ESG has grown to such a level, it’s now emerging as a measure of compliance. In being such a tool of compliance, ESG has created quite a stir among companies.
Even the term ‘stir’ does not explain the high-stakes here. According to Ernst & Young, the ESG friendly fund flows projected by 2025- “Projected assets under management with a focus on ESG by 2025”- are a hefty US $ 53 trillion. This shall be a 232% growth from 2016’s 22.8 trillion.
However pro-ESG a company may be and is ‘growing’ within this ESG domain of multi-trillions, in the eyes of compliance seekers and investors, its ESG assessments will not ‘go far’ if the materiality of its ESG declarations are not sufficient. In ESG assessments, one vital consideration (in view of compliance, for example) is the materiality–to what extent a specific ESG issue is relevant? (Eg: Relevant to stakeholders of the firm). The fundamental question that seeks answers here is: When it comes to environmental, social and governance (ESG) issues., “in how success is defined and enterprise value is determined, does the company create true value beyond mere profit numbers?”
Ballotpedia defines Materiality as “…effectiveness and financial significance of a specific measure as part of a company’s overall ESG analysis” (Ballotpedia.org). According to another definition, material issues are those “that are reasonably likely to impact the financial condition or operating performance of a company and therefore are most important to investors.”
From an Environmental (E) point of view of ESG, some material issues are carbon emissions, product carbon footprint, financing environmental impact, climate change vulnerability, raw material sourcing, toxic emissions and waste, and packaging material and waste. From the Social (S) view of ESG, some material issues considered are labor management, health and safety, supply chain labor standards, privacy and data security, health and demographic risk, and access to communication. From the Governance (G) view, some material issues shall be executive pay, ownership, anti-competitive practices, corruption, and tax transparency. This is ESG Materiality from a societal standpoint, the other being the business/financial perspective. What is assessed in the societal view? Does this matter to society and does the company significantly impact on this topic?
