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The journey to sustainability begins with assessing materiality

29 Apr

My biggest takeaway from the class on “Strategic and Sustainable Business Solutions” at UC Berkeley has been the concept of materiality assessment and the related idea of “speaking the appropriate language of sustainability” to communicate priorities and impact with different stakeholders.

As defined by Serwinowski and demonstrated in class by Champa Gujjanudu, a professional from PWC,  materiality assessment is an exercise in stakeholder engagement designed to gather insights on the relative importance of specific environmental, social and governance (ESG) issues for a corporation. While the insights are mainly used to inform sustainability reporting and communication strategies, they are also valuable for making strategic planning, operational management and capital investment decisions.

Very often, it is difficult to quantify the impact of CSR and sustainability issues since they are not clear cut, often very complex, related to externalities and not properly priced in the marketplace. For example, the 2013 GlobeScan/SustainAbility Issues Survey, mentions climate change, air pollution, access to energy, water pollution, bribery/corruption and biodiversity loss as priority issues that require high levels of accountability and urgency. Without a clear price signal, estimating materiality and putting a price on the problem and thereafter justifying the need for any sustainability initiative may be viewed as a subjective instead of objective exercise.

However, there is growing awareness about the need for materiality assessments in corporations. According to Serwinowski, the three recent developments driving adoption of materiality assessments include investor demand for more disclosure, global reporting framework synergies, and financial market convergence.

Figuring out what data is really important to internal and external stakeholders is the key goal of materiality assessments. This materiality assessment process involves bringing together various internal stakeholders such as the company’s leadership, sustainability teams, financial departments, managers. Based on the corporation’s decision, external  stakeholders such as suppliers, regulators and NGOs may also be involved. Very often, an external agency may be the facilitator leading and facilitating the process. The results not only guide which factors demand attention but how that information should be presented, and to whom it should be disclosed.

This brings us to the crucial point of speaking the right language to different stakeholders. Once the materiality assessment is conducted, it is important that the insights from the assessment are framed and presented appropriately, in a manner that different stakeholders understand and appreciate. This is critical in order to enlist support of the different stakeholders to agree on the priorities, plan appropriate sustainability activities, implement them effectively and thereafter measure and report impact of those activities. Communication plays a critical role in each of these stages. The assessment itself may be able to shed light on the communication formats that would be most suitable and effective for engaging and holding dialogs with different stakeholders. As discussed on numerous occasions during class, how information is packaged and presented to a CFO may be different from how it is presented to a supplier or NGO partner. Discussions with guest speakers during the course also highlighted the need for multi-pronged strategies – the use of numbers, stories, visuals, reports and other forms of communication – depending on the audience.

Conducting materiality assessments are not without its own problems or challenges. There are several frameworks available and choosing the one that is appropriate for one’s organization is challenging. Organizations may feel that they do not have the time or other resources to make this a priority. A disconnect with the ESG issues and fear of the unknown often make materiality a difficult concept for many sustainability managers to comprehend. Some companies might worry that disclosing certain information will result in the loss of competitive advantage, while others are reluctant to discuss matters that are not entirely within their control. Still others may struggle with quantifying the cost implications.

As discussed during our class, getting the backing of a company’s top leadership is critical to make the exercise a robust one. This is also critical to signal the commitment of the leadership to everyone in the organization, so that they take the exercise seriously and participate in the activity.

As the noise and confusion around sustainability and CSR activities in organizations become intense, it is increasingly important for organizations to acknowledge ESG concerns related to their business, prioritize activities to address these concerns, execute them effectively and consistently and demonstrate impact. While some organizations are ahead of the curve in terms of incorporating such activities into their core operations, several companies are trying to understand what can be the best way forward that benefits society while adding value to their business. Conducting a thorough materiality assessment may be the first step an organization can take as a structured reflection exercise to plan its sustainability operations in a collaborative and strategic manner.