ESG
Implementing Double Materiality
Double materiality is a foundational principle in successful ESG programs.
Jason Doel
January 8, 2024
Double materiality is a foundational principle in successful ESG programs.
Double materiality is a foundational principle in successful ESG programs. In practice, double materiality is implemented through a process known as a materiality assessment.
This process is a crucial component of an ESG program because it helps an organization to identify and prioritize the ESG issues that are most significant to its business and stakeholders. This process promotes transparency and helps ensure that companies focus their efforts and resources on areas that have the greatest impact on their operations and society.
Furthermore, by understanding which ESG issues are most material, organizations can align their sustainability strategies with their business objectives. This alignment ensures that ESG initiatives support overall business strategy, rather than being seen as separate or peripheral concerns.
At their core, double materiality assessments are surveying exercises, in which varying stakeholder groups are asked to rate the relative importance of various ESG issues to the company, the environment, and society. This information is combined with ratings of how much the company can actually impact each issue. Impacts can be assessed through surveys and by measuring selected company metrics, such as the amount of greenhouse gases produced per employee.
Successful ESG programs make this a regular recurring process, given that stakeholder priorities and the external environment are continually evolving and changing. This parallels traditional financial materiality, which is also a continuous process.
The graphic below summarizes the key steps in a double materiality assessment. While the process appears linear, it is usually an iterative process in which ESG managers use early feedback to refine the process for subsequent assessments. Furthermore, double materiality assessments are often a series of assessments conducted sequentially or in parallel with multiple stakeholder groups.
Materiality assessments require ESG managers to engage with key stakeholders both inside and outside of the organization. It is unlikely that this will happen without strong support from the top. Furthermore, organizations must be prepared to act on the assessment results, if the assessment is to have any lasting value. Acting on results means incorporating ESG priorities into the strategic plan, allocating significant resources to ESG initiatives, supporting a culture of ESG values, and more. None of these significant steps will happen without strong and unwavering leadership commitment.
For this reason, the first step of materiality assessment is to clarify why an organization is embracing the activity and to confirm leadership support. This messaging then needs to be reinforced early and often with all stakeholder groups who are subsequently engaged in the materiality assessment process.
As a final tip, support for ESG programs will be strongest when senior leadership sees them as a means to achieving long term business strategy. While ESG is fast becoming a regulatory requirement for many organizations, ESG managers who can articulate a “why” that aligns with corporate strategy will enjoy greater success than if ESG is viewed only as check-box activity.
Materiality assessment is unique from traditional financial materiality and enterprise risk management processes in that it seeks feedback from a wide range of parties, many of whom are outside of the organization. These groups may include:
Engaging the right stakeholders helps to ensure that subsequent ESG initiatives are aligned with the expectations and values of those who are most impacted by the company's operations. The right stakeholders can also provide valuable insights and diverse perspectives that will help identify new opportunities and improve risk management. Finally, effective stakeholder engagement can help foster transparency and build trust that will support the company’s long term business success.
In practice, a materiality assessment may encompass a series of assessments that are completed sequentially or in parallel with different respondents, with ESG managers learning and refining their assessments as they go.
Once key stakeholder groups have been identified, ESG managers can identify the ESG topics that are most likely to be of interest to their targeted audiences. There are many ESG reporting standards and frameworks that can help with this process. For example, the Global Reporting Initiative (GRI) provides a comprehensive set of standards across 31 focus areas, including emissions, biodiversity, effluents & waste, diversity & equal opportunity, non-discrimination, child labor, and many more. Furthermore, ESG legislation and regulations continue to advance, providing increasingly prescriptive guidance on areas and risks to be considered.
Typically, the first step for ESG managers is to compile an overall universe of potential ESG priority areas. The image below is taken from the Essential ESG system from Tracker Networks, but this process can be completed manually with some extra effort.
As ESG managers compile their list of potential topic areas, it is helpful to maintain mappings to reporting standards. This will help to ground the ESG program in best practices and provide additional credibility during subsequent reporting activities.
Once the initial universe is created, ESG managers can then cull the list to create a shorter, more manageable list to be included in the assessment exercise. ESG managers must use judgement when performing this task. Leaving the list too long will create materiality assessments that are excessively long and tedious, leading to incomplete or less considered responses. Cutting the list too short may remove key topics that are important to certain stakeholder groups and undermine the perception of transparency. For this reason, ESG managers may wish to build a small working team to help complete this step. Tools like focus groups and prioritization votes can also be helpful with this process.
The result of these activities will be a shorter list of ESG priorities that are likely to be of the most importance to the company’s key stakeholder groups, and that will be rated in the subsequent assessment activities. Once again, we have used an example from the Essential ESG system, but this can be completed manually in spreadsheets with some more work.
