The New Sustainability Language: Materiality and Risk...

By Joel Makower via GreenBiz

"Materiality” is becoming part of the fabric of sustainable business.

For the uninitiated, materiality is an accounting or auditing term that refers to the estimated effect that a given piece of information may have on a company’s value—its current or future stock price, for example. If a CEO has been diagnosed with a terminal disease; if a company is being investigated for bribery by a government agency; if its profit or loss needs to be restated by a significant amount—all are examples of something that is “material,” from an investor or stakeholder point of view.

So, when does sustainability become a materiality issue?

This is a question that is rising up through investor communities, from so-called socially responsible investors, to mainstream pension funds and university endowments, to Wall Street stock analysts, and the regulatory agencies that oversee publicly traded companies. All are concerned with the risk factors facing companies in a world of constraints related to the availability of energy, water, and other resources; where the toxicity of products or manufacturing processes present risks all the way up the supply chain; and where climate shifts can disrupt the availability of raw materials and threaten the well-being of employees and customers.

And it’s increasingly part of the job of sustainability executives in the world’s largest companies. For them, understanding “materiality” and “risk” means learning a new language and translating it into their companies’ far-flung operations.