The potential of materiality: Part 3 (the alignment with strategy and risk)

In the first two blogs of our tetralogy on materiality, we shared our views on the impact of the latest GRI revisions regarding the way we use materiality in organizations, and the impact of COVID-19 on the (re)-performance of the materiality assessment.  We explored the challenge in the way organizations act upon the identified material topics. In this third blog on the subject, we want to take it one step further and elaborate on the potential of materiality when we integrate it into a strategy. This integration into strategy also requires alignment in the way we assess the risks associated with the material topics.

The importance of synchronizing materiality and strategy
Naturally, organizations define strategies to deliver on their objectives and goals. Materiality assessments determine which topics are important for the primary stakeholder-groups of the organization. The material topics are topics that have an impact on the organization or are impacted by the organization. After completion of the materiality assessment, some organizations only use this as input for the annual report. Luckily, most organizations step in by defining action plans to address their contribution to the material topics. Execution of those action plans is frequently monitored by a CSR or Sustainability Manager. So, what do strategy and materiality have in common?

They both identify what is truly important for the organization and aim to monitor the progress in the degree of realization. However, strategy and materiality are two managerial tools on different frequencies. Synchronizing the frequencies of strategy (development) and the outcome of the materiality assessment enables the organization to make an intelligent combination of both strategic pillars & objectives and the material topics.

Let us take an example: in a world in which strategy and materiality are not synchronized yet, an organization can have a strategy that’s completely focused on financial gains and growth. Meanwhile, a materiality assessment is conducted and material topics like ‘Societal Impact’ and ‘Employee Wellbeing & Engagement’, are handled independently of the strategy. However, the way the organization approaches ‘Societal Impact’ and ‘Employee Wellbeing & Engagement’, is integrated into the strategy leading to financial gains and growth when both management tools are synchronized. Integration stimulates organizations to actively think about their role in relation to the material topics and how they can contribute to areas in which they have a major impact. Plus, what stakeholders find important.

A welcome side-effect is solving ’the governance issue’, regarding handling the material topics as independent topics, which is often not seen as a high priority when those are not directly related to strategy. Integrating the material topics into strategy enables the organization to use the existing governance structure for strategic targets for material topics as well, reducing the risk of not taking responsibility by (senior) leadership.

And yes, we know that the example above is overly exaggerated and simplified, yet it illustrates the potential of materiality. Nowadays, organizations can benefit from further integrating material topics into their business strategies. First, there is a reputational gain since society and the organization’s stakeholders have indicated these topics as important. Therefore, they will reward the organization for their effort when acting upon them. Second, these non-financial indicators will become more important to assess the success of organizations in the long run, as these indicators illustrate the sustainability of the business model much better than only the yearly financial gains do. Last, if you can develop a business model in which you serve society, positively impact the environment, and can earn some money, you are a winner!

The trilogy of strategy, materiality, and risk
So, integrating the outcome of the materiality assessment into strategy helps the organization to focus on what is truly important for the organization. A very interesting side effect is pleasing the organizations’ stakeholders by transparently integrating the topics they think are relevant to its’ strategy. We explained the benefits of the integration of material topics and strategy. But surely, there are no benefits without taking risks. So, what is the impact and role of risk?

Delivering on the objectives of the organization requires taking risks. Most organizations have explicit processes to identify, assess, and consistently manage risks, all on a strategic, tactical, and operational level. When material topics are integrated into the strategy, it feels obvious to include the relevant risks associated with these topics. But don’t forget; when identifying these risks, be precise about them. A material topic is not a risk in itself. Material topics are just relevant topics for the organization. To manage these risks in an intelligent way, organizations need to identify which risks are related to the material topic. The added value of the risk assessment is optimal when it includes all risks associated with all elements of the strategy. Therefore, the risk assessment can be a helpful tool to research the material topics from a different perspective and to identify all relevant elements for the organization.

In other words, the outcome of the materiality assessment provides insight into the positive and negative impact of material topics identified by internal and external stakeholders. By integrating the organizations’ approach towards these topics into the strategy, it provides the opportunity for organizations to deliver on strategy while assuring the right focus for all material topics. Risk management strengthens the strategy execution by creating a different view, and more insight into the risks that are associated with that strategy (and thus material topics).

The trilogy of strategy, materiality, and risk enables the organization to focus, manage, and protect what is important.

In sum, we elaborated on the potential benefits of the integration of materiality into strategy and the use of risk management to understand risks associated with material topics. Understanding this ‘why’ is an important first step for organizations. The next challenge is ‘how’ to do it! In the last blog of our tetralogy, we will focus and elaborate on the steps organizations can take to insert materiality into the strategy in a sustainable way. So stay tuned for our fourth and final blog on materiality!

Are you looking for support in executing a materiality analysis for your company? We can help! Send an email to Daniek or Lot or give us a call anytime.

Authors: Anniek Bakker & Lot Elshuis

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