OPINION

Leading in the New Age of Materiality: What the WEF paper doesn’t say

30 March 2020 - By Susanne Katus, VP of Brand and Business Development

Earlier this month, the World Economic Forum (WEF) published a white paper entitled “Embracing the New Age of Materiality”, with the subtitle “Harnessing the Pace of Change in ESG”. It is a relevant reminder of the speed at which ESG issues are becoming financially material, and the need for both corporates and investors to have robust processes in place to monitor the external market.  

For example, the backers of the Task Force on Climate-related Financial Disclosures (TCFD) are now valued at over $118 trillion USD, and represent a group of investors who expect meaningful disclosure on climate issues.

The current coronavirus pandemic is a more palpable example. The United States Securities and Exchange Commission (SEC) and the European Securities and Markets Authority (ESMA) have already issued guidance for 2020 financial disclosures. We also see that many companies have responded quickly and transparently to the crisis in their 2020 annual reports.

These examples reinforce how materiality is evolving into a forward-looking process, where monitoring is key. Let’s unpack this.

A new age of materiality: key takeaways from the WEF white paper

The WEF paper focuses on how investors and corporations are developing the capability to anticipate future material issues. One of the key takeaways is the acknowledgement that what is financially immaterial today can quickly become material tomorrow

Even more than that, the paper reinforces how hyper-transparency is becoming the norm. Companies are being asked to provide more and more data on a wide selection of topics, and different investors often have different expectations. In a world in which information can be disseminated widely and immediately, social movements can emerge and achieve scale rapidly, creating legal, branding, recruiting, retention, and other challenges.

There is an acknowledgment that cutting-edge tools and capabilities are necessary to further integrate ESG issues into the wider business space. As the authors note, “to win in the coming decade, investors and companies must equip themselves with forward‐looking and proactive approaches to materiality.”

The WEF paper characterizes proactive approaches to materiality as “dynamic materiality”, in keeping with increasingly mainstream discourse around the subject. Companies and investors need to develop stronger processes for monitoring and proactively managing emerging issues. To the point, the paper lists two sets of practical questions that investors and corporations should ask themselves to ensure that their materiality processes are dynamic.

WEF paper, page 14 - new age of materiality

Source: World Economic Forum paper, page 14.

Surprisingly, however, the role of technology is under-discussed in the paper. What is lacking is a firm recognition of how many progressive companies have already embraced and operationalized proactive and dynamic approaches to materiality - backed by technology.  

Dynamic + digital: a mainstream approach to materiality

Dynamic materiality is at the heart of the digital risk management space. AI-leveraged toolsets and bigger than ever databases have combined with cloud-accelerated stakeholder engagement to provide companies with more reliable data, faster. We see this in both the corporate and investment management space. 

For instance, companies like Philips, BBVA, and Nike, use Datamaran’s AI-powered platform to have a materiality and risk management process that is dynamic, backed by data and fully auditable. In this way, they ensure accuracy and defensibility in the approach, deepen and broaden the stakeholder views incorporated, and focus resources on strategy versus research.

BBVA’s Antoni Ballabriga, Global Head of Responsible Business for the banking group, puts it bluntly, stating that “data-driven materiality helps [BBVA] take better strategic decisions.” 

More specifically, a dynamic and digitally-enabled materiality process helps decision-makers to answer four key questions:

1. What is important now? 

The core of materiality is identifying - in a data-driven way - what currently matters, so that you can establish policies, processes and overall positioning on those issues. 

2. How does it change over time?

Presuming that stakeholders’ expectations won’t change between one materiality assessment and the following one just isn’t realistic anymore. To be in control, companies need to monitor how issues evolve over time - across diverse stakeholder views - in order to anticipate how issues will be positioned during your next materiality analysis.

3. What is likely to emerge as material in the future? 

Analyzing the gaps between forward looking sources, like voluntary reporting frameworks and media, and backward looking sources, like corporate reports, allows decision-makers to comprehensively assess what issues are more likely to become material in the future. Looking at a comprehensive set of relevant data on a continuous basis makes materiality even more decision-useful and robust. 

4. What are the potential unknowns? 

Every monitoring system operates within the boundaries of a defined universe of issues. This means it is vulnerable to unknowns - elements that are outside the initial scope and may become relevant at some point. Enlarging the universe of issues - for instance by not relying exclusively on one type of reporting standard or depending on an outdated materiality analysis from one year ago - counteracts these risky externalities by putting them on your monitoring radar.

A dynamic materiality process in action

In this way, dynamic materiality is more than just incorporating new data analysis tools. It is also about adapting to a digital world which is constantly changing and in which proactive measures are not just beneficial, they are critical. Monitoring changing priorities, trends, and markets is a crucial part of any truly decision-useful dynamic materiality solution. We see that more clearly than ever now as we all try to navigate these disruptive times. 

WEF paper - New age of materiality

Source: World Economic Forum and BCG, page 8.

In a recent interview, BASF Sustainability Manager Jutta Kissel stressed the importance of continuous monitoring - backed by technology. ”It is important to continuously monitor the dynamics and the evolution of the key topics, so we, as a company, can be more proactive and stay on top of these developments.” She continued, “the broader BASF “science-based” approach [has led us] towards a continuous monitoring of key topics.”

“The world is changing very fast and the amount of information generated is increasing exponentially. We need solid business processes supported by technology to scan what is going on through tracking the regulatory and corporate landscape as well as online and social media changes. This will help us to focus on areas that can have an impact on our business.”  

The present moment

The Datamaran community is full of similarly forward-thinking companies that we are proud to support. These companies recognize that the future of ESG and materiality in general is now. Stakeholders are rewarding this robustness, transparency, and dynamism.

In the present moment, which is so uncertain, this is brought ever more to the forefront. Datamaran has launched a COVID-19 Monitoring Tool for its clients to help them stay on top of regulatory updates, news reports, corporate disclosure, and social media, related to the coronavirus crisis. 

Dynamic materiality means, in part, being receptive to the needs of stakeholders across the value chain. During this pandemic, we know that corporations are focusing on supporting their communities. We are highlighting inspiring initiatives across the globe, and will continue to do so for the duration.

ENDS


From Reporting to Strategy: Best Practices in Corporate Materiality

Based on a series of in-depth interviews, this free ebook explores how the boldest industry leaders have brought materiality beyond reporting, leveraging on digital solutions to make their analysis dynamic, transparent, and decision-useful. 

You will learn how to enhance the voice of stakeholders in your assessments, why continuous monitoring is critical to stay on top of emerging risks, how to use technology to implement a more credible and systematic method of conducting reasonable assurance of your ESG data, and the best practices to streamline your materiality process.

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