vulnerabilities, limit future risk, and assist in long-term strategic planning.
How To Determine Materiality Issues
Understanding what issues are materially important for a business is challenging. One of the most widely accepted methods is through a materiality assessment. Materiality assessments engage business and community stakeholders to identify how important specific ESG issues are to them.
There are five key steps for conducting a materiality assessment:
Phase 1: Identify Issues, Stakeholders, and Business Components
The initial step is to decide who the business's stakeholders are, what issues to present them, and what core values are essential to the company.
First, create a list of issues relevant to stakeholder groups and the company. It should include metric-based outputs like energy use to less tangible topics like employee happiness.
Second, decide who the relevant stakeholders are. This should be a holistic group that encompasses all relevant parties. You want to include a range of groups, from those directly impacted by the company, like community members, to industry experts.
Third, determine what other issues the business internally finds important and wants to consider as part of its ESG programs. Topics like risk management and employee promotion rates fall into this category.
Phase 2: Stakeholder Outreach
Use the list of ESG issues you created, along with business drivers, and collect data from the internal and external stakeholders identified in Phase I. Typically, this includes a combination of formal and informal surveys and interviews.
Phase 3: Map and Prioritize Materiality Issues
The collected data should now be synthesized, typically with a model or framework, to create quantitative scores that allow issues to be ranked. Ranking issues lets the business identify and prioritize key material ESG components. These rankings are used to create an initial ESG materiality matrix.
Phase 4: Align Issues with the Company Vision
Then, the initial matrix is reviewed and edited by the business's leaders to ensure it aligns with the management's vision and company goals. Ultimately, a final matrix identifying the company's ESG materiality issues is created. This final matrix is sent back to key stakeholders for final review and comments. From here, the company develops a plan to address and track materiality issues over time.
Phase 5: Execution and Reporting
Finally, the company should regularly publish updates on how there are progressing on their overall ESG strategy and materiality issues. This can be done through an annual ESG/sustainability report or a designated portion of their website.
Regular reporting lets the public know that the business takes ESG seriously and provides a place for the company to discuss how they are addressing lacking ESG areas.
Growing Demand for Materiality in ESG
As ESG reporting grows towards becoming a mandatory filing in the U.S., the concept of materiality and sustainability strategy will continue to grow in importance. Assessing materiality issues is crucial to measure a company's environmental impact, social responsibility practices, and governance structures over time.
By identifying your company's material ESG issues now, you'll be able to get ahead of the curve in sustainability strategy and reporting. Not only does this prevent future legal concerns, but strong ESG policies are linked to long-term financial success. Emerald Built Environments has over a decade of experience developing and implementing sustainability strategies. Contact our team today to learn more about ESG, materiality, or sustainability reporting -- we can help you be a sustainability leader in your industry.
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