Materiality sucks. How can we upgrade it to a business strategy tool?

Where are we now?

Let’s play a game. Take a pen and a piece of paper — or open your digital notepad…

Now, without reflection and hesitation, write down the first 5–7 words that immediately come to mind when you hear the term “Materiality assessment”…

Take a step back.

Which are they?

Risk?
Confusion?
Headache?
Nightmare?
Tedious?
Compliance?
Costs?

If these are some of the connotations, you’re not alone.

Large multinational companies around the world have been scrambling to up their Materiality game. This is, to a great extent, an effect of CSRD (the EU’s Corporate Sustainability Reporting Directive) soon entering into force.

With the Directive, concerned sustainability champions have achieved what long seemed difficult: Materiality, and in more broadly corporate sustainability, has entered many Board conversations. But is it really time to declare victory? Haven’t we merely created the perfect conditions for cementing approaching materiality as a tick-box exercise? Merely making the box to be ticked a lot bigger?

I argue we have. The “design flaws”, so to speak, of existing materiality approaches, are making it so. And yet, let’s not despair — there is a way out of this mess. A way to use this time of confusion and aversion-to-nonsense to channel our efforts to actually making materiality relevant.

In this article, we:

1. Dare to spell out the shortfalls of current materiality approaches — which you most likely see too, but have not put it in words;
2. Introduce our proposed alternative, aka Materiality-as-the-World-Needs, conceived by leveraging the flaws of materiality-as-a-chore as design constraints;
3. Offer a few suggestions on how to take things further, as per usual.

The tone of the first half of this article is highly critical. This reflects our indignation at how far we have (collectively) gone in the wrong direction, at how deeply entrenched legacy/mainstream corporate sustainability approaches are in doing what the world does not need. However, the intent here is not at all to berate. It is rather to articulate what many think, but do not feel permitted to voice. To offer a wake-up call, and help us all move towards more meaningful action. Thank you for bearing with us!

The shortfalls of current materiality approaches

Getting back to the need for making materiality relevant… It is indeed ironic that the root “material” in materiality is meant to point to the significant, essential, consequential and pertinent. Because the way materiality is currently done — or is about to be done for the first time ever by corporations around the world — is irrelevant/immaterial to both: attaining a liveable future and wellbeing for all, and to securing future business readiness and business continuity, let alone future shareholder value.

In other words, materiality-as-usual is divorced from both — contributing to real-world sustainability outcomes, and from the broader corporate strategy exercise. Again, this is highly ironic, and a paradox.

What are some of the method’s main design flaws and their unintended consequences?

4 Design Flaws

Defying unsustainability of the planetary and economic contexts

One, the so-called sustainability context (such as previously prescribed by the GRI, for example in their latest edition — the GRI Universal Standards 2021 — and to a degree reflected in the CSRD) is largely devoid of the contexts that matter the most here: The outer planetary context and its impacts on the global economic context.

The guidance actually suggests companies analyse their respective value chains as those each value chain was in fact an island, isolated from and unaffected by collapsing Earth systems and the planet’s gradual destabilisation process. And heaven forbid we’d even also consider the factor of time:

How long till things get really bad?

How long till we hit points-of-no-return?

How quickly do we need to turn things around in order to… have a shot at future business continuity and the underlying liveable conditions on the planet?

These questions are typically neither asked nor answered by a materiality assessment.

As a result, broader disclosures fail to inform shareholders and other stakeholders of the sustainability potential — and true “do-nothing scenario” prospects — of the organisation in question.

Is it compatible with a future economy?

Is it compatible with liveable conditions on the planet?

How long before a future economy kicks in?

Again, questions not asked, not answered. The purpose of disclosures unmet. If this is the approach, why even bother reporting, one might ask? And why do our reports’ readers tolerate the charade?

Note that this situation is symptomatic of the main affliction of legacy sustainability approaches — always looking at detail, never zooming out to the big picture, never assessing things on a macro level.

Again, there is a better way, and we’ll get to that soon.

Defying unsustainability of the core business

Two: Existing approaches to materiality assessments by design do not address unsustainability of the core business: they take for an unchangeable axiom what we are in the business of, and assume — and in fact suggest — that our range of action is limited to nudging the edges.

In this way, materiality assessments are crudely defying the long-ago quantified reality that many — if not most — industries and mainstream business models, in the context of a planetary overshoot, do not have the potential to attain sustainability without changing what they’re in the business of. In other words, they cannot achieve compatibility with a future economy shrunk to within the planetary boundaries — and thus secure future shareholder value — nor compatibility with liveable conditions on the planet and wellbeing for all. Their very current business activities, predominantly focused on short-term value maximisation, are in fact actively eroding the prospects of a future liveable state on Earth and actively preempting and squandering future shareholder value.

