A formal stakeholder engagement process is fundamental to developing a materiality assessment. ESG expert Ed Micheau outlines the steps involved.

An old Chinese proverb states that ‘The best time to plant a tree was 20 years ago - the second-best time is today.’ A new year brings a new opportunity for company leaders to make progress on their sustainability agenda.

In addition to the wisdom contained in the Chinese proverb, business leaders will understand the value of planting an acorn, and how they can begin developing a coherent Environmental, Social & Governance (ESG) strategy to help them prepare for inevitable future change. 

Over recent years, many businesses have been distracted from the ESG agenda by a series of mega global events – the Covid-19 pandemic, supply chain interruptions, energy security, rampant inflation and a cost-of-living crisis, not to mention an acceleration in digitalisation and hybrid working.

For some, good intentions towards developing a more effective sustainability platform have not translated into hard actions and progress. 

For those lagging behind, there is a danger of transition risk – being left behind in the wake of sweeping public policy changes in Ireland and at EU level, in addition to changing consumer sentiment towards various parts of the ESG agenda.

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Among those businesses leading the way on sustainability, core values towards profitability and value creation are shifting, as indicated by a research report last year from Business in the Community Ireland. The report, which surveyed 185 large firms, found that at a minimum the thinking of most participants now includes a more holistic view on what is meant by ‘value creation’.

While profit remains central as a business value, it is not an exclusive value – the remit is now wider. The old mantra of maximising ‘shareholder profit’ is giving way to maximising ‘stakeholder value’.

For those businesses struggling to get started on the sustainability journey or who are stalled and confused by the complexity of the ESG agenda, or simply overwhelmed by the time and costs involved in transformation, the ESG Materiality Assessment is a good starting point.

Materiality Assessment

A materiality assessment is a formal process by which decision makers identify and understand which issues impact the sustainability performance of their business or organisation. The term ‘materiality’ has its roots in financial auditing and is now being employed to describe those non-financial items that are also important for a company or a business sector.

A material issue can have a major impact on the financial, economic, reputational or legal aspects of a company, in addition to its relevance to both internal and external stakeholders.

Increasingly, these issues are being incorporated into a company’s future strategy development and planning. With sustainability becoming more important to commercial success, figuring out which issues on the ESG spectrum are most salient or ‘material’ is now considered at board level as a key step to developing a successful strategy.

According to Réka Szücs of Deloitte, there are six reasons and benefits as to why companies should conduct a materiality assessment:

+ Big picture – better understanding of a company’s total business performance.

+ Transformation – materiality can inform business strategy to be more sustainable.

+ Buy-in – identify issues relevant to stakeholders to improve stakeholder engagement.

+ Retention and recruitment –  demonstrate to employees that a company is serious about sustainability.

+ Opportunities – open up new areas of co-operation both in business and with stakeholders.

+ Preparation – Start preparing for the EU’s upcoming ‘Corporate Sustainability Reporting Directive,’ which commences for large companies from FY2024.

So how to get started? A formal stakeholder engagement process is fundamental to developing a materiality assessment. There are many ways to design such a process, but a standard check list includes:

+ Identify internal and external stakeholders.

+ Conduct initial stakeholder outreach.

+ Identify and prioritise what you want to measure.

+ Design a materiality survey / questionnaire. 

+ Launch your survey and collect insights including follow-up.

+ Analyse and interpret insights and list key priorities.

+ Develop an evidenced-based materiality map providing a visual representation of the key issues and their corresponding relevance to both the company and to stakeholders> 

+ Put insights into action including incorporation in future strategy plans and business as usual.

+ Repeat the process every three years to refresh and update.

Company Examples

A good example of the outcomes that can follow a materiality assessment process is provided by the ESB, which used the materiality assessment process to identify and prioritise five key strategic issues.

These were to eliminate greenhouse gases from its activities and reduce dependence on fossil fuels; maintain reliable and secure energy supplies for customers; accelerate the electrification of society; protect vulnerable customers and tackle fuel poverty; and operate to the highest standards of fairness, ethics and transparency. 

These five key priorities are publicly disclosed on the ESG hub of ESB’s corporate website, where the company goes into some more detail on its commitments in relation to the five areas. ESB conducts detailed stakeholder materiality research every three years, in addition to ongoing public research every quarter.

According to Cormac Madden, environmental and sustainability manager at ESB, the main purpose of the materiality assessment is to assess where your greatest impacts are. To companies at the starting point of this process, his advice is to understand your main impacts and work from there.

“The EU draft standards divide sustainability into five environmental and four social topics,” says Madden. “Starting with these, you can assess your principal impacts through a combination of consultation within your organisation and engagement with your stakeholders.

“Begin measuring your carbon footprint, starting with the fuels you use. Seek to align with national climate targets for your sector and act with integrity. There is good advice available from many agencies, and when you get started, you will start learning.”

For those businesses new to the materiality assessment process, another good example is provided by Smurfit Kappa Group plc in its annual Sustainable Development Report. The graphic above shows an axis highlighting the relevance to the business and the importance of the issue to stakeholders.

SKG adopts a structured three-step approach to developing the materiality assessment. First, it identifies the sustainability issues material to its business and stakeholders. Second, it validates these issues through a formal stakeholder process. Third, it analyses the results to determine priority areas.

Next steps 

The first step is to set up an internal team to take ownership and drive the process. If external advisers are required, it makes sense for your company to do its own research first, and to educate and familiarise yourselves before incurring external expense.

The good news for those starting off is that there is wealth of information and examples freely available online. A great starting point is to see what the bigger companies are doing in the space and leverage the investment that has been made by them, and there are also numerous basic guides from consulting firms.

There are also many online courses in the wider Sustainability and ESG space, including free courses provided by the likes of Coursera.

For those companies who are further down the road following an assessment of materiality, and who have developed and are implementing a sustainability strategy, a next step is to consider conducting a Gap Analysis.

This looks at a company’s performance in ESG and identifies the initiatives and metrics to help you progress further still. A Gap Analysis is best performed by an external adviser, who can provide technical expertise in areas such as measuring greenhouse gas emissions or in corporate reporting.

Overall, the materiality assessment process yields great benefits to a company in its own right – engaging employees, a reason to get closer to your stakeholders, and the gaining of greater insights into the risks and opportunities facing your business. The next step is to get going.