Double Materiality Assessments: Criteria for a More Robust Process that Supports Strategy and Disclosure
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In a previous blog post, we revisited the original objective of materiality processes (identify company impacts and their influence on stakeholder decisions), what companies actually ended up doing (asking stakeholders to rank pre-set issues), and why that approach no longer serves us (if it ever did). We also promised we would share our thinking on how to reinvent the materiality process. In this blog post, we want to share what we consider to be fundamental criteria for a better approach to materiality.
In a final upcoming blog, we’ll share a new approach to corporate sustainability materiality assessment – piloted and developed over a period of 5 years with companies across the globe – that is more comprehensive, grounded in context and impacts, brings better insights to your corporate strategy process, and will help your company prioritise where to act to do its part to support sustainability.
Criteria for a Meaningful Materiality Process
There are many possible ways for a company to undertake a materiality processes. There are also good reasons why companies adopt different approaches, including shifting their approach over time as they progress their own sustainability maturity. That said, for more than two decades, we have been invited contributors to materiality processes in many different companies. Many of these processes failed to deliver meaningful insights for all the reasons we outlined in our prior blog post. From these experiences, and lots of conversations with those doing this work, we have identified some foundational criteria that help to ensure that a materiality process generates more useful and actionable insights for companies and brings them closer to doing their part to support sustainability.
A meaningful materiality process…
Enables the prioritisation of both material and strategic issues
In many companies, materiality processes support disclosure but remain only loosely connected to the core strategic process. This is a lost opportunity for synergy, efficiency, and integration. Take health & safety as an example – in many businesses, health & safety will always be material. Stakeholders want (and need) to know about your safety efforts and performance. But health & safety won’t always be a strategic issue. If your company has a strong safety culture and good preventative controls and mitigations in place, the issue is material, but may not require further strategic action.
Ideally, your materiality process will be able to identify issues that are important from a disclosure perspective and elevate those issues that are particularly strategic (for instance, those that require additional investment or even a shift in your core strategy).
A robust materiality process, anchored in understanding both company impacts on the resilience of social and natural systems and impacts and strategic constraints for the company, allows companies to identify and prioritise among both material issues and strategic issues.
Is comprehensive in the issues it considers
The process needs to be comprehensive and ensure that companies examine the full range of environmental, social, and governance issues, including issues that may not be identified in current reporting standards or by industry peers. Ideally, the process that you employ will be industry agnostic rather than overly anchored in a particular sector. Emerging issues are often overlooked as not (yet) relevant to your company or in your industry, but we increasingly see sustainability issues bring rapid and disruptive changes to businesses, regions, and industries as their awareness ‘hops over the fence’. A wide lens helps you to consider and begin to meaningfully monitor and address emerging issues proactively.
Considers the full scope of actual and potential impacts
To enable meaningful understanding of company impacts and the design of subsequent action (as needed), the process should differentiate between what is within the direct control of a company, what takes place in its value chain (indirect control), and the company’s potential for positive influence on the resilience of broader environmental and social systems (where your company has influence, or is a key decision-maker or gate-keeper, or holds key knowledge or resources within the system).
The process should also distinguish between whether the identified impacts are actual or potential. A lack of impact can be due to effective controls that result in limited residual risk of impact. However, a lack of impact can also be the result of sheer luck. Potential impacts, while they have not happened (yet), are crucial to identify and take action on.
To do this, your process needs to consider how your company (and its value chain) affects each issue (with reference to relevant thresholds) and how each issue, in turn, can affect the company and its ability to achieve its objectives. When we recognise that sustainability impacts can be a crucial a source of strategic risk, the strategic potential of an impact-focused materiality process becomes even more clear.
Addresses your confidence in your findings
Many companies are working to better understand their impacts and very few companies can claim to have a robust understanding of all the direct and indirect ways they affect the systems around them. Despite this, the expectation on companies is to keep improving their understanding of those impacts and their understanding of the underlying thresholds of environmental and social systems. A robust materiality process, then, needs to incorporate an assessment of confidence in the findings, which cautions the reader and signals where more work is needed to build better understanding. A low level of confidence across a range of topics would also reflect an honest appraisal of your maturity and signal where there is room for improvement on processes and controls that underpin how your company is currently addressing various issues.
Meets companies where they are at
Each company is on its own sustainability journey, and a meaningful materiality process needs to be able to meet companies where they are at and provide value and direction regardless of how embedded sustainability is in their decision-making or of the current strength of their social and environmental performance. This also means that, while the process should help companies to reflect on the types of practices leading companies employ and the types of impact they seek to address on a broad range of sustainability topics, the process should not be prescriptive or anchor itself in specific performance expectations.
Can be scaled
Ideally, to be most useful, the same process would be applicable to projects, business units, at the enterprise level, as well as for divisions, supplier categories, and even portfolios of companies. This would enable companies to start at the enterprise level one year, and then drill more deeply into specific areas of the business. A parent company could develop an understanding of several or each its subsidiaries and leverage the findings of those processes into an enterprise-level assessment. Or, an investor could use the same approach to look at companies across a portfolio of holdings.
Enables clear comparison
Materiality assessments, by their very nature, are comparative processes that rank company impacts in one area against impacts in others to determine what is most material. Ideally, the process creates a consistent process for relative comparison.
To help a broad range of people (executives, the board, employees, and external stakeholders) to understand the output, a meaningful materiality process would result in a clear, comparable figure that helps the viewer to understand the relative ranking of issues and enables comparison over time, as well as against peer companies or others operating in the same or similar contexts.
Meets the expectations of standard setters
Lastly – and this almost goes without saying – for the process to meet the needs of companies, it needs to align with expectations of the forthcoming ISSB (currently SASB) standards and the GRI.
This is the point where some of our most ardent readers may cry foul. We recognise simply aligning with disclosure standards is not equal to actually addressing sustainability. Companies need to go beyond these standards and ensure they consider their impacts on key thresholds (this is still a key criteria) and take relevant action. From a practical standpoint, however, companies need to also demonstrate their alignment with current reporting standards, or the best process in the world just won’t see wide adoption. So, we need a process that does both.
The Radar Double Materiality Process …
“This all sounds great, but what does such a process look like?”, you may ask. In our third blog, we will walk you through the Radar – a process that we have developed to help companies assess and prioritise among material and strategic issues. Why the wait? First, the blog was already too long: clearly, we have many things to say on the topic. Second, we are already seeing a lot of interest and we want to make sure we have process resources ready. It’s coming, we promise.