We speak about this at length in our free webinar: What is the Big Trap of Sustainability-as-Usual (view webinar, view slides), and from the perspective of fiduciary duty for CEOs and Boards also in our online masterclass: Planetary Boundaries — and so what? Implications for strategy, sustainability agendas and fiduciary duty. Learn more and register to watch anytime.)

Instead of assessing the core business and its potential for sustainability — which, trust me, can be done quickly, efficiently, and therefore at a fraction of the cost — existing and hitherto proposed mainstream materiality approaches insist we start from the nitty gritty: that we collect a wide pool of potential topics — a vast yet fragmented puzzle — without ever taking on a systemic perspective to assess the state of the planet as a whole, and to forecast how a planetary overshoot will impact the economic environment in which business operates. What a radical thought — putting the puzzle together, seeing the full picture first, instead!

Procedurally and ethically dubious

Three: Hitherto approaches to materiality assessments have been procedurally and ethically dubious.

It is worth acknowledging that specific procedures for carrying out materiality as per CSRD are in many cases still in development. In the past, conducting the assessment, including in reference to the GRI standards, predominantly relied on quizzing stakeholders on dozens of often unfamiliar or abstract topics in isolation — one by one (nitty gritty, remember?) — asking that respondents rate or rank them without reasonable priming. It should be easy to spot that such a procedure is ill positioned to produce highly relevant outputs.

However, the approach has also been problematic from an ethical perspective. Being trapped in the predominant view of the global economy’s purpose and of what we owe to our shareholders, we’d routinely and perhaps subconsciously manipulate the assignment in order to for example avoid asking whether value chain stakeholders need and wish for a living wage, and asking how strongly they’d rate that impact against things like “transparency of communication” or “recyclable packaging content”.

We’d further pretend that not paying living wages did not automatically result in human rights abuses. Or pretend that “not in my backyard”, presumably in the Global South, non-liveable wages must somehow be in fact liveable.

And of course, because we’d be guided to quiz respondents on the nitty gritty, it would not occur to us to ask whether they thought the planet’s destabilisation was going to financially affect our business.

We know not to ask questions we do not want the answers to, after all.

Notoriously costly and effort-intensive

Four: As a cherry on top, in addition to all of the above design flaws which render the outputs of hitherto materiality assessments, well, immaterial, carrying out the exercise as prescribed, to the letter, would be / has been incredibly effort intensive and hence costly. Those who have attempted to do so know we’re talking about an exercise spanning a good part of the year, if not more, for large corporations with multi-layered supply chains.

And indeed, this has made for a substantial revenue stream from large, legacy sustainability consultancies that have been in the business of monetising compliance and perceptions management, instead of monetising a global transformation towards a liveable future and a new role of business in society. “Who benefits?” one ought to have asked…

4 Real-life Consequences

However, proceeding the way we did — and the way many now sadly still plan to proceed — resulted and will result in more than just a waste of time and money. It has had some real-life consequences too, including the following four:

Materiality assessments have been fudged

First, materiality assessments have frequently been fudged. This is a dirty secret shared by many who were in charge of the exercise in-house, and those guiding the exercise from an advisory role. This, sadly, only makes sense: If we sense the exercise cannot relevantly inform our corporate strategy, or a quaintly standalone sustainability strategy, and yet are faced with the prospects of an sky-high bill, in addition to countless hours in interviews, we’ll want to cut the corners, cut the scope, cut the crap…won’t we?

I’ve mentioned earlier that the exercise design was hardly ever relevant to disclosing material information to shareholders and stakeholders, let alone informing future-ready strategies. However, with this “fudging” in mind, we should take a step back and reflect whether materiality-as-usual inevitably sets us up to scam our shareholders and stakeholders. (I know, it sounds harsh… and not what we want to hear… but wouldn’t you agree?).

Breach of fiduciary responsibility?

Fudging of materiality assessments aside, keeping the design flaws in mind, aren’t materiality-as-usual assessments tantamount to a breach of fiduciary duty (our legal responsibility to shareholders and other stakeholders)? Let’s think it through:

• We follow methods that look away from what is knowable and known about the outer context, in which our business operates;
• We adopt an assumption that has been debunked by substantial scientific evidence (that is, we assume that our core business a priori has the potential to be future-ready, and compatible with a sustainable state on the planet);
• We define our strategic decision-making agendas (i.e. what scoring the relevance of topics is supposed to feed into) in this absence of context, and to a degree by collating grossly uneducated opinions — which there’s little time to educate as part of the process;
• We spend lots of money, time and resources on all of the above, which could have been invested otherwise… to actually protect and grow shareholder and stakeholder value.

