Materiality: the key ingredient of sustainability reporting
Kye Gbangbola explains how organisations can improve their progress on the UN’s Sustainable Development Goals by targeting the impacts that matter most
Amid a global sustainability and climate crisis, organisations can show they are part of the solution, rather than the problem, through corporate sustainability reporting. They need to frame their sustainability thinking in an orderly, relevant, and transparent manner – and this is precisely what good sustainability reporting provides.
A sustainability report should reflect the magnitude of the organisation’s contribution and impact. The organisation should be clear how it demonstrates stewardship, and how it creates and sustains value. The emerging term ‘sustainable finance’ signals that investment communities are increasingly taking notice of organisations’ sustainability credentials. It is estimated that achievement of the SGDs could unlock $12trn of global value for businesses every year. Investors have realised that they can interact with organisations and make more money while also supporting the UN’s Sustainable Development Goals (SGDs) and the Paris Agreement on Climate Change.
CEOs at reporting companies cite competitive advantage, attracting capital, enhanced reputation and trust, greater employee motivation and increasing profits among the areas of added value brought by greater sustainability. Sustainability reporting also boosts organisations’ resilience and capacity to manage change.
Authenticity and sincerity
Organisations that do not engage in sustainability reporting are unlikely to remain in business – indeed, many such companies are already finding that they are being left behind. Being unable to identify material issues and impacts based on robust, tried and tested processes is often a recipe for disaster. However, insincere businesses, whose reports are little more than smoke and mirrors, remain an issue. Recent large corporate collapses have revealed serious failings in the conduct of certain organisations’ reporting processes – and perhaps this is to be expected within businesses that are considered to have dubious corporate cultures.
Advising non-reporting organisations on sustainability reporting is far more rewarding than working with an ethically challenged reporting company with a board that is prepared to misdirect stakeholders. The non-reporting company can be trained, while the latter organisation has no interest in the systematic processes of stakeholder engagement, sustainability context and materiality.
The Sustainable Development Goals
There are 17 SDGs, encompassing 169 targets to be delivered by 2030. The goals aim to end poverty, protect the planet and ensure prosperity for all as part of a new global sustainable development agenda.
Each goal has specific targets to be achieved during the next 15 years. The challenge for businesses is to identify and deliver the meaningful contributions they can make to the global effort. Materiality is the part of the reporting process, with issues relating to the SDGs having moved up the agenda. Since the SDGs were introduced, CEO statements have started to discuss how their organisation contributes to sustainable development, both in the organisation’s day-to-day activities and in the strategies it sets and delivers. Increasingly, material issues must reflect the organisations’ purpose relative to outward global, regional and local sustainability issues.
Starting the journey
Sustainability reporting requires stakeholder participation. At times, this can be broad and involve large numbers of stakeholders; at other times, it can be narrow and involve only key stakeholders. This engagement is crucial to materiality.
The reporting process begins with ‘prepare’: this is where governance and resources are positioned in preparation for change, and the organisation connects with stakeholders in a structured manner to consider the topics and issues to be addressed. The next phase is ‘define’ – considering the list of material aspects gathered from the preparation.
This third phase is where organisations identify what is ‘material’. This is like panning for gold – having collected the resources, the sieving process reveals the precious material topics sought. Materiality is about identifying what is essential and focusing on the impacts, risks, and matters that are most relevant to stakeholders. It identifies the key issues for an organisation, to help generate clear, concise reports that concentrate on the ‘value-creation’ story – what you did, what you gained from it, how you did it and what the outcome was. Imagine you are packing a backpack for a hike; you take only the supplies that are critical, otherwise the weight will slow you down and eventually bring you to your knees.
Material issues are found across the three categories that make up the legs of the ‘sustainable development stool’. The economic ‘leg’ is made up of topics such as economic performance, anticorruption, tax payment and procurement. The environmental leg would include materials, energy, water, biodiversity, emissions and so on. The social leg includes employment, health and safety, gender, child labour, public policy, etc. It should be remembered that the relevance of each topic is relative to the organisation and its activities.
The problem for many businesses is a lack of methodology allowing them to focus on what matters, meaning they try to do too much or have an insufficient understanding of which sustainability areas will enhance their performance – and a failure to achieve sustainability objectives.
Establishing the boundaries
To understand ‘boundary’ is to understand both the nature and amount of impact an organisation is responsible for. Boundary and supply chains are important because they provide the complete footprint of a topic’s impact. Failure to address the issue of boundary results in an inaccurate assessment of impact.
It is no longer good enough for an organisation to turn a blind eye to impacts simply because it has outsourced production. When setting the boundaries of their sustainability reporting, an organisation should consider both the impacts it causes directly, and those it contributes to through its relationships with suppliers.
If materiality is done well, an organisation will be clear on what is relevant and where risk can be reduced; it can now measure, monitor and manage its impacts, and thereafter accurately and transparently report on the same.
Seek expert advice to get you up and running. This can help to avoid overloading the organisation and get processes positioned quicker, including assessments of past performance for setting baselines, and internal and external benchmarking.
Kye Gbangbola is director and founder of Sustainability Consultancy Total Eco Management, and the author of How to Produce a Sustainability Report: A Step-by-Step Guide to the Practices and Processes and Gold Standard of Corporate Sustainability Reporting: A Step-by-Step Guide (out soon).