How ESG materiality assessments can unlock sustainable value for your business

What is double materiality and how does it impact your business?

Double materiality in ESG refers to the fact that organizations not only exert impact on the environment and society but are also subject to influences from social factors and the external environment. This concept underscores the interdependent relationship between an organization, its external surroundings, and its financial performance.

The two dimensions of double materiality are:

1. Impact materiality — Organizations affect the world through their operations.
2. Financial materiality — External factors influence an organization’s ability to create value. Factors include, but are not limited to, climate change regulations and societal expectations.

The potential impact is measured through financial consideration. For an ESG factor to affect an organization’s performance, it must be seen as influencing financial.

How can an ESG materiality assessment support your organization?

Strategic decision-making

ESG materiality assessments guide strategic decision-making by helping organizations identify and prioritize which ESG factors are most relevant to their operating environment and stakeholder expectations. Strategic alignment fosters long-term resilience and growth by ensuring that sustainability enhancement work is integrated into core business priorities, investments, and functions.

Risk mitigation

Organizations can proactively manage potential challenges, safeguard their reputation, avoid regulatory penalties, and avert financial crises by identifying and addressing material ESG risks. ESG materiality assessments provide a structured approach to risk identification and mitigation, enabling businesses to navigate the evolving regulatory landscape .

For example, an organization's stakeholders may identify that the treatment of employees is highly material. The organization can then improve its labour standards to mitigate reputational risks and avoid non-compliance with labour regulations.

Stakeholder engagement

ESG materiality assessments facilitate dialogue with stakeholders and foster transparency and trust. Organizations can enhance their reputations and build stronger relationships with customers, investors, employees, industry peers, and the broader community by listening to and addressing concerns that matter most to stakeholders.

Value creation

Organizations that integrate ESG considerations into their core strategies often find opportunities for value creation. ESG materiality assessments help organizations identify areas where sustainable practices can lead to operational efficiencies, cost savings, and new revenue streams. This proactive approach contributes to long-term value creation and competitive advantage.

Consider a manufacturing company operating in a jurisdiction where the costs of greenhouse gas (GHG) emitting energy sources are regulated and taxed. The company can reduce production costs and improve operational resilience by diversifying its energy mix. Additionally, the company could explore relocating parts of its production to regions with more reliable and cleaner energy sources, such as hydroelectric power. This can help mitigate potential operational disruptions and reduce exposure to price volatility associated with carbon-intensive energy sources.

What are the steps of an effective ESG materiality assessment?

A customized approach

Every business is unique — and ESG materiality assessments should reflect this. An effective assessment should be tailored to fit the specific needs, goals, and circumstances of your business. A customized approach ensures the resulting strategies align with the organization's overall culture and objectives.

Engaging a range of stakeholders

Effective stakeholder engagement is a cornerstone of successful ESG materiality assessments. It is crucial to facilitate meaningful interactions with many groups of stakeholders, capturing diverse perspectives that help establish a hierarchy of material concerns. A third-party advisor can help facilitate these conversations.

Integration with business strategy

ESG materiality assessments are most impactful when the findings are integrated into your core business strategy. It is crucial to weave sustainability into your strategic planning to ensure that ESG factors become embedded in decision-making processes, risk management, and overall business operations.

Continuous improvement

ESG materiality assessments require ongoing monitoring and adaptation — ideally on an annual or semi-annual basis. This ensures you re-evaluate material topics and adjust priorities to reflect the evolving ESG landscape and changing stakeholder preferences.

External experience

External guidance can provide insights into leading ESG practices, global ESG frameworks, and industry benchmarking. Third-party advisors can guide organizations through the complexity of assessing ESG materiality, ensuring thorough and accurate analysis of the most relevant factors.

Take the next steps

A materiality assessment is a crucial step to support your organization’s ESG journey. This assessment supports the business case associated with implementing sustainable practices as the focus remains on determining the primary ESG factors that have financial implications. Knowing what ESG topics to integrate into strategy can help your organization build resiliency and navigate the evolving ESG landscape successfully.

For more information, contact a member of MNP’s ESG team. Our advisors have the knowledge and experience to help you conduct an ESG materiality assessment and integrate the results with your overall business strategy.