Can we really argue that in doing so, we actually deliver what we legally owe? Hardly so, I’d say.

Materiality assessments have been cementing an unsustainable role of business in society

While supposedly a portal to doing right by our stakeholders — shareholders included, due their faulty approach, materiality assessments have in fact been cementing an unsustainable role of business in society.

Oblivious to the outer planetary content, not questioning an organisation’s potential for sustainability, looking away from the business model actively eroding the prospects of future liveable conditions on the planet, wellbeing for all, and undermining its own future returns… It led us — and will continue to lead us, unless we turn things around now — to more of the same old same old, with some green around the edges. Nobody can afford that.

The mother of moral injuries to conscious assessors

A final real-life consequence of materiality-as-usual, which might not affect you personally, is the moral injury inflicted on those in charge of carrying out the exercise — who already saw the gap the chasm. Many in in-house sustainability roles and consultancies, including me, opted for their current careers in search of purpose-alignment. Of having impact, and “making the world a better place”. The knowledge of the gap is psychologically draining, if not unbearable. I write about this in “Why most sustainability jobs suck, and what can we do about it?”

Which other real-life consequences would you add?

Why CSRD / ESRS do not help us out of this mess?

Corporate sustainability circles have placed a lot of faith in the CSRD and the awareness building it is expected to bring about. We feel far more sober about CSRD’s potential. As far as materiality and reporting is concerned, it has inherited and incorporated at least 3 of the 4 design flaws we discussed above.

In other words, it appears to keep assuming organisations can be nudged to sustainability through a process of fine-tuning, whereas most require rapid and radical coarse-tuning.

We estimate it may take an organisation several years to go through the sustainability-as-usual process (of preparing for and rolling out CSRD-mandated procedures, collecting baseline data in the likely newly defined scope, defining new sustainability strategies — likely still siloed from the core business strategy, and boldly implementing programs for a few years) before starting to question whether the current business at all can ever be made sustainable (viable, tenable, defensible in the long-term).

Sadly, we do not have the time. Several years later will be too late for securing either future shareholder value or liveable conditions on the planet. If mainstream materiality approaches cared to reflect on the temporal aspect of real-world sustainability imperatives, they’d know we only have years to shrink the negative impacts of the global economy to within a fraction of their current size, before we hit points of no return (learn more for example here, here, and here).

Compare and contrast the below two images.

View the arkH3 Theory of Change: Visual Summary

What do we propose, then?

At arkH3, we’re keen to offer a constructive alternative. We’ve been increasingly recognised for our ability to eloquently translate the outer planetary context into business imperatives, spelling out the specific “and so what?” and “how-to”. We’re lucky to be in a unique position to do so: We’ve never built our offerings or won clients by selling sustainability-as-usual, or the science-defying Net Zero by 2050 agenda. We therefore do not face the need to reposition, with its inherent risks to client trust.

Drawing on this advantage, we do not see much value in incremental improvements on approaches that failed to deliver in the first place. We tend to start from a blank canvas, until and unless aspects of previous approaches prove their place in how things need to be done.

Using a systemic perspective and a back-casting approach, we’ve previously defined Business-as-the-World-Needs (or, what does the world need from business?), the Sustainability-as-the-World-Needs (SWoN) Approach and the corporate SWoN Agenda, and the arkH3 Theory of Change. We’re starting to work towards Boards-as-the-World-Needs.

What would Materiality-as-the-World-Needs need to look like?

The broad strokes of what we call Materiality-as-the-World-Needs were born in April 2024, when I (Alice Kalro) was invited to speak at the 8th Annual S-Hub Summit. One of the sessions I was asked to contribute to was titled “Materiality as Strategy”, and Andreas Friis specifically asked if arkH3 could provide both critique and guidance. We’ve accepted the challenge.

The design flaws discussed earlier in this article served as helpful design constraints. We’ve put together the principles and high level methodology for Materiality-as-the-World-Needs, so that it would:

• Address what matters the most for future conditions conducive to big business, as well as liveable conditions for humanity on Earth and well-being for all);
• Not be separate from but one with the business strategy design process — genuinely integrating sustainability and business strategy, at last, for real;
• Transcend arbitrary distinctions between financial and impact materiality, addressing business sustainability and real-world sustainability outcomes in a single process;
• Effectively operationaliss a redefined role of business in society as co-stewards of the global commons;
• Be faster and cheaper to carry out than existing approaches, and far exceed them in its integrity.

