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Guide your company’s sustainability journey

3

KEY CHALLENGES

3.2

External Reporting

3.3

Mapping Stakeholder Expectations

3.4

Sustainability Training

3.5

Human rights

3.6

Social Innovation

3.1

Materiality Analysis

Only what matters is important

WHAT IS IT?

WHY IS IT IMPORTANT?

IDEAL SCENARIO

3.1

MATERIALITY ANALYSIS

RESOURCES FOR
THE JOURNEY

GOOD PRACTICES

WHAT IS IT?

 

Materiality analysis is a procedure to define what is strategically important for the company, where to allocate resources and what to manage with an overall view to improve process and performance.

 

Materiality analysis has several different contexts:

 

  1. Financial disclosure related
  2. Financial performance related - impacting the financial bottom-line of a company,
  3. Sustainability reporting related – to define reporting boundaries and what stories to tell different stakeholders
  4. Business strategy and implementation focused – comprising both financial and non-financial elements. This is what CSR Europe considers to be the ideal situation when defining the purpose of materiality analysis.

 

The definition of materiality will also take different forms according to the context. In the MIA assessment we used a combination of the GRI and IIRC definitions in the context of point 4.

An area is material if it has a substantial effect on the value
of the company in short, medium and long-term

WHY IS IT IMPORTANT?

 

Materiality analysis is important for both internal management, and external engagement reasons. Internally, it helps focus on the essential areas of sustainability management and convince less involved senior / executive management on the importance of such areas due to their impact on the company’s reputation, different footprints and eventually environmental, social and financial bottom-lines (the triple bottom line). Thus, it is an important first step towards integrated financial and non-financial thinking, management and performance.

 

Externally, materiality analysis is an important lever in making reporting more concise and also more credible through the description of a robust approach. This in itself will improve communication on sustainability with the potential to enhance transparency and positively impact reputation.

IDEAL SCENARIO

 

In the MIA benchmark, we considered the ideal approach to materiality analysis to include the following elements:

 

  • A strategic scope (step 1 in flowchart) – using materiality analysis in the context of point 4 above as a starting point for strategic sustainability (holistic) management.
  • Systematic stakeholder and issue mapping (step 2 in flowchart) – as opposed to ad-hoc practices
  • Systematic stakeholder and issue prioritisation (step 3 in flowchart) – as opposed to ad-hoc practices
  • Matrix or other method of representing material issues – to define material issues and clarify what factors were taken into consideration
  • Verification of prioritisation with stakeholders (step 4 in flowchart) - through consultation, preferably in the form of a physical stakeholder dialogue workshop
  • Regular review of materiality analysis (step 5 in flowchart) – to capture changes in stakeholder expectations, company approach or prioritisation

For more information on capturing stakeholder expectations see also challenge 3.3 Stakeholder expectations mapping.

MIA RESULTS

 

The assessment captured that in general, the companies assessed are less mature in using materiality analysis for strategic management purposes and tend to look at materiality analysis as a tool to define sustainability reporting topics instead. The two weakest areas were systematic mapping of stakeholders and external validation of company prioritisation (where companies also tend to define what they think is material for their stakeholders often based on non-systematic, unstructured relationship management practices. For more information on stakeholder expectations mapping see challenge 3.3 Stakeholder expectations mapping.)

TRENDS

 

Materiality analysis is a good, essential element of sustainability management, but it does have some general drawbacks creating dilemmas especially for the external comparability / usability of the information reported.

 

1. What is material is a question of interpretation

Although, CSR experts will agree that strategic materiality is key in a company from a resource allocation point of view, the overall business case of such an approach from an analytical point of view is not so certain. A UNPRI report on how investors are integrating ESG factors into their equity valuations concludes that whereas there is some consensus that certain ESG factors could have significant impact on performance, others will depend on individual investors’ judgement. From conversations with both companies and investors it appears that in general investor valuations focus more on governance facets than social and environmental aspects.

 

2. Different approaches may yield different information

Since materiality analysis is conducted according to different approaches primarily related to issue/stakeholder prioritisation, the resulting information may also be a colorful set of priority areas that are difficult to compare even within a sector.

