Why doing a materiality assessment often makes sense
You might learn something about your company and comply with regulation. Stakeholders will appreciate it, too.
A materiality assessment is how you figure out which sustainability issues have the greatest risk or reward for your company. Most people who work on corporate responsibility or sustainability have done, or considered doing, some sort of materiality assessment .
The process requires an assessment of a company's social, environmental, and economic impacts and risks in the context of business goals.
Information is “material” and must be disclosed if it would be significant enough to impact an investment decision.
For U.S. based public companies, the concept of what's material has a specific regulatory meaning, which is helpful to understand. Information is “material” and must be disclosed if it would be significant enough to impact an investment decision.
Companies can use a materiality assessment to identify sustainability issues that fall within the regulatory reporting requirements. To help with this process, the Sustainability Accounting Standards Board (SASB) is creating voluntary standards by which to identify material sustainability issues for U.S. public company reporting. If you work at a public company, you will want to understand this concept of materiality in more detail.
Among sustainability practitioners, a materiality assessment is often referred to in much broader terms. Practitioners often use a materiality assessment to determine what to report to a wider range of stakeholders, not just shareholders. This may seem like a subtle distinction, but what gets reported to all stakeholders is quite different than what gets reported to shareholders. The threshold for “materiality” is not only tied to financial performance. It also reflects much wider interests and concerns.
The Global Reporting Initiative (GRI) defines materiality assessment in the context of more general reporting.To report in accordance with the GRI framework, you must identify and consider what's significant to a wide range of stakeholders. What companies often don’t realize is that a materiality assessment holds tremendous value beyond reporting. It is a powerful way to prioritize sustainability work. You can do this in a variety of ways.
For example, this is the assessment process we use in our technology tools, coaching, and consulting:
- Identify social, environmental, and economic impacts across all business functions.
- Assess areas of social, environmental and governance related risk.The combined impact and risk assessments capture the full set of “relevant sustainability issues” for an organization.
- Use a variety of criteria to rate and rank the relevant issues. The criteria should include sustainability drivers, business strategic goals, and stakeholder perspectives. This creates a prioritized list of the relevant sustainability issues.
- Select a set of the most significant sustainability issues from the prioritized list. The issues with the greatest potential to impact the company in either the short or long term rise to the top of the list through this ranking process.
Using materiality assessment this way has significant benefits with short-term and long-term payoffs, in four ways:
1. You will know where you can get the most bang from your buck. The process guides you to identify areas that have the greatest potential to create value. You can create value by managing risk, increasing efficiency, engaging employees, or enhancing reputation. Focusing on top issues also avoids dedicating precious resources to less impactful areas. A recent Harvard Business Review study shows how this kind of assessment and focus translates to stock outperformance.
2. You will learn something. When done right, the assessment process gets you to view your company and its impacts with the widest possible lens. This requires input and perspective from individuals across the company. The risk assessment process will raise new questions and prompt further education on issues that were previously glossed over or not even considered. And, it’s not just a one and done. You will learn something new each time you repeat this process. That learning often leads to new ideas, innovations, or strategic direction.
When stakeholders understand how you went about deciding what to focus on, they tend to be less critical and more supportive.
3. Your sustainability strategy will make sense to your stakeholders. There's great logic behind this process. You may be want to tweak the process here or there to get more of this perspective or less of that perspective. But ultimately, it is a sensible and practical way of prioritizing work. When stakeholders understand how you went about deciding what to focus on, they tend to be less critical and more supportive. They are also more likely to appreciate your plans. They are able to connect the dots to their interests and see why and how you chose your focus areas.
4. You will infuse business strategy into your sustainability program. On the flip side of #3, this is an internal benefit (although it has external implications as well). One of the biggest challenges for sustainability/corporate responsibility managers is getting buy-in from senior leadership. The more strategic you can be, the more buy-in you will get. Senior executives value managers who think strategically and express how their work ties to the ultimate business goals and objectives. That is exactly what this materiality assessment process delivers.
One final point. A materiality assessment is not as hard as it may seem. Even for GRI purposes, you can do an assessment in a variety of ways and with various levels of engagement. The more stakeholders you involve, the more comprehensive your assessment will be, and the more time and resources it will require. Do not assume that you must go whole hog to do a meaningful and useful materiality assessment. Even baby steps can provide substantive benefit.