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With 78% of the S&P 500 now publishing sustainability reports, non-financial reporting is becoming essential for companies looking to manage risk and capture opportunities in a changing business environment.[1] The widespread adoption of reporting on environmental, social, and governance (ESG) issues is driven by investors aiming to predict long-term financial performance, which is increasingly influenced by ESG data and information. The reporting trend is clear, but how does a company determine what to report? While standards from the Global Reporting Initiative and the Social Accounting Standards Board offer guidelines for corporate ESG reporting and identification of material ESG issues, many companies only loosely adhere to these standards. Nonetheless, a materiality assessment can help a company identify essential issues for investors, customers, employees, and other key stakeholders. This white paper provides an overview of the materiality process and discusses how materiality assessments may better serve the utility sector.
In short, a materiality assessment is a structured exercise that helps a company identify specific ESG issues that need attention by surveying or interviewing internal and external stakeholders. Said another way, materiality for ESG issues is, “the threshold at which sustainability topics become sufficiently important that they should be reported.” [2] Materiality assessments can be used to periodically evaluate the importance of specific issues to all stakeholders, helping to prioritize what to incorporate in both ESG reporting and the development of corporate strategy.
A materiality assessment allows a business, through a structured and defined process, to identify the areas of focus that align with the needs of its most critical stakeholders. Utilities face increasing demands from stakeholders, and no organization can focus on everything. The materiality assessment creates alignment on those areas of sustainability that are most in need of attention or those most material to the company’s overall success.
A common process for carrying out a materiality assessment includes the following steps:
Though the process is relatively straightforward, conducting a thorough materiality assessment is not a quick or easy task. It requires significant buy-in across the organization as well as dedicated time and resources to complete. The amount of effort needed may partially explain why many energy and utilities assessments do not include or publish a materiality assessment.
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Table 1: Sustainability Issues Most Relevant to the Electric Power Industry in 2017 |
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Air Emissions |
Habitat and Biodiversity |
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Assets and Operations |
Job Satisfaction |
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Business Model |
Labor Relations |
| Climate Change |
Public Policy Relations |
| Community Vitality |
Safety and Health |
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Customer Relations |
Skilled Workforce Availability |
| Cyber and Physical Security |
Supply Chain |
|
Energy Affordability |
Waste |
| Energy Reliability and Resiliency |
Water |
| Greenhouse Gas Emissions |
Workforce Diversity, Inclusion, and Equal Opportunity |
Materiality assessments help ensure an organization’s sustainability goals align with stakeholders’ priorities. A rigorous process to determine what measures are important and why can provide greater confidence in ESG reporting and foster greater internal commitment.
Provide a structured, robust approach for receiving stakeholders’ feedback: Materiality assessments are a structured way of evaluating a company’s most important ESG impacts and pave the way toward setting effective goals. By seeking the input of a broad range of individuals or entities, companies can connect with stakeholders in a new way, often uncovering previously unknown information about their priorities. A robust stakeholder assessment helps mitigate personal or internal bias as a company seeks to build or enhance its ESG strategy. The feedback received in an assessment will supplement utilities’ existing touchpoints with customers, employees, activists, and other key groups.
Inform overall company strategy: Materiality assessments can lay a foundation for strategy, and this benefit isn’t limited to ESG issues. While most executives already evaluate performance regularly and strive toward specific targets, materiality assessments allow them to calibrate goals to stakeholders’ needs better. Once material aspects are identified, they can be a base on which to form long-term goals.
Uncover external and internal insights: Understanding the thoughts, attitudes, and ideas of customers, investors, non-governmental organizations, regulators, community members, and others can unearth new business opportunities or improvements to existing processes. Materiality assessment interview questions allow the company to dig deeper into the minds of stakeholders to reveal more context where needed.
Similarly, internal to the company, understanding employees’ and executives’ thoughts, attitudes, and ideas can help determine which ESG information matters most to key decision-makers. But the next level of analysis is just as important: the evaluation of the management approach. Here the company assesses its current strategy and opportunities for improvement in the context of material aspects.
