Achieving “true” materiality: the quest starts here
22 May 2019 - By Alex Voskou
Covering everything from carbon emissions to climate change, human rights to slavery, materiality has always been a hard thing to pin down. All companies are different, whether in culture, size or circumstance, so there is no standard approach for understanding and assessing the concept. On Thursday 16th May, Datamaran hosted a webinar discussion to address the challenge.
Entitled The Quest for “True” Materiality: Make it Work for you, the webinar helped organizations understand how to reconcile the different interpretations and assess materiality in a way that makes sense for their business. It featured contributions from Lene Serpa (Maersk), Andreas Hoepner (EU Technical Expert Group for Sustainable Finance and University College Dublin) and Yen-Pei Chen (ACCA). Each of our guests gave their interpretations on the concept and explained their own organizations’ approaches where applicable.
Investors and regulators have paid growing attention to materiality processes in recent years. Lene Serpa, Head of Organisational Engagement and Reporting at Maersk, suggested that “Investors are the new NGOs...they are pushing us to come up with much more concrete data points, pushing companies on the sustainability agenda.”
When devising an effective approach to materiality, clarity is therefore more important than ever. Splitting materiality into three dimensions – responsibility, risk and shared value – Maersk developed its own framework in 2015, replacing what was previously viewed as a tick-box exercise. “A clear separation of the issues helps to define how these issues are important to your organization and how to manage them properly,” explained Lene Serpa.
Yen-Pei Chen, Corporate Reporting and Tax Manager at ACCA, favours a more entity-specific approach. “Companies are more proactively explaining the materiality process. This approach enables a more natural loop back into the decision-making processes of the company.” If you identify and report on issues that are significant for the company, you can use these reports to help define business strategy and manage risk.
Andreas Hoepner is part of the EU’s Technical Expert Group for Sustainable Finance and Professor of Operational Risk, Banking and Finance at University College Dublin. He focused on the merits of dual materiality – assessing “what’s important to the company and important to the planet.” Citing the precautionary principle from the 1992 Rio Earth Summit, he said: “If in doubt, err on the side of the planet – not on the side of the company. Do not let financial conflict of interest get in the way of accurate reporting.”
Beyond materiality: the future of ESG disclosure
Although the European Parliament and EU member states recently reached an agreement on mandatory investor disclosure regulations, corporate sustainability disclosures are still voluntary. Accordingly, there is still a lot to do. “The biggest achievement of the Task Force on Climate-related Financial Disclosures (TCFD) is that it made investors look into the data,” said Andreas Hoepner. “When you read TCFD reports, you realize with a degree of surprise how bad the data actually was on average. It is not just what is important for your bottom line, but also what is important for the planet.”
Materiality goes beyond reporting – it defines corporate accountability, risk identification and strategy. With investors and regulators increasingly focusing on the quality and frequency of the materiality analysis process, there was a consensus that processes need to be ongoing and dynamic, guiding decision-making. “Forward-thinking businesses will need to use the process to inform their strategic decisions. When the inside and outside are aligned, you can have a meaningful process,” said Yen-Pei Chen.
Companies need to consider disclosure on all emerging issues and assess whether their disclosure is sufficiently detailed to provide insight into management plans. Again, transparency is key. “The materiality process needs to be robust and needs to have direct CEO or CFO oversight,” said Andreas Hoepner. “It needs to be exportable and downloadable by any interested party.” When you have a transparent and detailed process that covers the right issues and is accessible to the right people, the path to materiality truly starts to become clear.