Building a sustainability strategy requires focus. Rather than addressing every possible environmental, social and governance issue in its strategy and reporting, an organization can - and should - narrow its focus to the areas it determines to be ‘material’.
So what is materiality? While there are many official definitions, broadly speaking, an issue may be deemed ‘material’ to an organization if it could be considered relevant or of interest to its stakeholders.
To discover which factors are material, and decide which ones to prioritize, companies should conduct a materiality assessment, ideally with input from external stakeholders.
Company size, sector and specific business practices – these and many more factors will combine to determine what a company’s top material issues are. The list of potential issues is as long as it is broad - from emissions and water use to safety practices and human rights in the supply chain.
Why does materiality matter?
Conducting a materiality assessment may seem like a daunting exercise. But the time and effort will certainly pay off.
And you don't just have to take my word for it. Evidence shows that companies that focus on material issues in their strategies perform better and create more value for their stakeholders than those who do not - there is a clear link between materiality, sustainability and financial performance.
In their paper on this topic, Khan, Serafeim and Yoon present that firms with good ratings on their material sustainability issues significantly outperform firms with poor ratings on the same issues.
Interestingly, their study also shows that even if a firm performs well on sustainability issues, if these issues are deemed to be ‘not material’, the company does not significantly outperform firms with poor ratings on the same issues. In other words, the issues have to be material to create value.
How can materiality help?
We realize that materiality is a potentially complex topic, but it is crucial to get it right if you wish to build an effective sustainability strategy. A materiality assessment is an exercise that should ultimately inform:
- Stakeholder engagement: Once you know what your material issues are – now consider which stakeholders are most impacted by those issues. Is it your employees, your customers, your suppliers, the communities you operate in – or another group? Are you sure you are engaging with the most relevant stakeholders?
- Resource allocation: A proper materiality assessment will enable you to focus on the most important issues. For example, it is counterproductive to spend all your time and resources managing carbon emissions if your carbon impact is dwarfed by your water use. Are you spending your time wisely?
- Major innovation: How can you innovate to address your most material issues? Research by Eccles and Serafeim of KKS Advisors demonstrates that firms can boost both financial and ESG performance by innovating products, processes or business models to address material issues. For example, if your company sells products, and waste packaging is one of your top material issues, how can you design and use more sustainable packaging? Before attempting this, the very first step is to understand materiality, so you can be sure to focus on what matters. Get it right, and the rewards will be sure to follow.
How we help navigate the complexity
As specialists in strategy, we go beyond the traditional standards and metrics which are commonly used to develop corporate reports, so we can tailor each materiality assessment to the individual organization.
We identify entity-specific metrics for each material sustainability issue, taking the core competencies of the organization into account to track performance over time and guide strategy execution.
Materiality can be a complex topic, but it doesn’t have to be. Allow us to draw on our many years of experience in this area to guide you through the process and maximize your opportunities. Whether you are only just starting out, or are looking to advance your approach, contact us to find out how we can help.