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PE-International ... Materiality assessment – How to make it fly

Burgess COMMENTARY

Peter Burgess

Materiality assessment – How to make it fly

When I started to work in the area of sustainability, I had no idea what a materiality assessment was, and what all the acronyms like GRI and SASB meant. It occurred to me I probably wasn’t the only one, and now that materiality assessment is such a hot topic, I thought it would benefit others to review. For this, I turned to our Corporate Sustainability Officer at PE INTERNATIONAL, Jennifer Clipsham, to explain it for us in simple terms.

Raphael: Materiality Assessment: What is it?

Jennifer: Conducting a materiality assessment helps companies determine where to focus their energy and resources and what activities matter most from a sustainability perspective. The tool was designed to reduce the complexity of reporting indicators listed in the Global Reporting Initiative’s (GRI) Sustainability Reporting Guidelines, and helps companies identify what is important to report on. For companies new to sustainability, it’s a great way to help you identify and prioritize the issues that are most important to your stakeholders and most relevant (or material) to your business. For companies further along in their sustainability journey, assessing materiality on an ongoing basis helps validate your existing strategies and make changes when they are needed.

Raphael: Why is it important for companies to report on the outcomes from their materiality assessments?

Jennifer: The term materiality comes from the financial world. The Global Reporting Initiative (GRI) incorporated the concept of materiality into their reporting guidelines with the aim of elevating sustainability issues to the same level as other traditional business issues and consider the financial risks and opportunities associated with those issues. It reflects the changes we are seeing in the investor world and the growing importance investors are placing on effective management of sustainability within companies. Just look at how many shareholders are filing resolutions against companies focused on sustainability. In 2013, 40% of all shareholder resolutions were related to sustainability and climate change. 94 US companies were targeted. This was a big deal. These resolutions actually forced companies to change their policies and programs.

Materiality assessment is a useful tool that can help companies identify stakeholder concerns and potentially avoid shareholder filing actions. GRI encourages companies to reach out to external stakeholders for input when conducting a materiality assessment.

Raphael: How should companies determine which external stakeholders to engage in a materiality assessment?

Jennifer: You need to think about which stakeholders are impacted by your business, or have influence on your business. These can include customers, different levels of government, NGOs, investors, employees, local communities and suppliers. In the earlier example we saw that shareholders are especially important if you are a publically traded company. You may have customers sending you sustainability questionnaires as part of their own supplier assessments - they would be important stakeholders to involve - as would a long time strategic NGO partner or a particularly vocal NGO that has been contacting you about a certain sustainability issue.

The stakeholders you choose to engage can depend on where you are in the value chain, who has shown interest in your sustainability efforts and who you want to involve in your sustainability efforts moving forward. Think about those stakeholders who would have some insight into the business risks or opportunities you face from greater levels of action, or inaction.

Once you have mapped out your key stakeholders and selected the ones you want to include, you then survey people from those stakeholder groups. You can send them electronic surveys, interview them one-on-one or even invite them to participate in a focus group. This external view can add a lot of value to your business.

For example, we worked with BASF on an extensive materiality assessment that polled external stakeholders in many regions of the world where they have operations. They suspected there would be regional differences in the prioritization of sustainability issues and therefore how material the issues would be to their business. We helped them understand whether there were regional differences, and what those differences were.

When reviewing the outcomes of the survey, BASF realized their key stakeholders in Europe were more interested in energy consumption and more sustainable product design. In Latin America, what mattered most was air pollution, jobs and water quality.

Based on their materiality assessment, BASF’s Corporate Social Responsibility (CSR) programming in different regions had different areas of focus.

The materiality assessment process, and outcomes, will be different for each company. What I described for BASF may not apply to your company.

Raphael: What do the outputs of a materiality assessment look like?

Jennifer: Companies usually document the outcomes of their materiality assessments in a matrix illustrating both the significance of economic, environmental and social impact as well as the influence on stakeholder assessment and decisions. Each element will be rated from its importance (low, medium and high). The result means that the topics rated with highest importance for the business success, both for internal and external stakeholders are the most crucial to focus on. For these elements it’s key to report on activities and programs in the sustainability report. In addition these topics should be actively managed internally by setting goals for improvement and reviewing progress against those goals on a regular basis.

Raphael: Do you have examples of the benefits companies are seeing by doing a materiality assessment?

Jennifer: Sure. One of our clients who was new to sustainability, said it really helped them prioritize the issues to focus their sustainability strategy on (and not to take on too much initially). The exercise also helped this client build internal alignment on the strategy as many senior leaders were engaged in ranking what mattered most. In addition to the benefit of alignment, it brought people from different business functions across the company together - people beyond the sustainability team - including folks from marketing, finance, enterprise risk management, product development, etc.

For a client in the mining sector who already had a sustainability strategy but wanted to ensure it was still on target, the exercise helped to validate elements of their existing approach while pointing out several areas for improvement.

As we learned from the BASF example, this is also a great way to engage external stakeholders on a regular basis for early identification of issues and to incorporate their input into your strategy. It makes it easier to respond to their questions about issues they think you need to address. When asked about issue A or issue B, you can refer back with some credibility to the ranking process and why you are focusing on the outcomes of the materiality assessment exercise.

You also don’t want to overlook the fact that in order to fulfill the GRI G4 Guidelines or to respond to Sustainability Accounting Standards Board (SASB) in the US, companies will need to document the process they used to assess materiality and the outcomes of that assessment.

Regardless of upcoming regulations, I recommend that companies do this assessment every year, or every two years because things change. It’s a crucial business management tool that you can add to your toolbox!

Raphael: Thank you Jennifer! Now, readers tell us what you think. What do you find the most challenging about materiality assessment? Let us know in the comment section below.

Daniel

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