ESG MATERIALITY ASSESSMENT. HOW ?
Updated: Sep 25, 2022
How to do a materiality assessment?
ESG is a set of standards that describes how companies take into consideration broad factors beyond financial profit when running their business. ESG stands for Environmental, Social, and Governance.
Of course, the company is expected to address all the related issues. But under limited resource constraints, the company needs to prioritise these issues. At a different time, the company may focus on different subjects, which induces the need for the material topic.
What is the material topic?
According to the Global Reporting Initiative - GRI, material topics are topics that represent the organisation’s most significant impacts on the economy, environment, and people, including impacts on their human rights (GRI Universal Standards 2021).
Then, Materiality assessment is the process to determine material topics.
So, How do you conduct a materiality assessment?
Each company may develop its own way of conducting a materiality assessment. In this article, we follow the flow of GRI in doing materiality assessment.
The definition of “material topics” has changed. In the GRI Universal Standard 2016, material topics are defined that reflect at least one of these two dimensions.
The organisation‘s significant economic, environmental and social impacts.
Their substantive influence on the assessments and decisions of stakeholders.
Based on these criteria, a materiality matrix is invented which builds on the question of how important the topic is to business and stakeholders. The level of importance and impact vary from moderate, high and very high which means remaining in focus, increasing visibility, and new and further enhanced aspects, respectively. Example of Unilever material matrix is below.
The GRI Univeral Standard 2016 material topics approach has been found to lead to biases and incorrectness in the interpretations of these dimensions. As often, only when he consulted stakeholders to stress its importance, the impacts will be prioritised. Furthermore, the above matrix does not take into account how the businesses have impacts on the economy, the planet, and society but instead, it looks at the other way around which only assesses the factors that impact the business itself and its stakeholders.
Since the GRI Universal Standard 2021 has touched upon this problem, it also brings a new way of conducting a materiality assessment.
Step 1: Understand the organisation’s context.
In this step, the organisation needs to create an overview of its operating activities and business relationship and a profile of its stakeholders under a sustainability context. This first step will draw critical information for identifying its actual as well as potential impact.
Step 2: Identify actual and potential impacts
The organisation could have actual, potential, positive and negative impacts on all three-factors of ESG as well as human rights. The organisation needs to clearly, separately identify these impacts, categorise them by “causes”, “contributes to” and “directly link to”.
Step 3: Assess the significance of the impacts.
The organisation needs to focus on assessing the significance of negative impacts, based on Severity which is defined by Scale, Scope, Irremediable character; Likelihood, and human rights.
Step 4: Prioritise the most significant impacts for reporting
In this step, the organisation needs to:
Set a threshold to determine which topics are material: ranking impacts based on their significance, from highest to lowest, of course in relation to other impacts.
Group impacts on topics
Determine how many topics the organisation will report
Test the organisation’s material topics: based on applicable GRI Sector Standards
Approval of the material topics: by the highest governance body.
Tada: We have the List of the organisation’s material topics.
So, What to do for each topic after the assessment?
Having the material topics list doesn’t mean end of the process. It means the organisation now has to determine what to report for each material topic.
How often should an organisation conduct a materiality assessment?
There is no simple answer to this question. But since the impacts are closely related to the organisation’s context (activities, business relationship, sustainability context, stakeholders) and this context can be changed and evolved all the time. It is advised that the assessment of the organisation’s context, its impacts, and a review of the previous list should be conducted on an ongoing base.
Why do we do the materiality assessment?
Or in other words, what are the benefits of doing a materiality assessment.
Opens an opportunity to analyse business risks and opportunities, and to eventually readjust and improve their business strategy;
Provides the knowledge and means on how to measure different performances (financial, social, environmental, and governance);
Assessing new opportunities for the development of new products or services and, therefore, staying ahead of the competition;
Allow companies to meet the sustainability reporting expectations of stakeholders;
"You can only improve what you measure" - Tom Peters
Global reporting initiative, https://www.globalreporting.org/
Material topic 2021 - GRI 3