Last month I had the good fortune to host a webinar on the rising importance of corporate ESG programs. One guest mentioned that a particularly challenging issue is setting an ESG materiality standard for your business, so you’ll know what items you want to track and report.
Today, then, let’s take a deep dive into the resources available to help you assess ESG materiality. Plenty are available.
First, if you want a detailed example of how ESG materiality assessments work at a large company, one good place to start is Bank of America. BofA devotes a significant chunk of its corporate website to ESG issues, including a page devoted to explaining the bank’s ESG materiality assessment.
Essentially, Bank of America hired the consulting firm Business for Social Responsibility to interview 30 BofA executives and 15 leaders of various ESG groups. The goal of the assessment, BofA says, was “to determine which ESG issues are most relevant to both external stakeholders and the company’s core business strategy.”
From there, Bank of America identified 29 ESG issues — everything from ethical behavior to retail branch location strategy; greenhouse gas emissions to investor activism and proxy voting — and mapped those issues on a coordinate grid. That let Bank of America define each issue by how important it was to the business (the horizontal axis) and how important to stakeholders (the vertical axis).
Figure 1, below, is the resulting map, swiped directly from Bank of America’s website.
Underneath that “materiality map,” Bank of America then defines each of those 29 ESG issues more fully.
How well does Bank of America actually execute on those ESG issues? I don’t know, and I’m sure plenty of critics will say the bank could do more. That’s not a point for us to explore today.
Rather, if you want an example of how an ESG materiality assessment might work — a finished product, which you can then keep in mind as you build your own ESG materiality assessment — Bank of America demonstrates how all the fundamentals fit together. They are:
- Executive support to embark on an ESG program
- Consultation with all stakeholders, both inside and outside the organization, to articulate ESG goals
- A device, such as a materiality map, to place those ESG goals in context: how they’re relevant to the business, and how they’re relevant to your organization’s stakeholders
Then you can start to develop more specific ESG metrics, processes, and internal controls.
Back to the ESG Materiality Resources
OK, I promised to list other resources that might be helpful as you build your ESG program. Here they are.
We have a materiality map from the Sustainability Accounting Standards Board, which tracks more than two dozen ESG issues across 11 major industries. You can select a specific issue in a specific industry, and then SASB offers one or more potential metrics you could track and disclose.
For example, you could select “labor practices” for the mining industry, and SASB’s map will serve up two ideas: the number and duration of strikes & lockouts; and the percentage of workers covered by collective bargaining agreements, broken down by U.S. and foreign employees.
ISO 26000 is the ISO standard for sustainability, although this particular standard is only guidance; an organization can’t be certified as ISO 26000-compliant, as you can for most other ISO standards.
The World Economic Forum has its set of Stakeholder Capitalism Metrics, most recently updated in September 2020. The set includes 21 “core” metrics and another 34 expanded ones — and, notably, Bank of America is one of the primary corporate sponsors of WEF’s sustainability work.
While poking around the Global Reporting Initiative website, I found an interesting case study on ESG materiality assessment from Eastman Chemical Co., dated 2018. That also led me to review Eastman’s 2020 sustainability report, which includes a review of its ESG materiality assessment process starting on Page 51.
Along those lines, let’s consider a few other ESG materiality assessment reports from large businesses:
- American Electric Power
- Edison International
- General Motors
- Johnson & Johnson
What Comes Next
The big question for ESG programs, of course, is when and how the Securities and Exchange Commission will move ahead with more specific proposals for ESG disclosure. Chairman Gary Gensler has made quite clear that he plans exactly that sometime soon, although we don’t know more than that right now.
Meanwhile, his predecessor Allison Herren Lee said earlier this year that SEC staff would be reviewing ESG disclosures more closely; and then she gave a speech just the other week explaining from where the SEC derives its legal authority to require more enhanced ESG disclosures.
My assumption is that when the SEC issues a proposed ESG rule for public comment, there will be plenty of questions about how to assess the materiality of ESG issues. Maybe the agency will ultimately mandate some strict, prescriptive formula for assessing materiality across all industries; but that strikes me as unlikely (and dumb).
More likely is that the SEC will point to something like SASB’s materiality map: easy enough to understand, versatile enough for a large number of filers to use it, and still specific enough to provide useful information to investors.
Anyway, if you have other ESG resources you’d recommend, drop me a line at [email protected] and we’ll include them in a follow-up post.