August 10 2020
By Pam Styles, Principal and Founder, Next Level Investor Relations, and G&A Institute Fellow
Will ESG/Sustainability be more or less in the forefront as economies attempt to recover from the COVID-19 pandemic? Survey results vary, but a common theme is that materiality and quality of a company’s strategic sustainability focus and reporting will be expected.
Sustainability in Economic Recovery
A recent survey of publicly listed U.S. company executives by the Conference Board™ suggests that well over half (59%) believe the COVID-19 pandemic will have little or no negative impact on growing interest in company sustainability programs overall, while a majority within these results believe the pandemic may shift the focus of sustainability, e.g. more to people, supply chain, etc.
A survey of recent company announcements related to sustainability formed the basis for the article, Is sustainability undergoing a pandemic pause? by Joel Makower, CEO of GreenBiz. He concludes that, “Unlike previous economic downturns, sustainability isn’t being jettisoned in the spirit of corporate cost-savings. It’s being kept alive as part of a pathway back to profitability.”
These are challenging but exciting times, and there is every reason to believe that ESG/sustainability can and will be in the forefront as companies, communities and countries recover from the COVID-19 pandemic.
That said, heightened emphasis on materiality in sustainability reporting has gained traction, in response to perceived “greenwashing” by companies in sustainability communications. The trap of greenwashing has been prevalent enough to frustrate many third-party stakeholders and gain attention across the field.
Most major voluntary frameworks for corporate sustainability reporting guidance now separately and collectively encourage companies to pay attention to the materiality of reported content. This includes GRI, SASB, IIRC, TCFD, CDP and others.
The Chartered Financial Association (CFA), the Big Four accounting houses, law firms and others are also stepping-up the pressure on corporations to bring sustainability reporting to a next level of materiality focus and quality.
Governance & Accountability Institute succinctly captures the breadth of concern,
“Materiality is an important cornerstone of an effective corporate sustainability process…Without an effective materiality process (and mapping) companies can waste time, effort, human resources and financial investment on issues that will provide little or no benefit in sustainability and responsibility reporting — or may even serve to further cloud and confuse the company’s stakeholders and shareholders…Companies committed to position themselves as recognized leaders in sustainability require the materiality determination process to be thorough, accurate, and effective to implement their Sustainability program.”
Less-is-more… your company sustainability report need not be lengthy! It needs to focus the reader on, where and how your particular company can effectively prioritize its sustainability efforts.
Those who read a lot of sustainability reports can quickly distinguish between sustainability platitudes and substantive content. The former can be perceived as a possible sign that the reporting company has not truly integrated sustainability into its business.”
As John Friedman writes in his newly-released book, Managing Sustainability, First Steps to First Class,
“For this reason, it is important, always, to adopt and use the language of business rather than advocacy or philanthropy when integrating sustainability into any business…too often sustainability professionals speak in terms of “doing well by doing good’ and the “Sustainable Development Goals” rather than the more compelling arguments that link sustainability programs to the established (and more familiar) business imperatives such as “improving business processes,” “implementing best practices,” and “return on investment.”
A recent joint report by the U.S. Chamber of Commerce and Center for Capital Markets Competitiveness report on ESG Reporting Best Practices, makes other relevant observations including:
“… materiality determination may differ based on the diverse characteristics of different companies…”
“… while the word “materiality” is used by some constituencies to connote different meanings, the term has a well-established definition under the U.S. federal securities laws”
“Issuers preparing ESG reports should explain why they selected the metrics and topics they ultimately disclose, including why management believes those metrics and topics are important to the company.”
“Disclosure should not be a tool for advancing interests that are not aligned with the company’s ability to create value over time”
Company leadership may find that…
- renewed attention to materiality can help streamline internal efforts and strengthen the basis of information that Company corporate communications and spokespersons rely on.
- having a clear materiality basis enables your communications team to clearly indicate ‘n/a’ or ‘not material’ in some fashion, where applicable, as opposed to not responding or to staying silent within external sustainability reporting and questionnaire responses (obviously seek legal counsel as warranted).
- having a clear ESG materiality basis can help avoid frustration, confusion, and misunderstanding in external communications – and, yes, minimize guessing or interpolation by third party stakeholders.
- Renewed attention to materiality helps everyone focus on the substance of your company’s sustainability efforts, strategic positioning and reporting.
Ensuring the company’s sustainability and survival and contributing to the economic recovery post-pandemic are too important to waste time or money communicating trivial metrics.
Sustainability is more important now than ever, as we urgently work together to lift our companies, economies and stakeholders up in the wake of the devastating pandemic.
This urgency will require every company to play to its strengths, stretch where appropriate and produce compelling sustainability reports (website and other collateral communications too). It will require strength of conviction that materiality matters – courage to clearly communicate when particular large or small performance elements of sustainability framework guidelines do not apply to your company and are simply not material for a framework response or third-party consideration.
Pamela Styles – Fellow G&A Institute – is principal of Next Level Investor Relations LLC, a strategic consultancy with dual Investor Relations and ESG / Sustainability specialties.