The new sustainability language: materiality and risk

"Materiality” is becoming part of the fabric of sustainable business.

For the uninitiated, materiality is an accounting or auditing term that refers to the estimated effect that a given piece of information may have on a company’s value—its current or future stock price, for example. If a CEO has been diagnosed with a terminal disease; if a company is being investigated for bribery by a government agency; if its profit or loss needs to be restated by a significant amount—all are examples of something that is “material,” from an investor or stakeholder point of view.

So, when does sustainability become a materiality issue?

This is a question that is rising up through investor communities, from so-called socially responsible investors, to mainstream pension funds and university endowments, to Wall Street stock analysts, and the regulatory agencies that oversee publicly traded companies. All are concerned with the risk factors facing companies in a world of constraints related to the availability of energy, water, and other resources; where the toxicity of products or manufacturing processes present risks all the way up the supply chain; and where climate shifts can disrupt the availability of raw materials and threaten the well-being of employees and customers.

And it’s increasingly part of the job of sustainability executives in the world’s largest companies. For them, understanding “materiality” and “risk” means learning a new language and translating it into their companies’ far-flung operations.

This is hardly new stuff. For years, environmental activists have been pointing out the lack of reporting of material issues in some sectors, particularly extractive industries like forestry and mining, as well as water-intensive industries, such as chemicals, food and beverage, and pulp and paper. (GreenBiz has reported on these issues for more than a decade; see this story from 2000 and another from 2003, for example.) Concerns have existed for years about the financial impact of climate change on the insurance industry; see this GreenBiz story from 2005, among many others.

What’s new in all this is the growing clarity of what sustainability materiality looks like across a range of sectors, and the growing role sustainability executives are now playing in bringing materiality issues to light, both internally and externally.

This was driven home last week with the publication by Ceres, Oxfam, and Calvert Investments of a guide for companies and investors “on disclosure and management of climate impacts.” The report (download here), prepared by the consultancy David Gardiner & Associates, is one of the best overviews I’ve seen of the tangible risks companies could face in coming years as the threat and impact of climate change grow. As the report puts it: “Virtually every sector of the economy faces risks from the short- and long-term physical effects of climate change—impacts across the entire business value chain, from raw materials through to the end users.”

Next page: Not your father's "carbon footprint"