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The Elephant in the Room: Materiality

Sustainability reporting and transparency are a rapidly growing concern. Widely accepted by the business community, and investors and stakeholders at large. There’s one not-so-small obstacle for many companies starting down that road, however. How do they know what to report? What factors and performance indicators truly matter?

Enter materiality, the elephant in the room that organizations need to talk about, but aren’t sure how to begin the conversation.

By definition, materiality is the quality of being relevant or significant. And within the sustainability realm, it’s a way for companies to determine and report on what’s within their own sphere of influence.

Elin Olson, Sustainability Specialist at Schneider Electric, provides her insight on the topic — detailing how organizations can create a strategic sustainability plan and reporting structure to meet environmental and larger company goals.

Why should companies care about materiality?

Elin: Companies tend to concentrate on direct operational impacts, but there are a lot of sustainability factors that fall more broadly within their sphere of influence, such as social, supply chain or financials. These factors may not be the first thing companies think of when they think “sustainability.” Materiality is also starting to align more with integrated reporting by having rigidly defined rules as a way to ensure companies won’t omit an important data stream or report on something incorrectly that could cause an adverse reaction. It also serves as a way to internally strategize and communicate a company’s sustainability efforts based on different audiences like internal and external stakeholders.

How is materiality linked to sustainability?

Elin: It is linked to sustainability mostly through the three Ps: people, profit and planet. Essentially, it’s looking at all impacts and aligning them to what is important for a specific company. It’s a way to link every aspect of a company and its value chain in one place. Materiality helps sustainability-focused companies to define how and what they should be communicating, and how to do so effectively.

How do companies figure out what sustainability factors they need to track?

Elin: Through a materiality assessment. Which is a framework companies can use to examine many different sustainability impacts and see what is important for their business, what can be a great opportunity or what can pose a significant risk. It’s the foundation to a company’s sustainability program. It helps companies identify and strategize around their sustainability journey. Once a company understands the core topics important to its business, the next step is identifying different performance metrics. After going through an assessment, companies look at different performance goals, such as emission reductions, and identifying certain initiatives internally that they can use to help move their program forward.

Why is materiality important to sustainability-focused companies?

Elin: For two main reasons. First, it allows them to determine what’s important — and quit chasing things that aren’t. For example, a manufacturing company may be using a significant amount of water in their processes in a water-scarce region, whereas water management may not be as material to a commercial enterprise. From company to company, different resources are being used and different stakeholder interests are at play. So it’s a way to focus in on what will have the biggest impact.

Second, it assures companies actually report true impact by looking at everything from a company’s first, second and third sphere of influence, and providing information. For example, say a retail company doesn’t make its own product, it’s still important to ensure the people who are making its product are being treated well. And that should be an area of focus for reporting. Companies can use materiality to make sure they’re reducing both their internal burden, as well as seizing on all risks and opportunities.

Is it as simple as checking data streams?

Elin: In principle maybe, but in practice it’s a bit more intricate. Materiality can be confusing to companies, mainly because of how broad it is. The Global Reporting Initiative (GRI), which is a standard framework companies use, has hundreds of different indicators. Sometimes it’s not clearly stated what indicator is or isn’t important for a specific company. Having to go through every single detail can be overwhelming and looking at a long list won’t provide a lot of value. It will simply turn any assessment into an exercise of collecting data without any context.

How can companies avoid becoming overwhelmed during a materiality assessment?

Elin: Companies don’t have to do everything at once – and really, they shouldn’t. Start with what’s of most value and what’s the most impactful, and go from there. Filter everything down from the topics that make most sense to a company portfolio and put the others aside, or, if they’re not important at all, disregard them.

What’s a core step to filtering the right topics?

Elin: Involve as many internal stakeholders as possible, from the c-level to facility managers to human resources to legal, to get the right idea of what’s important to the company. But don’t forget external stakeholders. Customers and NGOs can sometimes see risks more clearly than a company may so it’s important to get everyone involved in the process to ensure all viewpoints are incorporated.

Materiality is a must for companies to begin wrapping their brains around sustainability reporting and what matters most to their portfolio. Finding the right items to focus and report on is key in helping translate data into a story around sustainability impact, and getting the right people in the room ensures all perspectives are taken into account. By starting the conversation, companies can turn it into data driven results to successfully track and implement sustainability programs.

To kick off your own journey, download our Sustainability Reporting & Business Growth in 8 Steps guide.

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