Engage stakeholders: By taking part in the survey process, the stakeholders also learn about the company’s decision-making process. This clarity can support positive stakeholder relations by demonstrating to key groups that the company values their opinions.
Stay ahead of transparency needs: This connection with stakeholders can allow the company to get ahead of concerns that could result in future regulation or negative public perception. For example, many utilities did not foresee the enthusiasm for distributed energy resources (DERs). Had they been in front of this changing tide, utilities could have pushed for more transparent rules around where and how to install a DER. Utility-scale solar is an example of this; if grid-planning information had been widely available, projects could be constructed to better serve both utilities and project owners. Instead, utilities have seen interconnection challenges, ever-growing queues, and intense legal battles as consumers and regulators demand more renewable power options.
Utilities already have a robust set of stakeholder processes in place, which can make integrating new tools difficult. The public presence of utilities requires well-defined and documented procedures to respond to various stakeholders—from regulatory commissions to communities to investors. Few other industries have to directly manage complex stakeholders, like regulatory commissions and residential communities. Utilities regularly interact with these stakeholders, so adding the materiality assessment may seem redundant.
An energy and utilities assessment often has “evergreen” metrics used to drive long-term performance through an integrated management approach. Balanced scorecards for safety, diversity, and other ESG issues already exist in many cases. These methods are designed for the long term, and the thought of changing them yearly or their scope would seem to counter the work already done to put them in place.
Increasingly, external stakeholders, including the investor community, are looking for companies to produce sustainability information. Utilities are already being judged through this lens. A recent Fitch report introduced “ESG Relevance Scores”: an energy and utilities assessment for corporations that includes an evaluation of utilities’ risks framed in ESG terms. It will be important for utilities to report in a way that comports with the expectations of ESG rating groups and investors. A materiality assessment can be critical in assuring external confidence in an overall reporting program. The following are a few suggestions for utilities in approaching materiality assessments to get maximum value.
Do it right every three to five years. If done well, a company’s material ESG topics should not change significantly year over year. Outside influences like regulation and markets will change materiality to an extent, but those changes are generally minor. For that reason, an in-depth assessment every five years could be followed by lighter “recalibrations” to check and adjust the set of metrics used periodically. These recalibrations should not substantially change the tracked metrics, as maintaining year-over-year consistency is essential for performance management.
Most ESG standards do not suggest specific timing for conducting an assessment. However, they do emphasize long-term impacts, “includ[ing] reporting on activities that produce minimal short-term impact, but which have a significant and reasonably foreseeable cumulative effect that can become unavoidable or irreversible in the longer term (such as bio-accumulative or persistent pollutants).” [3]
Leverage the materiality assessment to add context and detail to metrics. For the most part, energy and utilities assessments already have robust scorecards and metrics, but materiality assessments can improve detail in areas where it is difficult to have objective measures. External audiences can identify issues that leadership previously may have sensed but did not have enough data to address. Materiality assessments, through connecting with a wide variety of stakeholders, can bring objectivity to the problem.
Tie the materiality assessment results into strategic and business planning to ensure that plans account for ESG risk. Many organizations limit a materiality assessment’s impact by ending with a report, not an action. Instead, materiality assessments should be used as a tool to inform strategic planning across the utility’s operations.
The case for materiality assessments at energy utilities may be more clouded by challenges with integration and longer-term planning than some industries, but the approach still offers valuable benefits. By completing the assessments at the right cadence and focusing efforts on areas with previously difficult-to-measure performance gaps, materiality assessments can inform a company’s strategy while engaging all stakeholders.
[1] “State of Integrated and Sustainability Reporting 2018,” IRRCI, 2018.
[2] “Defining What Matters: Do Companies and Investors Agree on What Is Material?” Mining, Metals and Electric Utilities. (p. 5), 2016.
[3] “As far as practicable, activities, events, and impacts are expected to be presented for the reporting period in which they occur.” Source: Global Reporting Institute 101: Foundation. p. 12, 2016: https://www.globalreporting.org/standards/media/1036/gri-101-foundation-2016.pdf#page=25
Additional Contributing Authors: Ryan French, Tina Jeffress
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