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Monitoring the 'Dynamic Materiality' of ESG matters


Monitoring the 'Dynamic Materiality' of ESG matters

  • Monitoring the 'Dynamic Materiality' of ESG matters Why is dynamic materiality important and what are the latest tools available to help companies track it?
  • Date: Dec 29, 2020
  • Category: Sustainability
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What is ‘dynamic materiality’?

The COVID-19 pandemic has transformed the landscape businesses are operating in. For sustainability practitioners, the rapid onset of the pandemic has had significant implications for the materiality of Environmental, Social, and Governance (ESG) matters facing their company and their stakeholders.

Alongside these rapid changes, 2020 also saw the timely rise of the concept of ‘dynamic materiality’, which looks at materiality as a process that unfolds over time. This can happen very gradually, as awareness of an emerging risk increases (e.g. climate change), or very quickly due to specific events (e.g. COVID-19 pandemic, Black Lives Matter). Dynamic materiality reminds us that sustainability topics that appear financially immaterial today can quickly prove to be business-critical tomorrow.

Given that sustainable business strategy requires long-term thinking, being able to identify ESG matters that are rising in importance and are likely to be material in the future - even if they are not today - would be of great value for companies when making decisions. As such, companies should conduct materiality assessments in an on-going and proactive manner, rather than at certain intervals. The challenge then, is how to anticipate or track these changes in a timely manner.

Making use of emerging tools to track dynamic materiality

With advancements in data analytics, it is now possible to monitor and assess trends and signals on how the materiality of ESG matters is changing for different industry sectors – almost in real time. Investors and companies can then use this to inform their materiality analysis.

One example of this is TruValue Labs, which developed tools to track the volume of different ESG categories over time. At the onset of the pandemic, they specifically developed the Coronavirus ESG Monitor to track trends and metadata related to discussions on the COVID-19 pandemic and ESG issues, as defined by the Sustainable Accounting Standards Board (SASB) Standards categories.

The dashboard uses AI to mine over 100,000 data sources – including news – in real-time, distilling the “sentiment” of stakeholders on company actions and responses to the pandemic. Each mention is then assigned a score on a scale from 0-100, where 100 is most positive, 0 is most negative, and 50 is neutral. This allows TruValue Labs to create scores to track company and industry performance on the pandemic and identify significant events.

The data is then presented through powerful visualisations to reveal interesting insights. The dataset from the interactive Coronavirus ESG Monitor is free for download, either as a spreadsheet or infographic, which can provide key metrics for companies, investors and other stakeholders.

What does the Coronavirus ESG Monitor tell us?

One of the datasets in the dashboard (see Figure 1 below) shows the emergence of five social issues that have grown in importance as a result of COVID-19: Employee Health and Safety, Labour Practices, Access and Affordability, Product Quality and Safety, and Supply Chain Management - on top of GHG emissions. As an example of a useful trend demonstrated by the graph, Employee Health and Safety and Labour Practice in particular represented a disproportionate share of volume at the start of the pandemic before tapering off as the months passed. The dashboard is able to validate ‘common sense’ trends such as these with hard data, which companies can use to inform their own materiality.

Figure 1: SASB Categories Volume Mix Within COVID-19 Content:

In addition, TruValue Labs also created a COVID-19 signal and five sub-signals to capture various trends this year. For example, the response signal captures the shifting focus of companies as they responded to the pandemic — such as changing production to relevant products such as ventilators or vaccines. Meanwhile, the economy signal detects information relevant to the broader, global economic situation and outlook. The chart shows how all signals started to increase rapidly since March 2020 as companies reacted to the pandemic. The social impact signal – tracking information on the social impact of the pandemic – was unsurprisingly the fastest growing and high-volume signal. Similarly, companies can use these signals to monitor changes in the external landscape to guide their own materiality and thus decision-making.

Figure 2: Volume of COVID-19 Signals

What are the similar tools out there tracking dynamic materiality?

Apart from TruValue Lab, there are other tools out there that companies may also find useful. For example, Datamaran’s materiality tool tracks mentions from financial and sustainability reports of companies, on top of news and other sources (unlike Truvalue, which focuses exclusively on the latter). Datamaran – a paid resource – also has some ‘emerging issues’ analysis built into their tool to help companies see which issues are moving up and down, and identify issues that may be rising based on a greater proportion of mentions in news or social media compared to company reporting.

Key takeaway for companies

Tools such as the Coronavirus ESG Monitor provide interesting signals on the changing materiality of ESG issues over time, in particular as a response to events such as COVID-19. The data presented by these tools can help companies reflect on critical questions in a new age of dynamic materiality, for example:

  1. Is our view on which ESG issues matter to us informed by a sufficiently wide range of data?
  2. Do we continuously update these views?
  3. Are we successfully implementing the changes needed to perform well against future material issues?

However, while the tools can provide useful insights for companies when determining materiality, these insights are high level and not company specific, and companies should not treat them as a be-all and end-all. Discerning companies would be wise to use these insights as signals to identify areas for further analysis and engagement, exploring what these trends mean for their specific operations over the long-term. This would include ongoing efforts to engage stakeholders on their expectations and/or looking into potential regulatory changes in relation to trends.

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