By Delphine Orfila
The concept of materiality initially came from financial reporting practices which required indicators to evaluate both the performance and the trustworthiness of a company. The general intent of materiality was to define the threshold for financial information becoming relevant to decision-makers.
As sustainability took a wider understanding and weight for organizations, the concept of materiality started to be applied to sustainability reporting. An important milestone in that regard is the G4 sustainability reporting guidelines published by GRI (Global Reporting Initiative) in 2013. It stated the need for a specific process to conduct and apply a materiality assessment to sustainability strategy and reporting. It remains to date a major reference in sustainability management.
As part of a reflection on the societal impact of an organization, this tool allows the identification, relevance and prioritization of issues that may have an economic, social, environmental or governance impact on both the company and/or society. Given the multitude of subjects covered by sustainable development, using a materiality analysis makes having a sustainability strategy a manageable and actionable process.
In the current context in which companies are being asked to show more transparency in regards to societal issues, they need tools to both assess and report their impact. Indeed, stakeholders are now expecting a proven engagement that goes beyond a simple declaration of values or intent statements on a website. Concrete, measurable and effective actions are expected, just as investors are asking more and more metrics from reliable tools that can measure the engagement of companies. In other words, they are looking for tools that can translate sustainability issues into quantifiable risks and opportunities.
Among other things, the materiality assessment does just that by prioritizing which societal issues impact the company and its stakeholders and, vice versa, how the company impacts these societal issues. By doing so, the materiality assessment reveals the key information the company needs to take action on.
Any type of organization, whether for-profit or not, small or large, can benefit from this exercise. The methodologies will change to adapt to the characteristics of the organization, but the exercise and its benefits will remain the same.
The materiality concept is in constant evolution and has been under pressure to evolve in the past few years as more organizations are taking part in this exercise. Faced with a growing sense of urgency in dealing with societal issues, the frames of reference have multiplied, creating a lot of noise and confusion. We are now at a turning point as more energy is put towards consolidation and simplification of frameworks and reporting standards. 2022 should see the emergence of a more integrated approach for sustainability standards and it may influence the way we conduct materiality assessment.
The first step of a materiality assessment process is to identify the key stakeholders that either impact or are impacted by an organization's activities.
Beyond the commonly identifies stakeholders like clients, suppliers, employees, communities, governments, etc. at Umalia, we encourage to consider the planet as a stakeholder in its own right in this process and any sustainability reflection.
Once the stakeholders are identified, the next step will be to identify the societal issues, whether they be environmental, social, economic or related to governance, that surround the organization's activities and that have an impact on them as well as evaluate the impact that the activities have on the issues.
By interrogating all stakeholders on their perception of the importance of each issue and placing the result on a matrix, we give the organization a clear picture of the importance of key issues on its business at a given time. It will be key to cross validate this information and give it perspective by conducting research on the side.
Over and above identifying key issues and potential risks and opportunities, this visual representation of stakeholders' priorities regarding sustainability topics has great strategic value for the organization. It becomes an asset to informed decision making and allocation of resources in consequence.
This prioritization tool will help identifying actions to be taken, but also indicators to be implemented and practices to be reported on. Following its evolution and making it a recurring exercise is a powerful tool for measuring impact, particularly as the relevance, importance and potential impact of key issues will evolve over time as well.
The reasons why an organization may conduct such an assessment may range from communication purposes to business or CSR strategic planing. The depth of the exercise will vary depending on the objectives, the measurement tools, the stakeholders involved in the process and the methodology that the organization will choose to adopt. The general outcomes that can be expected are relatively similar although the extent and depth will of course depend on the research and cross validation put into the process.
Here are some of the key results you can expect from your materiality assessment:
The materiality approach is particularly interesting when shared with stakeholders because it provides a holistic approach to sustainable development and aligns key stakeholders around key common issues.
We know all too well today that societal issues are so complex that a single stakeholder will not be able to solve them alone. Finding efficient and creative solutions will start with discussing those challenges and mobilizing stakeholders to contribute to their resolution together.
A stakeholder engagement initiative that is anchored in tangible issues is particularly convincing and enticing as we talk about "real business" and not high level concept and big principles. From our experience, we mostly - if not always - experience a clear openness to the exercise as stakeholders are invited to express what is important to them. The listening posture is then key in order to spot opportunities for collaboration and for impact. Focus groups with employees are one example of an initiative that can help you identify and prioritize sustainability matters that are close to your business.
By doing this exercise you are naturally keeping your ecosystem informed and aware of responsible practices and influencing them on their own engagement. Keeping your stakeholders informed and up to date on practices is actually a key element of sustainability in that you are taking advantage of your business relationships to influence others along your value chain, thereby enabling more collective value.
Having a solid methodology in determining which topics are material and therefore will be the focus of your effort will bring the credibility that is so sought after when engaging in societal impact. The recurring concern we hear from our clients, as consultants in sustainability, is their fear of being tagged opportunists or even "greenwashers" when their intention is genuine.
A materiality matrix could be a good tool to share with your stakeholders in order to showcase your engagement, as long as the methodology you are using and the choices you made in conducting your assessment are reported on too.
There are different ways to proceed in order to identify the issues the materiality assessment will be based on. The GRI in the G4 guideline defines such issues as "those topics that have a direct or indirect impact on an organization's ability to create, preserve or erode economic, environmental and social value for itself, its stakeholders and society at large." It is relevant to add to this definition that we should widen our perspective by identifying the impact that our organization has on those issues.
We understand then the importance of including the stakeholders in the issues definition process in order to ensure they are relevant for them.
Using the existing data, either with general reference frameworks or sectoral, is a good way to make sure all the important aspects of sustainability are included. These databases are built on the experience and observation of many organizations and will help you making hypothesis on what will be material to your organization based on your sector, industry, size, geography, mission, etc.
Doing an inventory of your existing practices in terms of sustainability is a good starting point to identify the issues surrounding your activities. Another one is to directly and openly address these topics with stakeholders.
Indeed, the materiality assessment is a formidable opportunity to listen to your ecosystem's expectations while engaging stakeholders to reflect on their own activities.
Observing what are the topics that your ecosystem is talking about, reading the press and specialized media mentioning the major trends or even looking at what the non-profits and advocating organisations say about your sector, may give you an idea of the elements that influence or are likely to influence stakeholders' decision-making and the way they evaluate the organization.
Mixing the different approaches will allow you to make sure there are no blind spots in the identification of issues.
They are many approaches to conducting a good and reliable materiality assessment, here are some of the key tips and good practices we gathered from our experience:
ESG issues are evolving all the time, and so is their impact on your activities and stakeholders. Materiality assessments can be a great tool to keep track and follow the evolution of your context. Here is an example from British Telecom who has been using the materiality exercise over the course of the years and who uses it as a monitoring and reporting tool.
Over the years they added key information to enrich the exercise, such as the movement of the topics from one year to another, the existence of internal policies, the indicators in place, the main risk, etc.
Involving your stakeholders in the reflection, communicating on measurable and tangible initiatives and practices, giving information on your methodology to select and act on the most material issues is a good start.
Materiality assessment is a powerful tool to add to your toolbox when reflecting on your societal impact. Beyond being an ally to determine priorities, its power also lies in the fact that it can be used to channel collective intelligence and make it blossom.
The challenges we are collectively facing are complex and we have a lot to learn and discover from one another in order to sustainably and creatively tackle them.
There are countless other topics surrounding sustainability strategies that we would love to explore such as financial materiality, corporate reporting, double materiality... We will make sure to explore further these topics with you and give you insights on inspiring sustainability initiatives and methodologies.