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It's All Material...Unless It Isn't


 

Quick Takes

  1. Materiality assessments are key components for corporate sustainability teams in developing meaningful programs and policies.

  2. Sustainability is a remarkably vague concept and materiality assessments are a great resource to start establishing actionable parameters…but many assessments, as currently performed, don't really help in the ways we would hope.

  3. Asking a group of stakeholders to identify their issues of concern and interest contributes much less to the process than does the act of identifying which stakeholders to engage in the first place.

  4. The priority of the assessment should be to inform your strategic planning and not simply to assist in communication materials.

 

Establishing Parameters


Materiality assessments are key components for corporate sustainability teams in developing meaningful programs and policies. They are a starting block to sharpen your focus and determine what it is you want to direct your attention and efforts to over the coming years.


Sustainability is a remarkably vague concept, and materiality assessments are a great resource to start establishing actionable parameters…but please do not overestimate the power of materiality assessments, at least not as they are typically practiced.


Materiality assessments are generally undertaken to determine which issues matter. Of the many hundreds of sustainability issues which could possibly be engaged, it is generally accepted that no one organization could, or is appropriately positioned to, take meaningful action on all issues simultaneously, and so materiality assessments help provide a system of triage.


If you want to know what matters, you also need to ask who it matters to.



How It Typically Works


When resources permit, many companies turn to a consultancy service to guide their materiality assessment. Most commonly, these assessments are performed every two years, with the addition of light-touch revisions every intervening year to ensure the initial assessments remain up-to-date.


With an entire service sector now active in promoting and providing materiality assessments, a common approach is now emerging--so common, in fact, that it was applied in 19 of the last 20 corporate sustainability/ESG reports we read. This approach can be useful, but not always in the ways that we may think.


The most common approach to materiality assessments holds that two groups of actors should be considered when deciding what matters. The first is the company itself and the second is a group known as ‘stakeholders’.


To complete the materiality assessment, the company lists the issues it believes are material to it on the X-axis of a graph in increasing order of perceived importance. These issues typically fall into five categories:


  1. Issues which measurably impact the company’s revenue streams. (Profit)

  2. Issues in which the company is well-positioned to be viewed as a ‘leader’ by external audiences. (Goodwill)

  3. Issues the company foresees growing in regulatory interest. (Risk Management)

  4. Issues of concern/interest to key investors. (Access to Capital)

  5. Issues of concern/interest to employees. (Employee Engagement)


On the Y-axis of the graph are issues of interest to stakeholders, also in increasing order of perceived importance. Determining exactly what these issues are is of critical importance, and we will return to this shortly.


The graph area is then divided into quadrants to create a hierarchy of relative materiality, with a focus on the top-right quadrant. Some assessments choose bands or a ‘regression’ line instead of a quadrant, and although the visualization is slightly different the idea is the same. This often results in many issues being identified and so kicks-off a filtering process to decide which of the material issues the company actually wants to, or is willing to, engage with.


(Here is a real-world example of a materiality assessment. I am not linking to the source simply because I am using this as an example of the approach in general and am not taking issue with how this specific company uses it. Connect with us directly if further information is required.)



This last point is not a weakness--at least not in our opinion. Through a materiality assessment, it is reasonable to expect a dozen or more issues to showcase as being of importance to both the company and to stakeholders, but it is unreasonable to think that the company will be able to meaningfully deliver on all of these issues at once. If a decision must be made to prioritize a few material issues ahead of a few other material issues, then who better to make that decision than the individuals who will be held accountable for the outcomes?



So What's The Problem?


Materiality assessments can be quite helpful, but as they are typically performed today they actually do very little meaningful work.


Let’s return to the question of how stakeholder interests are identified to see what is truly going on with this approach.


Typically, a group of stakeholders will be sent a survey eliciting their concerns and interests. On some occasions, stakeholders may be engaged in discussions and focus groups. Most often, however, the responses to these surveys and engagements are not explicit to one company, but rather collected by the materiality consultant and employed in the assessment processes across many of their clients.


Again, this is not such a big issue. It is reasonable to assume that a stakeholder of Ford (for example) may very well equally be a stakeholder to General Motors, or that a stakeholder advancing climate change mitigation strategies may very well hold views applicable to many, if not all, companies within a given industry or region.


The issue--the substantive weakness-- is that asking a group of stakeholders to identify their issues of concern and interest contributes much less to the process than does the act of identifying which stakeholders to engage in the first place.


If you ask The Nature Conservancy, The ClimateWorks Foundation, and a Trade Union (simply as examples) then we shouldn’t be surprised to see biodiversity and habitat protection, climate action, and workplace safety and compensation identified as material issues of concern. But who determined that The Nature Conservancy, The ClimateWorks Foundation, or the Trade Union were the appropriate stakeholders to engage?


In these cases, materiality was effectively determined in the act of deciding whose voice should be included, and not by what each voice has to say once included. In this approach to materiality assessments, the process of stakeholder identification is more important than is the process of stakeholder engagement.


Yet in all the materiality assessments we see, there is no discussion on stakeholder identification theory--no discussion of how one stakeholder is identified as being worthy of engagement while another is not. The assessments are clear in that stakeholders were engaged, but not clear in how it was determined which stakeholders were to be engaged.


Without this element, the materiality assessments do not provide much actual insight into which issues are material to stakeholders. In many cases, these assessments provide insight into which issues are material to the stakeholders which the company (or the consulting firm!) already believes to be material. As you can see, this adds very little to the process anymore than simply having the list of issues the company itself believes to be material.



Be Sure To Help Yourself


This doesn’t mean this approach to materiality assessments isn’t helpful, but it does mean it isn’t helpful in the ways we would hope it to be.


What it does do is provide a veil of legitimacy to your sustainability efforts. It demonstrates that you engaged with stakeholders when developing your sustainability plans. And maybe that is helpful to provide cover from a few critics, but none of this is helpful in actually designing and implementing better sustainability plans.


The false veneer of engagement does not provide any meaningful insights for you to incorporate into your strategy. This approach to materiality assessment provides a PR asset but not a strategic planning asset.


There are so many issues to be addressed in sustainability that you need a thorough materiality assessment to make sense of the parameters within which you should be operating. The priority of the assessment should be to inform your strategic planning and not simply to assist in communication materials.


Your team has a strong grasp of the issues which are material to your organization, and there are earnest stakeholders with a strong grasp of the issues for which you have, or could have, a material impact. To be meaningful to your efforts, however, your materiality assessment needs to be clear in how it identifies which stakeholders to engage.


There are ways to do this, and we will speak more on this in another blog, but for now, please remember that if your materiality assessment follows the process we described above, it may be useful as a PR exercise, but please do not turn to it for your own decision-making--your efforts are too important to be distracted by your own PR.


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