Mastering Materiality Part 2: Four key reasons to undertake a Materiality Assessment

In part two of our Mastering Materiality series, we look at why your organization should undertake a Materiality Assessment, why stakeholders think it’s important, and how this will benefit your organization.

By AnsaradaTue Apr 11 2023Industry news and trends, CEO-CFO, Governance Risk and Compliance, Environmental Social and Governance, Board

By Andrea Spencer-Cooke and Anna Young-Ferris, One Stone Asia Pacific

In the previous article, we explored what a materiality assessment is. But why should your organization do one? 

1. A strong business case

Imagine you are going on a trip. You are packing your bags, but you realize you don’t know much about your destination. Will it be cold? Will it be wet? What currency do people use? What language do they speak? Without this kind of detail it is very hard to know what to pack or what to expect. It’s likely you won’t be well prepared.
It is not a perfect metaphor, but sustainability leadership is a similar kind of journey. The more you know about where you’re going and what’s expected of you, the smoother your trip will be and the less likely that things will go wrong.
Conducting a Materiality Assessment helps you prepare for your sustainability leadership journey by mapping out what your biggest environmental, social and governance (ESG) risks and opportunities are, what your stakeholders care about and how this affects you. In the same way that talking to other travelers helps you plan your trip better and decide what to take, do and see, consulting with your stakeholders helps you determine what sustainability impacts to focus on, where to invest your limited efforts and resources and—hopefully—avoid nasty surprises along the way.
By conducting a Materiality Assessment your organization gains a fuller understanding of the ESG issues and stakeholder expectations that relate to your sustainability leadership journey. Instead of flying blind, this insight can be applied to develop a meaningful ESG strategy, manage ESG risks and opportunities more effectively and set impactful improvement targets, aligned with your and your stakeholders' values and objectives—an important step towards reaching your ‘destination’ with ease.

2. Stakeholders care

A Materiality Assessment is an important foundation step on any ESG journey. It is a valuable process for ensuring that your organization understands its key impacts, risks and opportunities and is in touch with the issues that matter most to your stakeholders. Increasingly, it is something stakeholders are demanding.
Investors are showing growing interest in investing in companies that prioritize Environmental, Social and Governance (ESG) factors in their operations. Sustainability issues are increasingly being perceived as business risks and opportunities with the potential to impact financial performance both in the short and long term. Sound management of ESG is a proxy for good management and identification of material issues is a critical part of due diligence. Research shows that companies that manage ESG well outperform their peers in the long-term. 

By conducting a Materiality Assessment, you can demonstrate that your ESG approach is considered and aligned with stakeholder priorities and concerns. This enables investors to better understand your organization’s current and future risk exposure and opportunities for value creation. A formal Materiality Assessment brings legitimacy and transparency to this process, building trust by making it easier for investors to hold companies accountable and monitor sustainability performance over time. This is particularly important for those seeking to invest in sustainable, socially responsible companies—a growing focus of investors. A recent PwC study highlighted that asset managers globally are expected to increase their ESG-related assets under management (AuM) from US$18.4tn in 2021 to US$33.9tn by 2026, with ESG assets on pace to constitute 21.5% of total global AuM in less than 5 years.
Consumers are placing greater value on sustainability. According to research, two-thirds of consumers are willing to switch to an unknown purpose-driven brand, 70% are willing to pay more for sustainable products, and a third of all consumers now opt for sustainable and ethical products, driving a growing multitrillion dollar market. Google has reported that when searching for products online, people searched for the keyword 'sustainable' 10 times more in 2020 than in 2015, highlighting the rise in market awareness of and demand for ESG-aware products and services.
Conducting a Materiality Assessment that captures customers’ values and sustainability priorities enables B2B organizations, in particular, to align key initiatives with customers' main areas of focus and emerging concerns, seize opportunities for growth, drive brand loyalty, and maintain social license to operate.
There is a tangible link between an organization’s values and employee loyalty and motivation. When your employees believe in your values and goals, they feel more connected to their work and are more likely to stay with your organization.
Younger generations are leading the charge towards purpose-driven organizations, helping reshape the workplace by demanding transparency and pushing employers to become more socially and environmentally responsible. A Gallup study found that a sense of purpose ties millennials to their jobs, with additional research showing purpose-driven companies have 30% higher levels of innovation and 40% higher employee retention. According to Deloitte’s 2020 Global Millennial Survey, climate change and protecting the environment were the top two concerns for millennials and Gen Zs. 
Materiality Assessments provide a structured way for organizations to check ongoing alignment with employees’ values, priorities, and expectations. By identifying your significant ESG risks and opportunities, the materiality process enables you to set a clear roadmap for action that aligns with—and delivers on—your purpose and values. As well as demonstrating your commitment to making a positive impact on society and the environment, this can create a reinvigorated and shared sense of purpose for your employees.
Around the world, regulation surrounding ESG, materiality and sustainability is evolving rapidly. Recent years have seen a surge in ESG-related requirements in areas like climate change, modern slavery, executive pay, and diversity and inclusion. These regulations often require companies to adopt more robust ESG practices and standards and disclose more detailed information on sustainability risks, impact and performance.

A good example is the Task Force on Climate-related Financial Disclosures (TCFD). Established in 2015 by the Financial Stability Board, the TCFD was created “to develop recommendations on the types of information that companies should disclose to support investors, lenders, and insurance underwriters in appropriately assessing and pricing risks related to climate change.” With the aim to provide a clearer understanding of a company’s exposure to climate risks and opportunities, the TCFD recommendations cover four areas including: governance, strategy, risk management, and metrics and targets.

