The Benefits of Forward-Looking Materiality

How to prepare for the impact of future materialities
The Benefits of Forward-Looking Materiality
Publ. date 30 Apr 2020
The COVID-19 outbreak shows that a topic that seems to be immaterial a few months ago, can be material today. The increasing transparency, growing stakeholder influence and visible changes of our planet increase the pace in which ESG topics become material. Companies should avoid being surprised by the impact of future ESG factors and identify which topics become material for their business in the future. In this article, we illustrate the importance of a forward-looking approach towards materiality.

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The benefits of the right focus

The importance to companies addressing material ESG issues becomes more and more apparent. A study from Harvard Business School found that companies with strong performance on material sustainability issues and poor performance on immaterial issues had the best future stock market performance. These results show the importance of focusing on ESG factors that are material to your company, while leaving the factors that are immaterial to your company out. But as the world is changing fast, issues that are immaterial today can become material tomorrow.

The unexpected impact of COVID-19

As we are experiencing now, the COVID-19 outbreak has an unexpected major impact for many companies. In a study by the World Economic Forum published in 2019, economists estimated that, in the coming decades, pandemics will cause average annual economic losses of 0.7% of global GDP. According to this study, the outbreak of infectious diseases is inevitable, but the economic impact that it may cause not. This study highlighted the importance of companies to understand the possible factors that make the company vulnerable to financial losses from infectious disease outbreaks in the future. Therefore, preparedness for such an event is key to build a resilient business.

Rising opportunities of the circular economy

That new global issues are emerging also becomes clear from the increasing importance of circular economy for the chemical industry. Back in 2016, research into the reported sustainability topics from the chemical industry demonstrated low interest for the circular economy. Only 4 from the top 10 performers of the industry actually mentioned circular economy and policy statements or management systems. But the companies in the chemical industry have made a shift the past few years, acknowledging the opportunities of the circular economy by integrating circularity into their strategy. An example of this step forward is the foundation of the ‘Alliance to End Plastic Waste’ in 2019. This alliance comprises, amongst others, of more than 25 major global chemical companies, with the goal of initially funding USD $1.5 billion over five years, to develop and accelerate solutions that minimize and manage plastic waste.

Benefits of a forward-looking approach to materiality

What the above mentioned examples illustrate, is the fast pace in which immaterial topics become material. For a company to build a resilient business, it should prepare for the impact of future material topics by equipping the company with a forward-looking approach to materiality. Obtaining this approach to materiality may bring companies the following advantages:

  • The identification of future material topics will help companies set direction for a future-proof strategy, focusing on long-term value creation for business and stakeholders. Frequently scanning the company landscape on stakeholders’ positions on ESG topics helps identify rapidly evolving issues. It is recommended to consult different trend reports (by e.g. World Economic Forum) and sector publications from ESG ratings (by e.g. S&P Global) to identify those issues that may impact your business, positively or negatively, in the future;
  • Early identification of opportunities arising from emerging issues may create first-mover advantage and helps to challenge product and service development on innovativeness and future consumer demands. Take for instance DSM, a global science-based company active in nutrition, health and sustainable living. Circular economy models and principles have played a critical role in shaping DSM’s product development. After DSM realized that the carpet industry was producing a lot of waste because of the non-recyclability of its products, DSM decided to tackle the issue by developing a carpet that would be fully recyclable, with the 100% recyclable carpet DSM Niaga as a result;
  • Understanding the potential impact that emerging issues may have on the activities and value chain of the company will contribute to better risk mitigation planning and implementation. For instance, Swiss Re’s, one of the globe's largest reinsurance companies, identifies emerging risk with their tool ‘SONAR’: Systematic Observation of Notions Associated with Risk. This tool allows Swiss Re to identify, assess and report emerging risks in a timely manner and to integrate them into the company’s decisions, with the objective to reduce uncertainty and prevent unforeseen losses.

Looking at the high speed at which issues that are currently considered immaterial become material and the advantages that early identification of those future materialities may bring, equipping yourself with forward-looking approaches to materiality will help your company prepare for the future.

Do you want to equip your company with the forward-looking approach to materiality?

Get started by updating your materiality matrix and start focusing on a selection of issues that matters most, now and in the future. Finch & Beak has developed a Re-Fresh Materiality service that guides companies in the process of developing a (new) matrix in compliance with relevant standards such as SASB and GRI. Get in touch with Josée van der Hoek, Director, at josee@finchandbeak.com or +34 6 82 04 83 01 to find out more.

About Josée van der Hoek

Experienced strategic issues management specialist with expertise in strategy development, food waste and DJSI. | josee@finchandbeak.com

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