The topic of materiality is moving to centre stage as environmental, social, and governance (ESG) standards are increasingly requiring businesses in the EU by law to track and report their greenhouse gas emissions. But it’s not only legal mandates which urge companies to focus on materiality – consumer preferences and investor demands are also now prioritising this matter.
Materiality, in a broad sense, refers to the measurable aspects of an organisation’s enterprise value. Traditionally, this impact has been measured predominantly as a function of a company’s financial sustainability, or its bottom line – what would be considered its inward materiality.
Consider a SaaS company operating in one country, and expanding to new markets. A decision to expand would need to factor in whether to invest in local offices for each market, or to work with consulting third parties. Expansion means profit, but how are these profits best stewarded and harnessed? The company needs to think about its inward materiality to make decisions that help its own interests – including climate risk assessments.
But focusing on an organisation’s value to itself is no longer enough. The climate crisis urges businesses to assume greater responsibility for the impact their actions are having on the environment. Beyond financial and risk imperatives, businesses need to track and understand their effect on the outside world – fast.
In other words, it is now essential to include outward materiality in corporate impact assessments. In ESG terms, this means assessing the organisation’s impact on the environment, the economy, and society, including human rights.
This consideration of an organisation’s inward and outward impact is known as double materiality, and going forward, must be factored in as a crucial part of data-driven business intelligence informed by climate science.
In the example of the SaaS company expanding to other markets, outward materiality assessments would include tracking the company’s footprint from travel, electricity and water consumption in office spaces, diversity of suppliers, and more. This adds insights into the resources the company takes from the environment, and how those resources are returned.
Dynamic materiality assessments take the idea of data-driven business intelligence one step further. On top of assessing a company's inward and outward impact at this moment in time, dynamic assessments help a company to anticipate which factors might affect its impact in the future. By taking into consideration which ESG issues may become more pertinent over time, and which current immaterial ones may evolve to become material, a company optimises its actions and mitigation efforts to be both more timely and effective in an era of climate volatility.
It’s not only those impacted by a company’s outward actions who want materiality assessments. Investors too are becoming increasingly aware of environmental, social, and governance priorities, and are now evaluating those they fund for their ability to steward their materiality well. The longer the investment horizon, the more important this issue becomes for investors.
Materiality assessments are foundational to a company’s sustainability efforts, and need to be done, and to be shown. When well executed, it can greatly help a company to align its business strategy with both sustainability priorities and its own bottom line so it can maximise its enterprise value while reducing unwanted impact.
Companies that regularly perform and transparently report their materiality assessments help not only themselves, but also make it possible for their stakeholders to make more informed sustainability decisions for themselves down the line.
Rather than thinking of it as an increased burden to report, you can instead structure your assessments dynamically, and use the daily insights generated for data-driven decision-making. This way, you ensure that you report only what is relevant to your company’s materiality. The ongoing assessment of dynamic, double materiality then simply informs your company’s social and environmental performance indicators.
Materiality reporting doesn’t need to be complicated, and the sooner you implement it, the sooner you can make it work to your company’s advantage.