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Our Insights 17 Aug 2018

The Maturing of Materiality Really Matters

By Rob Cameron

© Photo by Urfan Hasanov on Unsplash.

After 15 years, it might finally be time that materiality fulfils its true potential in driving change towards sustainability. Here’s how.

Back in 2003, Simon Zadek, and colleagues were smart enough to recognise that normative standards could accelerate progress on sustainability. That thinking led to the emergence of the AA1000 Assurance Standard with three principles at its core: materiality, completeness and responsiveness (for responsiveness read “inclusivity”).

Companies now had a means to secure recognition for their sustainability / corporate responsibility reports and assurance providers had a vested interest in promoting this new tool. So AA1000AS, and with it the concept of materiality in non-financial reporting, took off.

The choice of the term was deliberate – sustainability could not blossom at the margins, so had to adopt and then reframe – the core language of business. The intention was that such a materiality analysis would be about strategy and performance as much as engagement and reporting. But somehow since then “materiality” became less about analysis and more about assessment and compliance relating to disclosures and a 2×2 matrix.

We are now starting to see companies realise the full potential that materiality analyses can bring.

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Now, though, as the wider business and financial community more fully embraces the importance of sustainability, we at SustainAbility are starting to see companies realise the full potential that materiality analyses can bring.

One such example would be Novartis. Instead of a two-dimensional methodology or matrix, Novartis has adopted a sophisticated model that has enabled it to much more deeply understand the issues and to marry them according to both external and internal and priorities in a tool that can help managers across the enterprise with risk management, opportunity identification, decision-making and resource allocation. It shows where there is alignment between the company and its stakeholders, helps management to focus and thus is influencing the direction of the company as a whole.

Novartis is not alone. In the past 12 months we have seen a substantial uptick in requests from companies for materiality analyses that both support report planning and content and are also expressly designed to provide guidance to the business and its core functions. We see new actors at the table, including strategy teams, enterprise risk management, brand teams and even the c-suite. In short, materiality analyses are no longer about a matrix or a report, but an analytical tool for better management. We see four specific ways in which this is happening:

Identifying the relationships between material issues helps to better understand the greatest points of leverage to drive change.

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New lenses

The criteria of “impact upon”, or “importance to” company or stakeholders are being superseded with richer perspectives driven by more sophisticated lenses. Issues are being assessed across different forms of value creation and loss – be it financial, environmental, social or reputational. Stakeholders are not homogenous and new tools such as Kumu allow for much smarter stakeholder segmentation across the value chain and beyond. Other tools such as Datamaran and Shaping Tomorrow are also enabling perspectives on present and future trends. Understanding what is going to be material in future is as important as what is material today. That forward thinking is essential to achieving the Sustainable Development Goals (SDGs) which also bring new perspectives on boundaries and alignment. For example, Nestlé and Unilever are mapping materiality with these new perspectives and finding new value.

Connect the issues

Sustainability “topics” are in many cases cross-cutting. As the sustainability agenda matures it is increasingly difficult to distinguish a “sustainability” topic from other material management issues. This creates opportunities and challenges – not least the challenge of being an “everything” agenda.

Identifying the relationships between material issues helps to better understand the greatest points of leverage to drive change. For example, PG&E’s materiality analysis shows the interconnections really well.

Informing strategy

The richer perspectives possible through new lenses requires issues to be properly understood and categorised. Are they strategic and or critical? Are they in sphere of influence or sphere of control? And are they relevant to investors?

While there is a long way still to go there has been a distinct uptick in interest on the part of investors.

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While there is a long way still to go there has been a distinct uptick in interest on the part of investors. And we are seeing more examples of sustainability issues being reported in an integrated strategic report as, for example, RBS, Novo Nordisk, ING amongst many others have done. ING has integrated its materiality analysis with Enterprise Risk Management. As more companies adopt integrated reporting there will be an even greater need for sustainability teams to be more strategic in thinking and make fresh connections with IR teams which may open new pathways for influencing decision making.

Be more local

One of the reasons why materiality analyses have been slow to deliver on their potential is lack of relevance and buy-in. Conducting market, country or site-level materiality assessments enables better understanding and deeper insights at corporate level of local stakeholders. This secures greater buy-in to the whole process and enables better responses to issues. GSK Romania is just one example of the local application of a corporate process.

Where next?

The thoughtful pioneers of materiality adopted the language of business to get sustainability on the business agenda. Now it is time to complete the job. As materiality matures the key is convergence so that there is one definition of materiality that works for all. The SEC appeared to begin this process in 2016, but it is unclear where it is going now. But waiting for policymakers is not enough. There is an urgent need and opportunity for practitioners to play their part by embracing the full potential that materiality assessments and analyses can bring for all stakeholders. The better their quality and the greater their use, the faster much needed convergence will occur and the original aims of sustainability being at the core of strategy and performance realised.

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