ESG and Compliance – The Materiality Assessment

Thomas Fox

Compliance Evangelist

Every compliance professional should be aware of what a risk assessment is and its importance in any compliance program. Numerous regulatory frameworks state it be the key foundational mechanism to identifying corporate risk for any corporate compliance program. However, in the Environmental, Social and Governance (ESG) world, you need to understand the material ESG matters for your organization. This transforms a risk assessment into a ‘Materiality Assessment’, which is the starting point from which you manage your non-financial risks and opportunities.

A systematic materiality assessment helps determine which topics should be considered in business or sustainability strategy development, in performance measurement and in reporting. A materiality assessment is the starting point for an overall sustainability framework. It clarifies the strategic focus, helps define suitable goals and KPIs, and sets the framework for internal and external communication.

In a materiality assessment, potentially relevant topics are evaluated from different perspectives to gain a comprehensive picture of the expectations of your business and its impact on society and the environment. According to SustainServ, some “topics must be deliberately left out in order to focus on the most relevant areas. This allows you to ensure long-term business success, meet stakeholder expectations and contribute to sustainable development. Through the exchange with your stakeholders, you not only gather insight into their needs and expectations vis-à-vis your company but also strengthen your relationships.”

KPMG, in their 2017 paper entitled “Environmental, social and governance (ESG) materiality assessment”, said, “to be valuable and credible, the development of ESG reporting practices depends on an holistic approach to your material ESG matters, and not merely the extraction (and in some cases extrapolation) of historic ESG data within your organisation.”

However, KPMG sees the materiality assessment as broader in context and believes that it “should be used as a strategic business tool, with implications beyond corporate responsibility (CR) or sustainability reporting.” This is because it provides an “opportunity to apply a sustainability lens to business risk, opportunity, trend-spotting and enterprise risk management processes. Rather than creating a separate, isolated process, leading companies embed sustainability thinking within existing processes.”

KPMG believes the benefits can broad and varied including the following:

  • Ensuring business strategy takes into account significant social and environmental topics, and the management of sustainability issues is embedded in wider business processes.
  • Identifying trends on the horizon, such as water scarcity or changing weather patterns, that could significantly impact your company’s ability to create value in the long-term.
  • Prioritizing your resources for the sustainability issues that matter most to your business and stakeholders, so you can focus time and money on the most important topics, and on collecting relevant data.
  • Highlighting areas where you need to manage and monitor risks that are important but not currently addressed.
  • Identifying the areas of interest to the most important stakeholders, enabling you to report concise information that gives a meaningful picture of progress to those who need it.
  • Helping to identify where your company is creating, or reducing, value for society.

Antea Group believes that materiality assessments should be viewed as “formal exercises aimed at engaging stakeholders to find out how important specific environmental, social and governance (ESG) issues are to them. The insights gained can then be used to guide strategy and communication, and help you tell a more meaningful sustainability story.” They provide a seven step approach to conducting a materiality assessment.

  1. Identify internal and external stakeholders. You should start by creating a list of relevant stakeholder groups, then identify key contacts within each who can provide a meaningful perspective on your company’s sustainability strategy.
  2. Conduct some initial stakeholder outreach. After you have identified the key stakeholders, reach out to them and seek their participation. You should “Keep your pitch as concise as possible without leaving out essential details. Your objective should be to express to the participant group why their unique insights are valuable and how their insights will be used to inform your company’s sustainability strategy and business practices.”
  3. Identify and prioritize what you want to measure. Next, “determine what sustainability indicators to measure so you actually get the insights you want and need.” They break down these sustainability indicators into:
    1. Economic – This would include issues such as “revenue, profit and company turnover.”
    2. Social – Here you should consider such areas as “labor statistics, human rights, consumer issues and community impact.”
    3. Environmental – This area would include overall carbon footprint, water stewardship, greenhouse gas emissions and waste management.
  4. Design your materiality survey. Just as with risk assessments, materiality assessments should be formal, structured engagements with stakeholders. Make the survey user friendly and equally straightforward to analyze. They suggest, asking “stakeholders to rate the importance and impact of each indicator you identify on a numerical scale, such as 1-5 or 1-10. This will give you quantitative data that can be analyzed and explained visually. Leave additional space for written insights and comments to enhance the results you receive.”
  5. Launch your survey and start collecting insights. Here you should “reach back out to your stakeholders and provide them with the link to the survey and a deadline…When the deadline approaches, reach back out to those who have yet to complete the survey to remind them of the deadline.”
  6. Analysis. As with a risk assessment you have to interpret and analyze the results. Create a forced ranking for your survey results to understand what issues are most important to each stakeholder group. Group the data together to find commonalities and anomalies as well. Map out graphs to visually portray trends, observations, the commonalities and anomalies. They suggest the “end result should be a formal matrix graph that plots how each indicator ranks in significance relative to stakeholder influence.”
  7. Into action. Here they suggest sharing your results and insights with your stakeholders and those outside the organization as well. It can be done in a “formal sustainability report or summary, but then can be shared more widely through other channels, such as the company website or media releases.” (For a great example of this check out the Bank of America Materiality Report here.)

Antea Group ends by stating, “Sharing your materiality assessment results can serve as a starting point for continuing the conversation and maintaining engagement with your sustainability initiatives. Welcome feedback from all stakeholders who view your materiality assessment results so that you can keep the conversation flowing after the assessment is complete. In addition, incorporate your findings into your overall sustainability strategy so you can create communications plans for each group, and more effectively tell your company’s sustainability story.”

The steps laid out herein should be both familiar and comfortable for every compliance professional. As you move into a greater role in your organization around ESG you will be ready to begin the process, with a materiality assessment.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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Thomas Fox

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