It's Time to Get Serious about Materiality

Integrating Sustainability and Enterprise Risk Management
Sustainability and Enterprise Risk Management
Publ. date 9 Apr 2018
Last year, research among WBCSD member companies on sustainability and risk disclosures revealed that only 29% of material topics as published in the sustainability report were also included in the company’s legal disclosure of risks. Amazingly enough, for 35% of member companies this disclosure dropped to zero(!) demonstrating a feeble link between sustainability reporting and Enterprise Risk Management. With the launch of a public consultation on fiduciary duties and sustainability by the European Commission in November 2017, the increase of the interest in this topic is likely to further expand.

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Sustainability as Part of Fiduciary Trust

Boards of Directors are trusted to run the company in the best interest of their shareholders. This trust is often referred to as the fiduciary trust; the legal obligation of one party to act in the best interest of another. The duty-bound party is a fiduciary that is entrusted with the care of the owners’ assets. Over the past decade, the notion that this requires the Board of Directors to focus on the direct shareholders’ interests has slowly eroded. Shareholders and providers of financial capital have been identified as one of several stakeholders to the company. With the use of the different forms of capital in the International Integrated Reporting Framework (financial, manufactured, intellectual, human, social and relationship, and natural capital) different stakeholders with different interests emerge. Positively or negatively impacting these interests could have a big influence on the long-term shareholder value of the company thereby becoming material.

Towards Integration of Sustainability and Enterprise Risk Management

In the view of the European Commission, clarification and thereby emphasis of these fiduciary duties and sustainability could motivate investors to allocate capital more efficiently. This implies a shift towards a longer-term perspective on sustainability risks and opportunities, rather than simply seeking to maximize short-term financial returns.

“The world’s most pressing problems have significant impacts. This, coupled with evidence that many of these problems are occurring more frequently, is a clear signal that businesses need to understand how these risks (and opportunities) affect their businesses so that they can disclose those that are material to the financial markets.” 

Peter Bakker, President World Business Council for Sustainable Development

In the same research under WBCSD members’ reporting, discussions and surveys with risk management and sustainability practitioners indicated that most practitioners (89%) agreed that sustainability risks could contain a significant impact on business. At the same time, more than 70% of the practitioners claimed that “risk management practices are not adequately addressing sustainability risks”.

Making it Practical: 3 Business Induced Complexities

So, what is holding companies back? The combination of high complexity and low maturity seems to be a prime candidate... In itself, the process of materiality assessment is at best cumbersome, at worst a time-devouring matchup between external and internal opinions. In addition to the usual difficulties, the sustainability materiality assessment can suffer from other business induced complexities: complications caused by the specifics of the business model of the company. Three of the most common business induced complexities are:

  1. The Mixed-up Chameleon Complexity: Material issues do not stop at the company’s back door. Or at the front door, for that matter. But to what degree do companies adjust their sustainability material topics to their value chain partners? The analogy with the classic children's collage book by Eric Carle “The Mixed-up Chameleon”, springs to mind. It features a chameleon who discovers it can change not only its color but also its shape and size and tries to imitate all of the animals at the zoo--all at once. Service industries such as consultancies and banks are probable candidates to focus on the material issues within their client portfolio than on their own (relatively small) footprint. With a potentially very diverse client base, the range of material topics that need to be addressed can become huge.
  2. The Geography Complexity: As definitions of material issues might differ per region, global businesses have an extra challenge compared to regional companies. The dairy sector provides ample evidence for this as the example of the Dairy Sustainability Framework demonstrates. Devised after 100 individual interviews, several global meetings and workshops and reviews of more than 80 dairy and 20 non-dairy sustainability initiatives from all over the world, the Dairy Sustainability Framework came to life. In total, the Dairy Sustainability framework includes 11 global criteria such as waste, water and greenhouse gas emissions. These criteria are allowed to be interpreted differently across 11 regions around the globe, enabling a prioritization of the issues relevant to the region, while connecting them at a worldwide level.
  3. The Hodgepodge Complexity: Similar to private equity firms, conglomerates with a broad array of portfolio businesses have a corresponding display of material topics. This diversity makes the vectoring of sustainability efforts hard, if not, impossible. In the absence of one central business that is driving materiality, much is left to the individual portfolio businesses. Decentralized business is leading to decentralized sustainability, but this is creating extra complexity for reporting and it can stand in the way of implementation on a transformational level.

Interested in an agile update of your materiality matrix?

In 2017 Finch & Beak launched its, by now tried and tested, new service called the Re-Fresh Materiality Assessment. Grounded in an agile business design approach, the basic concept is to conduct a thorough assessment of sustainability topics using a big data approach, with a minimum of effort. In summary, the key benefits of our Re-Fresh Materiality Assessment are:

  1. Resource and time efficient, easy to organize. Using existing big data makes questionnaires dispensable while delivering quantitative outcomes, internal resources limited to a two-hour workshop resulting in a reduction of costs and no organizational hassle
  2. Integrates materiality challenges. Combining insights in material issues, SDGs and Dow Jones Sustainability Index performance in an industry context
  3. Framework savvy. Materiality assessment is fully aligned with the reporting framework of GRI

If you want to discover the benefits of integrating big data in the process of your materiality assessment, please contact Jan van der Kaaij, Managing Partner via jan@finchandbeak.com or call +31 6 28 02 18 80 to get serious about your next materiality matrix.

About Jan van der Kaaij

Creative sustainability expert in strategy development, DJSI and sustainable innovation, with a hands-on approach and always committed to go for the max. | jan@finchandbeak.com 

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