How to make materiality matter: Three ways to elevate your materiality assessment for your business in 2024
7 MINUTE READ | BY TOM CARR AND PHOEBE WHITTOME | 1 FEBRUARY 2024
Materiality is perhaps the most talked about but least well-implemented sustainability requirement today.
Clearly, having a rigorous process to guide your priorities is a crucial input to guiding an effective sustainability strategy and to robust regulatory disclosures. That said, the debates surrounding ‘single’ vs ‘double’ vs ‘dynamic’ materiality have been going on for years. They each have their merits and drawbacks, but sometimes we wonder whether companies are in danger of getting caught up in an academic debate, when in reality, they all get us to broadly the same answers.
Last year at SB+CO, we published an article looking at the different uses of materiality assessments, asking ‘how much is enough’ when it comes to materiality.
As we enter the new year, we’ll not only be talking to clients about what is important, but why it matters to their business.
Let’s take an example. An electric vehicle manufacturer might find that human rights in its battery supply chain is material, as is the circularity of its product design, and so too are inclusion practices in its US workforce. Materiality tells us that these issues all matter, but a typical materiality process doesn’t tell us how we should be responding.
Some would argue that doing so just isn’t the job of materiality. Materiality is supposed to tell you what’s important, not what you should do about it. While it’s true that double materiality isn’t meant to set your sustainability strategy, designing the process to ask the right questions can make it an important input to your strategy.
Seeing the wood for the trees
Responding to CSRD and other regulations can often feel overwhelming. As a result, there’s a danger that companies revert to materiality approaches focused solely on meeting disclosure requirements, whereas done well, materiality assessments can unlock a much wider range of benefits.
At SB+CO we see four key benefits of an effective assessment:
Meaningful metrics and management information to track how the management of sustainability matters is contributing to, or detracting from, business performance.
A robust understanding of the financial risks associated with the full breadth of sustainability topics (going beyond just climate).
A firm foundation to incorporate sustainability into strategy, helping the business to prioritise and deprioritise topics based on solid commercial analysis.
An understanding of the innovation gap for the business, helping to analyse where and how the business needs to evolve to stay competitive and capture value the sustainable transition.
A materiality assessment that focuses solely on disclosure requirements will fail to capture these benefits. At best this is missing a trick, and at worst it is distracting attention from the necessary action and potential value to be gained for the business.
Our tips to make materiality matter
1. Materiality is a tool, not the final answer. Plan your approach while considering the benefits you’re trying to unlock.
Having worked with clients required to make CSRD-aligned disclosures from 2024, a key lesson is to pause and plan the benefits you want to achieve before starting to design your double materiality process. Jumping straight in will require huge resources and risks providing little in return.
At face value, double materiality provides much more binary outcomes than traditional materiality matrices; topics are either material or they are not. Because of this, it’s important to stop thinking of materiality as an outcome in itself. It’s a tool that can provide valuable inputs to business planning. Consider which features will make that tool most useful to your business.
What level of granularity of sustainability topics and their underlying causes is needed to help you make decisions?
For financial materiality, what are the key effects on your business you need to model: balance sheet, P&L, cash flow, cost of capital?
How can issues be broken down into distinct categories to provide a more nuanced way of engaging with the outcomes, and help determine where to prioritise - and importantly, deprioritise? Figure 1 provides an indication of the types of categories and actions we think are important.
Reputational risks can be a hugely important aspect of financial materiality for some ESG topics. Even once material topics have been identified, how should the reputational risk influence the objectives of the disclosure and how to disclose, e.g. the right depth of disclosure.
Sometimes explaining why things aren’t material can be just as important as disclosing the topics that are material. How well do you understand the difference between your material topics and those prioritised by the rest of your sector, can you explain what makes your business different?
Figure 1: While CSRD-aligned double materiality requires companies to make a binary distinction between material and non-material topics, it’s digging into the details of what makes an underlying issue material that provides valuable insight.
Our take: don’t get caught up in whether climate change is more or less material than diversity, equity and inclusion. Instead, focus on defining how each aspect of those topics impacts you and your market today, and how that is likely to change in the future. This may throw up some surprises when it comes to priority setting.
Establishing parameters around (i) how you will respond, (ii) who needs to be involved, and (iii) what types of resources will be required is the key to a more meaningful exercise.
2. Think about how to separate sustainability topics into manageable chunks.
‘Sustainability’ or ‘ESG’ management tends to entail aggregating a broad range of issues into a single umbrella of management responsibility. Let’s return to our example of the EV manufacturer who identified human rights, circular economy, and employee inclusion as three material topics. A traditional approach would lead companies to produce a single ESG strategy centred around these three pillars, which would necessarily lack in detail. This often leads the business to feel disconnected and unclear as to what it means for them. When we look under the surface, any one of these three topics could constitute many individual challenges for the business to solve.
Thinking more commercially helps to break sustainability down into manageable chunks which the business has the power and know-how to solve. These smaller, distinct problems become the bread-and-butter challenges which businesses are so well set up to solve, such as: improving the efficiency and process optimisation; product design; customer engagement; employee incentivisation; and cost management.
3. Find your competitive advantage in sustainability and ensure you’re set up to harness it.
Done right, materiality won’t just be a reporting exercise; it will help you identify the sustainability issues where your business has leverage. It could be identifying emerging consumer demands that you’re well positioned to service, de-risking your business to offer existing products at more competitive rates, or differentiating your products in a crowded marketplace. Whatever it is, it’s about shifting your mindset from seeing sustainability as a cost of doing business, to a market trend – and focusing on harnessing a competitive advantage from it.
To put this more commercial approach to materiality into practice:
Think about which sustainability topics represent genuine opportunities for competitive advantage. This needs to be a rigorous commercial exercise, not a theoretical world in which a green glow heralds around every corner. Look at how potential opportunities align with or could enhance the existing business.
Work out your role in the market. Not every business naturally lends itself to transformational sustainability - that’s ok. The strength of many larger businesses will be in acquiring or partnering with other organisations at the right time, The key will be taking priority opportunities and defining a plan for how your business should execute your competitive advantage.
Build the business case. It should start with the numbers. However good the story is, if it doesn’t contribute to the P&L, the sustainability strategy isn’t going to scale across the business. It’s important for sustainability teams to become more commercially minded.
With so much regulation coming, almost every company will have to tackle double materiality in one form or another. It’s important to ensure that your response doesn’t just tick boxes; it should contribute to your business.
At SB+CO, we help clients prioritise meaningfully, build effective strategic responses, and create compelling sustainability and ESG narratives. Delivering materiality processes that offer a meaningful input to strategy is just one way we support clients. The key take-away: materiality shouldn’t just be an exercise to identify what matters. It is how it matters, that matters.
Keen to find out more? To download a free PDF guide to making materiality matter, please share your contact details in the form below…
Phoebe Whittome
Sustainability Director
Tom Carr
Sustainability Director
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