In this third installment of our series, we consider how a materiality analysis can leapfrog companies over common roadblocks to developing a sustainable business strategy—and position them for integrated financial and sustainability reporting.

Crafting a comprehensive sustainability strategy isn’t easy (indeed, to quote Ken Frietas of the Boston College Center for Corporate Citizenship: “It’s a long, hard, slog!”) Companies face several challenges to successfully incorporating sustainability risks and opportunities into their business strategies, including:

• Information overload: the sustainability “umbrella” encompasses a huge array of potential social, environmental, and economic issues.
• Squeaky wheels: the most vocal stakeholders may be focused on issues of relatively minor importance
• Limited resources: organizations must choose carefully where to allocate scarce resources
• Turf wars: there may be internal conflicts over the importance of specific sustainability issues

A materiality analysis is useful in addressing all of these challenges. It provides fresh perspectives on a company’s sustainability profile and yields actionable insights to integrate into strategic planning. The comprehensive and rigorous nature of a materiality analysis, especially if aligned with ongoing enterprise risk management activities, can also tease out those topics that legitimately require more resources and attention.

• Ford refines the initial results of its materiality analysis by assessing the level of control or influence the company can exert over specific issues. (managing information overload)
• Intel uses outcomes from its materiality analysis (p.14) to set performance goals, initiate programs, and establish new policies. (identifying the best use of limited resources)

Making the connection to integrated strategic planning and reporting

The importance of materiality analysis for charting an overall business strategy is also becoming clearer as companies—and shareholders—realize that there is no such thing as a “non-financial” issue. Materiality analysis provides an opportunity to start evaluating the financial value and impact of environmental, social, and governance (ESG) topics, weaving that calculation into the “impact on company” ranking. Although ESG valuation is still a developing field, companies can take advantage of work done by innovators like Paul Herman of HIP Investor and apply methodologies to measure and quantify the impact of specific issues—and their relationship to profitability.

Some companies (with Novo Nordisk as the poster child) are already making forays into integrated strategic planning and reporting:

• Starbucks 2009 Annual Report/10-K (p. 7): “Starbucks Global Responsibility strategy and commitments are integral to the Company’s overall business strategy.”
• UTC 2009 Annual Report/Letter to Shareowners: “Our performance in 2009 was achieved with a complete commitment to corporate responsibility: operating with the highest ethical standards, protecting people and the environment, and contributing to the communities where we conduct business. UTC has embraced sustainability, not only in our products, but also within our operations.”

The increased corporate interest in materiality analysis, ESG valuation, and integrated reporting should not be surprising. Societal concern is at an all-time high with regard to appropriately assessing environmental and social risks and their potential financial ramifications (deepwater drilling, anyone?). As such, we certainly expect to see more regulatory debate in the near future, building on actions similar to the SEC issuance of guidance on climate disclosures in annual financial filings.

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