Four Reasons Why Senior Leaders Should Care about ESG Materiality

A Materiality assessment, when conducted as a strategic process, across key operational areas of the company (sustainability, legal, strategy, risk) and not as an isolated exercise, has proven to produce a number of positive outcomes. 

For instance, a clear assessment of material issues followed by transparent reporting, shows an improvement in a company’s performance while reducing its exposure to different risks – including reputational, financial and legal. Moreover, a credible and detailed explanation of materiality has been determined as a fundamental requirement to attract investors, and a meaningful argument to get the board and executives buy-in. 

(This article is reprinted with permission from Datamaran. It was originally published here.)

The success of this approach requires to continuously engage the management, and in particular C-suite and Board members, and to have reliable data to support your ESG strategies. But if you are still finding it hard to win your company’s board members and senior leaders’ attention over materiality, here are four reasons that will convince even the most skeptical of business leaders on why running a materiality assessment is now more important than ever before. 

For each reason, you’ll find more associated resources for a deep dive into materiality, its scope and meaning. The four reasons your senior leaders should care about materiality (not listed in order or relevance as they are all equally important):

• Manage your existing risks and identify new opportunities
• Meet the evolving expectations of investors and board members
• Keep up with regulatory developments
• Preserve your company’s reputation and brand value.

1) Materiality Allows You to Manage Existing Risks and Identify New Opportunities 

You may have heard somewhere that “a risk is but an opportunity you saw too late”. But how can you timely identify emerging issues, before they become business-critical? This is where materiality insights become invaluable to reveal business opportunities ahead of time. 

As Jutta Kissel (Sustainability Manager at BASF) says, the world has never gone faster, and ESG risks and opportunities can become financially material with unprecedented speed and strength, and greater interconnections with each other. Prioritizing critical ESG factors and integrating them into the enterprise risk management process offers the chance for business to understand where to focus the attention.

While generally companies with adequate levels of ESG integration have a very good pulse on what is material to their industry, what is generally lacking (and is actually most needed) is to be equipped with the ability to scan the horizon and identify blind spots in a dynamic way. 

Those emerging issues not yet manifested but with potentials for being disruptive for the company have to be spotted in a noisy environment where data and information abound and the time to process them is limited.

2) ESG Is Now on the Investors’ Radar and on Board Members’ Agendas 

With an increasing level of magnitude, senior leaders and board members are now recognized as the main owners of ESG risks and opportunities. In the eyes of outside shareholders and external stakeholders, the C-suite is ultimately responsible for external risks management. The pandemic has been a revealing moment for accelerating this shift that was already ongoing. 

As ESG and sustainability have finally entered the boardroom, insights from materiality assessment are the most immediate and effective way to enable Board members to make well-grounded decisions, backed by robust data. 

Investors are also increasingly integrating materiality in their considerations. In particular:

• They look at how companies identify their material issues as it sheds light into the governance and risk management processes a company has in place;
• They are building their own materiality assessment models to assess which issues have an impact on the value of the company and/or are likely to have an impact in the future.

3) Materiality Is at the Center of Regulatory Activity and Political Debate 

Materiality has been recently a key focus for policy makers, standard setters, and major accounting organizations reviewing sustainability reporting standards.

Looking in particular at regulatory bodies, the revision of the Non-Financial Reporting Directive (NFRD) and the subsequent proposal by EFRAG (European Financial Reporting Advisory Group) (to which Datamaran contributed) for European reporting standards, materiality takes a central role in light of the introduction of the new double materiality perspective.

Materiality is also at the center of the policy debate in the United States. After years of disregard for ESG, the new administration has brought them back in the economical and political debate. The U.S Security and Exchange Commission (SEC), with a newly appointed commissioner has recently opened a consultation on climate and ESG disclosures that attracted widespread attention and was joined by more than 450 stakeholders who sent their letter of comments. The House also passed a package of rules on climate and ESG disclosure requiring public companies to report environmental, social and governance metrics.

4) Materiality Can Help Prevent Crises and Corporate Scandals

As we said earlier on, failing to transparently and timely report material information to external stakeholders can have a deep impact on a company’s reputation and brand value with huge financial repercussions. There are multiple examples and stories of companies where failure to report material information in the years led up to corporate scandals or greenwashing accusations. 

The common denominator among companies failing to protect their brand is the lack of consistency in evaluating external and internal risks, and lack of clarity in disclosing their governance and practices on material issues. 

Conclusion: Opt for a Data-Driven Approach to Materiality

Making clear why and how certain external ESG issues are impacting your company or business sector, both as a risk or as an opportunity, and responding in a timely manner to the challenges they pose, requires a leap forward in materiality practices. 

There is also an overload of data and information to consider while evaluating material risks, and processing an increasing amount of information represents a challenge even for the most motivated teams. So, while human expertise is certainly needed, it should be supported by digital solutions that allow business leaders to expand the scope of your research and pool of stakeholders considered, while freeing time that can be dedicated to strategy and goal setting.

Being able to easily and consistently get relevant dynamic insights that provide your board and senior management with consistent data on material issues to act upon, representing also a new kind insurance policy for them, is what is guaranteed by a data-driven approach such as the one offered by Datamaran. 

Nicoletta Ferro is Director of Customer Succes at Datamaran.

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