Rachel Welch-Phillips

Rachel.Welch-Phillips@den­tons.com

En­vi­ron­men­tal, So­cial and Gov­er­nance frame­works (ESG) are be­ing rapid­ly de­ployed by busi­ness­es across the globe to mit­i­gate risk and op­ti­mise op­por­tu­ni­ty. An ESG frame­work asks a busi­ness to ap­ply a sus­tain­abil­i­ty lens to their op­er­a­tions and con­sid­er the ad­verse im­pacts on peo­ple and the plan­et aris­ing from their rev­enue gen­er­a­tion.

A com­pa­ny wish­ing to in­te­grate ESG in­to its op­er­a­tions needs to start by is­sue spot­ting ESG is­sues ma­te­r­i­al to its busi­ness.

Is­sue spot­ting:

One size does not fit all

Not all ESG is­sues mat­ter equal­ly to all. Re­search on the re­la­tion­ship be­tween a com­pa­ny’s ESG is­sues and its fi­nan­cial per­for­mance has re­vealed that ma­te­r­i­al ESG is­sues are not uni­ver­sal.

In the air­line in­dus­try, fu­el ef­fi­cien­cy has a crit­i­cal im­pact on the bot­tom line but has no ma­te­r­i­al im­pact on an or­gan­i­sa­tion pro­vid­ing con­sult­ing ser­vices.

The op­por­tu­ni­ty for a busi­ness to im­prove its fi­nan­cial per­for­mance by de­ploy­ing an ESG frame­work is premised on that frame­work be­ing built with a fo­cus on the ma­te­r­i­al ESG is­sues to that or­gan­i­sa­tion.

Con­verse­ly, re­search has shown that a com­pa­ny’s fi­nan­cial per­for­mance is neg­a­tive­ly af­fect­ed when its ESG strat­e­gy is cen­tred on im­ma­te­r­i­al ESG is­sues.

One size does not fit all and the way to tai­lor your ESG strat­e­gy is by con­duct­ing a ma­te­ri­al­i­ty as­sess­ment.

ESG ma­te­ri­al­i­ty as­sess­ment—what it is and why we dou­ble it

A ma­te­ri­al­i­ty as­sess­ment is a process where­by an or­gan­i­sa­tion de­ter­mines the ESG is­sues most rel­e­vant to the com­pa­ny and its stake­hold­ers.

Most busi­ness­es are fa­mil­iar with fi­nan­cial ma­te­ri­al­i­ty as­sess­ments—this is where an or­gan­i­sa­tion iden­ti­fies the con­cerns and ac­tiv­i­ties that af­fect its fi­nan­cial growth and prof­itabil­i­ty pro­vid­ing di­rec­tion for build­ing on those that grow the bot­tom line (and avoid­ing those that ad­verse­ly af­fect it).

ESG ma­te­ri­al­i­ty as­sess­ments go one step fur­ther as they are premised on “dou­ble ma­te­ri­al­i­ty” which ex­am­ines both how a com­pa­ny’s ac­tiv­i­ties af­fect peo­ple and the plan­et, as well as how peo­ple and the plan­et af­fect the com­pa­ny’s pros­per­i­ty and vi­a­bil­i­ty.

The two ques­tions asked un­der a dou­ble ma­te­ri­al­i­ty as­sess­ment are:

How sig­nif­i­cant­ly does this ESG is­sue af­fect the com­pa­ny’s abil­i­ty to per­form?

How sig­nif­i­cant­ly do the com­pa­ny’s op­er­a­tions af­fect peo­ple and the plan­et?

(See il­lus­tra­tion at top of page)

The good news is that com­pa­nies do not need to rein­vent the wheel in this space.

A va­ri­ety of frame­works and stan­dards are read­i­ly avail­able from or­gan­i­sa­tions such as the Sus­tain­abil­i­ty Ac­count­ing Stan­dards Board (SASB) and the Glob­al Re­port­ing Ini­tia­tive (GRI) that each de­ploy unique ap­proach­es to ma­te­ri­al­i­ty as­sess­ments in ESG.

A com­pa­ny can choose the frame­work that best suits its needs. The GRI for ex­am­ple has in­tro­duced Sec­tor Stan­dards that pro­vide a list of the ma­te­r­i­al top­ics to con­sid­er from a sus­tain­able de­vel­op­ment per­spec­tive on a sec­tor-by-sec­tor ba­sis.

