Many mainstream investment managers are deepening their interest in ESG. Yet there is an important question being debated in the ESG community and beyond.
As part of Breckinridge’s ongoing commitment to sustainability, we created a Materiality Map and published it in our 2017 Corporate Sustainability Report (CSR). The Map lays out the components of our corporate environmental, social and governance (ESG) efforts and serves as a tool to track our progress.
Our Map fits with the broader movement of companies increasingly seeking to align their ESG missions with what’s most material to their financial well-being. This focus on materiality allows companies to determine which factors are most likely linked to stronger operational performance, avoiding “noise” and potential resources poured into ESG criteria that are less relevant.
In addition, as investors view bond issuers’ ESG-related conduct with more scrutiny, companies are seeking to tell the stories behind their ESG targets and state the metrics used to define their progress. The Map also serves as an effective communication tool for these targets.
Many companies ground their sustainability efforts in a “materiality matrix.” In this way, companies ensure that they prioritize material ESG factors that are meaningful to both internal and external shareholders. Of course, material factors are sector specific; for example, an oil company will have different material ESG factors than, say, a consumer products company.
The Materiality Matrix
The materiality matrix is promulgated by The Global Reporting Initiative (GRI),1 an organization that outlines standards for companies to report on a wide range of ESG topics such as governance structure, greenhouse gas emissions or anti-corruption policies. To comply with GRI reporting standards, companies must perform a materiality assessment that includes a matrix such as the one depicted in Figure 1.
GRI defines materiality in two ways: the level of significance to the broader, external community (represented on the x axis), and the influence the topic has on company stakeholder decisions (the y axis). In Figure 1, each dot represents a different ESG topic. The ESG topics with the biggest impact on both society and stakeholders – i.e., those in the upper right portion of the matrix – are the most material and the ones that should garner focus.
In practice, the matrices vary widely among companies in the labels given to each axis, the processes used to decide how dots should be placed and the metrics used to assess performance in each topic. Companies may map to industry-specific standards for ESG performance. Based on the material topics determined by the matrix, companies then set targets – some science-based – to create goals and track progress (see Sizing Up Carbon Emissions Goals). Figure 2 shows an example of a materiality matrix for a ground transportation company.
Importantly, the targets are moving. The company may change direction or come under new management, or new issues may become more important to stakeholders, prompting updates to an existing materiality matrix. For example, in 2017 Dell updated its sustainability and corporate social responsibility goals due to its transformative $67 billion merger with EMC.
Companies sometimes share their materiality matrices in their CSRs and other mediums. The publication of the matrices highlights the important shift toward wider and more standardized reporting of ESG metrics, and helps to keep ESG in the front seat of company priorities. In addition, to create the most meaningful ESG plan, it is crucial for companies to determine what ongoing ESG business practices are verifiably affecting their financial results.
The Breckinridge Materiality Map
The Breckinridge Sustainability Committee, a formalized group of employees tasked with aligning our company with our commitment to sustainability, spearheaded the creation of Breckinridge’s Materiality Map.
The Committee began by compiling ESG factors most material to Breckinridge by considering material criteria for investment management firms provided by the Sustainability Accounting Standards Board, as well as other resources. These criteria include transparent information and fair advice for customers, employee inclusion, systematic risk management, and other factors.
Then, the Committee surveyed Breckinridge stakeholders to rank the factors, which allowed us to consider what our board members, employees and clients view as the most important ESG issues facing the firm. We see this as a major element in our efforts to proactively engage with our stakeholders. The factors, along with their descriptions, implementation tools and forthcoming methods of measurement, are collectively known as the firm’s Materiality Map (Figure 3).
Our Materiality Map is a road map for ESG at the firm. Moving forward, we will monitor the progress on our targets and, because they are not static, we will monitor the targets themselves to make sure they continue to represent the ESG goals of our stakeholders.
Our Map is consistent with our ongoing efforts to bridge the importance we place on ESG factors for our bond issuers to ourselves and to the best interests of our stakeholders. As we discuss in our CSR, the Map stems from the idea that we are turning the sustainability lens placed on our issuers back on ourselves, to examine our own progress in ESG. In addition, we are supporting the important push to build standardized, transparent ESG reporting into best practices for companies.
 In October 2016, GRI launched the first global standards for sustainability reporting. Developed by the Global Sustainability Standards Board (GSSB), the GRI Standards enable all organizations to report publicly on their economic, environmental and social impacts and show how they contribute toward sustainable development. GRI was founded in Boston in 1997.
DISCLAIMER: The opinions and views expressed are those of Breckinridge Capital Advisors, Inc. They are current as of the date(s) indicated but are subject to change without notice. Any estimates, targets, and projections are based on Breckinridge research, analysis and assumptions. No assurances can be made that any such estimate, target or projection will be accurate; actual results may differ substantially.
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