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Our Insights 4 Aug 2014

Materiality 2.0: Evolving practice to drive long-term performance

By Michael Harvey

image © x_tine, Flickr

This post has been co-authored by Michael Harvey and Margo Mosher.

Materiality has taken the main stage of the sustainability agenda – and for good reason. The practice of identifying and prioritising the sustainability issues that matter enables a company to make better decisions overall. When business leaders make decisions that recognise both financial and sustainability material issues, and the relationships between them, they can position their businesses to effectively manage operations and set strategies for the long term.

Conducting a robust materiality assessment that focuses on the most strategically material issues and engages corporate strategy teams in the process involves understanding:

  • How can the materiality assessment process better serve the changing needs of a company?
  • How can the outputs of a materiality process be integrated into the business?
  • What is the best way to communicate the outputs of a materiality process, internally and externally?
  • Who needs to know about these issues from the company’s perspective, and how can they use this information?

SustainAbility has revised its own approach to materiality to help companies achieve greater integration of the outputs within this process. This approach – or “materiality 2.0” – addresses the above questions in a way that builds on existing good practice and reflects what we see as representing the next step in the evolution of materiality approaches.

We recognize that a “one size fits all” approach to materiality won’t work for all companies. Depending on a company’s objectives for undertaking a materiality process – from defining report content, to responding to stakeholder concerns, to shaping strategy – the approach will differ. Companies also vary in their current stage on the materiality journey; some have already conducted materiality assessments in years past and are in need of “refreshing” their understanding of material issues whereas other companies will need a more start-from-scratch approach.

Although varied in form, scope, depth and quality, many approaches to materiality assessments have the following aspects in common. They:

  • Involve an assessment of potential business impact
  • Incorporate external stakeholder input, often through interviews and surveys, as a way of identifying or validating topics of stakeholder concern
  • Provide a quantitative-based ranking of external stakeholder viewpoints
  • Present their outputs in an illustrative matter, e.g. a matrix or value chain diagram

Despite some of the benefits of these aspects (i.e. supporting stakeholder engagement and delivering a handy matrix to include in reporting), they can also lead to results of somewhat limited value – at best they can fail to provide new insights, and at worst they can create barriers for internal change if framed incorrectly. Some of the challenges to current materiality approaches are highlighted below:

  • Focus: Identification of a large number of issues (the catchall approach) creates confusion as to which issues are truly strategic for the business
  • Impact: By not taking a value chain approach and accounting for impacts beyond direct operations, companies may not accurately identify their material issues
  • Inefficiency / Resource intensity: Time (and money) spent conducting numerous, generic stakeholder interviews often yields outcomes that could have been obtained through desk research
  • Quality of insight: Failure to secure the right quality of stakeholder input, from people with insight about the issues and knowledge of the company, results in “obvious” or misplaced insights
  • Measurement methodology: Variation in the robustness of the method used to measure stakeholder concern contributes to inaccurate and misleading scoring
  • Interconnections: Relative placement of issues on a matrix often fails to capture the possible relationships between issues
  • Internal priorities: Competing business priorities and internal politics can lead to rescoring of issues and the undermining of the materiality process

In order to meet these challenges head on, a few key principles will become evident in the next generation of materiality assessments. These principles build on the successes of the current approach but reflect the needs of ever-changing sustainability and business agendas.
SustainAbility believes that a materiality assessment should:

  • Focus the results: Prioritizing a select group of critical issues and developing plans for integration helps companies strategically allocate resources and have a greater impact.
  • Explore the value chain: A value chain approach and the consideration of externalities beyond the company’s direct operations can help identify issues of strategic relevance.
  • Focus on the qualitative: Given the typical limitation on time and resources, and the typical use of the results, it is the qualitative insights, rather than quantitative scores, that are often most valuable. The materiality process should be informed by deep knowledge of the particular business/industry context and the business strategy gathered through targeted research and insight.
  • Tailor the process and outputs: Materiality can be used both as a decision-making framework and to support communication, and the approach and outputs should be tailored accordingly.

SustainAbility’s revised approach to materiality incorporates the above principles. In doing so it has refined the traditional approach to materiality assessments in a way that focuses on creating value for our clients (irrespective of where they are on their sustainability journey), and society as a whole.

Materiality assessments will continue to play a critical role in helping companies understand their key areas of impact and opportunity, but the way in which these assessments are delivered must be continually refined to meet changing priorities. The integrated consideration of financial material issues and sustainability material issues will ultimately enable business leaders to make informed decisions that lead to better outcomes for both the business and society. We invite you to join us in driving this forward.

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The Art Of Alignment

Sustainability & Financial Transparency

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