This required rethinking the steps in the Materiality process itself, as well as revising the substance of how different steps are carried out. We’re unveiling the key changes on June 21st, 2024, in an online masterclass that will be available on-demand from recording afterwards.

How is what we propose different?

Materiality-as-the-World-Needs is substantially different from existing and alternative proposed approaches.

Most importantly, it asks: “what is ours to do, given the unsustainable outer context”? Those of you familiar with strategy design processes likely see a parallel here. Conventional business strategy indeed asks “how do we win, given the outer context?”, although the similarity ends where old school strategy approaches then ignore the outer planetary context (which they have in common with materiality-as-usual).

For comparison, existing double materiality approaches de facto ask “what is ours to do, given how we stack up against our unsustainable peers, or unsustainable stakeholder expectations?”. Or at least so on paper, when not approached as a check-box exercise, in which case the assessment doesn’t ask any real questions at all, and seeks no actionable answers.

Context-based materiality, proposed as a more meaningful alternative in 2019, de facto asks “what is ours to do, if everyone does their fair share, in time”, or more precisely “what would be ours to do, if everyone did their fair share, in time” — since everyone doing their fair share in time is highly improbable.

Via Materiality-as-the-World-Needs, arkH3 therefore importantly propose recalibrating the materiality exercise to the context of severe planetary overshoot, and its consequences to future economic forecasts and fiduciary duty, as well as for humanity’s survival on the planet. Afteral, we need the output of the exercise to be… material.

How can you take things further?

Now that we’ve agreed that materiality-as-usual sucks, what are some of the immediate practical steps that you can take to move beyond it?

We offer suggestions in segmented categories: please navigate to what applies to you, dear reader.

Organisations affected by CSRD

• Join our online Masterclass on Materiality-as-the-World-Needs, together with all those involved in your materiality exercise, and in oversight of sustainability agendas, as a primer: grow awareness, provide food for thought, and begin courageous conversations.
• Book a talk by arkH3 for your Board and key decision makers, on how to make the most of the CSRD exercise: How can the mandated exercise be leveraged to both satisfy compliance requirements and at the same time create a genuine roadmap to future-readiness?
• Reach out to explore our bespoke capacity building programs for C-Suites and Boards.
• Grow your own systemic thinkers and strategists in-house: Delegate participants (sustainability, risk, strategy, revenue, finance and other functional heads and champions) to the 3-Month Acceleration program towards Sustainability-as-the-World-Needs, Cohort 2 of which begins in August/September 2024.

Organisations not affected by CSRD

• (You too) join our online Masterclass on Materiality-as-the-World-Needs, together with all those involved in your materiality exercise, and in oversight of sustainability agendas, as a primer: grow awareness, provide food for thought, and begin courageous conversations.
• If the thinking resonates, consider a pilot deployment of the method with arkH3 — preferably with some industry peers or value chain partners, to diffuse any concerns for first-mover disadvantage and to drive change at scale.
• Reach out for assistance in identifying, sensitising, and mobilising potential fellow-first movers, or explore our bespoke capacity building programs for C-Suites and Boards.
• Grow your own systemic thinkers and strategists in-house: Delegate participants (sustainability, risk, strategy, revenue, finance and other functional heads and champions) to the 3-Month Acceleration program towards Sustainability-as-the-World-Needs, Cohort 2 of which begins in August/September 2024.

Consultancies

Reach out to explore:

• Leadership awareness capacity building — sensitise and mobilise your own Partners to see the immediate need to transform your offerings and underlying capabilities as a matter of survival.
• Training and certification of your mid-senior consulting staff
• Licensing of our training content, methodologies and tools (we’ve got a lot to be published this year!)

(You won’t be the first! :) ).

arkH3 Fans & Sympathises

Do you love what we do?

• Re-read how you can support the arkH3 Theory of Change, pick your level and pull.
• Consider donating to help us scale our R&D capacity, so we can produce more of these highly relevant, actionable, strategic, high-impact approaches and methods, faster.
• Consider becoming a steward / ambassador building a community of practice in your industry, vertical or location, around the arkH3 Theory of Change and Tools. Reach out to learn more about who we’re looking for.

Thank you for reading this piece!

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