Correlation in Materiality Charts

Materiality is a familiar term in the sustainability space. In fact, materiality is the foundation on which the sustainability or ESG strategy is formulated. Any discussion on sustainability or ESG reporting starts with defining the materiality of different aspects. As more professionals from accounting and economics background are entering the discussion of sustainability and ESG, there is a new term that is coined - "double materiality", but we will save that for another day.  

Over the past many years, I have been part of the development process of some of the guidelines around sustainability reporting. We have deliberated much on how to evaluate materiality. In those discussions, the now common scatter plot with one axis showing the relevance of topics for the organization, and on another axis, the relevance to stakeholder emerged. This graph reflects the contrast between what an organization degree of relevance on an aspect and what the stakeholders think it to be. There is always a difference between the two.

Surprisingly, I stumbled upon a chart last week that showed the relevance in both axes as almost similar. To be honest, I have not seen perfectly matching thoughts of an organization and its stakeholder yet. Somehow, the chart took me to my statistics classes. This chart would have been a perfect example of a positive correlation.

A quick refresh, correlation is the measure of the relationship between two variables (keeping it linear simple). The correlation coefficient varies between +1 and -1. As the coefficient moves towards zero, the relationship is weaker. The direction of the relationship is indicated by either + or -. If the variables have a high degree of positive correlation, the coefficient moves towards +1, and with a high degree of negative correlation, it moves to -1.

Coming back to materiality, the chart got me thinking, and I picked 20 materiality charts at random, 10 of them international and 10 of them from Indian companies. I went on to calculate the correlation for all those charts. Below is the outcome.

It is interesting to observe that none of them have a negative correlation. This indicates that the organization and the stakeholders tend to be in the same direction when it comes to materiality. Although when I look at the averages both internationally and in India, there isn't a significant difference (though the sample size is small, it was picked at random), but the variance is there.

So is +1 the best materiality chart? No, it will look like coming out of another world.

The materiality chart on one axis plots the inputs received from the organization, and this stakeholder base is an almost uniform set of people. They know the organization's purpose or vision; they have a fair idea of its performance, risks, and controls. This is more of a homogenized group. But on the other axis, it represents a set of different stakeholders and each stakeholder with different interest. This axis will represent stakeholders like investors, regulators, unions, community, pressure groups etc. Coming out with a one coordinated position, taking the views of different stakeholders itself is difficult, but having that coordinate match with the organization coordinate will be a minuscule chance. So, think of 30 such points perfectly matching; what is the probability of that?

There is no perfect materiality correlation. Yes, a positive correlation sounds good. Anything above 0.7 will make me feel skeptical, and anything above 0.8 will seem fictional.

Many companies avoid putting out these charts and only state that they have a stakeholder engagement process and use that to arrive at material topics. I should say, as a stakeholder, I will not be very convinced of the outcome, maybe because I have been regularly seeing these charts. Many companies come out with alternative representation to a scatter plot to convey the materiality. But the scatter plots are the easiest visual to communicate.

It might be interesting to see whether there is a sectoral trend or changes with one organization over the years. This can also bring in how the importance of certain aspects change over years.  It will also help track how global incidents impacts the views of stakeholders and business. Will have to keep this study going.....