Why materiality assessments (still) matter

ESG may be a 4-letter word to some these days but, like any good 4-letter word, when used well it delivers. Beyond the noise, investors and company operators alike know that effectively integrating material sustainability factors is a value creation lever (not a political statement).

In this paper, we explore just how much these factors matter to the bottom line, identify additional nonfinancial benefits, and share best practices for assessing materiality. Our goal is to help founders and management teams navigate this fraught landscape and find the material topics that actually drive performance.

Addressing material ESG factors boosts financial outcomes

A recent survey covering 9,000+ private companies and nearly US$60 trillion in AUM found that general partners estimate sustainability initiatives contribute a 4% – 7% lift in EBITDA.¹ In particular, initiatives focused on sustainability themes such as energy efficiency and employee well-being can drive cost reduction and revenue growth. This finding aligns with separate research showing sustainability efforts in private companies can increase exit multiples by up to 7%.²

Critically, reaping these benefits requires private companies to focus on the most influential, or “material,” sustainability initiatives and avoid “box-ticking” distractions. While governance topics such as board oversight and ethics apply universally, environmental and social priorities vary by industry. To quote a leading global audit firm, “as in financial reporting, you need to provide your stakeholders with information about the topics that matter and ensure less-relevant information doesn’t get in the way.”³ So, how can companies figure out what areas to focus on?

Enter the materiality assessment: a strategic tool to identify the specific sustainability value creation levers that most influence a company’s future growth. This is the crucial step that moves ESG initiatives from a mundane reporting exercise to “embedded sustainability”⁴ that can help drive long-term outperformance. A survey of 5,000 C-suite executives found that organizations with embedded sustainability initiatives had a 16% higher revenue growth rate and were 52% likelier to outperform on profitability.⁵

Materiality assessments help build better businesses, especially for private companies

Ultimately, conducting a materiality assessment is about building a stronger, more future-ready business. In our view, private companies can benefit from this exercise as it helps management teams and boards focus their (often limited) time and resources where they can have the biggest long-term impact. Beyond the concrete financial benefits noted above, materiality assessments can help drive:

• Better risk management and strategy: Research shows that organizations with strong ESG performance experience significantly lower idiosyncratic volatility, meaning they face fewer unexpected financial shocks and more stable returns.⁶ By identifying and addressing ESG risks early (such as regulatory, reputational, or supply chain exposures), they can enhance resilience and protect long-term enterprise value.
• Greater alignment with customer strategic priorities: Companies increasingly expect key suppliers to support their sustainability goals, particularly those related to mitigating supply chain risk. In fact, 81% of survey respondents said ESG is an important or very important factor in supplier selection.⁷
• Improved preparation for investor and lender expectations: Private companies now face greater ESG scrutiny from capital providers. Private equity firms, banks, and insurers increasingly integrate ESG due diligence into deal evaluation and pricing.
• More flexibility to navigate regulatory momentum: While US federal disclosure regulations are receding, both US state and international requirements are on the rise. Examples such as the California Climate Accountability Package, which will require corporate disclosure of GHG emissions and climate-related financial risks,⁸ and Europe’s Corporate Sustainability Reporting Directive (CSRD) are setting new norms for transparency. Notably, supply chain reporting rules mean private companies providing goods or services to public firms may soon need to meet similar standards.
• Increased stakeholder trust: Employees, customers, and communities expect companies to show responsibility and purpose and prefer to associate with those that do. For example, organizations with effective sustainability integration are 56% more likely to outperform peers in attracting talent.⁹

Differentiating stakeholders’ key ESG materiality considerations

Each stakeholder looks at ESG risks and opportunities through a different lens. In our view, understanding their distinct expectations is key to a holistic assessment of materiality.

