By Roy Snell
Having a policy development process that is clear and understandable is key to your ESG success. A difficult part of any ESG program is telling employees, investors, or customers that your organization may not have a policy for every environmental, social, or governance issue they raise. There may be one group of people suggesting the adoption of a specific policy while another group is asking to adopt an approach directly against the same topic. The Sustainability Accounting Standards Board (SASB) provides a structured set of standards based on materiality that might help you manage the myriad of requests you receive from stakeholders to take a stand on environmental, social, and governance issues.
Steer your stakeholders to consider the following concepts:
Financial Materiality
A financially material issue impacts a company’s performance, market position, and long-term value. Topics such as water usage have a different impact on a water intense manufacturing enterprise located in a desert climate than on a software company located on a body of freshwater. Periods of drought or a significant increase in water prices pose a risk that can have a material impact on an organization’s financials. If so, the organization may develop a robust water utilization policy and track metrics that inform management, investors, and other stakeholders of risks that impact long-term value creation. Considering the financial impact of a topic is an essential part of policy development and should help stakeholders understand why policies are adopted.
Impact Materiality
An impact materiality issue refers to the social and environmental impact of a business’s activities. Impact materiality criteria alone may not be sufficient to track a problem. In many cases, there is an overlap between financial and impact materiality. For example, in the human capital area, tracking wage growth and worker incidents add valuable insight to the business and investors from a financial materiality perspective but also adds insight for employees and consumers from a social impact perspective.
Non Materiality Considerations
You may encounter an ESG topic that has minimal financial or impact materiality on your organization. If a proposed topic is purely aspirational, or the cost of gathering data and tracking exceeds the value it provides, it should not be tracked. It should be placed in a backlog and reconsidered when it becomes material for your business.
If social causes are a founding principle of your business, as is the case for Patagonia® or Bombas®, issues that are seemingly not financially material to many companies become material. In such a situation, financial and impact materiality metrics tied to aspirational goals, such as the UN SDG goals may be in order.
In that organizations will be asked to develop policies for and against the same issue; it is essential to stick to a materiality-driven process; it will help you resolve issues that arise during your policy development process. A materiality-driven policy development process will help stakeholders understand why you did or did not take a stand on various issues, increasing buy-in. Whatever approach is taken to manage policy development processes needs to be communicated to stakeholders simply and directly to help maximize stakeholder support.