Unpacking Double Materiality with Beth Richmond

Transcription

David Stearns:
Welcome to BSR Insights. I'm your host, David Stearns. I'm joined today by Beth Richmond, a director in BSR's transformation team. Beth works with companies to create a more just and sustainable world. Through the application of cutting-edge sustainability management practices, Beth leads BSR strategy practice and works with companies helping them to understand performance, to identify priorities, and to design effective sustainability solutions that increase resilience and deliver value for business and society. So thank you for being here today, Beth. Welcome.

Beth Richmond:
Thank you. Glad to be here.

David Stearns:
I guess what I'd like to start our discussion today would be just thinking more broadly about the overall changes in the world of regulations and disclosure, what is exciting to you about this moment? The companies you work with, what should they feel excited about?

Beth Richmond:
Well, in many ways, I think the formalization of some of the voluntary practices that we've all been working on for a really long time is really exciting. So we're seeing a lot of practices that we've advocated for a really long time, including things like materiality, assessment and reporting and strategy to a certain extent that were things that companies could do are now things that companies should do. And so I think it's a really exciting time to be in the field to see what does that look like, to raise the floor, to have things that we've been advocating for become mandatory and applicable sort of across the board.

David Stearns:
So one of the things that you just mentioned, materiality is something that we'd like to dive in a little bit deeper on with you today. One of the key themes that BSR has observed through this recent period is the many ways that these different frameworks are actually defining materiality and how these different definitions might work with each other. So if you could for a moment, help us to understand how do the different frameworks and guidelines define materiality? Where are they similar and where are they different?

Beth Richmond:
It's a really good question, and I think in the last maybe three years, we've seen a lot of convergence around the concepts of materiality, and I'll just highlight a few. So if we look at something like financial materiality that is primarily concerned with the impacts of a particular topic on enterprise value. Those are the kinds of things that you would expect, for example, an investor audience to be interested in what will materially impact the financials of a business.

If we look at something like impact materiality, which is the primary concern of a framework like the GRI, that is looking at things that are relevant from a civil society standpoint, from another other stakeholder, employees, customers, things like that. So there we would consider impacts to people and the environment from the company on society. So there are two elements there. The inward impacts on financial material and enterprise value and the outward impacts on people and economy and environment.

If we put those things together, we get double materiality, which is the primary concern of a regulation like the CSRD which looks at both of those things together. There's also a concept of dynamic materiality which is how things move over time. So conceptual clarity across the different standards and frameworks, both voluntary and mandatory is something that we're seeing, but we're also seeing regulators that pick up just one element. So CSRD looks at double. The SEC, for example, is primarily concerned with financial materiality, and there are several other jurisdictions who have taken that more financial materiality approach for the time being as well.

David Stearns:
So I know that BSR has consistently advised the companies that it works with to utilize the double materiality approach. Can you talk a little bit about why this is the way we handle it? Why should companies apply this concept of double materiality? Why that's the approach that we have favored in the past?

Beth Richmond:
Well, I think that both of those elements are important, right? It's important for different stakeholder audiences that you report on the things that are relevant to them. So from an enterprise value standpoint, you've got one audience who is interested in that, investors primarily, but there may be others employees may be interested in that. Your customers or suppliers may be interested in that lens. I think there's also, from a disclosure standpoint, pure play disclosure, there is an interest from civil society partners, from governments, from employees, again, from community members who are interested in a company's impact on the water environment, the water world.

So both of those things are important just from a pure play disclosure standpoint. Going beyond that, when we think about strategy, then the overlap of those two things becomes really important. Where are those opportunities for external impact that are also financially material where there's significant business opportunity and how do we think about that? So we think both from a disclosure standpoint where we're dealing with different audiences and what they might care about and parsing that as well as from a strategic standpoint where we're looking for insights that might help a business decide what to do on a particular topic.

Those two ends are important. I guess the last thing I'll say on the outward impacts piece is just there are some values judgments that we make, and so there are some ethical things that are non-negotiables. And if we're looking at impacts on something like forced labor, we want to know that that is happening regardless of whether or not it's financially material. So we feel like it's really important to consider both of those things in tandem and how they work together or how they're separate.

David Stearns:
That's really interesting. And I want to come back with a follow-up question specifically on companies that only or at least before they've worked with BSR who are only engaging in a financial materiality approach. You've kind of touched on this already, but could you maybe spend a little bit more time just offering, what do you say to companies that really have only engaged in financial materiality? What do you say to them to help them to understand why they should be embracing the double materiality approach?

Beth Richmond:
Yeah, so I think even traditional financial materiality tends to take a point in time kind of approach. So it's what is material today. I think we're seeing that expand. So even financial materiality from a sustainability standpoint, from an ESG standpoint is starting to expand a bit to consider short, medium, and long-term impacts across the full value chain. But I think here the concept of dynamic materiality becomes really important as well. We can assume at least to a certain extent, that if you have a really significant external impact on people, on the environment, and we've seen this over and over and over again, over the long-term, people notice and they look at that and it has reputational impacts, it has regulatory and compliance impacts.

Those things become financially material over time. And so it's important just to get ahead of that to a certain extent. I think the other thing is that moral argument though there are certain things just from a business value standpoint and who you want to be as an organization standpoint that are non-negotiable, and so surfacing anything that might go against those values that might undermine your credibility with your employees, with the folks that you partner with, that's really important to surface in those outward impacts that look at the outside world really helps to do that.

David Stearns:
Does that all imply a need for companies to engage with other stakeholders that they may not have engaged with previously?

Beth Richmond:
I'm so glad you asked that question. I think one of the things that the new standards around materiality, impact materiality, so looking outwards, the GRI standards as well as the CSRD really emphasize is the intersection between impact materiality and human rights saliency assessments and the guiding principles and how they think about which topics are important. A really important part of that assessment is understanding and engaging with affected stakeholder groups and vulnerable groups in particular.