• Investors and lenders want transparency on financially material issues that could affect returns or valuations.
• Customers and suppliers seek assurance of sustainable practices in their value chains.
• Employees care about purpose, safety, diversity, and inclusion.
• Regulators and policymakers are developing standards, like the ISSB (International Sustainability Standards Board) under IFRS, that set a global baseline for ESG reporting.
• Communities and NGOs increasingly influence a company’s reputation and license to operate.

A good materiality assessment maps these perspectives, identifies overlaps, and reveals where your company’s most meaningful opportunities and risks lie.

How to identify your material ESG issues

You don’t need to be a public company (or have a huge budget for ESG initiatives) to get started. In our view, even a focused assessment can deliver valuable insights. Below, we list five practical steps for private companies conducting a materiality assessment:

Step 1: Identify key stakeholders

1. Define your company’s purpose and strategic objectives for the materiality assessment. What are you trying to accomplish? What are the related priorities or initiatives? Who is in charge of oversight?
2. Create a list of stakeholders that considers both internal contacts (e.g., leadership, employees) and external contacts (e.g., customers, suppliers, investors, regulators, communities) to ensure you capture a full perspective.
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. Engage both your internal and external stakeholders to list potential ESG issues using frameworks like the ISSB and legacy SASB standards for guidance. 
2. Identify which topics are financially material (affecting enterprise value) and which have broader social or environmental impacts.

Step 3: Design and conduct a materiality survey

1. Develop engagement surveys that ask key stakeholders to rank a list of material issues from 1 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, 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 stakeholders’ needs.

Step 4: Analyze insights

1. Review findings to explore gaps and opportunities for ESG issues. Apply a simple scoring model to quantify attributes like magnitude and probability of business or financial impact for each issue.
2. Use the resulting insights to create a materiality matrix (see example in Figure 1) 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-market 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 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, while others integrate them directly into their broader corporate strategy. Provide disclosure to key stakeholders on the progress of goals to ensure accountability and transparency.
3. Update your company’s materiality assessment as needed. This should be an iterative process that evolves as the business grows. You may need to repeat this process each time your business or operating context substantially changes.

Bottom line on ESG materiality for private companies

ESG materiality assessments are a value creation exercise. We believe private companies that start this effort early can build competitive advantages through an improved ability to drive profitability, attract talent, and be a supplier of choice to sophisticated customers. They’ll also be ready for a potentially smoother transition if they choose to go public or seek institutional investment.

Done correctly, we believe sustainability isn’t a reporting exercise but is instead a strategy for building resilience, reducing risk, and enhancing long-term value.

How Wellington helps our portfolio companies
As part of our investment in a portfolio company, we offer support in this process including:

• Sharing materiality frameworks relevant to a company’s industry.
• Generating a potential stakeholder list for the company.
• Providing a template of potential survey questions for stakeholder engagements.
• Identifying potential external vendors to help with a more in-depth materiality assessment.

Figure 1

¹Sources: “The business case for sustainability grows,” New Private Markets, 10 October 2025. “Sustainability in Private Markets: 2025 EDCI Benchmark Annual Report,” EDCI, 2025. | ²Sources: “The business case for sustainability grows,” New Private Markets, 10 October 2025. UN PRI, Sustainability Value Creation framework, July 2025. | ³Source: “Materiality for sustainability reporting,” KPMG, 31 July 2025. | ⁴Source: “Beyond checking the box,” IMB Institute for Business Value, February 2024. | ⁵Ibid. | ⁶Source: “ESG performance and stock idiosyncratic volatility,” ScienceDirect. Dayong Liu, Kaiyuan Gu, Wenhua Hu. December 2023. | ⁷Source: “New study reveals how ESG is a growing factor in global trade & supply chain resilience,” Thomson Reuters, 9 December 2024. | ⁸Source: “California climate disclosure laws – Countdown to disclosure: What companies need to know about reporting deadlines, CARB guidance and ongoing litigation,” Mayer Brown, 13 October 2025. | ⁹Source: “Beyond checking the box,” IMB Institute for Business Value, February 2024.