“Materiality is like packing a backpack for a hike: you can only bring the supplies that are absolutely critical, otherwise the weight will slow you down and eventually bring you to your knees.”
This great quote by Gary Niekerk, Director of Global Citizenship at Intel, opens Redefining Materiality II, a new report written by Marcy Murninghan for AccountAbility, which aims to help companies understand the current materiality landscape, or in other words – what they should take into consideration now when packing their backpack.
You might think that 10 years after AccountAbility published its first Redefining Materiality report, it would be easier for companies to figure out what’s material and what isn’t when it comes to environmental, social and governance (ESG) factors. Yet, in a way it looks like things have become more complex. “The boundaries between corporations, the environment and society continue to blur,” explains Ted Grant, Head of Global Research and Development at AccountAbility.
But not to worry, the report is here to help. Here are five important lessons:
1. Shareholder resolutions are a good indicator of present ESG concerns – One of the questions companies constantly struggle with is what ESG issues are highly material to investors and other stakeholders. The resolutions shareholders file in an effort to influence companies’ policies and practices provide a good indicator on what these issues are.
Looking at the latest proxy season, 365 shareholder resolutions on environmental and social issues were filed in 2013 (compared to 345 in 2012). According to Proxy Review 33 percent of them focused on political spending, 14 percent on sustainable governance/reporting and other environment issues each, 12 percent on climate change and eight percent on human rights/decent workplace conditions.
Companies should take a look not just at these figures, but also at the trends – for example, issues like water and methane emissions seem to get more attention now among investors. Yet, it’s also important to remember that what we see here is a reflection of what investors are concerned about now, not necessarily in the future. Therefore, companies should be looking for more resources to better evaluate their investors’ and other stakeholders’ future concerns.
2. More stakeholders want more information – As AccountAbility explains in the report, in addition to shareholders, a wide array of stakeholders have growing expectations from companies on ESG issues. The list includes consumers, regulators, stock exchanges, information/data providers (Bloomberg, for example), and special interest/advocacy/NGO groups.
To make it even more complex for companies, many times these expectations will refer to different issues. Regulators and stock exchanges might be more interested in climate change risks while NGOs will focus on supply chain practices and consumers on the company’s products’ end of life policy.
The report rightly notes that an important driver of this trend is the proliferation of digital tools, including social media and other forms of interactive technology, which enable the collapse of boundaries and the shift of power away from central sources to investors and other stakeholders.
3. Leading actors drive different change – The report provides a description of the leading actors on sustainability materiality, including GRI, IIRC, SASB, FASB, SEC and GIRS. According to the report, all these actors, and especially the first three, have many things in common. They rely on a collaborative, multi-stakeholder approach, are committed to transparency, use an iterative or “formative” approach that makes adjustments as the work unfolds, and utilize digital tools and data-based evidence to foster better decision making and stakeholder engagement.
Yet, the differences between them are important and companies should understand them as each actor represent a different materiality approach and therefore choosing to follow the guidance of one or more of them means also choosing a certain materiality approach.
A new paper by BSR’s Dunstan Allison-Hope and Guy Morgan provides further understanding of these different approaches. It shows how the IIRC, promoting integrated reporting and SASB, is working on adding a disclosure on material ESG issues in mandatory filings which frame materiality more in terms of what will influence assessments made by investors, while the GRI frames materiality as looking at the assessments of multiple stakeholders, not just investors.
4. A materiality matrix is no longer sufficient – Tim Mohin writes in his book, Changing Business from the Inside Out, that the starting point of a materiality analysis is a materiality matrix. This 2×2 matrix is bound by the horizontal axis indicating increasing importance to influential external stakeholders and the vertical axis indicating increasing importance to your company’s business success. “Like all two-by-two matrices,” Mohin writes, “the items that end up in the top right quadrant are the areas for additional focus.”
AccountAbility’s report notes that while useful as a preliminary map, the effectiveness of materiality matrices is somewhat limited. “That’s because they often don’t show the priorities of different groups, or the industrial benchmarks used by peers and investors to compare performance, or characteristics such as ‘innovation’ that represent resilience and adaptability to changing times.”
So what’s the alternative? AccountAbility doesn’t suggest throwing away the materiality matrix, instead it suggests adopting a wider framework that is based on a cycle of three broad stages: identify issues, prioritize, and review, helping companies to assess gaps in their definition, prioritization, and/or implementation of material issues. In this framework, the materiality matrix is used in the prioritizing stage (another interesting framework, incorporating key concepts from GRI guidelines and the IIRC framework is offered in the BSR paper).
5. This is also about storytelling, not just data – It seems like materiality is mostly data driven which is probably true, but we need to remember materiality is also about the effort of companies to articulate the value of their sustainability practices and ensure stakeholders get it. It means that companies needs to raise their game in both dimensions – only with good analytics and effective storytelling will they manage to pack their sustainability backpack in the best way possible.
Raz Godelnik is the co-founder of Eco-Libris and an adjunct faculty at the University of Delaware’s Business School, CUNY SPS and Parsons The New School for Design, teaching courses in green business, sustainable design and new product development. You can follow Raz on Twitter.