So there's really an emphasis here on hearing from those stakeholders who you might not regularly interact with, but who are affected by the decisions that you make, and we're really happy to see that. I think that's a really important part of the exercise. And one of that makes it really valuable because you are getting new information as opposed to talking in the echo chamber that we sometimes find ourselves in talking to the same partners we talk to over and over again.

David Stearns:
And I would imagine just the exercise of having those conversations has value, even aside from the value that they're offering in terms of helping to put together these materiality assessments.

Beth Richmond:
Yeah. I mean, the stakeholder engagement part of a materiality assessment from my perspective, I think is one of the most important and valuable pieces. It gives you an excuse to talk to people you might not otherwise be able to get time with, and that's tremendously valuable. Now, I think we need to make sure that's a two-way street. So one of the things that we're thinking a bit about here is how do we make sure that that doesn't create stakeholder fatigue? As more and more companies are doing materiality assessment as they're trying to engage the same stakeholders, how do we make sure that the interest of those stakeholders are also protected and that they're able to provide the input that is needed without also it taking a lot of their time and energy to do that?

David Stearns:
I know that you've in fact just recently come off of a pretty extensive conversation with some of our member companies around reporting and I think it'd be really interesting for the people listening to this interview to hear a little bit about what are you hearing from companies who are going through this process? What are some of the things that come up for them? I'm sure they've got lots of questions. I'm sure there are lots of challenges that they'll encounter along the way. What are some of the greatest hits of what you're hearing from companies when you're engaging with them?

Beth Richmond:
So I think for those subject to mandatory reporting and the sort of compliance aspect of materiality, we hear a couple of things. One is, at what level? So if we think about materiality you could do that at a facility level. You could do it at a business unit, level by region, full corporate. So the first thing they're thinking about is where do I want to do an assessment and what should that look like? I think once we get past that and we say, okay, here's the level we're going to do it, here's the granularity, then we start to get into methodological questions around things, do I consider inherent risk?

What things look like before I mitigate anything? Or do I look at residual risk and does that determine materiality? I think on the impact materiality side, that's very clear. CSRD says you have to disclose on topics before you have managed them, and so inherent risk becomes the measure there, but it's less clear on financial materiality and companies have a little bit to play with. I think both are important, but the answer is not there. There are other questions like do I use a survey versus interviews? How quantitative should this be?

What is the role of technology or AI in summarizing some of our impacts? How do I get the best data that is needed for this? How do I integrate it with the due diligence? So there's lots and lots of things that folks are figuring out in real time. There's some guidance from FRAG that is in draft that we expect will be out earlier next year, but I think we're in the point where it becomes a compliance exercise and that raises a lot of questions and scrutiny that maybe weren't there before.

David Stearns:
Well, that's really interesting insights from your conversations with companies. I would imagine that as we move into this new era of now understanding and then beginning to implement some of the changes that are mandated by these new frameworks, really the next six months to a year is going to be a really busy time for you in terms of helping companies to navigate this and to execute it and comply effectively. I guess the next question though is, so what's around the corner? What do you see coming beyond that in terms of the world of materiality and compliance and disclosure?

Beth Richmond:
Yeah. So I'm really looking forward to when this is standard practice. So I think what we're doing right now is helping companies to set up the infrastructure that they need to do this on a more regular basis. So a lot of the questions we're getting will become sort of commonplace and companies will find the way that they want to approach risk, and they'll find the way they want to engage stakeholders and what works best for them, and they'll do that on a [inaudible 00:12:47] basis and we'll have great information from those conversations. The exciting part of that is that it's a launchpad for strategy.

So once you have all the data that you need and you've deeply engaged your value chain and you've got all this stakeholder relationships built, where do you go from there? And I think we're seeing really strong ambition maintained even in the face of all these resources that are required to go towards compliance. So I'm excited for when we pivot from this moment, which is super important in professionalizing the practices and making sure we're all doing the same thing and that it's interoperable, but moving from that to, okay, great, so now I have a strategy around this and I think I have goals here and making that kind of progress. That's what I see coming next, and I'm super excited to see it.

David Stearns:
It sounds like what you're describing is this is going to require a real of business approach, that this is not going to be something which is just siloed into just the sustainability practice, but it's going to be something where when we talk about stakeholders, it's not just external stakeholders, but it's going to be the people that you work with, talking to people throughout the company as well.

Beth Richmond:
Yeah. And we're starting to see that already. I mean, when we talk about materiality assessment, we're getting the risk team involved, we're getting the audit team involved, legal is involved, finance is involved. The folks that are reporting, maybe it used to be the sustainability team, and now it's more corporate communications are involved. So there's already an expansion in the teams that have to be up to speed. We're seeing ESG controllers as a new role. So there's a lot that's going on already. There's a lot of training and learning on both sides.

So I think from the sustainability team standpoint, getting those colleagues up to speed and knowing this space and understanding, for example, there is always a quantitative answer. And so we have to go forward with what we know is there and do our best. And I think on the flip side, what does good data tracking and assurance look like and how can we take the lessons from accounting and apply those to something like sustainability data? And so there's all this upscaling on both sides that's happening right now that will lead to deeper integration into the business. So I think to your point, more and more people involved, more and more familiarity, it's going to be part of standard business practice, and I think that's really exciting.

David Stearns:
Well, I think that's a really great note to conclude with. So thank you so much, Beth. Look forward to continued conversations and to hearing more from the transformation team at BSR.

Beth Richmond:
Thank you. It's great to be here.

David Stearns:
Thanks for listening. For more in-depth insights and guidance from BSR, please check out our website at bsr.org and be sure to follow us on LinkedIn.