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FAQs on Materiality

Materiality Assessment: What is it?

The concept of materiality has its origins in the auditing and accounting processes of financial reporting. In financial terms, a concept is considered material to the company if its omission or misstatement influences the economic decision of users. In recent years, the concept of materiality has been adopted in sustainability and is increasingly influencing the design of sustainable strategies and reports. In contrast to financial statements, sustainability covers a multitude of issues- environmental, social, economic and more. This context requires a more comprehensive definition for materiality. Materiality Assessment, in the context of sustainability, is performed to assess what sustainability issues and concerns are most important to the company and its stakeholders. During the assessment implicit and explicit stakeholder perspectives on a set of sustainability issues that are relevant to a business, are mapped through variety of means. This information and perspectives are used to inform business decision making and communications strategies. Results are generally presented on a Materiality Matrix that plots stakeholder priorities vs. the priorities of the management team. Materiality assessments help business leaders understand the priorities their stakeholders place on various sustainability issues relative to the importance management has placed on. This assessment of alignment between stakeholder concerns and company efforts can reduce risk and enhance engagement. Materiality analysis is also seen as step, that can integrate sustainability and financial disclosures by the business entities. How to conduct Materiality Assessment?

A materiality assessment can be conducted using the following procedure: Step 1: Identify and priorities your major stakeholders – investors, employees, consumers, suppliers, NGOs, government and the media. Organize major stakeholders into segments and identify the aspects of sustainability that could relate to these segments. Step 2: Identify and prioritize major sustainability indicators (economic, environmental, labor practices, human rights, society, product responsibility) using GRI Guidelines / SASB maps for sectors etc., and decide on the most important sustainability indicators relating to your organization, with reference to major stakeholders groups and segments. The number of indicators will depend on the scope of activities of your organization and available resources. To determine the importance of indicators, one can conduct surveys, media research, and analyze internal documents. Step 3: Conduct discussion across the organization and discussions and surveys with major stakeholders to rank sustainability indicators on two levels: o Importance o Impact Surveys can be for example on a scale of 1-10 Step 4: Rank the indicators on a matrix using two axis, one for importance, and one for impact. Why is it important to disclose the outcomes of materiality assessments? As mentioned earlier, the term materiality comes from the financial world. Guidelines for Sustainability disclosures such as GRI, SASB etc., also incorporate the concept of materiality into their reporting guidelines with the aim of elevating sustainability issues to the same level as other traditional business issues and consider the financial risks and opportunities associated with those issues. It is keeping with the growing importance investors are placing on effective management of sustainability within companies. In 2013, 40% of all shareholder resolutions were related to sustainability and climate change and 94 US companies were targeted. These resolutions actually forced companies including Nike and Starbucks to change their policies and programs.

In addition, by disclosing how they arrived at material issues in the sustainability report, company is demonstrating to all its stakeholder it intent to be transparent, their attempt to provide information and address concerns of the stakeholders and explaining why certain issues are not being addresses or disclosed.

Is Materiality Assessment undertaken one time- first time…or is it periodic exercise?

Materiality assessment is useful tool that can help companies identify stakeholder concerns and potentially avoid stakeholder/shareholder complaints and actions. GRI encourages companies to reach out to external stakeholders for input when conducting a materiality assessment. For companies further along in their sustainability journey, assessing materiality on an ongoing basis helps validate your existing strategies. It could be an integral part of companies strategy formulation and be done as frequently as Board revisits strategy. How should companies determine which external stakeholders to engage in a materiality assessment? You need to think about which stakeholders are impacted by your business, or have influence on your business. These can include customers, different levels of government, NGOs, investors, employees, local communities and suppliers. Shareholders are especially important if you are a publically traded company. You may have customers sending you sustainability questionnaires as part of their own supplier assessments – they would be important stakeholders to involve – as would a long time strategic NGO partner or a particularly vocal NGO that has been contacting you about a certain sustainability issue. GRI has prepared helpful guidance on how to map out your stakeholders and prioritize them – pages 11-12 have the specific guidance on assessing materiality. The stakeholders you choose to engage can depend on where you are in the value chain, who has shown interest in your sustainability efforts and who you want to involve in your sustainability efforts moving forward. Think about those stakeholders who would have some insight into the business risks or opportunities you face from greater levels of action, or inaction. Recently, we were engaged with a company, involved at a stage of value chain, where it has least control on stakeholders that are supplying main raw materials and similarly lesser control on customers in the way that they use their products. Many sustainability risks are at the end of suppliers and customers. So engaging with them and understanding sustainability risks at their end revealed a few more material sustainability issues in addition to those identified by company’s management. Once you have mapped out your key stakeholders and selected the ones you want to include, you then survey people from those stakeholder groups. You can send them electronic surveys, interview them one-on-one or even invite them to participate in a focus group. This external view can add a lot of value to your business. What do the outputs of a materiality assessment look like?

To get a sense of how companies are documenting the outcomes of their materiality assessments, take a look at

faq1

Source: MTR

What makes Marks and Spencer’s materiality matrix outstanding is its level of clarity, as seen below

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Source: Marks and Spencer

The 10 priorities for SAB Miller can be seen below

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Source: SAB Miller

Autodesk’s materiality map – page 9 of the sustainability report At the top right hand corner of the matrix “energy efficiency and energy management” were identified as being the most important elements to both their stakeholders and their business. Autodesk will be sure to report on the activities and programs they have in place to manage their energy consumption in their sustainability report. This also means that Autodesk needs to actively manage this issue internally, by setting goals for improvement, and reviewing progress against those goals on a regular basis. What benefits the companies are seeing by doing a materiality assessment?

A company in the mining sector, new to sustainability practice, said it really helped them to prioritize the issues for sustainability endeavor (and not to take on too much initially). The exercise also helped this client to build internal alignment as many senior leaders were engaged in ranking what mattered most. In addition to the benefit of alignment, it brought people from different business functions across the company together – people beyond the sustainability team – including folks from marketing, finance, risk management, R&D, etc. For a client in the Auto sector, who already had a sustainability processes, but wanted to strengthen it, the materiality exercise helped to validate elements of their existing approach while revealing several areas for improvement. Our experience with some clients also proved that materiality analysis is a great way to engage external stakeholders on a regular basis for early identification of issues and to incorporate their input into your strategy. It makes it easier to respond to their questions about issues they think you need to address. In order to fulfill the GRI G4 Guidelines or to respond to Sustainability Accounting Standards Board (SASB) in the US, companies need to document the process to assess materiality and the outcomes of that assessment.

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