This article on ESG Materiality was written by Charlie Killingbeck, from Moore Kingston Smith, which is a firm located in the United Kingdom and member of Moore Global. The article’s point of view is therefore from the United Kingdom, but a good portion of the information can be applied to Canada as well.
Materiality is not a new concept, and its definition remains unchanged. Information is material when it can be reasonably expected to make a difference to the conclusions drawn and decisions made by reasonable stakeholders when reviewing the related information.
However, the information sets which are considered material are expanding to include ESG factors resulting in new materially concepts being defined: Double Materiality and Dynamic Materiality.
Double Materiality captures the concept that ESG is directional. Firstly, there are the internal ESG factors that impact the environment, economy, and society. Emissions or employment practices for example. Secondly, there are the external ESG factors that will have a material impact on a company’s ability to create value. Climate change or Brexit for example.
The two directions are interlinked in the long term – the failure of companies to address their internal ESG factors in the short to medium term will increase the risk of external ESG factors eroding company value in the long term
Dynamic Materiality seeks to describe this directional relationship and how external ESG factors move from the immaterial to the material. The are plenty of examples: #MeToo, Black Lives Matter, COVID-19, and the myriad of natural disasters occurring on an annual basis. The speed and increasing frequency of these events reinforce the need for a robust and agile ESG strategy, governance structure, and reporting practices to ensure swift responses.
Advertising Sector ESG Progress
As with most sectors, advertising management teams and shareholders have begun their focus on the external ESG factors that are eroding value or providing an opportunity to create value. Most notably in the sector, social movements such as #MeToo and Black Lives Matter have seen Equity, Diversity, and Inclusivity (EDI) risks move to the top of the agenda.
Whilst the effects of these movements have already come to fruition, others are undoubtedly on the horizon. Organisations and their clients throughout the sector are increasingly looking to improve the EDI qualities of content, reach more diverse audiences, and better understand how audiences are engaging with and influenced by content. To deliver these end goals media companies are addressing the internal root cause, workplace EDI.
Similarly, the environment is fast becoming an increasing area of focus. Globally governments are setting net-zero targets. In the UK, the target for decarbonising our economy is 2050. For the mid-market (those not captured by TCFD) the environment presents an opportunity to differentiate and create value in the short run and avoid value erosion in the long run. Companies are increasingly looking to calculate and offset their carbon emissions from travel and content production. Supporting offsetting programmes are strategies to reduce emissions to zero by 2050 or earlier.
An area considered less within the mid-market is data protection, intellectual property (IP) rights and content verification. However, management teams would argue that GDPR and IP law compliance is sufficient on this front. While this is true from the UK perspective, operating in jurisdictions outside the UK, and in particular those which do not have sophisticated, transparent regulatory environments, increases exposure to breaches. The UK mid-market whilst compliant is not yet considering how governance and reporting practices are incorporating these risks.
ESG Value Creation – The Big Picture
ESG is growing across all sectors and when utilised correctly can create stakeholder value within organisations, both financially and commercially. Fundamentally, companies failing to embed ESG will leave value on the table in the short term and cease to exist in the long term. We are already seeing evidence of this in the advertising mid-market:
Organisations up and down the advertising value chain beginning to incorporate ESG factors within existing supplier due diligence frameworks. As these frameworks evolve any early adopters who have identified, incorporated and measured their material ESG risks will begin to capture market share.
The immediate pressure is top-down with institutional investors demanding ESG strategies and data from PE funds. PE funds and PE-backed businesses making acquisitions are now considering ESG factors, albeit inconsistently. We have already seen investment opportunities fall through due to a lack of diversity within senior management teams or a high concentration of customers from negative industries such as oil & gas or tobacco. On the other hand, those organisations that are measuring and reporting on ESG may be able to earn a premium.
Advertising is already subject to the strict GDPR and IP laws within the UK. However, compliance should not be taken for granted as both legislation and advertising are continually evolving. It is essential for organisations to have strategies in place to be constantly evaluating and monitoring regulatory risks, reducing exposure wherever possible.
The Taskforce for Climate-related Financial Disclosures (TCFD) is now mandatory for organisations with more than 500 employees and a turnover of more than £500m. Commencing in reporting periods after the 6th April 2022, qualifying companies are now required to report on the material climate-related (environmental) risk, the governance of these risks and the strategies in place to mitigate.
Agencies which have been able to adopt and integrate ESG will be in a better position for future regulatory changes.
ESG issues now have the potential to create significant reputational damage to companies and brands. Organisations that fail to act or act irresponsibly through greenwashing will quickly erode the reputational goodwill from both customers and suppliers.