 

3. Legislating on material issues may compromise proper materiality

Prescriptive legislation defining sustainability areas and indicators to report on may complicate the procedure of analysis and negatively impact the conciseness or the integration of resulting reports. However, in Europe the EU Directive on Non-Financial Information Disclosure is introducing a “comply-or-explain” regime, which leaves room for proper, robust materiality analysis to explain why something is not managed and/or reported.

 

4. Industry-level material topics complement company specific ones

Multistakeholder consultation-based industry guidelines on material topics and indicators for entire sectors may be helpful to balance company-specific materiality analysis and comparable sector-based importance of topics.

 

5. Large companies are improving their materiality analysis and disclosure

See further “Reporting Matters” analysis by WBCSD and Readly Yeldar.

 

 

 

RESOURCES FOR THE JOURNEY

 

PREPARATION

 

Executive buy-in to ensure strategic purpose of materiality analysis is key

Try to obtain executive buy-in for regular, strategic materiality analysis at the right time in the strategic planning cycle to be on time to inform the process and not only report on topics that are predefined.

 

Connect financial and non-financial materiality

Check internally how financial materiality and sustainability materiality are defined and used in your company. This may be a good starting point to obtain high-level buy-in and help integrate internal thinking, management and reporting further.

 

  • The guides published by the Financial Reporting Council (FRC) in the UK may be a good basis for discussion, e.g. “Thinking about disclosure in a broader context”.
  • UNPRI`s Value Driver model is also a good basis to link financial and sustainability value to increase investor interest.

 

 

IDENTIFICATION

Stakeholder mapping:

 

Engage your staff

Internally, your colleagues in divisions and departments will have the answer to who are stakeholders that are important for them. The ideal situation is to have a stakeholder relationship management system in place (backed up by integrated / non-integrated IT system) from which necessary information can be extracted (i.e. a list of stakeholders). A less ideal, less time-efficient yet still operational, approach is to consult individual departments on this.

 

Engage other stakeholders and / or service providers

Externally, industry associations, organisations (communications, public affairs, CSR agencies) or business networks such as CSR Europe and its national partners can prepare a stakeholder map for you.

 

See further tools and resources in chapter 3.3 Mapping Stakeholder Expectations.

 

 

 

Issue identification:

 

Decide on the level of detail (granularity) of concerns identified in a way that will yield a manageable number of issues, but will not be too high-level to compromise credibility. MIA pilot companies plotted between 20-40 different issues in their matrices, with 5-15 selected as material. There is no one-size-fits-all solution, but two perspectives from experts may provide further guidance on how to approach this exercise: Why materiality matrix is useless, by Elaine Cohen and How to navigate the maze of materiality?, by Dunstan Hope.

 

At the issue identification phase you may want to look into sector guidelines on material sustainability areas. For example:

 

 

 

PRIORITISATION

 

  • Make sure quantitative and / or qualitative interpretations are available where appropriate – it is impossible to quantify and monetise everything. The approach of Coca-Cola Hellenic, provides a simple yet robust methodology to determine the impact of issues on business and the impact the company has on society and the environment through stakeholder engagement and secondary information sources. Access Coca-Cola Hellenic good practice here.
  • Make sure a fair representation of internal and external stakeholder voices are taken into consideration when prioritising issues. Toyota Motor Europe, for example has done this by assigning stakeholder roles to division leaders, who are in contact with relevant stakeholders. Many companies also use online consultation tools to complement internal prioritisation with stakeholder feedback.
  • Be prepared that some company prioritisations may be conflicting stakeholder expectations. Group meetings, workshops and structured stakeholder dialogues are a good way to have real-time input from relevant stakeholders who might convince each other and where topics’ relevance can be defined by consensus. CSR Europe and its national partners are organising such stakeholder dialogues.

 

 

VERIFICATION

 

  • Directly verify your materiality matrix with stakeholders. CSR Europe experience on direct one-day stakeholder dialogues shows that the exercise, even if proving your prioritisation correct, will have a good effect on stakeholder relationship, reputation management and most importantly, legitimising of your efforts towards a positive triple bottom line impact and performance.

 

 

REVIEW

 

  • Depending on the granularity of issues identified and prioritised, corporate and / or reporting strategy development cycles, an annual, bi-annual review of material topics may be relevant and require less efforts than restarting an entire analysis.
  • External review and / or assurance may be solicited to yield more credibility to the exercise. However, it is worth gauging whether the audiences really value such additional administrative costs. A well-established and well-communicated process and results may be a good enough starting point.