Beyond Reporting – more value from materiality
Is this article for you? Have you ever felt that the materiality assessment process can be overly focused on stakeholder opinions; can be too backward looking; or believe that it could be more aligned strategic business objectives? In short, do you believe there is more potential value in the process, and the involvement of key stakeholders? If so, then yes, this article could have some valuable insights for you.
I remember the first time, many years ago now, when I first heard the word ‘materiality’ in my work as a sustainability professional (my second career). It was a new term for me in the sustainability context, but it didn’t take me long to figure out that they were talking about what I had always called a ‘priority impact assessment’.
As an ex-commercial lawyer (my first career), I was familiar with the notion of materiality in the insurance field. In that context a material issue is: one that would influence the decision of a prudent person (the insurer) about a particular course of action (providing insurance). I think that’s a helpful guide for assessing the materiality of sustainability issues. It begs the question, what are the most important sustainability issues, that will affect decisions of people who we have vital relationships with (customers, investors, suppliers, trade partners etc), and on which the long-term success of our business depends.
Easy. And even easier with the clarification provided in the new GRI Standards.
The materiality assessment process has gained a lot of popularity over the past few years; mostly due to mainstream frameworks like GRI emphasising a concrete approach to define the key topics for reporting and disclosure. As a result of this focus on disclosure, materiality and material issues tend to be most commonly associated with good sustainability reporting.
So far, so good. Now, if you were asked to choose between (a) a focus on effective communication of a sustainability topic and (b) a strategic focus on eliminating the issue, which would you say was more valuable? For example, if you had a budget of $100k, which area would you want to invest most of the money in? And how would you spend it?
This isn’t to say disclosure and reporting aren’t important, or that the wrong issues are being identified for reporting. Generally they’re not. This was highlighted recently in research results from an investigation by GRI and RobecoSAM (pioneers in sustainability investing and the scoring agency behind the Dow Jones Sustainability Index). The report, studying 391 topics revealed “an overall high degree of overlap between topics reporting organisations consider material [for sustainability reporting] and those considered material by investors.”
The point is, to what extent are the material issues valuably informing, or even driving, core business strategy? At Proxima, our intention is always to help companies achieve more value from investment in sustainability initiatives. And we’re on a mission to help businesses leverage the materiality process to its full potential.
Three ways to add more value
The number of New Zealand businesses identifying and reporting material ESG issues is set to rapidly increase following new non-financial disclosure requirements in NZX’s updated Corporate Governance Code. Rather than seeing this as another compliance hurdle, we believe there are three ways to add more value.
- Do more work first: A solid materiality process won’t just rely on internal and external stakeholder opinions, but will be grounded by science-based, concrete sustainability principles to carry out a gap analysis between current performance and truly sustainable performance. You then evaluate the negative sustainability impacts in terms of their significance (science) and importance (strategy) to gauge their overall strategic priority. Then you can map against key stakeholders to see which priority issues connect with which relationships.
The benefits of this approach means you’ll understand early on, and before any stakeholder engagement:
- Which issues have the most significant impacts to be concerned about;
- Which issues are the most strategically important for the business; and
- The priority issues that are most relevant to discuss with different relationships (suppliers, customers, staff etc.) – not just for communication purposes, but to frame conversations about working on collaborative solutions.
- Tackle the tough conversations with a fresh perspective: There’s a reason why people use mediators and judges to solve intractable differences. Opposing interests become entrenched, dialogue turns into dispute, and conflict displaces collaboration. Sometimes, an independent and fresh perspective can make all the difference. You might be thinking, ‘well, you’re a consultant, of course you’d say that.’ And you’d be right, but only partially. The truth is, time and time again, we’ve seen how an independent approach can break through persistent barriers and start a fresh conversation.
The act of engagement itself gives a voice to people who are involved with, impacted by, or have influence over your organisation’s operations, and its future success. It can be both a productive dialogue and an opportunity to nurture valuable relationships. An example might be engaging with a NGO that has been critical of, or even taken action against your organisation; or a local community that has strong concerns about your activities. These can be difficult conversations, but handled more objectively, they can establish and build trust which forges the path towards constructive discussion and even partnerships for a viable long-term solution.
The benefits you might expect to realise are:
- Turning perceived enemies into allies;
- Stronger and more trusting relationships with groups who can affect your brand and suck up a lot of time and energy; and
- A solid understanding about how to communicate better with people on the issues they care passionately about.
- Look for new opportunities and make it happen: As a general observation, a common approach to sustainability reporting can be somewhat short-term focused, and overly concerned with previous performance rather than future potential. Materiality engagement processes focused solely on reporting often overlook the opportunity to validate new ideas; projects which could help mitigate or solve certain ESG risks and impacts. This is a wasted opportunity.
If you’ve done the early work to identify priority ESG impacts and issues, the stakeholder engagement process can do more than seek opinions. It can be the start of a more applied process to work collaboratively on solutions that will provide future value and mutual benefit.
Using a more integrated materiality process like this will enable you to:
- Align disclosure and reporting goals on sustainability issues with strategic intentions that underpin business development and future solutions; and
- Identify and develop more initiatives that benefit from partnership and collaboration to solve gnarly, complex problems.
This article attempts to encapsulate the benefits of a more integrated materiality process. We call ilt integrated because it merges the materiality assessment for disclosure with a more strategic and applied stakeholder engagement process. The value comes from putting more focus on real solutions to material issues, rather than simply validating as part of the process to give stakeholders a voice.
How could your materiality process add more value to the business? How are you using it to establish or reinforce partnerships that will help address priority sustainability issues? What would you do differently next time to make it a more integrated process, that merged disclosure and communication objectives with more strategic imperatives?
As ever, we’d love to hear your thoughts. If you have any concrete examples to share or any comments, drop us a line.