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4 min read Determining material factors lie at the heart of ESG reporting
ESG (Environmental, Social, and Governance) principles have a major impact on a company’s reputation and its bottom line. Sustainable business practices are in particularly high demand by investors, making it critical for organizations to tell a transparent and positive ESG story.
To do so, all potential factors that could affect a company’s ESG disclosure must be considered in the process of compiling a report. In other words, a materiality assessment which identifies stakeholders and charts the risks facing an organization should be conducted to ensure that all possible factors are accounted for.
The most frequently discussed corporate risk in 2023 is activity affecting the environment, a broad category encompassing items like pollution and water usage. According to a recent report of leading executives, 4 in 5 respondents claimed their organization had a public commitment to carbon reduction, and a clear majority saw environmental issues as an emerging ESG risk.
But companies simultaneously must consider the “S” and “G” categories in ESG, including board diversity, human rights, and workplace safety. In an increasing age of activist investing, socially conscious buying and global economic activity have raised the profile of ESG, making materiality studies even more important to a company’s public facing ESG information.
Determining material ESG factors should be based around deciding which risks are most important to both society and stakeholders.
Such an assessment can be conducted through the following steps:
- Identifying stakeholders,
- Engaging with stakeholders to gather input on risks,
- Mapping out which risks are material to the organization, and
- Issuing a public assessment of ESG risks, results, and plans to address deficiencies.
Stakeholder input is critical to ensure your organization is targeting issues of importance. Stakeholders could include investors, customers, suppliers and other affected parties.
A quality materiality study should ask questions about a wide range of risk factors, from broad indicators to targeted metrics all the way down the supply chain. Such questions should include items such as:
- Is child labor utilized in your company’s value chain?
- How many greenhouse gas emissions are emitted by suppliers?
- What are your company’s plans to reduce such factors, and what are the targeted dates to do so?
Questions such as these are critical, as stakeholders increasingly want to know if they are wearing clothes produced through low-wage child labor overseas, or if the company they are buying from is contributing to climate change. In a strict business sense, many investors also want to know if they are investing in a product of the future, or an initiative stuck in the past.
While many other factors should be included, topics like carbon emissions produced and child labor in the supply chain highlight what companies should include in ESG materiality assessments. Reference tools such as the Sustainability Accounting Standards Board (SASB) provide standards for materiality on the environmental side, and Xenophon Strategies is a partner of the Global ESG Monitor, which uses a series of materiality questions to analyze and rank ESG transparency at leading corporations worldwide.
While materiality questions are crucial to corporate decision making, debate over how to define materiality in ESG is picking up steam in the nation’s capital. The Securities and Exchange Commission, the leading regulator of capital markets, is currently considering rules which would broaden the legal definition of “materiality” as it relates to climate disclosures – a move which would force many companies to significantly expand their calculation of material factors.
The natural result of a successful materiality study would be a transparent, all-encompassing ESG report which lays out all material factors while setting targeted improvements into motion. In addition to our work on the Global ESG Monitor, Xenophon Strategies has an ESG practice focused on effectively telling company sustainability stories. Learn more about our overall ESG services at xenophonstrategies.com/esg-reporting.
