How to avoid the materiality traps

This time of year, the materiality marathon is on. Companies and consultants are on a journey to define what topics should be included in the upcoming sustainability or non-financial report.

Materiality analysis can be an extremely useful and strategic exercise, with  value far beyond reporting. However, the many definitions and adaptations to the concept can result in a meaningless outcome. For reporting purposes, let alone for strategic guidance and risk management.

Dizzying definitions

The conceptual confusion reached such a point that eight reporting guidance organizations joined forces to create the Corporate Reporting Dialogue. In March 2016, they issued an eight-page statement on the common principles of materiality. Does such a document really help? It offers an overview of the variety of definitions that are the source of confusion, but it doesn’t really help those running the materiality marathon.

Materiality matters not because GRI or any other reporting framework asks for it. It matters because it identifies the topics for the company’s strategic focus going forward. These topics are identified by analyzing which economic, social and environmental factors critically influence the organization’s ability to create value for society and itself, now and in the future.

Common materiality traps

Even if you follow the steps prescribed by any of the non-financial reporting frameworks, you can still fall into two of the most common materiality traps:  ‘future-blindness’ and ‘meaningless compliance. 

A well done materiality analysis answers the question “What do you think are key topics to be managed strategically to create value for the company and society? And why?”. The answers should have a clear connection to the analysis. If this is not the case, you probably stepped into the ‘future-blindness’ trap. One way to get out of the trap is to reframe the underlying question from “what do you think should be in our report?” to “what do you think are key topics we need to manage strategically to create value for the company and society?” A materiality analysis done from that mindset will not just yield better non-financial reporting, but also make an organization more future-proof.

The ‘meaningless-compliance’ trap shows a disconnect between the materiality analysis and the report content itself. A company may have a well thought-through materiality analysis and know the most material topics, but this isn’t always translated into relevant goals, indicators and content in the report. With some reports, it seems like the materiality analysis was a box to tick in the reporting process, rather than a real step to focus your reporting efforts. In this case, materiality analysis is conducted only to comply with reporting guidelines . But without using that as an instrument to shape content, reports can end up full of anecdotes and (potentially meaningless) metrics, unrelated to the topics identified as material. While compliance may seem like an easier way out, such a disconnect raises concerns about management’s depth of understanding of relevant risks and opportunities highlighted by the analysis.

The value of what matters most

Creating a thorough understanding of the risks and opportunities related to the materiality analysis requires active engagement across the company. If done well, the process unlocks both insights and commitment. So this can’t be done by the sustainability department or external experts in isolation.

The focus on a company’s strategy, rather than reporting, also determines the nature of stakeholder dialogues, as well as the identification and prioritization of the stakeholders to engage. It opens up avenues for efficient partnerships and pushes stakeholders to be more specific when voicing ideas and concerns. In turn, that enables the people in the company to really focus on what matters most to create value for the company and the society in which it operates.

A 2015 Harvard Business School study shows that this really pays off. Focus and investment on material topics really enhance the value of companies. Investment in immaterial sustainability issues should be avoided, as that proved to have little value implications.

The matrix reloaded

A brief look at a materiality matrix and the underlying analysis tells us so much about how ready a company is for the future. It shows how well it understands the context in which it operates; which stakeholders, risks, and opportunities are key to achieve its strategy; and how prepared it is to focus on what really matters. The materiality analysis reveals much more to its stakeholders than most companies realize. What does yours reveal? How would you like to reload it for your future-proof strategy?

This article  is the first in a series on the topic of materiality. It is co-authored by Marjolein Baghuis of Change in Context and Nelmara Arbex of Arbex & Company. At GRI, they worked together on the creation and stakeholder engagement around GRI’s G4 Sustainability Reporting Guidelines. They are now working together to support companies with strategic sustainability challenges.

Artwork credits: “Materiality of Paint” by Ian Davenport

Tags:  collaboration, Corporate governance, Global Reporting Initiative, materiality, sustainability, stakeholder engagement, reporting

Short summary text: Even though materiality is used mostly in the reporting context, its real intent is far more strategic, argue Nelmara Arbex and Marjolein Baghuis.