Do MSMEs only think about profit? Understanding ESG and Materiality Assessment. By CA. Balaji Padmanabhan

Things are changing quickly. MSMEs must consider their impact on the environment, people, and governance practices. This is where ESG—Environmental, Social, and Governance—comes into play.

If you’re a small business owner or an MSME in India, you might wonder:

“Where do I even begin with ESG?”

The answer is simple: Start with a Materiality Assessment. Let me explain this concept clearly.

What is a Materiality Assessment?

A Materiality Assessment is a straightforward process that helps businesses:

• Identify which ESG issues matter most to them

• Understand what their stakeholders care about

  
  

Focusing on these areas lets you dedicate your time, money, and energy to what truly matters—both for your success and for society.

What Are ESG Issues?

Before diving into your assessment, it's important to know the range of ESG topics available.

Environmental (E)

Here’s a quick list to consider:

• Energy consumption

• Greenhouse gas (GHG) emissions

• Waste management

• Water usage and conservation

• Pollution (air, water, noise)

• Chemical and hazardous waste

• Climate change risks

• Renewable energy use (solar, wind)

• Plastic use and packaging

• Biodiversity impact

• Environmental compliance

  
  

Social (S)

These issues relate to your employees and the community:

Employees

• Health and safety

• Fair wages and working hours

• Training and skill development

• Employee diversity and inclusion

• Prevention of child and forced labor

  
  

Customers and Community

• Product safety and quality

• Customer satisfaction and grievance redressal

• Data privacy and cybersecurity

• Community support and CSR

• Local employment generation

• Human rights in supply chains

  
  

Governance (G)

This includes aspects around how you run your business:

• Business ethics and anti-corruption

• Legal and regulatory compliance

• Financial transparency

• Risk management

• Internal audit systems

• Whistleblower policy

• Conflict of interest management

• Board oversight

• Tax compliance

• Cybersecurity and IT governance

  
  

How to Conduct a Materiality Assessment in 6 Simple Steps

1. Make a List of ESG Topics

Start by compiling a list of ESG issues that apply to your business. Pick the ones that directly impact your operations or are significant in your industry.

2. Talk to Your Stakeholders

Who are your stakeholders? They include employees, customers, suppliers, lenders, and the local community. Engage with them by asking:

• What issues do they care about?

• What do they expect from your business?

  
  

You can gather this information through short surveys, WhatsApp messages, phone calls, or small meetings.

3. Score Each Topic

Use a simple rating scale (1 to 5) to evaluate:

• How much each issue impacts your business

• How important each issue is to your stakeholders

  
  

Issue	Impact on Business (1–5)	Stakeholder Concern (1–5)
Energy use	5	4
Worker safety	5	5
Plastic packaging	2	3

4. Identify Top ESG Priorities

After scoring, you’ll want to find the top 5–7 issues with the highest combined scores. These are your material issues—the areas on which to focus. Visualizing them with a Materiality Matrix can help clarify:

• X-axis = Importance to stakeholders

• Y-axis = Impact on business

  
  

5. Make an Action Plan

For each material issue identified, outline:

• What you want to achieve (goal)

• Who will be responsible

• How you’ll track progress

  
  

Example:

Issue: Energy consumption

Goal: Reduce electricity use by 10% in six months

Action: Install LED lighting and train staff on energy-saving practices

Responsibility: Admin or operations team

6. Share and Use It

Finally, share your findings and action plans with:

• Your team

• Customers or clients

• Banks or investors

  
  

This transparency builds trust, enhances your business reputation, and can facilitate loans or equity for your business.

Conclusion

You don’t have to be a large corporation to care about ESG. Small factories, shops, or service providers can also make impactful strides. Simple, thoughtful actions toward sustainability and responsible business practices foster trust, open doors to better business opportunities, and prepare your business for the future.

Getting started on ESG is crucial. Don’t wait until it’s too late!