Over the past few millennia, our relational intelligence has taken a beating. This makes materiality analysis interesting. It allows consultants to make a killing.

Annual reports should be concise, but stakeholders need a reasonably full picture to inform their decisions. Materiality analysis is how they find a balance. It requires teams to consider and agree what actually mattered during the reporting year. Reports should also be forward-looking, so materiality analysis is informed by trends i.e. those matters that are likely to remain or become more important going forward.

At one level, what mattered seems obvious to anyone deeply familiar with the business. Every executive has a view of what mattered. Every manager knows what mattered within their area of responsibility. Every employee has a valid view too. They were there, day in and day out. Their bodies accumulated data on what mattered every millisecond. We naturally track trends. What makes materiality seem obvious to some is intuition.

At another level, the question of what matters is complex. This does not conflict with it seeming obvious to some. The problem only arises when we are asked to make the materiality process explicit. That usually means a set of simple steps. Complexity science tells us that problems arise when we impose linear methods (e.g. a set of simple steps) on a complex system (e.g. executive intuition). Our intuition just became shy.

At the base of the problem is the fact that materiality is relational. What matters depends. It depends on what happened. It depends on how our business model might have changed. It depends on what people think is important at any given time. Mainly, it depends on who is reading the report and what decisions they seek to make. Despite what the ESG raters say, it’s just not as simple as splitting a list of topics into material vs not material.

When categories become fluid, Westerners get worried. There’s cognitive legacy here. Colonial scientists destroyed local knowledge that had been accumulated over millennia because it did not accord with their categories. San hunters, for example, can categorise animals based on where they find their food. Makes sense to a hunter; sounds primitive to a colonial scientist who knows that The Best Way to categorise animals is called species and based on genetics. The San were more interested in relationships: their categorisation was more complex and did not require killing large numbers of animals to work out. But I digress.

As materiality became encoded in reporting standards, disclosure teams began to face a dreadful problem: no one seemed to know The Best Way to do it.

For a while, reporting teams got around the problem by creating pseudo-processes to validate what seemed obvious to them. A plethora of 2×2 matrices emerged that ‘rated’ issues on (x) their importance to the organisation and (y) their importance to stakeholders, and variations on this theme. Elaine Cohen, blogger and founder of Beyond Business, had the guts to point out that the emperor had no clothes. That was 10 years ago.

Over the last decade, significant shifts have taken place. Unfortunately, it is not easy to determine whether they are useful or not.

• Materiality got divided into: financial materiality (what matters in relation to enterprise value); impact materiality (what matters in relation to society and environment); and double materiality (financial + impact materiality).
• Opportunists went with naming-by-numbers to announce ‘triple materiality’ which adds ‘context’ as a third element (as if it was something new).
• The IFRS opted for ‘financial materiality’: what matters must have financial implications for the company.
• South Africa followed the Europeans by opting for ‘double materiality’: when social and environmental issues look set to take us out, narrowing our gaze to financial implications seems short-sighted.
• The Europeans spent long hours and vast amounts of money creating guidance documents, many of which they kindly made open-source.
• ESG rating agencies short-circuited the process by expanding their lists of sector-based material themes and topics. This was good for them because algorithms are not yet know for their intuition; for companies, it became a nightmare.
• Consultants offered to remove the nightmare by developing more complicated and costly impact rating methods.
• Thinly stretched reporting teams, overwhelmed by jargon, investor ESG expectations and complicated methods, requested more and more budget to pay the consultants.

In short, we’ve entered a spin cycle or the Cynefin Framework’s infamous fifth domain: Confusion. Breathe. The spin cycle is a chimera. Notice it, and it starts to subside. Now take another breath. We are actually in the complex domain of Cynefin. Because things depend on other things, the connections count. Assumptions that ignore or hide them don’t help us.

Cynefin tells us we should: Probe, sense, respond. An intelligent materiality process should create what we call an ‘enabling constraint’. It should help your contributors (internal and external) apply their collective minds to what matters.

If you are not satisfied with your current process, here are seven action suggestions to help you probe and sense your way to a response. They are hardly radical but – bizarrely – appear to constitute an increasingly unorthodox approach:

• Action. Use the actions in whatever way and whatever order feels useful. There is no one right way to do materiality. There are more and less intelligent approaches.
• Action. Get a team together and think it through. Do this before you engage a consultant. What might work for your reporting suite? If you want a thinking partner, I am happy to oblige for a small fee.
• Action. Engage at least a few executives in a way that makes it as easy as possible for them to apply their minds. The ‘as easy as possible’ part is important. Materiality is no more difficult than before, but a simplistic process risks destroying your contributors’ innate intelligence.
• Action. Give some thought to the output of your process. The easiest approach is generally to create a loose set of material themes and topics. These are useful for planning the focus and content of your reporting suite.
• Action. Avoid publishing an explicit ‘materiality framework’ in the report. If you really think this will be useful for your target audience, be aware that it tends to vie for attention with your strategic framework. Get your design team to address this: your strategy is more important.
• Action. Avoid hitting send on that email survey. Really. Stakeholders have had it with materiality surveys. Just because [shareholder activists] Just Share did not respond doesn’t mean they are not interested. They are thinly stretched and deciding on uncomfortable questions to ask at your next AGM makes better use of their time. (There are interesting alternatives to surveys – drop me a note if interested.)
• Action. Remember that you are human. You and your networks have got this.

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