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The Carbon Almanac

https://vimeo.com/727950704?loop=0

Sustainability

After the pandemic, achieving better sustainability requires new materiality tools

April 13, 2020 by ديان أوسجود ، دكتوراه. Leave a Comment

Word Balloons
Materiality analysis will capture stakeholders’ changing priorities during and after the COVID-19 pandemic

A materiality analysis for sustainability provides insights on business risks, opportunities and future trends that influence a company’s ability to create value. It tells you what’s important to internal and external stakeholders.

Next-generation materiality tools make it possible to access stakeholder views in a more comprehensive and affordable manner than before. These flexible tools can be deployed rapidly, enabling you to quickly assess the changing landscape to provide:

  • A finger on the pulse of how society’s, employees’ and stakeholders’ views are shifting during the pandemic. With so many unknowns in a shifting landscape, a quick materiality analysis can capture how your stakeholders’ expectations have changed. It provides crucial information for determining how to reset your company’s policies and approaches on the issues that matter most to your stakeholders.
  • A more in-depth analysis for impactful sustainability strategies. A materiality analysis helps your company identify and refine topics that stakeholders expect your company to prioritize. These insights are building blocks for defining short- and long-term sustainability objectives, goals and strategies.

Next-generation materiality tools are needed 

Daniel Aronson, Gil Friend and Andrew Winston, 3 long-established sustainability experts, lay out in a recent article how many materiality analyses fall short. They cite 6 key reasons:

  1. Companies miss the broader issues of “what is important to the world” by taking a narrow stakeholder view.
  2. A narrow timeframe (3-5 years) excludes longer trends such as climate change.
  3. Too few stakeholders engage, leading to blind spots.
  4. Analyses miss dozens of hidden, unmeasured secondary and tertiary economic gains from sustainable practices.
  5. Analyses miss dependencies.
  6. Analyses miss time delays.

I add a 7th point to the list: Analyses miss time and cost. Traditional materiality analysis is laborious, time-consuming and therefore costly. It requires hours of expensive labor to interview stakeholders and plot responses.

Winston points out that “there’s so much more to understanding what issues companies impact and are affected by that just a 2-dimensional grid. We live in a world of complicated systems and global crises, and increasingly companies are expected to understand these issues and help solve them.”

A new way to size up sustainability: Next-generation materiality analysis

Clearly, materiality analyses need to overcome these 7 shortcomings. Framing the questions to expand time horizons, digging into the larger “important to the world” questions, and asking about dependencies can address half of these issues.

In a recent conversation with Daniel Aaronson of Valutus, I learned about two fundamental improvements that can strengthen a materiality analysis:

  1. Your company’s performance.
    What if you knew how stakeholders perceive your company’s performance on key issues? For example, it changes your strategies if stakeholders report that they thought your company’s performance was above expectations (vs. below expectations) on a priority issue.
  2. The level of certitude of the respondent.
    Not every stakeholder has great insights into your company. What if you could weigh their levels of confidence in their responses? Wouldn’t your analysis and subsequent strategies change if the majority of shareholders reported a high level of confidence vs. a low level of confidence in their understanding of your business?

Since both of these questions are critical, I integrate them into my client work.

“Knowing what’s important is not enough. Without knowing your strengths and weaknesses, you’re flying blind. As we discovered working with a top-ranked leader, even the best companies can be surprised by which stakeholders think they’re doing well on what’s important and which don’t,” Aronson explains.

And finally, time and cost. We gain speed, cost and flexibility by automating surveys and enabling dynamic analysis of the findings.

A tool that meets our current challenges

Today we all face immense challenges and uncertainty. How your stakeholders’ priorities have changed doesn’t need to be an unknown.

The next-generation tools available now provide a finger on the pulse of your key stakeholders, including employees, supply chain partners, community members and shareholders.

When we exit the worst of the pandemic shut-down, the profound changes in their views will be critical to understand.

Let’s sharpen our materiality tools to make better decisions and apply the best information available in these complex times.

Filed Under: Blog, Uncategorized Tagged With: Andrew Winston, COVID-19, Daniel Aaronson, Gil Friend, materiality analysis, Sustainability, sustainability strategy

Meaningful purpose, strategic sustainability and material ESG

January 1, 2020 by ديان أوسجود ، دكتوراه. Leave a Comment

What it takes to create shareholder value and employee engagement

Employees fist-bump
A meaningful purpose rings true to employees.

This is the first in a series of blogs that explores the value of meaningful purpose, strategic sustainability and material Environment, Social and Governance (ESG) management.

Over the past 25 years I have witnessed companies embrace purpose, sustainability and ESG to create value for shareholders and employees. 

However, it takes more than a cursory effort for a company to outperform. Purpose must be meaningful to gain employee buy-in. Sustainability must be strategic and ESG material. 

Recent research confirms companies with these qualities tend to outperform industry peers. 

A company’s purpose must become its animating force. Purpose needs to drives action and unlocks potential.  A marketing slogan or tagline doesn’t cut it. Purpose speaks to the heart of how a company serves society. It must ring true with employees. 

For example, Virgin Management Limited’s purpose is “Changing business for good.” Over 90% of all employees agree that the company is aligned with its purpose, and as a result the company enjoys very high employee engagement.

Sustainability needs to be strategic. Companies that prioritize action based on robust materiality analysis focus on what’s important – not just on what’s easy. 

For example, a clothing company may decide to change its fleet to electric cars. However, it’s not a strategic move if there are only a few cars in the fleet. It doesn’t impact business operations. Worst, it could misdirect overall sustainability efforts and squander executive goodwill.

A more strategic and impactful approach would be to increase the sustainability of its supply chain. The global clothing supply chain involves millions of people as well as tons of water, chemicals, crops, and oil. It’s a top priority action area of the apparel industry.

In a seminal paper, Professor George Serafeim explored the financial performance of companies with good ratings on industry‐strategic sustainability issues. He found that they deliver significant financial outperformance over firms with poor ratings on the same issues. 

The research also found that firms with good ratings on immaterial sustainability issues do not outperform firms with poor ratings on the same issues.

ESG needs to be material. ESG is shorthand for a company’s performance on sustainability (environment and society) and governance issues. Thus, similarly to  sustainability, a strong performance on material ESG creates value for shareholders. 

The difference between material and immaterial ESG was recently examined for the banking sector. A study released in December 2019 by the Global Alliance of Banking on Values found that banks that consistently scored high on material ESG issues delivered higher risk‐adjusted returns compared to banks that performed poorly on the same issues.

The study also shows that performing well on immaterial ESG issues neither harms nor helps performance.  These results suggest that a focus on material sustainability and ESG issues is likely to coincide with enhanced financial returns. The findings are important for banks to set operational priorities.

Where would you rather invest your money?

Graph of stock returns 2007-2019 showing 2.6% outperformance since 2014 for stocks of banks which outperform on material ESG
The top materiality portfolio outperforms the bottom materiality portfolio by 2.65% in average risk‐adjusted returns since 2014.

What’s material? The concept of materiality frames which are the relevant and strategic ESG issues for a given industry.

For example, water is material for extractives, apparel and hospitality. Water is not material for financial services. A robust materiality analysis will determine which issues are important to address and why.

In subsequent blogs, we’ll further explore meaningful purpose, strategic sustainability and material ESG, including insights into materiality analysis and other tools. 

Filed Under: Blog, Uncategorized Tagged With: Do sustainable banks outperform, ESG, Global Alliance Banking on Values, Material ESG, Meaningful purpose, Prof George Serafeim, Purpose, Strategic Sustainability, Sustainability

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