A new report from the World Business Council for Sustainable Development (WBCSD) and Erasmus University School of Economics offers some intriguing insight into corporate ESG materiality assessment approaches and potential pitfalls.
Generally speaking, popular ESG reporting frameworks fall into two overarching categories: those with a basis in corporate financial costs and opportunities, and those with a basis in impact of company activities on the planet and human beings. The WBCSD study demonstrates that the difference is also reflected in company approaches to conducting materiality assessments:
Another principal observation is the broad adoption of the two different perspectives of materiality: 1) The business cases perspective, indicating that a topic is material when it has significant (positive or negative) impact on the financial performance of the company; and 2) The societal impact perspective, indicating that a topic is material when it matters to society and the company significantly impacts this topic. The boundaries between these two perspectives are less clear in reality than they are in the theoretical setting of reporting standards development.
In practice, companies tend to pick indicators from both types of reporting frameworks for their disclosures. However, if the materiality assessment was conducted using only one perspective, the basis of the reporting may itself be skewed. Indeed, one of the report’s conclusions supports this idea:
In 150 of the 428 reports reviewed the materiality perspective was not clearly explained. This could suggest that companies are unaware of the multiple perspectives of materiality or do not recognize it as important to communicate their perspective on materiality. At the same time, our analysis found that in 61.2% of the reports multiple perspectives on materiality are combined. This would suggest that the majority of companies in our sample are aware of multiple perspectives on materiality and that these perspectives provide different but complementary insights.
As a helpful tool, the report also includes a compendium of the definition of “materiality” from a number of common ESG standards and frameworks.
What You Can Do
When approaching your ESG materiality assessment and reporting activities, include the financial perspective as well as the impact perspective. Recognizing the difference may lead to a more robust assessment outcome and support more holistic reporting that is not limited to only one framework or approach.
Additionally, it is worth considering Harvard and Oxford professor Robert Eccles’ recommendation of publishing what he calls a Statement of Purpose. The original version from 2015 (then called the Statement of Significant Audiences and Materiality) called for companies to specifically declare who their primary or main audiences were for purposes of ESG reporting, which also sets the foundation for defining non-financial materiality. The concept and name were updated in 2019 as a way for Boards to clearly articulate a company’s purpose to profitably achieve a solution for society. Even so, his original suggestion to examine and prioritize the variety of ESG information consumers to determine your “significant audiences” is a worthwhile undertaking.