Identifying your Material Topics
ESG topics comprise of a wide variety of possible topics, including anything that may impact the business or its stakeholders. ESG topics are not only threats but could also provide opportunities, for example, renewable energy could represent a new business line. Using Operational Risk Software can be key.
Each topic needs to be assessed for its impact on the firm and stakeholders, and, for the threat or opportunity posed, and how such a threat might be mitigated.
What are Material Topics
Material topics are those topics that have a significant economic, environmental or social impact on the business, or that might influence stakeholder decisions. These are the topics that should be reported on, and as they will therefore be under scrutiny, they need to be closely managed. Having said that, topics that are not material still need to be monitored in case they become material at some point in the future.
Environmental Topics
Environmental topics typically come under four main categories which are, climate and weather; natural resources; pollution and waste; environmental opportunities. Here are some examples of each – some topics can come under more than one category:
Climate and Weather
Topics can including: emissions (GHG, ODS, NOx, Sox); Carbon use; product carbon footprint; climate change vulnerability; severe weather effects; earthquakes and volcanic eruptions; environmental impact of financing; natural resources; water stress; and biodiversity.
Natural Resources
Topics can include: water stress; biodiversity; land use; resource use and depletion; raw material sourcing; and energy use.
Pollution and Waste
Topics can include: effluents and emissions; waste disposal; packaging material and waste; electronic disposal; third party assessment; and environmental compliance.
Environmental Opportunities
Topics can include: clean technology; green building; renewable energy; habitats protected or restored; stakeholder engagement and the ESG Report.
Some environmental topics have only one main threat or opportunity, for example, the main threat from carbon use is excessive carbon use. However, a topic like emissions could be broken down into three main threats which are Excessive greenhouse gas emissions, excessive emissions of ozone-depleting substances and excessive emissions of nitrogen oxides, sulphur oxides and other significant air emissions.
Social Topics
Categories for social topics include human capital, product, stakeholder and social opportunity. Here are some examples:
Human Capital
Topics can include: employee management; health and safety including mental health; diversity and inclusion; human rights; human capital development; third party employee management; labour/management relations; child labour; and rights of indigenous peoples.
Product
Topics can include: product safety and quality; financial product safety; privacy and data security; responsible investment; responsible innovation; marketing practices; product disposal; labelling; accessible products and services.
Stakeholder
Topics can include: satisfaction surveys; customer data security; customer health and safety; controversial sourcing; local communities; participation in public policy; and supply chain management (which links to environmental policy)
Social opportunities
These can include: communication access; financial access; health care access; nutrition and health; market presence; CSR volunteers and charitable partnerships and programmes.
While some social topics have just one main threat, for example, the main risk of not developing human capital is a resultant lack of skills within the business. However, human rights can pose several threats including, breaches, abuse of rights, discrimination and suppression of freedom of opinion.
Governance Topics
There are three main types of Governance topics and these can be defined as corporate governance, corporate behaviour and governance opportunities. Here are some examples of each;
Corporate governance
Topics include: board diversity; separation of powers; executive pay; economic performance; ownership; clear business objectives and market presence.
Corporate behaviour
Topics include: business ethics and culture; procurement practices; anti-corruption; risk management; resilience and financial system stability; tax transparency; whistle blower practices and compliance with laws and regulations in the socio-economic area.
Governance opportunities
These include; employee engagement; fair appraisals and indirect economic impacts.
As with the other areas, some topics will have just one main threat, whereas others will have several threats. For example, economic performance can result in threats from three different areas such as poor assets on the balance sheet, a shortfall in defined benefit plans and government financial assistance that is expected but not received.
Making a long list of Material Topics
As discussed above there is a huge variety of ESG topics, not all applicable to every business, and some businesses will have niche topics of their own. Having made a long list of topics that are applicable to the business, they must then be analysed for impact on the firm and its stakeholders to determine which are material.
Reporting on Material Topics
For each material topic there should be a statement explaining why the topic is material, giving the boundary or parameters for the topic. The statement should also include information on where the impacts occur, and the firm’s involvement with those impacts, for example, if the business contributed or caused the impact, or if it is directly linked to the impact through a third party business relationship.
Information should be presented for the current reporting period, and ideally, at least for the two preceding periods, as well as future short and medium term targets.
As we have suggested in previous blogs, ESG reporting is a journey. It is better to start out with a few well defined material topics and report on those topics comprehensively rather than attempt too many topics at once resulting in available resources being too thinly spread.
For more information about how RiskLogix could help your organisation to analyse, define and manage your ESG material topics, contact us today: enquiries@risklogix-solutions.co.uk
