What is ESG materiality? 

ESG Materiality Discussion

Every business, despite the industry they operate within or their size, is exposed to non-financial factors that can affect their business. In particular, ESG (environment, social, and governance) issues are a growing concern for consumers, governments, investors, and other various stakeholders. 

The majority of organisations are exposed to a range of ESG issues. With this in mind, it is essential to determine which are the most material and to comprehend how exactly they affect your enterprise. Undertaking a business sustainability course can provide valuable insights into these aspects. Continue reading to learn more about ESG materiality and the benefits of assessment for your business. 

About ESG materiality 

Material issues are relevant in numerous contexts, from financial to legal and accounting. Materiality essentially encompasses all the issues an organisation must take into account when determining its risks and opportunities. These are the issues they absolutely cannot ignore. Put simply, in the accounting sphere, information is material if misstating it or omitting it from an entity’s financial statements could influence decisions made by the user. 

For businesses and investors intrigued by ESG and sustainability performance, materiality takes on an entirely new meaning concerning ESG issues that impact a business. In an ESG Risk Ratings methodology, an issue is deemed material if its absence or presence in the enterprise’s financial reporting is likely to influence decisions made by a reasonable investor. Additionally, it is likely to have a major impact on the value of a business. 

For issues to be deemed relevant to the organisation’s ESG Risk Rating, the problem must have a potentially significant impact on the economic value of a business and its financial risk-and-return profile from an investment point of view. ESG materiality looks beyond the financial impact to consider non-financial factors which could impact the long-term sustainability of an organisation as indicated by a diverse range of stakeholders. 

The assessments can be either informal or formal. The level of documentation and vigour needed to support an enterprise’s identification of vital issues varies depending on the subjectivity of the frameworks in use and the location and intent of their ESG disclosures. Included in ESG materiality is an idea referred to as double materiality, which is where a company looks outward to determine how its decisions and operations impact the outside world. 

Benefits of an ESG materiality assessment 

Businesses today must be very clear about their ESG goals, policies, and performance. Therefore, carrying out a materiality assessment can be a great way to evaluate the ESG factors which can impact your business. In addition, to uncover how your business affects the surrounding world. Despite your goals, maturity, and resources, you should consider materiality as an essential component of corporate decision-making for long-term environmental action. 

Tracking ESG materiality has the added plus of offering a mechanism for surfacing new issues as they come up. Specific ESG factors will be standard within almost any industry, however, there is always the possibility that additional ones will emerge. Not to mention, existing ones can also gain more traction due to external influences. It is important to recognise ESG is a fast-moving space and that new opportunities and risks are continuously emerging. 

Summary

Every business faces ESG issues that are material to its financial performance, its most crucial stakeholders, and its impact on society. Navigating the evolving ESG landscape is vital to effectively manage these issues and their risks, allowing for long-term sustainability and enterprise value.

If you want to learn more about how to embed ESG principles into your strategy and track ESG materiality, our Diploma in Business Sustainability covers everything you need to know about ESG reporting, auditing, and more with a dedicated module on ESG Reporting and Auditing.

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