Conducting a materiality assessment is crucial when building your ESG strategy. Materiality assessments are risk assessments that determine which ESG and sustainability areas are relevant to your organisation, helping you to focus on the areas that are most valuable to your business and its stakeholders.
At Speeki, we believe there are two parts to a materiality assessment:
Material areas to focus
The first stage of a materiality assessment is considering the level of importance of each risk area, based on highest risk and significance to your business and its stakeholders, and then prioritising them.
Status and goals
The second stage of the materiality assessment is to assess your evaluation of your management of these risks today, and your goals, objectives and success criteria for the future.
Here are our top five areas for transforming your materiality assessment into a best-practice assessment that adds significant value to your ESG strategy:
1. Complete annually and engage multiple levels within the business
A materiality assessment is not a one-off exercise. It should be an annual exercise that pulls together key internal and external people to assess changing ESG and sustainability issues. This area is changing very rapidly, with new standards, new laws and increased expectations, so the materiality assessment must be constantly reviewed and regularly updated.
2. Take the time to think about your company’s risk tolerance
At this juncture, it is important to consider what sort of organisation the company is when it comes to risk. It is the responsibility of the board to set the risk tolerance of the company. When determining risk tolerance, consider:
- the nature of the company, its ownership, its operations or perhaps its investors
- whether the company is publicly listed or privately owned
- brand and reputation influences
- whether significant industry or governmental oversight exists on the company or its products
- whether the company has a sophisticated risk management system that enables it to be able to take on more risk
- whether there is a lack of focus, resources or budget to effectively manage risk that may lead to a lower tolerance for taking on risk.
For those companies that have never documented their risk tolerance, the best place to start is by interviewing board members and senior management. They can often describe what sort of company the organisation is, how it treats risk, and its approach to risk management.
3. Take the time to do solid research
To conduct a great materiality assessment, you must do your research. You should conduct research on some or all of the following:
- the regulatory environment in the countries in which you operate
- your competitors, or perhaps some of your peer groups, to understand what they are focused on when it comes to sustainability and ESG
- ESG reporting frameworks, to determine which apply to the company
- specific reporting obligations required by local laws
- ESG ratings and other information from ratings agencies on the company, its competitors, or its peers.
The research must also be ‘topped up’ at each annual assessment to document any changes or developments, especially in the ever-changing areas of standards, frameworks, reporting obligations and your competitors/peers.
4. Spend time with stakeholders
It is very common in ESG and sustainability matters to consider the views of stakeholders.
Understanding the expectations of and feedback from stakeholders is a critical piece of your materiality assessment. You will need to obtain their views on risk and perspectives on the priorities that you should manage.
There are several ways to collect information from stakeholders. These include:
- interviews, one on ones, townhalls, discussions or other group dialogues
- surveys and questionnaires
- research of laws, regulations and other documented expectations of industry groups
- trends from research papers from the community and the public
- research papers on climate and planet changes.
The information that you obtain will need to be sourced, collated, reviewed and analysed as part of that materiality assessment.
5. Prioritisation will be essential
Conducting a deep risk assessment of ESG risks across the business will require you to consider such areas as:
- the countries in which you operate
- your business model regarding sales and channel
- the size and complexity of your supply chain
- whether you operate in highly regulated industries or with highly regulated products
- the complexity of your products and services
- the ownership, size and risk tolerance of the company
- the types of customers and partners.
The best way to conduct this element of the materiality assessment is to study the business in detail and consider it against the different spectrum of ESG issues.
There are several ways to define ESG. The Speeki risk model classifies ESG into 19 different risk areas. The objective is to consider the Speeki risk model and determine which of the 19 risk areas is most important to your business.
This part of the materiality assessment is the hardest because it requires a deep assessment of the key risk areas against the business operations. To do that, you will need to have:
- a significant body of knowledge about the business and how it operates in each of its markets
- a very good understanding of the risk areas and how they appear in business (which is not always obvious).
To conduct that mapping between the business and the risk areas, we recommend a workshop attended by members of the company who understand the business, can add value to explaining its operations, and have a good understanding of risk.
You are likely to have too many issues and will need to conduct a ruthless prioritisation exercise to reduce and simplify the areas you will focus on. While many risk areas will be relevant, not all of them need to be addressed immediately.
A materiality assessment for ESG and sustainability involves a deep analysis of your company as it applies to ESG and sustainability areas. It is a vital step in your ESG strategy.