The TCFD framework has since become the most widely recognized and adopted standard for disclosing climate-related risks and opportunities. Spanning 99 countries and most sectors of the economy, TCFD’s supporters include over 1500 financial institutions responsible for $217 trillion in assets as well as a growing body of regulators and international standard-setters. The US Securities and Exchange Commission, for example, has used TCFD recommendations as the basis for developing proposed new rules on climate-related disclosures.

Another example of global convergence between sustainability standards and recognition that ESG impacts extend beyond societal stakeholders to financial market stakeholders is the newly formed International Sustainability Standards Board. Housed under the International Financial Reporting Standards (IFRS), the ISSB aims to deliver a comprehensive global baseline of sustainability-related disclosure standards that provide investors and other capital market participants with information about companies’ sustainability-related risks and opportunities to help them make informed decisions. Two exposure draft standards, S1 (for sustainability-related financial disclosures) and S2 (for climate-related financial disclosures), have been socialized for public comment during 2022 and early 2023, with indications these will become effective starting January 2024.

In the European Union, the new Corporate Sustainability Reporting Directive (CSRD) will affect not just EU-based companies, but many companies with operations in EU jurisdictions. This law mandates ‘double materiality’, requiring organizations to consider their social and environmental impacts on society alongside the financial impacts of sustainability upon the organization, to provide more extensive, in-depth sustainability reporting than in the past. By 2026, CSRD is anticipated to extend beyond large European-based companies to include small and medium-sized enterprises as well.

3. Multiple benefits

As governments, regulators, standard setters, and investors move to address urgent sustainability challenges, the global regulatory environment around materiality, ESG and sustainability is also maturing. Organizations that take a materiality-based approach to ESG management and sustainability reporting will be better positioned to comply with these regulations and new standards, and ‘bank’ the early-adopter benefits of proactive stakeholder engagement and improved sustainability performance.
Among the key benefits you can gain from undertaking a Materiality Assessment now are:
a) Identify significant ESG risks and opportunities: The assessment helps your organization identify and prioritize its most significant ESG issues. This enables you to focus your efforts and resources on the areas where you can have the biggest impact and create the most value.
b) Enhance stakeholder engagement: By engaging with a wide range of internal and external stakeholders, your organization can better understand people’s needs and expectations, strengthen alignment, uncover opportunities, and build stronger relationships.
c) Improve decision-making: A Materiality Assessment provides your organization with a data-driven approach to guide your sustainability efforts. This helps you make more informed decisions, allocate resources more effectively and demonstrate you have credible and robust processes in place.
d) Ensure compliance with regulations and standards: Understanding material issues helps your organization stay ahead of relevant ESG standards and regulations, so you can go beyond compliance and avoid potential legal and reputational risks.
e) Enhance brand reputation: By demonstrating commitment to sustainability, your organization can build brand loyalty, improve reputation and differentiate itself from competitors. Being able to prove you are managing ESG issues proactively can attract new customers, investors and talent.
f) Improve sustainability performance: Last but not least, a Materiality Assessment will help your organization boost ESG performance and become a greater force for good. As well as a sense-check for existing ESG leaders, for ESG beginners it is the all-important first step towards an ESG-ready organization.

4.   Materiality just got easier, quicker and cheaper

Doing a Materiality Assessment can be a complex and challenging process for organizations. Due to the wide range of potential issues and stakeholders involved, materiality can be time-consuming and costly. It requires dedicating valuable internal resources to complete detailed desktop reviews, gap and benchmarking analyses, or hiring external ESG consultants to do this work—or both. Without robust, user-friendly tools to guide and streamline the process, it can take up to 6 months and cost anywhere between $30k to $100k. 
In partnership with ESG experts One Stone Advisors, Ansarada has released a state-of-the-art digital Materiality Assessment, to help organizations kickstart their ESG journey at a fraction of that time and cost outlay. Designed with leading practice and processes built in, the Materiality Assessment builds on recognized ESG frameworks and latest ESG thinking. The result is a comprehensive, Board-ready report, with clear next steps to take and a blueprint for an integrated ESG strategy moving forward.

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Andrea Spencer-Cooke is Founder and CEO of One Stone Advisors Pty Ltd and specialises in helping senior management map and prioritise sustainability/ESG issues for better business planning and engagement. She has extensive knowledge of global sustainability leading practices, ESG frameworks and responsible business standards and is a recognised expert on the United Nations 2030 Agenda and Sustainable Development Goals. Formerly Head, Sustainability Reporting and Management at SustainAbility Ltd in the UK, Andrea was involved in pioneering early global efforts to improve corporate ESG reporting and helped co-develop the influential concept of the triple bottom line.
Dr Anna Young-Ferris is an Independent Expert at One Stone Advisors and an ESG, climate change and sustainability specialist with over 22 years of corporate and academic experience. She consults to industry leaders providing expert advice on integrating ESG issues into core business strategy. She is an established academic at the University of Sydney Business School and recipient of the 2022 Vice Chancellor's Award for Outstanding Contribution to Sustainability. Her research lies at the nexus of responsible investment and sustainability/carbon accounting, and she leads the integration of the SDGs into the School’s strategy. Previously, she helped build the climate change and sustainability team at Ernst & Young, Sydney.
One Stone Asia Pacific is a purpose-driven, women-owned sustainability advisory firm and certified B Corp specialising in impact measurement and leadership, ESG strategy, planning and engagement. Its mission is to help clients become more effective sustainability leaders, turn challenges into lasting value and create measurable positive impact. As well as working with government, not-for-profit and large and medium corporations to embed ESG leadership, One Stone provides B Consulting expertise to companies seeking certification.

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