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At this stage, ESG managers select the approach they will use to prioritize ESG topics and then, if appropriate, develop materiality rating scales.
There are two common approaches used in materiality rating exercises:
Priority or Dot Voting
In this process, participants are given a set number of dots (or stickers) which they can use to vote on a range of ESG topics presented, typically displayed on a board or wall. Each participant allocates their dots to the topics they prefer or consider most important, with the option to place multiple dots on a single option if they feel strongly about it. After all participants have placed their dots, the options with the most dots are considered the highest priority. This method is particularly useful for visually and quickly gauging a group's collective preferences or for reaching a consensus when multiple options are available.
Dot voting can be done in a live workshop setting with stickers or post-it notes. It can also be conducted quickly and easily using automated voting tools, such as the Essential ESG system.
Materiality Scoring
It this process, participants are asked to provide specific numerical ratings for a series of ESG factors. Typical materiality factors often include:
Rating is usually done via drop down fields with 3-5 options, such as:
Note that the quality and consistency of responses can be improved if ESG managers provide respondents with contextual examples for each of the rating levels e.g., what makes an issue critical for our organization or for society.
In practice, ESG managers may use different assessment approaches at different stages of the process and with different stakeholder groups. For example, they may use a dot vote in a working group to help cull the ESG topic universe down to a shorter list. They then may use that list within more detailed scoring assessments with varying stakeholder groups.
At this stage, ESG managers set up and execute their assessment activities. As described above, assessments can be done in live workshop exercises with dot votes and live survey exercises.
Typically, however, it is most efficient and effective to make use of survey functionality to complete this step, using one of two approaches:
Note that when conducting rating assessments, not all stakeholders will necessarily vote on every factor. For example, internal stakeholders may vote on an issue’s impact on the company, while external stakeholders may vote on an issue’s impact on society. As a result, ESG managers will often conduct multiple rating exercises and then consolidate results to build a materiality matrix report, like the one pictured in the next section. Once again, this is made quick and easy with tools like the Essential ESG system but can be performed manually with extra effort.
One common method for displaying the results of a materiality assessment exercise is called a materiality matrix. This report plots ESG issues against two axes: one representing the significance of these issues to stakeholders (such as investors, customers, employees) and the other indicating the impact of these issues on the organization's business performance. The matrix helps in prioritizing these issues based on their relevance and impact. Issues that are high on both dimensions are considered material and typically become the focus of the organization's ESG improvement efforts. Some reporting tools, like Essential ESG, allow ESG managers to vary the axes in the matrix to generate multiple perspectives, such as:
Once double materiality assessment results have been analyzed and reports created, it is time to review them with senior leadership and key stakeholder groups. This process is used to validate the results and confirm overall ESG priorities. This will provide a foundation and consensus upon which the ESG priorities can be further actioned.
And finally, perhaps the most important step of all is to decide what the organization will do with the results of the materiality assessment. For some organizations, an initial materiality assessment will be used to generate baseline data for planning purposes. For many organizations, however, there will be immediate pressure to incorporate material ESG issues into their strategic planning and execution process, driven by growing expectations from investors, regulators, clients, employees, and more.
There are many important steps that organizations can and should take for their highest ranking ESG priorities. These include:
Tracking metrics that are closely related to ESG priorities can help an organization to refine materiality scores and track progress towards improvement goals. ESG reporting standards, such as GRI and SASB, provide guidance on which metrics an organization should consider. Tools like Essential ESG can be helpful in this area as well, by providing libraries of metrics and automating the data collection process.
Comparing metrics against peers can be similarly helpful, but companies should be mindful that consumers are becoming highly attuned to “greenwashing” and other insincere attempts to portray progress. Claiming that a company leads its peers in a certain area can backfire quickly if the company’s impact in the area is still materially harmful.
Beyond metric tracking, the most meaningful way that an organization can act on ESG priorities is to integrate them into their strategic planning and enterprise risk management processes. This means incorporating ESG priorities into the organization's overall strategic objectives, aligning them with business goals and values. This integration requires the collaboration of various departments, ensuring that ESG considerations are embedded in decision-making across all levels. Furthermore, ESG topics can present many new risks to an organization and its objectives. This is why some emerging regulatory frameworks, such as the Task Force on Climate-related Financial Disclosures (TCFD), which requires certain organizations to consider and report on a set of prescribed climate-related risks within their enterprise risk programs.
Finally, through the process of integrating ESG priorities into strategic planning, an organization will identify many new strategic opportunities and ways to improve its ESG impacts. Organizations should develop a structured methodology to evaluate these opportunities and to plan and execute new improvement initiatives where warranted.
