3 Types of Materiality for Sustainability Executives

06/06/2017 11:27 am ET
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Successful sustainability strategies connect their sustainability efforts with strategic issues. Companies that do this are 50% more likely to report business value from sustainability compared with those that do not, whereas 16% of companies paying little or no attention to material issues report that they profit from sustainability.

So materiality is key, but it may be unclear how this concept translates to sustainability. There are three types of materiality and each can offer opportunities for your company to invest in a viable sustainability strategy.

Materiality is originally an auditing concept for a company’s accounting statements to insure that shareholders are given all the information germane to financial performance. Financially material sustainability hinges on whether an issue will impact profits in a measurable way. As an executive I interviewed explained, “If you’re a bank and you’ve got an energy-savings program and you’re in LEED platinum buildings, investors aren’t going to care. But if the bank’s loan portfolio has a bunch of ESG risk and stranded assets ... those are things that are material.” Some sustainability concerns are common within a given industry, and organizations like the Sustainability Accounting Standards Board (SASB) help companies identify material issues in their respective industries.

But sustainability is supposed to take more than investor concerns into account. Another type of materiality is stakeholder materiality. The cost of using of a community’s well water for your manufacturing plant may have little impact on your financial bottom line, but it may have a big impact on access to water for the people of that community. The best practice for assessing nonfinancial stakeholder concerns like this is through engagement and the creation of a “materiality matrix” that ranks issue according to their financial impacts and their importance to key stakeholders. Through this analysis, managers can highlight issues that matter to both companies and communities.

A third type of materiality to consider is contribution materiality. There are some issues where a company is intimately associated with a specific sustainability problem and its potential solution. In this case the company is a key player in the issue because of what it can contribute toward resolving a problem. Take the pharmaceutical industry and the problem of the HIV/AIDS crisis in Africa. Pharma companies did not cause the epidemic, so they resisted activists’ demand for concessions on pricing. But the truth was the industry owned the solution through its monopoly rights on the drugs that could combat the disease. Pharma could materially contribute to solving the AIDS crisis and was inevitably drawn into the resolution.

Financial, stakeholder, and contribution materiality are all useful tools to determine which sustainability issues will be strategic for your company. It is also wise to heed the words of Michael Porter and choose what not to do in your strategic planning.

This post is the second in a series of eight, representing key findings from a collaborative research report between MIT Sloan Management Review and the Boston Consulting Group.

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