Materiality assessment from a GP perspective

Assessing materiality in due diligence

To ensure that material ESG risks/opportunities are identified at the earliest stage possible, GPs should first assess materiality during the due diligence phase. Most GPs will use an existing framework (e.g., the SASB standards) to identify those material factors and embed them in the core due diligence process. This way deal teams are able to hone in on the most material potential ESG factors for a potential investment.

Once identified, the analysis that follows is embedded into the memo that goes to the investment committee so that material ESG factors are considered as part of the investment decision-making process. Then, the most significant/material ESG factors can be embedded into the value creation plans for each portfolio company.

At the due diligence stage, some GPs also engage external consultants to identify the most material ESG factors and prepare a detailed report for the GPs to consider/embed into their analysis.

Assessing materiality post-investment

Materiality assessments can also be a helpful exercise for existing investments. For example, when this sort of assessment was not done pre-investment as part of the due diligence process. Lately, more and more private companies are coming under pressure from customers/clients to explain their ESG strategy and to provide better ESG-related disclosure. This is often requested as these firms’ customers/clients are public companies and need this ESG information for their own disclosure. Carbon is a good example – many private companies need to provide carbon data to their customers because they are a key part of those customers’ supply chain.