sustainia explains

Let's Get Material

Everyone is talking about it. And with 95% of all S&P 500 companies reporting on environmental, social and governance (ESG) performance, ESG management has fast become the norm - at least among large corporations. A materiality assessment is the first step towards managing ESG performance.

The benefits of ESG management and the formats for reporting have caught on like a wildfire for large corporations across the globe – but this does not seem to be the case for small and medium sized companies yet. The road for SMEs may develop differently, as both resources and the need for implementing ESG measures are worlds apart. Adjusting ESG frameworks to suit individual companies will become an exercise relevant for many companies in the near future. 

Double materiality is about the effects your business has on the world, and how it affects you. Sustainia artwork assisted by AI (Midjourney).

The double materiality assessment is an important part of CSRD as it seeks to identify risks that affect your business and how your business affects the world around you.  Ill.: Sustainia x Midjourney.

Why is it important for a company to conduct a materiality assessment? 

For most companies, a materiality assessment is a great natural first step for ESG Management. In many ways it’s considered to be the backbone of ESG management and reporting as it allows a company to identify their most important issues – or material issues – meaning issues that may impact the company’s future success or issues important to the company’s stakeholders. This could be anything from water management and biodiversity to non-discrimination and anti-corruption practices. A materiality assessment will provide a clear overview of a company’s current and potential future issues, which in turn will enable them to react to the most pressing issues and act on areas of opportunity in a timely manner. That’s important for reasons of both legal compliance but also operational and commercial success.

So it acts as a strategic navigation tool for a company. Is that the primary reason for a company to conduct a materiality assessment?

Yes and no. Making the right decisions, at the right time, should always be a top priority for any company, but there are a number of additional reasons why it makes sense for companies to begin their ESG journey with a materiality assessment. The most obvious should be regulatory compliance – many large companies are required by law to report ESG performance while the EU’s Sustainable Finance taxonomy will certainly increase demand for ESG data from SMEs as financial institutions follow the taxonomy to assess clients and transactions. Understanding how key sustainability issues intersect and affect your company is also an important reason, while meeting stakeholder and customer expectations in terms of transparency is another.

How long does it take to do a materiality assessment?

Depending on company size and activities  – an assessment could easily be finished within a few weeks. For a small business it could take 3 to 4 weeks. On the other hand, a multinational energy company might spend 10 months systematically gathering data points soliciting stakeholder input before finalising the company’s annual materiality assessment.   

As with any process you can choose to go big or small – the same goes for facilitating a materiality assessment. Sustainia’s method is built on our experience with best practice from working with large corporations, but can easily be adjusted. 

Large corporations can easily involve 50 or 500 internal and external stakeholders. A company like Vattenfall has even involved thousands of stakeholders, but imitating such an extensive process is not necessary for an SME to conduct its first materiality assessment and simply identify and assess relevant ESG issues. At Sustainia, we design materiality assessments to require only what is necessary for a company to conduct an adequate assessment, involving anywhere between 5 and 50 people, depending on complexity and size of our client.

Can a company conduct a materiality assessment themselves or would you recommend hiring expert help?

When you bring in advisors to facilitate your process you get experience that can lead you around potential pitfalls – so you don’t end up doing too much or too little. You get a setup that has been designed to your specific needs including a methodology and framework – meaning you don’t have to develop these. That said, there is a lot of great guidance available for free that small companies can apply to get started – and plenty of options out there to learn from what others are doing – in the end it will depend on how much homework you’re willing to put into it.

So it acts as a strategic navigation tool for a company. Is that the primary reason for a company to conduct a materiality assessment?

Well, our process is pretty straightforward and can be boiled down to three essential steps for a successful materiality assessment:

  1. Map out the issues landscape for a company. The first step of the process is to create a “long-list” of all potential ESG issues, based on both desktop research and brainstorming sessions. Involving people that have both valuable and broad knowledge of your company will be key.
  2. Assess internal and external views on the issues. Understanding how issues intersect in a materiality matrix, will allow for important conversations. And  assessing a company’s societal impact vs. impact on your company’s business from both internal and external points of view will generate valuable nuances on your issues. 
  3. Score and prioritise issues. Choosing and scoring ESG issues is the final step in the process. This will leave you with a clear understanding of which issues are the most pressing for your company – and in which order pressing issues should be addressed through most appropriate frameworks and initiatives. 

Obviously, this process entails coordinating a few meetings and workshops, scoping the project, identifying relevant people for providing input, and brainstorming for additional issues before a final assessment can be conducted. But conducting a materiality assessment does not have to become an overly complicated affair.

It’s important to remember small and medium sized companies often have different needs compared to large corporations – and adjusting frameworks to fit – rather than blindly imitate what others are doing – will be key to ensure operational and strategic success implementing frameworks such as these. In the end, it’s vital to remember that tools, such as materiality assessments, are meant to help navigate sustainable issues and qualify decision making and prepare for the future – it’s not an exercise to be done just because everybody else is doing it, it has to create real value for your company. 

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At Sustainia we have specialised in translating complex regulation into actionable insights. Please contact us for further guidance and a free perspective.

Rasmus Schjødt Pedersen Sustainia CEO

Rasmus Schjødt Larsen

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