Of lo­cal in­ter­est would be the sec­tor stan­dards for oil and gas, as well as agri­cul­ture, aqua­cul­ture and fish­ing.

When iden­ti­fy­ing the ma­te­r­i­al is­sues, a com­pa­ny should en­gage with its key stake­hold­ers, both in­ter­nal and ex­ter­nal, to cap­ture a com­pre­hen­sive per­spec­tive on what is deemed ma­te­r­i­al.

En­gag­ing key stake­hold­ers

Stake­hold­ers are not just your share­hold­ers. Any par­ty with an in­ter­est in, or who is di­rect­ly im­pact­ed by, your busi­ness and its op­er­a­tions is a rel­e­vant stake­hold­er for the pur­pose of your ESG strat­e­gy. These in­clude em­ploy­ees, sup­pli­ers and third par­ty part­ners, mem­bers of the com­mu­ni­ty, in­vestors, reg­u­la­tors and cus­tomers.

The per­spec­tives of your stake­hold­ers are what de­ter­mine the ma­te­ri­al­i­ty of an ESG is­sue to your busi­ness. En­gage­ment with stake­hold­ers can take place us­ing a va­ri­ety of meth­ods—for­mal sur­veys and re­search can be con­duct­ed or in­for­mal con­sul­ta­tions and con­ver­sa­tions can take place.

What­ev­er method is de­ployed, the ob­jec­tive must be to ob­tain re­li­able feed­back on themes aris­ing with­in your or­gan­i­sa­tion that are most like­ly to have an im­pact on peo­ple and the plan­et and on the com­pa­ny’s per­for­mance. Again, there are re­sources avail­able to as­sist this process such as the SASB Ma­te­ri­al­i­ty Map.

The ben­e­fits of ESG

ma­te­ri­al­i­ty as­sess­ments

An ESG ma­te­ri­al­i­ty as­sess­ment pro­vides a com­pa­ny the op­por­tu­ni­ty to as­sess re­al risks and op­por­tu­ni­ties that arise from non-fi­nan­cial con­sid­er­a­tions and im­prove their busi­ness strat­e­gy as a re­sult.

Know­ing how your busi­ness adds or de­tracts val­ue from so­ci­ety and the en­vi­ron­ment can in­form risk as­sess­ment and risk al­lo­ca­tion de­ci­sions to op­ti­mise the busi­ness’ per­for­mance and vi­a­bil­i­ty.

This process can al­so iden­ti­fy op­por­tu­ni­ties for the de­vel­op­ment of new prod­ucts and ser­vices for a com­pa­ny to ob­tain com­pet­i­tive ad­van­tage in the mar­ket and pre-empt in­dus­try and com­mu­ni­ty needs. Stake­hold­er en­gage­ment al­so al­lows a com­pa­ny to keep its fin­ger on the pulse of what mat­ters to those most in­vest­ed in and im­pact­ed by its op­er­a­tions.

Where is the de­mand

com­ing from?

The hard sci­ence of cli­mate change, the nat­ur­al dis­as­ters we in­creas­ing­ly ex­pe­ri­ence, the in­ter­con­nect­ed­ness of the world through the in­ter­net and the trans­fer of wealth from ba­by boomers to a new gen­er­a­tion of in­vestors are all fac­tors dri­ving the de­mand for ma­te­r­i­al ESG is­sues to be as­sessed for im­pact and dis­closed.

Stake­hold­er ex­pec­ta­tions are chang­ing and there is dan­ger in stick­ing to the tra­di­tion­al sin­gle bot­tom line of prof­it.

Com­pa­nies should con­sid­er de­vel­op­ing an ESG strat­e­gy to em­brace the quadru­ple bot­tom line of sus­tain­abil­i­ty in their op­er­a­tions: peo­ple, plan­et, prof­it and pur­pose.

Rachel Welch-Phillips is an at­tor­ney and a part­ner in the cor­po­rate com­mer­cial team at Den­tons De­lany, a pan-Caribbean law firm. Rachel is the head of ESG and Sus­tain­able Fi­nance cov­er­ing the 14 Eng­lish-speak­ing Caribbean is­lands in Den­tons De­lany’s foot­print.