“The EU Green Taxonomy – and upcoming CSRD – both confirm double materiality as the basis for comprehensive non-financial information disclosure.
Value and Limitations of Materiality to Date
We at Ksapa have designed and updated materiality analyses for numerous Fortune 500 and financial institutions in the past decade. Together, we explored and tested multiple methodologies ranging from purely qualitative to fully quantitative approaches.
While materiality analyses are never easy and can still gain in robustness, the present document shares valuable contributions to help corporations and financial institutions focus on the most strategic environmental, social and ethical issues. That way, we hope to help them identify the necessary management modalities, to drive transformation and meet stakeholder expectations
THE MANY POSITIVE CONTRIBUTIONS OF MATERIALITY
Materiality has proven to be useful for companies and financial institutions for the following reasons – at the very least:
– Expands scope to better understand all the dimensions of business performance
Defined from the perspective of the impact of an organization on sustainable development and stakeholders, materiality increases companies’ focus on sustainability. This helps decision-makers better apprehend why performing on several sustainability issues is supportive of business performance
– Builds internal alignment on action plans to support business priorities and address stakeholder expectations
An organization’s identification of issues both financially material or material to enterprise value is incomplete unless it first reviews its material impacts on sustainable development.
Materiality clearly established why improving on select sustainability issues is good for business. It supports internal alignment, for decision-makers to take sustainability seriously as part of fulfilling the goals of their overarching plans.
– Enables better stakeholder engagement
Applying the materiality concept provides a clear rationale on the most relevant issues. This helps companies better understand and ultimately focus on why certain issues require resources and time to engage stakeholders.
For stakeholders, materiality assessments also provide a useful perspective to zero in on the issues certain companies may be interested in, to partake in a shared agenda.
– Nurtures purpose and employee engagement
Focusing on value for the organization, society and the environment rather than financial materiality alone helps organizations engage with the United Nations’ SDG.
Materiality helps connect corporate mission statements (e.g. “we design innovative solutions to increase productivity of our clients”) with their broader responsibility of addressing urgent collective needs (e.g. “we deliver solutions for our clients to use less resources and energy – which is good for the planet and for our development”).
– Drives collective action towards the SDG
Corporate reports that address sustainable development issues material to their organizations help educate and influence the broader society on sustainable development.
A decade’s worth of materiality assessments relentlessly listed climate issues as material for all organizations. This convinced the latter to engage in coalitions and support climate regulations.
– Connects non-financial performance and financial valuation
Disclosing material sustainability issues is relevant to value creation. Several data-based studies demonstrate the direct correlation of non-financial materiality, non-financial issue management and better financial valuation
– Streamlines resources
Materiality assessments enhance decision-making, for instance with regards to resource allocation.
Companies tend to consider they lack the resources necessary to lead sustainability programs. Before exploring ways to reign in additional resources, materiality helps revisit the allocation of existing resources to target the most material issues. This can come at the expense of programs that fail to contribute positively to material issues
THE LIMITATIONS OF MATERIALITY
Combining decades’ worth of expertise and perspectives from both practitioners and academia, Ksapa is well poised to summarize the pros and cons of materiality. We use the materiality tool because we find it useful on the whole. That said, we conduct these exercises bearing in mind certain limitations :
– The absence of a standardized one-size-fits-all methodology
Materiality approaches vary considerably from one company to another. Where they prioritize mostly financially material issues, the process is rendered less robust.
– Insufficient transparency guiding conclusions
Failing to disclose the process for determining material issues reduces the perceived credibility of materiality exercises.
– The absence of third-party verification
Materiality analysis and disclosure approaches are often not included in the scope of assurance engagements. Assurance engagements of sustainability information indeed focus primarily on verifying data.
– Inaccessibility for SMEs
90% of companies are SMEs, which do not typically carry out materiality analyses – except via business associations, for instance. Simplified approaches and guidance would be helpful to empower them to conduct materiality exercises”