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Published on September 20th, 2016 | by Sponsored Content

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The Role of Sustainability “Materiality” in Driving Business Value

September 20th, 2016 by  

By Sarah McAuley, senior director of marketing

“Materiality” used to be a word relegated to CFOs, accountants, and investors talking about financial disclosures and risks. But recently it’s become an important topic in sustainability and energy management circles. One only needs to follow the money to learn why.

Investors are increasingly putting a premium on companies that perform well against various Environmental, Social and Governance (ESG) metrics. In fact, research shows that companies that focus on material sustainability metrics outperform the stock market by an average of 6%. If that data point alone isn’t enough to convince you, consider this: 18% of investors have withdrawn from an investment or withheld capital on ESG grounds, according to a Greenbiz report. And there was a 200% increase from 2011 to 2015 in companies including corporate responsibility data as part of their annual financial reports, according to KPMG. [Full disclosure: this post has been generously sponsored by EnerNOC.]

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Materiality can mean different things to different businesses, but at their core, a material issue is anything that’s core to your long-term business success—whether it’s as obvious as the importance of water prices and supply to a beverage company, as specific as energy and grid reliability for a big software company with critical data centers, or as nuanced as sustainability’s importance to attract millennial employees in an intensifying war for technical talent. Understanding these issues allows an investor to make decisions that take into account the full picture of your company’s activities.

So materiality matters — not just for your traditional financial metrics — but for how your sustainability or energy strategy impacts your company’s financial performance.

Is Energy Material to Your Business?

The answer is, it depends. Sustainability encompasses many different aspects of an organization’s impact on the world: environmental factors like GHG emissions and energy management, social capital issues like data security and customer privacy, human capital issues like labor relations, and leadership and governance issues like risk management. The Sustainability Accounting Standards Board published a great resource, the SASB Materiality Map, which helps organizations understand what sustainability metrics are likely to have a material impact on their performance.

In the SASB map, energy was featured prominently in seven out of eight industry categories. Specifically, health care, technology, services (hotels, casinos, restaurants, etc.), manufacturing, and consumption (food processing, beverage production, agricultural products, etc.), were highlighted as categories where those serious about managing the overall health of their business and reducing their short- and long-term risk exposure performance, should be thinking holistically about energy management.

If you’re now convinced that ESG metrics will now play a big role in your company’s valuation, here are three key steps that will help guide your processes moving forward.

1. Establish Effective Internal Reporting

First, it’s critical to make sure you have an internal reporting infrastructure that facilitates effective, confidence-inspiring reporting. If there’s one thing this announcement proves, it’s that you will need evidence that your organization has embraced sustainability.

Investors are no longer satisfied with “green-washing” press releases with bold claims that are not backed by a meaningful audit trail of data. Even more importantly, as key business inputs like energy are increasingly considered material to overall business operations and profitability, claims that aren’t backed by hard data create serious litigation risks.

2. Conduct a Materiality Analysis

You’ll notice that having an internal reporting structure came first on this list; that’s because without the right data, it’s really difficult to know what’s material. But once you have a strong handle on your current status, a materiality analysis can help you determine where to focus your improvement efforts. A materiality analysis is voluntary—for now—but the Securities and Exchange Commission (SEC) is starting to increase its requirements on this front. In addition to the SASA Materiality Map mentioned earlier, other companies, like the consulting firm PwC, can assist on this front.

3. Make Sure Your Energy Strategy Includes All Stakeholders

If energy is one of your material business drivers, it’s important to develop your energy strategy with C-suite and cross-functional accountability to enable high-quality decision-making. Too often, responsibility for energy is delegated down to the facility-level, and rarely gets much attention from top-level decision makers.

Energy needs to be evaluated similarly to other initiatives intended to generate significant long-term changes. Strategic focus on achieving sustainability goals should be led by the C-suite, with a structure that creates accountability from the top and enables global collaboration and alignment among energy stakeholders, including operations, finance, purchasing, and sustainability. Organizations that are serious about energy management need to develop a clear vision, strategy, and governance approach to energy.

Conclusion

As a side note, if you’re reading this and thinking “this all makes sense, but I work in operations or facilities, and worrying about Wall Street is someone else’s job,” don’t be too quick to downplay the relevance to your day-to-day responsibilities. One of the biggest challenges we hear from the teams on the ground is that there’s never any budget to invest in energy management projects, despite the indisputable positive ROI. If that’s the case in your organization, try positioning your proposal in the context above—you just might be surprised how much budget is available when you’re talking like a CFO.

Sarah McAuley is the senior director of marketing with energy intelligence software pioneer EnerNOC

This post has been generously supported by EnerNOC.


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