This article was originally published in the Sept 2024 issue of Governance Directions Journal, from the Governance Institute of Australia.
Boards and leadership teams have never before had so many sustainability-related obligations. Agendas are growing crowded with climate and nature risks, expanding disclosure standards and rising expectations for changes that benefit people, the climate and nature, through every link in the value chain.
As boards respond, they risk being overwhelmed by the latest incoming issue, or mobilising around pet interests to the detriment of truly strategic exposures. More than ever, it is essential that they apply a sound logic to the sustainability-related matters before them to ensure that they receive proportionate focus and resources.
Helpfully, well-trained corporate muscle for Materiality Assessments can be put directly to the task. With only a modest lift, the humble Materiality Assessment can become a cornerstone of sustainability and strategy capability.
Financial Materiality is a well-established concept. Financial Materiality Assessments consider significant areas of exposure that could alter a company’s forward-looking valuation. While an important part of Finance team thinking and reporting and now understood to include major climate and nature risks to value, these Assessments give an incomplete picture of sustainability exposures.
Sustainability teams have been using the concept of Double Materiality for some time, adding to the assessment of sustainability issues that have the potential to impact their company’s future performance with the sustainability impacts that radiate out from their company’s actions. Double Materiality adds a more complete view of adverse impacts and value at risk, but assessments often lack structure. Worse, double Materiality outputs are frequently consigned to the narrative sections of sustainability reports and do very little for strategic management.
Boards need Materiality Assessments to be so much more.
Materiality can be used to bring coherence to sustainability strategies, investment decisions and operations, but only if organisations:
1. Employ structured evaluation: Double Materiality should prioritise the highest relative exposure areas, and
2. Make Materiality matter: The Double Materiality outputs must be wired into a prioritised work plan, investments, and other resource allocations.
Structured evaluation
The assessment of outward impacts for Double Materiality typically span climate, or greenhouse gas emissions, impacts on nature and biodiversity, and practices affecting people, whether First Nations, staff, customers, or people associated with the value chain or regions of operation. Impacts can each be positive or negative.
Adverse outward impacts, if left out of step with expectations, regulations, legal developments and shifts in the competitive landscape, not only cause harm, but increase transitional risks that can in turn destroy company value. Take for example a company with a track record of land clearing: An absence of plans to reshape its activities means the persistence of reputational, regulatory, and other risks which expose the business to external shock.
Organisations have multiple parallel responsibilities. The elevation of a handful of the most material impacts does not take away from the threshold need to manage a longer list of sustainability-related responsibilities with due care and to progressively build capability in each. The difference is strategic focus. Double Materiality Assessments provide an opportunity to organise effort and capital around the areas most exposed to criticism and most in need of positive change.
Reputational risk and external expectations are critical reference anchors when identifying areas of material impact and exposure. Boards gain much by understanding what is said about their organisations, figuratively, when they leave the room.
At the heart of Double Materiality is the idea of relative or proportionate importance. Impacts with the highest relative significance will reflect the different nature of each company’s activities and value chain. A gold mining company may have material environmental impacts such as water pollution but relatively low greenhouse gas emissions. A company engaged in fossil fuel extraction is likely to be most exposed by its greenhouse gas emissions even if it has similar environmental impacts to the gold mining company. This is not to say that they are absolved of responsibilities to repair nature, but emissions will define their strategic envelope.
The clearer the information returned to the board and management, the clearer the opportunity to respond through targeted action.
Make Materiality matter
What matters most for any Double Materiality Assessment is how it’s used. Companies that keep them squirreled away for external reporting miss something important; both for their own performance and reputation, and for their impacts on people and our planet.
A structured Double Materiality Assessment with a distilled set of outputs is a playbook for action. Its shape should be hardwired into the sustainability function workplan for the years ahead, visible in the organisation’s targets, and reflected in company allocation of capital and other resources. It should be understood across all levels of the organisation and answered directly by the company’s strategic plan. It should show up in governance cycles, incentives and rewards, and should culminate in aligned focus to deliver change.
By pinpointing the sustainability issues that are most relevant to the company, Double Materiality Assessments enable focussed leadership team oversight. It’s this level of responsibility and clarity that must be harnessed to steer businesses through the urgent transitions underway.
Anna Hancock is a Pollination Executive Director. Prior to joining Pollination, she established and led the Sustainability and Climate Change function at EnergyAustralia and has also worked in senior roles in the mining industry. Contact Anna to see how your company can benefit from a fresh approach to materiality assessments.
