ESG Materiality and the Impact on Businesses
Sustainability in a business context is evolving rapidly, and definitions can become confusing. It is important to understand what materiality means in the context of ESG, and more importantly how it impacts your business.
Financial Materiality and ESG Materiality – what is the difference?
- Materiality is normally applied to regular financial accounting to identify ‘decision-useful’ information that would impact the company’s financial performance and is mainly driven by the perspective of shareholders.
- ESG Materiality has a broader scope and is applied to a company’s social, environmental or economic credentials (or non-financial issues), impacting a number of stakeholders.
What is non-financial materiality (NFM)?
Similar to established financial accounting practise, NFM is being coded into a set of sustainability accounting principles for reporting purpose (1). Given that every business has its own unique DNA, materiality reporting is less technical and much more nuanced.
Essentially, the building blocks for understanding NFM start with a few key elements including:
- Carbon emissions
- Employee welfare
- Human Rights
From here it is possible to layer much more granular observations and actions as the company gains knowledge and related data over time. Businesses large and small are being drawn into the materiality orbit, and NFM is anything but immaterial today. Decisions made by the leadership team of a company with regards to process and application can have real financial consequences over time and can make a difference between winning and losing business.
An example of NFM
Any company providing a service in the supply chain of a larger business operating in the EU will be expected to provide evidence of awareness, planning and strategy around the NFM factors above. For this reason, it is vital for all businesses to understand their materiality and develop clear strategies that will both protect them and equally importantly provide real opportunities to grow and improve on their products and services.
Double materiality is both an inward and outward perspective on ESG related issues. It measures:
- How ESG impacts the company’s performance
- How ESG impacts the wider eco-system in which the company operates.
The duality of this approach is gaining its own reputation as part of the EUs emerging corporate reporting standards under its climate regulation (2) and tends to be seen through a longer-term lens.
Where to begin?
There are a number of different frameworks such as GRI, SASB (which is now part of the International Sustainability Standards Board (ISSB)) and whether the business operates in the UK, EU or US can have different implications. Navigating these various frameworks and standards can be complicated, particularly for mid-sized businesses. Recognising that these measures cannot be achieved overnight, developing a structured approach to reach sustainability milestones in the short and longer term can prove valuable for all stakeholders involved.
The Disruption House Assessment helps businesses address the increasing importance attached to building and demonstrating a sustainable strategy. Enabling better understanding of the type of material issues they need to address, mapping areas of competence, filling gaps, and providing opportunity for learning, risk management and business improvement.
- Other providers of sustainability accounting principles include GRI and SASB who work closely with the EUs ESRS and more broadly the IFRS’s Sustainability Standards Board (ISSB).
- EU Taxonomy legislation includes the European Sustainability Reporting Standard (ESRS)