Puzzling Sustainability Materiality with Beer & Pizza
There has been a lot of hoopla recently over the concept of sustainability and materiality.
For many, especially those of us who have been around sustainability for a long time, the concept of materiality is not particularly new. But for others it’s a new concept.
So what is materiality?
Well, in the simplest of terms, materiality refers to a company’s most significant sustainability impact, positive and negative.
Personally, I love the concept. But it can be a bit difficult to get one’s head around, at first, if you are not an accountant.
Now, no one who knows me would ever accuse me of being an accountant. But I did once consider myself an accounting enthusiast.
That was back in the early 1990s when I co-founded and ran the Social Investment Organization (SIO) in Canada. I was interested in accounting precisely because we had about as much income as there was interest in social investment at the time. And remember, this was when littering was still considered one of the biggest environmental concerns.
Despite the size of our budget, or lack thereof, every third Thursday evening of every month, my friend Mark, the accountant, would come to our offices to help do the books over pizza and beer.
Towards the end of the first year of these meetings we began preparing for our first annual financial report. It was then Mark asked me, “What is your materiality level?”
“Huh? What the heck is that..?”
“You know, the amount of money no one cares about if you can’t account for it.”
“What do you mean?? Can’t account for?”
“Look, its late and we’ve just spent two hours trying to balance the books over $120 we can’t find… on revenues of $167,000. I am tired and want to go home. Why don’t we just say the amount we don’t have to account for is 0.5% of revenues and call it a day?”
“You mean around 340 bucks?”
“Yep, that’s about right, it’s just not worth the effort looking for less than that.”
And that’s where we left it. Fortunately, for Mark and my Board of Directors, there are several rule of thumb materiality measures employed for accounting purposes.
Multivariable and Multidimensional
Not so sustainability.
Defining materiality for sustainability is a multivariate question. And just to make things more interesting, many of the vathumbsriables are not easily quantified and worse yet can’t be defined by Mark and Marc over pizza and beer.
No, indeed, sustainability materiality is also a function of what stakeholders think matters when it comes to a company’s impact.
To begin a company has to:
- Assess commonly accepted list of sustainability indicators;
- Assess if the company has a material obligation;
- Assess if the company has met or not it’s material obligation; and
- Assess the risk/opportunity of meeting or not a material obligation.
Unlike an accounting application of materiality, there are no rules of thumb to apply. Instead, a company has to:
- Understand why each indicator is material or not;
- Understand different stakeholder opinions as to why each indicator is material or not; and
- Measure the validity of different opinions.
Of course, once all this is measured and assessed, a company needs to decide what it wants to do or not about its material impacts.
As will be the case with many companies, they will also have to reassess efforts made on non- material sustainability impacts. That is, some companies may raise millions of dollars for cancer treatment research but cause many millions of dollars more in environmental damage, or worse provide products that actually cause cancer.
Materiality findings will unavoidably raise many strategic questions, or questions about what and how a company does to improve its sustainability performance. This is particularly going to be the case as the GRI G4 guidelines require companies to define their material impacts and as SASB begins publishing its sustainability KPIs.
Sure, establishing materiality will not be easy at first, but the effort will be worth it not only from a defining what counts perspective but ultimately as a key to improving sustainably performance and value enhancement.
Look for more on Materiality and Sustainability Strategy in coming blogs.