Making sense of the Materiality debate

Apr 28, 2021 | Articles, Monthly Briefing

If you are a sustainability executive or practitioner, you have probably seen and read much lately about materiality. You might be eager to try some novel approaches, unsure about which one(s) to adopt, or perhaps thoroughly confused and longing for the good old times, when materiality used to be a rather simple and straightforward concept. That is not the case anymore. Materiality now comes in all types of flavour: dynamic, double, core, financial, ESG, stakeholder… you name it!

Perhaps in the future we will be able to agree on a single standard that settles the dispute. For now, we have to deal with the proliferation of views and standards. Read on if you are looking for some guidance that spares you some of the time and effort needed to make sense of all this.

Should I subscribe to an ESG data tool, and which one? How often should I review my materiality? Should I care about financial impacts only, or take a wider view? These are important questions, but they should always come after a more fundamental, yet often forgotten question: what will I use materiality for?

If you know why you are doing something, it becomes much easier to figure out how to do it.

From our point of view, materiality is not a transactional task, nor a process to merely guide reporting, but rather a strategic engagement process that provides the foundation for embedding ESG in the business strategy.

As simple as this might sound, it goes a long way in helping to make sense of the materiality debate. For example, we hear much about dynamic materiality, but not so much about dynamic strategy. And if you do a double materiality, will you then have a double strategy?

Let’s focus on dynamic materiality. The digital evolution has made it possible to use ESG data tools that provide real-time monitoring of the ESG issues relevant for an organisation. This is similar to installing a webcam to monitor your home while you are away. It certainly gives a sense of security, of “being in control” that undoubtedly feels good. And you will check it often at first, just out of curiosity, just because you can. But soon enough the enthusiasm will vanish. That webcam can certainly be very useful, at times. The same applies to the multitude of ESG data tools now available, that enable monitoring and detecting emerging trends and issues, particularly in volatile and uncertain times such as those we live in nowadays.

An important distinction has to be made between tactical and strategic actions. If your dynamic materiality radar spots an emerging topic that is gaining traction, you might very well develop a tactical action around it, such as a specific communication initiative, or an employee activity. Ideally, these tactical actions will be linked to your overall strategy and build towards it, instead of merely being an opportunistic, short-term effort.

However, a good strategy is intended to provide a clear path forward, a long-term course to follow; and while it can certainly be flexible and evolve over time, part of its value lies precisely in its stability. In fact, business strategies often cover a period of three to five years, sometimes even more. In this respect, the day-to-day, or even month-to-month, fluctuations in ESG trends provided by ongoing 360 dynamic data tracking, become less relevant.

The SASB standards for 77 industries have not changed since they were originally published in 2018, after a thorough development process. Does that make them any less useful or relevant? Certainly not. Does that mean that I don’t need to renew my organisation’s materiality for three years? Certainly not!

Let’s go back to the key question of the objective we are pursuing. SASB standards were developed to provide a minimum set of indicators that are considered to have a significant financial impact on an average company in a given sector. They are not by any means an exhaustive list of all the topics that stakeholders care about in such sector.

Many ESG data tools promise an automated materiality process, quick and efficient, and they also impress us with the sheer scale of data sources they scan. Yet relying solely on ESG data tools to perform a materiality assessment, without directly engaging the key stakeholders of the organisation, is also a lost opportunity to have meaningful dialogue and engagement. As the Canadian singer Drake said, “Sometimes it’s the journey that teaches you a lot about your destination.”

To be clear, we are not advocating against the use of ESG data tools. They are certainly very useful, and a welcome addition to the toolbox of any sustainability practitioner. They can provide a useful additional set of inputs, supplementing – and providing context and validation to – other types of research and outreach.

But ultimately, choosing the right approach, process and tools for a materiality study… it all depends on the objective you pursue. Actionability is the key word here. What specific action will your materiality assessment enable? Are you looking for current issues to address in your communications and make them more relevant and timely? Are you doing it as part of your reporting routine? Or do you want to take a hard look at your business context, and revalidate or update your ESG and business strategy?