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The views expressed are those of the authors 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. Many may be wondering what factors are most relevant, or “material,” to their financial performance, and how best to begin addressing them. Our ESG insights for private companies content series is one part of our broader mission to help our portfolio companies navigate these topics and drive ESG-related improvements that we believe can lead to better financial outcomes for our LPs. Critically, the material factors a company may face can vary widely by industry and geography. For example, though corporate 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 ESG materiality as the most significant environmental, social, and governance issues that may 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.
More than 80% of CEOs believe that their sustainability investments will generate stronger business results in the next five years.1 However, making the right sustainability investments matters. Research suggests that companies focused on addressing 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.2 We believe materiality assessments are essential to answering the key question of which investments to emphasize.
Moreover, companies often have a bigger sphere of influence than they may realize. Part of doing an ESG 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 a business more efficiently by prioritizing where time and money are allocated.
A thorough materiality matrix maps your key stakeholders and then examines and incorporates relevant stakeholder needs to capture unaccounted future costs and opportunities for your company. 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. We therefore conducted our own materiality assessment in 2022.
Below, we outline five steps a private company can take to develop its 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 — even a fundamental issue review can provide valuable insight. 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 with 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.
Step 1: Identify key stakeholders
Step 2: Brainstorm material issues
Step 3: Design and conduct a materiality survey
Step 4: Analyze survey insights
Step 5: Create and execute an action plan
We believe ESG 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 at an early stage, 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 can offer support in this process including:
1Source: IBM Institute for Business Value (IBV) 2022 study, “Own your impact: Practical pathways to transformational sustainability.” | 2Source: Khan, M., et al. “Corporate Sustainability: First Evidence on Materiality,” Harvard Business School, 2015. Time period studied was 1991 through 2012.
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