The purpose of materiality

A materiality matrix is a tool that is often used by companies to determine their sustainability focus areas. Taking into account business and stakeholder influence, the matrix outlines the most critical areas of a company’s sustainability program. According to the WBCSD the purpose of materiality matrices is fourfold:

1. Aligning sustainability strategy with corporate strategy
2. Identifying and prioritizing business opportunities
3. Improving the decision-making processes by incorporating key sustainability criteria
4. Communicating and reporting relevant information concisely

However, developing a credible materiality matrix is not an easy task and requires engagement and support from senior management. Additionally, businesses have to overcome business-induced complexities related to their specific business models and so risk losing focus on what matters most during the process, ending up with a long list of materialities in their matrices. So what is the impact of this?

Less is more

A study conducted by Harvard Business Review researchers Khan, Sarafeim, and Yoon in 2015 examined whether a focus on material and/or immaterial ESG issues had an impact on the total shareholders return. The study revealed that companies focused on achieving a high performance on selected material topics outperformed their peers in terms of total shareholders returns by almost 5%. Companies that focused on both material and immaterial ESG issues also showed better returns than companies that only concentrated on immaterial topics (+1,5%). Concentrating on fewer material ESG issues and acting upon them is evidently bringing higher shareholder returns than having a long and undifferentiated list of sustainability-related material topics.

Developing your materiality process

It is clear that focusing on a selected amount of issues that are material to the company is therefore crucial. But how does this work in practice? In order to come to the most effective materiality matrix, the following steps are recommended:

1. Define key stakeholders, such as customers, suppliers, and investors. This also includes an analysis of the stakeholder's relevance to the business.
2. Create a longlist of materialities. The longlist can be developed through the use of big data, sector analyses and ESG framework analyses and is generally composed of circa 30 material issues.
3. Prune longlist into shortlist. Analysis of all relevant stakeholders through interviews, surveys, and workshops to come to a shortlist of material issues of approximately 25 issues.
4. Determine and rate the business impact in terms of risks and opportunities. For each identified material issue, rate the business impact such as the influence on revenue. The impact can be both positive and negative.
5. Create a first draft materiality matrix which still needs to be validated.
6. Deliver the final materiality matrix which is ready for communication and alignment with the sustainability strategy. 

Finch & Beak has developed a state-of-the-art approach to materiality concentrating on real impact. The Re-Fresh Materiality Update follows the above steps and uses a big data tool to come to the most effective and easy-to-organize materiality assessment. An additional action plan is also delivered and intended to be used to accelerate performance on top material issues.

Looking for an update of your materiality matrix?

Are you interested in this agile, low-cost high-value big data approach to materiality assessment? Please contact Johana Schlotter at johana@finchandbeak.com or +31 6 28 02 18 80