How to create an ESG strategy: Use a materiality matrix as the foundation

Environmental, social and governance (ESG) is increasingly important for businesses that want to create long-term value, manage risks and opportunities, and meet the expectations of their stakeholders. However, the relevance of individual ESG issues (e.g. climate change; health and wellbeing; equity, diversity and inclusion; responsible procurement; etc.) is unique to each company – it’s operations, supply chain, industry and location. Therefore, before you can even think about creating an ESG strategy it is essential to identify and prioritise the most significant ESG topics for your business. A materiality matrix is a standard, best practice, way of doing this. 

What is a materiality assessment 

A materiality assessment is the process of evaluating the relative importance of different ESG issues, and a materiality matrix is the output from this – a visual representation of the assessment in a graphical/diagrammatical format. 

Materiality assessments are typically conducted through a range of techniques including interviews, surveys and desktop reviews.

Types of materiality assessment

There are two types of materiality assessment, the ‘traditional’ and the ‘double’ approach. Both identify the most important ('material') ESG issues to the business, but in slightly different ways:

• Traditional materiality: Material ESG issues as those that are of both high importance to the business and of high importance to stakeholders.

• Double materiality: Material ESG issues as those which the business has a significant impact on, and those which have the actual/potential to have significant financial impact on the business.

Both approaches work but the route chosen depends on the specific business needs. The double materiality approach is a requirement for companies in scope for EU CSRD legislation, but it is more costly to conduct, as the evaluation of actual/potential financial impacts on the business takes time. Further, we find it to be less reliable because accurately quantifying the financial impact of an ESG issue can be very difficult.

For example, we conducted a traditional and double materiality assessment for a construction company, an industry known to have serious health and safety risks and for which sadly fatalities are not uncommon. Using the traditional materiality assessment we found health and safety to be a high priority issue (i.e. of high importance to the business and of high importance to stakeholders). However, using the double materiality process health and safety was only of medium importance as many stakeholders underestimated the potentially very high financial impact that health and safety incidents can have on a business (i.e. from fines; insurance premiums; operational costs from day’s lost; legal and remedial fees; etc.).

For this reason, unless it is legally required for a company (now or will be in the next 2-3 years), we often recommend using the traditional approach.

Purpose of materiality assessments

Historically, materiality assessments were used to shape ESG reporting. Advocated by the likes of the Global Reporting Initiative (GRI), their purpose was to guide companies on the ESG subjects that they should cover, and to what extent, in their ESG reporting.

More recently, materiality matrixes are commonly used to shape ESG strategies, but here is where some companies go wrong. They assume that a highly material ESG issue should be a high focus area in an ESG strategy. But this is not necessarily the case. Why? Because a materiality assessment measures ESG issue importance, not performance.

Take climate change as an example. If, for a given company, the materiality assessment shows it to be a high importance ESG issue, yet the company is already Net Zero (or close enough) then in their:

• ESG strategy it would be acceptable to not have any targets or a workstream in this area (beyond maintaining the current level of performance).

• ESG reporting it would not be acceptable to stakeholders for the company to have anything less than a significant amount of information on the company’s climate change policies, management activities, metrics and achievements.

Using a materiality assessment effectively to create an ESG strategy

Thus, to develop the best ESG strategy, first a company should use a materiality assessment to identify important ESG issues, and then they should evaluate their current performance against these same issues. The optimal ESG strategy should then focus on closing the gap between importance and performance.

For more ESG mature companies, perhaps on their second or third ESG strategy then a more nuanced approach is needed. For these companies we recommend that ESG strategies focus on one or two ESG issues to truly excel at. By doing this, the company gets greater internal traction and creates more business value as their ESG approach becomes a point of differentiation in their market.

As for which ESG topic to choose for this? That is an art, not a science, but one that we can help you with at Rawstone Consulting. Contact us to find out more.

Authored by Caroline Johnstone.