ESG Materiality Assessment
For those businesses struggling to get started on their sustainability journey, confused by the complexity of what their environmental, social and governance (ESG) agenda should be or simply seeking to become more accountable, conducting a materiality assessment with Kroll is a good starting point.
Even companies that have established ESG programs and regularly disclose ESG information find materiality assessments useful for prioritizing, reaffirming or refreshing their ESG goals and reporting program.
No matter how mature a company is, what their goals are or how many resources they have at their disposal, organizations should consider a thoughtful materiality assessment as a critical component of their decision-making for long-term sustainability.
In fact, evolving regulation is rapidly moving in the direction of making reporting on material sustainability factors mandatory.
What is an ESG Materiality Assessment?
What is an ESG Materiality Assessment?
The materiality assessment is a formal process used by decision makers to identify the issues that affect an organization’s sustainability performance and/or that affect people and the planet. Materiality originated in legal and financial accounting and specifically refers to both financial and nonfinancial factors that must be disclosed under securities laws. It has expanded from its original usage to become a useful tool to identify and prioritize those ESG issues that matter most to your organization.
In addition to its impact on both internal and external stakeholders, a material risk or opportunity can have a significant impact on the financial, economic, reputational, and legal aspects of a company. An increasing number of companies are incorporating these issues into their future strategic planning and development.
Identifying which ESG issues are most salient, or “material,” is now considered a key step toward developing a successful strategy for the organization and determining which issues it should report on.
Benefits of Engaging Kroll to Conduct a Materiality Assessment as Part of a Broader ESG or Sustainability Program
Kroll’s materiality assessments offer numerous benefits to an organization. They help identify key sustainability-related impacts, risks and opportunities; foster stakeholder engagement; enhance transparency; and position the organization for long-term success in a world where ESG considerations are increasingly important to stakeholders and regulators.
Identifying Key ESG Matters
Our materiality assessment helps an organization identify and prioritize the most relevant and effective sustainability matters for its business. Identification allows an organization to define its purpose and scope along its ESG journey. This also ensures that resources are allocated to address opportunities that matter most to stakeholders and the organization's long-term sustainability.
Stakeholder Engagement
By involving stakeholders (including investors, customers, management, employees, regulators and affected communities) in the materiality-assessment process, organizations can foster better relationships and trust. This engagement can lead to improved communication, responsiveness to concerns and enhanced reputation. Stakeholder feedback on the material topics identified is critical to the process.
Risk Management
Identifying and addressing material ESG matters proactively can help organizations mitigate potential negative impacts and enhance their broader enterprise risk-management processes. This can include reducing financial and operational risks, avoiding regulatory fines and protecting against reputational damage.
Opportunity Identification
Materiality assessments often reveal sustainability-related opportunities that align with an organization’s core business strategy. These opportunities may include cost savings through greater efficiencies (e.g., energy-related efficiencies), access to new markets through sustainable products or enhanced brand differentiation.
Enhanced Reporting and Transparency
Organizations can use the insights from Kroll’s materiality assessment to improve their ESG reporting. This leads to more accurate, decision-useful and credible reporting which can attract investors and other stakeholders interested in the company’s ESG performance.
Regulatory Compliance
Understanding material ESG issues helps organizations stay ahead of evolving regulatory requirements related to sustainability and responsible business practices. This is particularly useful as regulators increasingly focus on material sustainability-related financial risks and impacts on people and the planet. This can minimize compliance risks and costs and make the organization that much more attractive to investors.
Employee Engagement and Talent Attraction
Materiality assessments also facilitate identification of the sustainability factors that most contribute to talent attraction and retention, especially among those individuals who prioritize working for socially responsible organizations. It can also boost employee morale and engagement, which leads to more committed employees who work together to instill the organization’s culture.
Conducting an Effective Materiality Assessment
Kroll’s ESG materiality assessments help identify and prioritize the right ESG factors with the most impact on your business and/or that are most important to stakeholders.
Identifying Potentially Relevant Sustainability Issues and Key Stakeholder Groups | Ranking and Prioritizing the Right Sustainability Factors |
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Double Materiality
Double Materiality
An increasingly important consideration when conducting materiality assessments is whether or not to identify and assess existing and anticipated sustainability harms or benefits on people and the planet from an organization’s products, services and operations—through a process known as a “double” materiality assessment.
Typically, traditional (or “financial”) materiality focuses exclusively on a company's internal operations and financial drivers and performance to determine how its activities may affect stakeholder decisions about it and, over time, erode or create business value. Double materiality, however, takes the concept of materiality in sustainability reporting one step further.
In double materiality, a company also looks outward beyond financial drivers and performance to assess how its operations and decisions affect the external environment. Double materiality poses two overarching questions:
- Which sustainability-related risks and opportunities directly relate to a company’s ability to financially perform and grow its enterprise value (i.e., financial materiality)?
- How do a company’s products, services or operations cause or contribute to existing or future harms or benefits on people and the planet in terms of severity and likelihood (i.e., impact materiality)?
Understanding and Navigating the Demands of Different Frameworks and Standards
Different voluntary frameworks and standards have adopted different approaches and expectations concerning materiality. A double-materiality approach is required by the GRI, for example, which considers a wider range of stakeholders and focuses on issues that contribute to overall sustainable development. Both the ISSB and the SASB, on the other hand, take a more principle-based traditional approach focused on sharing decision-useful information with providers of capital. While both the ISSB and SASB recognize the potential value of also assessing impact, they are primarily focused on providing a methodological framework for consistent, comparable and decision-useful information in the context of financial decision-making.
Materiality requirements vary across jurisdictions as well, with U.S. regulators taking a different approach than those in the EU. The Securities and Exchange Commission in the United States maintains an investor-centric approach to sustainability issues, for example, focusing on those risks and opportunities that materially affect enterprise value and ensuring that information reported does not mislead investors.
However, in the EU, the CSRD expressly requires double materiality, the specific details of which have been set out by the European Financial Reporting Advisory Group (EFRAG). Despite the importance of value creation and financial materiality in EFRAG's sustainability reporting standards, EFRAG also recognizes that impact materiality is a crucial component of an organization's assessment, and that organizations should consider and disclose existing and anticipated impacts beyond those that carry financial risks and opportunities exclusively for the organization.
Your Next Steps with a Materiality Assessment
No matter whether your organization has an established ESG or sustainability strategy, or if it is completing a materiality assessment for the first time, the process can be daunting and may pose challenges. As part of a structured, customized process, Kroll will work with you to set a clear plan, assessing materiality relevance through data-driven analysis and industry benchmarks, while engaging stakeholders throughout the organization and externally to ensure the right objectives are identified and the proper solutions achieved.
If you believe your organization may benefit from our expertise in materiality assessments and our ESG advisory solutions, please contact us.
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ESG Regulatory Trends and Materiality Assessments — What Does This Mean for You?
ESG Regulatory Trends and Materiality Assessments — What Does This Mean for You?
We touched upon current global ESG disclosure standards, regulations and proposals that you should be monitoring, including recent climate disclosure regulations in the U.S.
