CSR and ESG professionals, prepare to get busy! With increased interest in ESG disclosures coming from the SEC and the EU, ESG reporting is primed to go mainstream. With this renewed interest comes a new focus on materiality because materiality is how we determine what information to report on and what to emphasize. Bid adieu to the matrix of yore. While beloved, it has served its purpose.
The old materiality matrix was static, a moment in time, and we used stakeholder input to inform it, which means, in most cases, it was relying on old information to garner new insights. COVID-19 is the perfect example of why the old ways of doing things are no longer sufficient: While few companies outside of big pharma and life sciences had public health on their matrices, public health became priority #1 for nearly every company in every industry, practically overnight. If the goal of the materiality assessment is to help us be more nimble and responsive to pressing issues, we need a model that will help us act more quickly. Enter dual and dynamic materiality.
Dual materiality means we must consider ESG topics that are material for financial reporting and material for CSR or sustainability reporting.
Dynamic materiality means we must use methods, such as AI and big data, that allow continuous inputs so that topics can shift — and organizations must be nimble enough to accept feedback and operationalize it outside of the CSR department.
As outlined in the Statement of Intent to Work Together Towards Comprehensive Corporate Reporting produced by GRI, SASB, CDP and CDSB, materiality can no longer be considered static. Here’s how they describe it:
The diagram uses dotted lines to emphasise [yes, it’s British English, make sure to use an accent] that materiality is a dynamic concept. Sustainability topics that a company once considered immaterial for disclosure can become material, based on evidence of an organisation’s impacts on the economy, environment and/or people. Likewise, some of these sustainability topics can also become material for enterprise value creation, either gradually or rapidly – as with human capital topics such as racial equity and, more recently, the Covid-19 pandemic
The sticky wicket for those of us who are deep into reporting process will be: can we still report on those feel good programs for which we believe there’s business value but it’s difficult to prove? I hope we’ll be able to maintain our rich, colorful CSR reports, even as our finance colleagues seek ESG data to satisfy investor interest.