Double materiality - the 'on' and 'of' switch
There has been a shift in thinking from just considering the impacts 'of' the environment and society and how they impact a business to also considering the impact of the business 'on' the environment and society as a whole.
Summary: There has been a shift in thinking from just considering the impacts 'OF' the environment and society and how they impact a business, to also considering the impact of the business 'ON' the environment and society as a whole. A complete circle. What that new thinking is really saying is we need to start thinking about organisations and businesses as part of a broader ecosystem that includes people and planet. We also take a look at Biogen and The HEINEKEN Company as examples of companies that have taken on board relevance and double materiality in their sustainability initiatives that should also help to provide security to their longer term business futures.
Why this is important: Increasingly disclosure standards and requirements will embody the concept of double materiality. Hand-in-hand with materiality is the concept of relevance. For something to be material it has to matter to the business and its stakeholders. It has to be relevant. The danger of taking a broad brush approach to sustainability to meet an aggregate score is that a business inadvertently greenwashes.
The big theme: Rather than 'Enterprise Value' we should be thinking about the bigger picture, the whole pie. As Professor Alex Edmans espouses in his seminal book 'Grow the Pie', the primary goal of a company should be to serve society rather than generate profits. This approach "enables investments to be made that end up delivering substantial, long-term pay-offs." It's not to say that profits don't matter, its more that by focusing on meeting the wider needs of society, profits are a result, not an objective. In other words it is not just worthy, it is good business. Thinking about that bigger picture is good business.
The details
Materiality - an investor's perspective
In August 1994 I started a training contract at Price Waterhouse, then one of the 'Big Six' accountancy and professional services firms that would later become one of the 'Big Four' as PwC. As an engineering graduate I had to complete a conversion course to be able to study for the professional accountancy exams en route to becoming a Chartered Accountant. One of the first things we learnt was the four fundamental accounting concepts: Going Concern, Consistency, Prudence and Accruals (also known as matching).
Wind the clock forward almost 30 years and my focus on sustainability, that first concept of 'Going Concern' seems highly appropriate! That's for another blog.
