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ESG insights for private companies

A guide to ESG materiality assessments

Multiple authors
2023-05-31
Archived info
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The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only. 

Private companies are increasingly asked to integrate ESG into their businesses, and many may be wondering what factors are most relevant to their company and how best to begin addressing them. Our ESG insights for private companies content series aims to help our portfolio companies navigate the rising importance of these topics in private markets. Critically, the material factors a company may face can vary widely by industry and geography. For example, though governance factors — such as shareholder rights, board composition, and executive compensation — are generally applicable across sectors and industries, not all environmental or social factors are equally material for all companies.

The concept of materiality is also evolving. We define materiality as the most significant ESG issues that will impact a company’s financial value. But companies with global investors should be aware that there is increasing interest in “double materiality” which also includes a company’s broader impact on the environment, economy, and people.

Here, we explore ESG materiality assessments, including why they are important and how to conduct one for your company.

Why are ESG materiality assessments important?

Companies often have a bigger sphere of influence than they may realize. Part of doing a materiality exercise is seeing where your business may create negative externalities in its value chain. We think this can help you develop a richer understanding of your business, its impact, and what issues, practices, and policies are most important to key stakeholders. Once you have identified your company’s most material ESG risks and opportunities, you can use the resulting insights to help you better address these issues in your strategic planning and reporting. This is an important risk-management tool that the board and executive team can use to steer the company most efficiently by prioritizing where time and money are allocated. Critically, research suggests that companies focused on their strategy to address material ESG factors for their industry may outperform over the long term, while there is an implicit opportunity cost for companies that focus their efforts on immaterial factors.1

Creating a materiality matrix that examines and incorporates various stakeholder needs thus helps in identifying unaccounted future costs and opportunities to business. We believe such an exercise will make businesses more resilient, encourage more informed decision making, and save costs through sustainable partnerships. As a firm, we recognize the importance of remaining holistic and dynamic in our strategic planning and are therefore conducting our own materiality assessment in 2022.

How to identify your material ESG issues

Below, we outline five steps a private company can take to develop their own ESG materiality assessment and share our views on a few best practices to consider. These steps may seem daunting at first, but they are solely intended to serve as a guide. We recognize that every private company is at its own stage of addressing ESG materiality. Earlier stage companies may be short on time or resources and should not be deterred by the full-scale assessment outlined below. We believe this guidance can be pared down to simply interviewing your key stakeholders to help identify your main ESG issues and guide the intention of your ESG strategy. Some companies choose to engage third-party vendors to assist in their data collection and analysis to enable a more robust exercise, increased transparency, reduced workload, and independent viewpoints. However, we believe you can also do this exercise on your own and we are here to help throughout the process.

Key ESG materiality assessment steps

Step 1: Identify key stakeholders

  1.  Define your company’s purpose and strategic objectives for the materiality assessment. What is it that you are trying to accomplish? Who is in charge of oversight?
  2. Create a list of stakeholders that considers both internal contacts (e.g., directors, executive leadership, regional managers, and employees) and external contacts (e.g., customers, vendors, regulators, community members, NGOs, environmental representatives, and investors) to ensure you capture a holistic range of perspectives.
  3. Build support with key internal and external stakeholders. Ensure participation across various divisions and functions so the assessment process remains independent and accountable.

Step 2: Brainstorm material issues

  1. Engaging both internal and external stakeholders, create a list of potential material issues for your business using resources such as the SASB Materiality Map
  2. Identify both financially material issues (that influence your company’s enterprise value) as well as socially and environmentally material factors (that impact the economy, environment, communities, and individuals). 

Step 3: Design and conduct a materiality survey

  1. Develop engagement surveys that ask key stakeholders to rank a list of material issues from one to 10 based on key dimensions, such as: How much does the topic impact the business and performance of the company? How well does the company currently manage the topic? 
  2. Host discussions with key stakeholders to gain deeper insights into their feedback and collectively explore areas of shortfall and ambition, discuss potential solutions, and identify priorities. Notably, this process will require careful consideration of the trade-offs in addressing competing stakeholder needs.

Step 4: Analyze survey insights

  1. Review findings to explore gaps and opportunities for ESG issues.
  2. Use the resulting insights to create a materiality matrix (see example in Figure 1 below) that highlights material issues for your company, grouping the risks by level of priority. We encourage private companies to review existing ESG maps of public peers and tweak findings to what is relevant to their businesses.
  3. Share results with key stakeholders and gather additional feedback.

Step 5: Create and execute an action plan

  1. Use findings from your materiality assessment to inform the way your company builds, shapes, and launches an impactful and differentiating sustainability strategy.
  2. Leverage these consolidated insights to generate tangible action items, organized by short-term next steps and long-term goals. Some companies align their targets with the UN’s Sustainable Development Goals. Provide disclosure to key stakeholders on the progress of goals to ensure accountability and transparency.
  3. Update your company’s materiality assessment regularly. This should be an iterative process that evolves as the business grows. Updates may be necessary each time your business or operating context substantially changes. 

Bottom line on ESG materiality for private companies

We believe materiality assessments will become increasingly critical to private companies, especially as they approach the public markets. We therefore seek to partner with our portfolio companies to assist in these assessments early, and thereby aim to enhance opportunities for sustainable growth and to reduce ESG risks. 

For example, as part of our investment in a portfolio company, we offer support in this process including:

  • Sharing materiality frameworks relevant to their industry.
  • Generating a potential stakeholder list for the company.
  • Providing a template of survey questions for stakeholder engagements.
  • Identifying potential external vendors to help with a materiality assessment.
Figure 1
a guide to esg materiality assessments fig1

Please refer to this important disclosure for more information. 

1Source: Khan, M., et al. “Corporate Sustainability: First Evidence on Materiality,” Harvard Business School, 2015. Time period studied was 1991 through 2012. 

ExpertS

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