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What is the Value of an ESG Materiality Assessment?

November 21, 2022

Taking the time to conduct a 5-step ESG Materiality Assessment can strengthen a company’s decision-making and provide confidence in building enterprise value creation.

Have you conducted a materiality assessment? The concept of materiality has long guided a company’s decision about what information is appropriate to disclose in their financial statements as well as what information should be shared with stakeholders. We explore the five steps to an ESG materiality assessment here.

What is materiality?

Materiality is the benchmark for determining which information should be disclosed. Information is deemed material if that information influences the providers of financial capital with regard to the organization’s ability to create value over the short, medium and long term. In addition, the AICPA, in alignment with federal securities law and the Supreme Court, deems information material if the omission or misstatement of the information “would influence the judgment made by a reasonable user”.

With that, there is no percentage or numerical threshold to decide whether items are to be considered material, therefore it is both qualitative and quantitative in nature and it is up to each company’s professional judgment to decide what is important enough to include when preparing financial statements as well as other information. This can be done by conducting a materiality assessment.

What is an ESG materiality assessment?

Similar to financial materiality assessments, the goal of an Environmental, Social, Governance (ESG) materiality assessment is to inform business decisions by identifying, assessing, and prioritizing ESG topics most relevant to a company’s operations, including their upstream and downstream suppliers. The assessment is used to inform a company’s goals, priorities and targets as well as their communication and reporting to stakeholders and customers.

The 5 Steps to an ESG materiality assessment are as follows:

  • Identify all potential ESG topics: This can be done with the help of resources such as the Sustainability Accounting Standards published by the Sustainability Accounting Standards Board (SASB).
  • Gather stakeholder perspectives: This includes gaining an understanding of topics that have the likelihood of impacting the judgment and decisions of key stakeholder groups.
  • Assess external impact: This includes analyzing the topics that impact society and the environment at different stages of company value chain.
  • Assess internal impact: This includes analyzing the company’s overall performance and business in terms of risks and opportunities that have or will have an impact on corporate value.
  • Identify the most material ESG topics: This includes identifying the topics that a company will prioritize at a point in time in their ESG journey.

Benefits of ESG materiality assessments

Each of these steps entails quantitative and qualitative analysis which includes:

  • A review of the severity, magnitude, and probability of a particular ESG topic as it relates to an entity’s operations
  • Consideration regarding the level of difficulty to counteract negative consequences
  • The leverage an individual company has to effect change (operational or organizational control).

The results of ESG materiality assessments support a strong and resilient foundation for making informed decisions. They allow senior management, those charged with governance and audit committees to evaluate the risks and opportunities associated with capital allocation, supplier contracts, distribution and retailing, along with human resource decisions.

There are a number of tools and resources available to help guide any business in establishing a materiality assessment. Contact us to learn more about the ways KLR can help your business with an ESG materiality assessment.

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