Integrating Environmental Sustainability into Business Strategies: The Materiality Assessment
A major challenge for businesses intending to buckle up on environmental sustainability (ES) is knowing exactly where they fit along the spectrum. In other words, how can businesses find relevance and frame their peculiar case for ES?
I have had businesses ask for an ES strategy on the spot in a manner similar to buying a product from the shelf. The unbridled truth is that the existence of a single master key that opens all doors is a perpetuated myth. Any ES strategy that does not attempt to work business operations with environmental variables i.e. perform a materiality assessment is a futile effort. The simplest rationale for this is that no two businesses affect and rely on the natural environment the same way.
While a materiality assessment takes place at the operational and activity levels, usually at the base of a strategy pyramid, outcomes are incorporated at the top levels of company mission and values, thematic goals, supply and procurement policy, etc. Therefore, ES can address business issues like regulatory compliance, cost reduction, biodiversity risk management, corporate reputation, operational efficiency, disaster resilience, resource availability, and many more. Finding an ES niche – areas where operations affect and depend on the natural environment – is the key.
Performing a materiality assessment is a rigorous process with great scope stretching across the entire value-chain. It, therefore, demands expert intervention and participation of major stakeholders including top-level management. In three major steps, I summarize how to perform a materiality assessment:
Step 1: Identify core business operations along the value-chain. Depending on the nature of the business, operations may be classified under procurement of input materials, processing of materials, production of goods, and distribution to customers. In some businesses, value-chain may include research and design of the product. Irrespective, the crux of the identification stage is to highlight core business operations and activities.
Step 2: Overlap these with the peculiar environmental impacts and dependencies of your daily business operations. Some of these impacts include gaseous emissions, waste and discharges, loss of biodiversity, depletion of forest resources, disturbances (air, noise, and light), land degradation from harvest and extraction of materials, etc. Obvious dependencies may include energy (hydro, solar, fossil fuel), raw materials, water source (ground, surface, rain or seawater), while ecosystem services like erosion prevention and soil regulation, flood control, are the less obvious ones. Mapping operations with impacts and dependencies require the establishment of standard metrics for measurement and valuation. As a standard practice, there must be a set of baseline data to measure environmental equivalence either qualitatively or quantitatively.
Step 3: Prioritize the most material issues into high, medium and low. Business drivers, interests, and/or needs usually inform this step. For example, a mining company might be keen on their environmental risk management and regulatory compliance, while a manufacturing company might prioritize resource availability, cost of capital and corporate reputation. These are just a few examples of business drivers and needs that often influence the prioritization of a company’s material issues.
To better put this in perspective, let us consider a company called Ofada Foods Nigeria Ltd. (OFNL); a major producer and wholesale supplier of instant rice within the fast moving consumer goods (FMCG) sector in Nigeria.
Recent reports from their procurement managers have indicated low supply of raw materials that may significantly stall production if not addressed. Meanwhile, OFNL is also coming under increased pressure from nearby communities to limit effluent discharge and fumes from their factories. This situation has made the management set new priorities and targets to make operations more efficient while also developing their environmental performance to meet investor’s requirement, which is necessary to increase operational capital and grow the business.
Following a risk assessment of OFNL’s value-chain and mapping of company operations with environmental issues, it was realised that partner farms from which they source rice in the northern and middle belt regions of Nigeria have low yields. This is due to the drought and flooding experienced in recent months owing to extreme weather and climate change. Furthermore, the farmers rely on traditional low-yield farming techniques that have a high impact on the environment due to the limited innovative alternatives available to improve farmland resilience and efficiency. The effluent from factories is a by-product of rice processing, specifically parboiling and milling. Nearby settlements are vulnerable from the discharges that pollute their lands and the occasional run-off into their primary source of water. Gaseous emissions and noises are associated with the generating sets running on fossil fuels.
From the preliminary mock assessment, OFNL’s priority impacts include effluent discharge, noise and emissions as informed by societal, reputational, legal and regulatory needs. Their priority dependencies include raw materials (rice) from partner farmers as driven by the need for operational efficiency. Together, these makeup OFNL’s materiality issues and set the direction for an ES strategy.
A basic sustainability strategy for OFNL will likely include the following:
1. Help partner farmers increase farm efficiency and yields through improved seed variety, tools and innovative techniques to develop their capacity in best farming practices
2. Establish a company farmland based on precision farming techniques to maximise yield and reduce exclusive dependence on third-party farms
3. Treat water discharge from factory to a specific end-use standard, or recycle to reduce dependence on water
4. Explore other power alternatives to curb noise and emissions from fossil powered generators to the barest minimum
5. OFNL might also be willing to take a step further to offset their residual impact on nearby communities by providing clean water
Measuring and valuing impacts and dependencies from step 2 (overlap) will give an accurate representation of the materiality issues. For example, how much MT of rice does OFNL expect from the company and third-party farms in a year, or by what percentage will it reduce dependence on water in 5years, and perhaps how many beneficiaries will the clean water reach. The magic is in the numbers and it always puts the formulation of an ES strategy in a better perspective for business integration and implementation.
*Please note that this is just a hypothetical example and in no way an exhaustive assessment of a company’s materiality issues.*
From the above, it is clear that when we combine business operations along the value-chain with environmental variables and company drivers, we realise that using a generic model is a misfit for framing ES. Sustainability incorporates a plethora of meanings and the peculiar case for integration will differ even with businesses within the same sector. Thus, performing a materiality test is essential to developing an ES strategy and integration into existing business models and reporting.
While framing your case through performing a materiality assessment can help the adoption of a more integrated approach to sustainability and bottom-line reporting, it will also add value to the overall decision-making process of the business. However, it is incomplete and ineffective without valuation and taking further actions to manage the identified impacts and dependencies.
I cannot overemphasise the importance of valuation as it is at the interface of integrating ES with business strategy and makes measuring ROI possible. Simply put – Indicators are criteria for identification; quantifying your indicators allow you integrate and measure the progress of what you have identified; measuring ROI is critical to achieving a sustainable development.
Taking actions to mitigate impacts and increasing the efficiency of your dependencies completes the cycle. This helps you internalize the environmental footprints of operations by reducing risks and maximising business opportunity.