Originally, materiality analysis was designed to map those relevant non-financial business risks that were of primary concern to a company’s shareholders. It was meant as an instrument to enhance the traditional fundamental analysis by focusing on intangible or externalized value drivers. By unveiling factors that often lie in investors’ blind spots and are therefore not yet priced in by the market, the materiality analysis –and its subsequent matrix- became a reporting tool for a comprehensive view of a company’s long term performance.
As a result of the rising importance of disclosure of material issues, initiatives such as The International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB) were formed. "The International Framework" was published and Global Reporting Initiative's (GRI) G4 Guidelines were issued. Through such developments, integrated reporting became a powerful but still undervalued management process for developing and reporting on sustainable strategies that create value over the short-, medium- and long-term.
In the meantime legislation did not stand still. The EU agreed that non-financial reporting is vital for managing change towards a sustainable global economy by combining long-term profitability with social justice and environmental protection. Large companies with over 500 employees and public interest that will have to report as of 2017 on their social, environmental and governmental issues, as a consequence of the EU directive, that was adopted on 29th September of 2014.
In his book Professor Eccles recognizes the gap between the treatment of financial versus non-financial risks and opportunities. He concludes that the governance of material issues needs strengthening and that boards are ultimately responsible for the determination of top priority issues and stakeholders. Moreover he suggests Executive Boards to publish a “Statement of Significant Audiences and Materiality”, to clearly communicate the status of non-financial issues within the company strategy.
One more conclusion is that the value creating opportunities of the materiality matrix are underleveraged. To stress the potential of material issues the concept of the Sustainable Value Matrix is introduced, which is designed to create value and distribute issues into the right business setting. This call to further mature the governance practises and value creation potential of material issues, directs towards the integration of sustainability into the business. A concrete example was recently presented by frontrunner Danish Biotech company Novozymes during our Insead case study on their sustainability strategy.
Novozymes, in 2002 the first company ever to publish an integrated report, not only uses materiality for reporting but materialities are translated into business opportunities. As a matter of fact, its entire sustainability department is located within business development.
The process approach called GLOBE-US that Finch & Beak developed, perfectly matches the void that Eccles addresses. GLOBE-US finds its basis in the Business Model Generation-approach of Osterwalder and Pigneur, it comprises 7 steps and uses the relevant material issues to focus on value creation and ultimately disruptive business model design. Over the past two years, GLOBE-US has been successfully implemented with a number of clients in complex settings throughout Europe.
For more background on developing a solid materiality matrix please contact Josée van der Hoek, at email@example.com or call +31 6 28 02 18 80.
Photo credits: Richard Summers, Banalities