Why ESG and materiality are a foundation for business excellence
Environmental, Social, and Governance (ESG) is an important part of how companies conduct their business, measure success and, an element often overlooked, create value. As ESG becomes increasingly important, it is essential to understand the intersection between materiality and ESG as a foundation for business excellence. Let’s dive into what this means and how it applies to businesses today.
ESG factors are important considerations for long-term value creation. Companies prioritizing ESG issues are often better equipped to manage risks, build resilience, and drive innovation, all of which can contribute to long-term value creation.
These factors can have significant financial implications on companies, but by prioritizing those that have the biggest impact, risks can be mitigated and opportunities capitalized upon. Managed effectively they not only reduce potential regulatory fines or reputational damage, but also improve access to investment, improve the attraction and retention of talent and demonstrate strategic leadership to shareholders.
What is materiality?
Materiality refers to a company’s most significant economic, environmental, social, and governance impacts. This includes factors that affect the business itself or its value chain—such as financial performance, risk management strategies, environmental performance objectives, labor rights issues, corruption policies, etc.—and are considered material in nature. Identifying these topics and prioritizing them according to their importance ensures that all stakeholders have access to accurate information about their operations.
What is ESG?
ESG stands for Environmental, Social, and Governance factors that companies use to measure and monitor their performance in meeting certain sustainability goals, both for their business and the wider world. With these issues becoming more prominent in corporate responsibility, risk identification, and enterprise strategy, it’s important to understand how companies assess and respond to their material impacts.
Understanding both the risks associated with ESG topics as well as the opportunities presented by them can help businesses achieve long-term success while also improving their reputation among customers and other stakeholders. Additionally, it helps companies identify areas where they can improve their performance on relevant topics in order to stay ahead of competitors and remain competitive in the market.
ESG is not just a box ticking compliance process, it is also a value creator.
How do materiality & ESG intersect?
The intersection between materiality and ESG involves understanding which topics are essential for a company’s success as well as how these topics affect the sustainability of its value chain. Companies need to be aware of any new trends or changes related to these topics so that they can stay up-to-date with relevant information about their operations or products/services offered. Additionally, considering both materiality and ESG in an integrated way when making decisions about investments or partnerships will help ensure long-term success for businesses in the future.
The best materiality assessments are treated as much more than one-off projects, in this context materiality is an ongoing process inherently linked to discussions about business strategy and the integration of ESG issues. Materiality is a fundamental business process that crystalizes relevant information in the context of principal business risks and opportunities.
Conducting and reviewing material assessments annually help stay ahead of factors that are constantly changing. Companies evolve - operating in new geographies and jurisdictions mean there will be new legislation to consider. Even without geographical growth there are changes to regulations within your current operating jurisdictions.
Some businesses raise concerns about materiality assessments focus on which standard or framework to follow, but that shouldn’t deter you. You don’t need to be an expert, choosing from a small number of the most influential standards and frameworks should be sufficient.
If you’re using materiality to inform your strategy, casting a wider net and not relying exclusively on one particular standard or framework is the answer. It is a ranking and prioritization exercise that requires strategic business thinking but the standards and frameworks are not a holy grail; they are tools that help businesses narrow down the materiality process from a disclosure context. Take guidance from the parts that are relevant to you.
ESG and materiality are the foundation for business excellence
Understanding the intersection between materiality and ESG is essential for businesses looking to achieve excellence in today's ever-evolving corporate landscape. Knowing which topics are important for your company’s success, as well as how these topics affect your ESG profile, will help you remain competitive in the market while also staying true to your values.
CEOs could benefit from taking note of these key considerations when planning an approach to materiality so they can make informed decisions:
- Alignment and connectivity: Your financial and ESG factors should be connected and integrated, particularly for reporting
- Expanding filters: Now that more data analytics tools and technologies are available to help companies showcase evidence of interest and financial and reputational impact, companies need to expand their filters to ensure they explore all issues in the right level of detail and identity those outside their normal field of vision.
- Timing and time horizons: Critical matters play out over longer periods, so dealing with uncertainty is key.
- Frequency: Materiality assessments need to be dynamic and evolving, not just once a year.
- Form: The completion of securities filings and voluntary reports where appropriate.
- Key value driver metrics: Understanding how to assess each issue, and communicating value creation and protection to all key stakeholders.
ESG and materiality are vital for business excellence as they help companies create long-term value, manage risks, build resilience, drive innovation, improve access to investment, and attract and retain talent. Materiality refers to a company's most significant economic, environmental, social, and governance impacts, while ESG factors are used to measure and monitor a company's performance in meeting certain sustainability goals.
The intersection between materiality and ESG involves understanding which topics are essential for a company's success and how these topics affect the sustainability of its value chain. Focus on alignment and connectivity, expanding filters, timing and time horizons, frequency, form, and key value driver metrics when planning an approach to materiality. By considering these factors, businesses can make informed decisions and remain competitive in the market while also staying true to their values.