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The Added Value of Materiality Mapping: Why Businesses Need to Act

In today’s world, customers and stakeholders are demanding companies to conduct more sustainable business practices and higher levels of responsibility. This landscape can be extremely difficult to navigate, which compels companies to increasingly turn to materiality — the process of identifying relevant and impactful ESG topics that matter most to an organization and its stakeholders. 

The materiality process provides an invaluable tool for prioritizing and acting on business and stakeholder’s dynamic needs. This mapping serves as a guide for both companies and investors who want to understand how value-creating ESG performance can contribute to the SDGs. To nurture stronger communication with shareholders, companies are increasingly focusing on materiality reporting frameworks and accounting standards such as the Global Reporting Initiative’s (GRI) G4 guidelines, the International Integrated Reporting (IR) framework, and the Sustainability Accounting Standards Board (SASB) framework. 

In addition, new regulations such as the European Directive on Non-Financial Reporting and increasing stock exchange requirements to report ESG risks are leading companies to consider what non-financial information matter and what they should report. Given this, there are many reasons why companies develop sustainability strategies to maximize long term value creation and mitigate against climate related risks.1 

ESG issues faced by all companies

While ESG practices continue to gain the Financial World’s attention following the 2005 UN-sponsored report ‘’The Global Compact,’’ firms still face resource challenges and knowledge gaps when it comes to implementing an ESG program. This is why global consulting firms like Our Hiraya have been pioneering sustainability as-a-service to help companies comply with their sustainability standards and to drive positive outcomes.  

In line with this, the UN concurrently developed the Principles for Responsible investment (PRI) as the standard to be used by asset managers and owners globally to contribute to a sustainable global financial system. Since the year 2016, the number of signatories to the PRI has risen from 63 with US$6.5 trillion assets under management (AUM) to over 3,850 signatories with US$121 trillion AUM.  

In addition, ESG controversies in large corporations in the US between 2014 and 2019 eliminated US$500 billion of these companies’ value. These risks also apply to small and medium organizations too. It is therefore very crucial for businesses to fully understand that ESG issues are regular business issues. ESG risk management in the value chain should also be considered part of standard corporate risk management.2345 

ESG performance comparison
Source: Sustainalytics

The above data compares ESG disclosure performance ranking by Corporate Knights, all exchanges of the six ASEAN & APAC regions, and other stock exchanges worldwide. With the exception of Thailand, all the other ASEAN countries lagged behind the global average with moderate risk exposure and good management score levels. Comparatively, companies in the ASEAN countries have a higher ESG risk in the value chain than companies in Europe and North America6789101112131415 

Complexities in the ESG reporting landscape 

There has been a proliferation of ESG corporate disclosure and reporting standards and frameworks in recent years. These organizations have not only been more numerous but also more sophisticated and matured. With this impending complexity, it can be very difficult to select the most acceptable standards and frameworks for corporate disclosures, as well as identify the efficient use of these ESG profiles for investors, customers, suppliers, and government institutions.  

As the competition among these standards has led to the deployment of significant innovations and inventions, it has also generated confusion and frustration among small, medium, and large organizations. With these efforts, there will be subsequent challenges for investor relation professionals to predict the outcome to guide their company’s disclosures. To address these resulting complexities, influential players have been converging the leading standards into a comprehensive corporate ESG reporting system. 161718 

For instance, the ESG reporting landscape has seen a number of mergers and collaborations among the standard-setting organizations. The SASB and IIRC officially merged into the Value Reporting Foundation in 2021. The CDP, CDSB, GRI, IIRC, and SASB announced a joint statement of intent to work together to form a unified global system for a comprehensive corporate reporting system which includes sustainability disclosure and financial accounting. Furthermore, the GRI in July 2021 disclosed its collaborative co-constructor role of the latest EU Sustainability Reporting Standards with the European Financial Reporting Advisory Group (EFRAG). The CDSB and CDP have also been consolidated into the IFRS Foundation to provide resources to the new International Sustainability Standards Board (ISSB).192021222324 

Materiality mapping as a strategic corporate mechanism 

According to the Global Reporting Initiative (GRI) Core Standards, “material” topics reflect an organization’s economic, environmental, and social impacts, as well as substantively influence the assessments and decisions of stakeholders. An organization’s materiality mapping sets the framework for its sustainability strategy. In addition, the materiality process should be used as an opportunity to apply a sustainability lens to business trend-spotting, risk management, and opportunity, with implications beyond corporate social responsibility (CSR) or sustainability reporting.  

In most cases, several organizations embed sustainability within their existing process instead of creating a separate and isolated process. A comprehensive and inclusive materiality process coupled with stakeholder engagement can deliver valuable benefits including: 

  • Improving relations and identifying areas of interest to most important stakeholders such as customers, investors, employees and C-suit executives 
  • Ensuring businesses identify where the company is creating or reducing value for society 
  • Demonstrating a proactive approach to climate action, risk management, social and governance issues, and long-term strategy 
  • Prioritizing resource allocation prudently in the organization 
  • Helping companies to assess and improve existing data tracking and monitoring processes used to evaluate their business25262728293031 

The right time to act on ESG is now 

ESG risks in the value chain is a material risk and failing to mitigate it promptly can lead to a range of consequential damages. As mentioned previously, the extent to which sustainable issues are integrated across a company’s environmental, social, and governance tools underlines its ability to reflect them in business strategy decisions.  

In compliance with this, Our Hiraya, a global consulting firm, has been assisting businesses regardless of size, industry or location to make sustainability more accessible by providing sustainability tools and services on a subscription basis. The company works with enterprises to enable and equip their value chains to do well and create positive impacts. With this, the company has been assisting organizations with vetted data and a baseline of priorities across operations which are aligned with their own sustainability objectives.32

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