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Materiality is a debated topic in the ESG debate. This term is originally an accounting concept that stipulates that all items reasonably likely to impact investors’ decision-making must be recorded or reported in a business’s financial statements. Traditionally, the disclosure is highly related to the financial performance of a company, on topics such as revenue, production units, accounts receivable, or inventory.
Increasingly, the materiality of climate, community, and other topics are being discussed. It is more and more acknowledged that climate change, for example, has a material impact on many businesses, and therefore, these related impacts, risks, and mitigation actions should be disclosed by the companies in order for investors to make informed decisions. A further broadening of the idea of materiality incorporate "impact materiality" and "financial materiality" into a "double materiality" construct. This concept, which suggests that corporations should report not only its activities that have financial impacts, but also those that have non-financial impacts, is endorsed by the EU Corporate Sustainability Reporting Directive (CSRD).
ESG, of course, is broader than just climate. It also encompasses S, meaning social, and G, meaning governance. Topics like community, diversity, human rights, and business ethics are all relevant and included under the broad umbrella of ESG. As a first step in assessing a company’s ESG activities, it is critical to define the scope of ESG as it relates to a company’s activities. Since the scope of the company activities in a particular sector is often similar, the “material topics” of companies within a sector often and should have many overlaps.
We assessed the topics considered “material” to the operations of a consumer goods company. This is the sector that produces our everyday products, such as foods, household items, clothing, hygiene products, etc. In this case, we first report a set of industry-relevant topics assembled by SASB, and we compliment it with a set of topics self-reported by the company. We also map a set of metrics that the company have announced and set against its reported material topics.
Watch the video to see the result of our analysis.
What is clear from this is that companies in the consumer goods sector are still grappling with how to define non-financial topics that are relevant, material, and distinctive to their business. Furthermore, the set of concrete metrics is narrower than the scope of topics, as these material topics must be transformed into actionable activities before they can be measured and tracked. The ESG journey is just beginning. Companies have traditionally operated based on primarily financial metrics. Broadening the metrics enlarges the perspectives of companies as major stakeholders in society. This process of defining tractable metrics should continue as the ESG movement evolves.