Materiality analysis is an essential step of forming a sustainability strategy or report. To create an effective and relevant strategy, a company or organization must first establish which issues are the most important i.e. material to the business and its stakeholders.
Many companies use the guidelines and resources provided by international organizations such as GRI, IIRC, SASB, AccountAbility and CDP to form their approach. These provide a great starting point, but sometimes fall short on important details.
Here are five practical tips to advance your approach:
1. Involve senior management in materiality assessment.
A firm’s ability to determine what is and what is not material through its senior management and those involved in governance symbolizes and highlights its social agency. Ceres, in its recent report Lead from the Top: Building Sustainability Competence On Corporate Boards, identifies the need to educate board directors on material sustainability issues, to make the boards sustainability competent. Only once company leaders have a deep and thorough understanding of material sustainability issues, will they begin to meaningfully factor them into their decision-making.
2. Integrate materiality analysis of sustainability issues in your business processes.
Do not add an additional process, instead embed the materiality analysis into existing business systems. But where should it go? We suggest taking a risk management approach, which includes the risk dimension of missed opportunities. By integrating materiality analysis in the enterprise risk management (ERM) process, you will ensure that materiality analysis becomes embedded in company processes.
3. Identify the stakeholders that are relevant to you at the time of the materiality analysis.
This will help you to choose which stakeholders to address, how to obtain their input, and the relative weightings to assign to issues and audience members. Eccles and Youmans take it further and suggest corporate boards issue an annual Statement of Significant Audiences, presenting the corporate stakeholders, or ‘audiences’, that the company's board of directors believes to be ‘significant’.
4. Go beyond quantitative questionnaires.
While quantitative feedback is important, you should also bring stakeholders together in focus groups to hear their views and gain qualitative input. Ask the right questions. Don’t just ask the stakeholders if the issue is important to them, really get them to consider whether the company’s performance on economic, environmental, social and governance dimensions would change an employee’s engagement, a client’s behavior, an investor’s capital allocation decisions, or a local community’s attitude towards the company. This information, combined with the quantitative input, can be used to assess the likely impact that failure to meet, or ability to exceed, stakeholder expectations on any given sustainability issue will have on how a specific stakeholder interacts with and impacts the company.
5. Move from the Materiality Matrix to the Sustainable Value Matrix.
The Sustainable Value Matrix (SVM) is the next generation of the materiality matrix, as proposed by Robert Eccles and Michael Krzus. The X axis of the matrix is defined as ‘materiality to the firm’ – acknowledging that materiality only has meaning from the perspective of the entity that determines it. The Y axis provides the stakeholder dimension – named ‘society’s issue significance’. Essentially, the Y axis represents the firm’s perception of its role in society, based on the stakeholders it chooses to engage with, and the weighting assigned to their views. As well as acting as a materiality matrix, the SVM can also be used to drive innovation and push the performance frontier upwards.
Those are my five suggestions to advance your materiality analysis for better and more effective strategy and reporting. Feel free to share your thoughts and feedback in the comments.