Many small business owners feel bombarded and overwhelmed by all the sustainability issues they “should” do something about. 10 different recycling bins, plant a tree for every product, only buy from ‘eco’ or Fairtrade suppliers, sign up to celebrate every diversity day, get rid of every bit of plastic…
But it’s not possible to do everything, especially as a small biz!
You’re running a lean business, so you want to make sure every action counts. Instead, many end up either paralysed by overwhelm and doing nothing, or spreading themselves too thin across actions that aren’t actually relevant to their business so sustainability feels like a burden.
The key is understanding your actual sustainability priorities. Targeting the areas where your business has the most significant impact and you have a real opportunity to do something about it.
Large corporate sustainability teams actually have a word for this – materiality.
While I generally say corporate sustainability approaches are not suited to small business, this is one key exception! The concept of materiality is essential for helping businesses of all sizes focus their efforts on what makes the biggest difference.
Materiality = Knowing what matters
When I mention this word to small businesses, I usually get a blank look. But it’s one of the most important principles of sustainability you need to know.
It means identifying and prioritising the environmental, social, and governance (ESG) issues and actions that are most relevant and impactful to your specific business and stakeholders.
For example, the three small businesses below would focus on very different sustainability actions that are most relevant to their own activities and impacts:
| Cafe or restaurant | Online fashion retailer | Professional services |
|---|---|---|
| Operational waste: Food waste, packaging Menu choices and sourcing: Ethical, sustainable, locally grown ingredients Employee wellbeing: Fair pay, flexible shifts, safe working conditions | Product design and sourcing: Sustainable materials, supplier labour practices Packaging: Sustainable and circular parcels, fit to size Energy and climate: Shipping and logistics | Energy and climate: Office lighting, heating and cooling, IT equipment, air travel Employee wellbeing: Work-life balance, health, bullying, diversity Governance: Ethical practices, cybersecurity |
And in case you’re tempted to say ‘but we don’t have any impacts’ – all businesses do, and that answer is a big red flag to any corporate buyers, investors and lenders that you don’t understand your value chain enough to know what they are. Doing an assessment of your ESG materiality allows you to justify where you invest your efforts, or don’t.
How materiality has evolved
The word probably already sounds familiar to you. Yes, sustainability folks adopted it from the financial accounting concept, where it refers to information that can influence decision-making, specifically in regard to financial reports.
“The information, size and nature of transactions are material if the omission or error of it might affect decisions by the users of the financial statements.”
In accounting, the threshold for what is material or not is not universal, but in principle includes both a quantitative threshold (e.g. 2-3% of revenue or 1% of assets) and a qualitative one on the nature of the information (e.g. fraud, compliance, trend changes and regulatory or legal issues can make it significant regardless of size).
When companies started expanding from financial reports into sustainability reports, the Global Reporting Initiative (GRI) established materiality as a core guiding principle in its 2006 standards.
This approach was further adapted by the European Sustainability Reporting Standards (ESRS), which established two lenses:
- Impact materiality (your effect on society and environment)
- Financial materiality (how sustainability issues affect your business value).
This dual approach is called ‘double materiality’, and is most relevant if you’re considering a broad group of stakeholders, whose decision-making may be influenced by either.
An alternative approach is taken by the IFRS Sustainability Disclosure Standards and considers only the financial lens. This is referred to as ‘single materiality’, as its intended audience is purely financial: investors, lenders and other creditors.
How to do a materiality assessment for small business
A large corporate may go through a highly involved process called a materiality assessment. For a small business, the important things to identify are:
- In which environmental, social and governance areas do we have the biggest impacts?
- How could sustainability issues impact my business?
There is no broadly accepted methodology for deciding whether an issue is material or not. The ESRS points to:
- for potential impacts on society and environment – consider severity in terms of scale (e.g. minor vs catastrophic), scope (e.g. limited vs widespread), and permanence (e.g. temporary vs irremediable)
- for financial risks and opportunities – consider the likelihood and magnitude of impacts to the business, such as regulatory compliance, reputational effects, operational changes, capital costs, resource efficiencies, ability to win customers, insurance and legal exposure.
Here’s a simple process to follow:
- Identify potential topics. You do this naturally all the time, so just brainstorm a list. Here’s some pointers:
- Gathering input from your senior leadership team is a solid foundation, as well as any existing initiatives.
- If you want to go more comprehensive, you can also look at existing or proposed regulations, requirements from customers or lenders/investors, media reports, peer reports, sector standards etc.
- Make sure to include things relevant to downstream use and disposal of your product and the upstream impacts in extraction and production of inputs.
- Screen things out that aren’t relevant to the business, e.g. some broader industry or peer issues may not be applicable due to differences in business activities, country regulations, supply chain, proximity to nature or communities, etc.
- Assess and rate the severity of the impacts and their potential effect on the business. Start with a quick pass of High/Medium/Low for both criteria.
- Sense-check your assessment with key external stakeholders, such as major customers or partners.
- Focus key sustainability initiatives and efforts on those that are high in both, while considering mitigation strategies for those that are high in only one. Anything else is low priority.
- Decide what to track and who needs to know. As a small business you don’t need to write a comprehensive report, but some topics will matter to specific audiences like clients, lenders or your own team.
Why this is useful for your business
There’s a reason materiality has become a core concept in sustainability. It’s not just about reporting information – it’s about focusing your efforts on the biggest impacts. This is relevant to every business no matter its size or stakeholder demands.
This simple process ensures your sustainability work is focused on what genuinely matters for the environment, society and your business.
…While avoiding over-reporting, helping you share the right information with the right people.
…And demonstrating to corporate buyers, investors and lenders that you’ve followed a robust process to understand your impacts, risks and opportunities, which builds trust and credibility.
It’s a win-win-win.
Where to start
If this sounds relevant to you, but still a bit intimidating, here are some tools that can help kickstart your thinking.
- To identify potential impact areas – check out the free diagnostic tool we made with Sustainability Tracker and Xero. In less than 10 minutes it determines sustainability priorities and recommended actions based on your sector and business activities.
- To understand the risks and opportunities for your business – try our new ‘Is ESG relevant to my business?’ drivers quiz. It gives you an indication of how key drivers like procurement, consumers, employees and financial orgs might apply to you.
- For a guided process and workbook – download the free Sustainability Strategy DIY Guide. It walks you through these and other considerations to pick your key focus areas and set goals.
- For hands-on support – Small Mighty CSR can work with you and your team through this process to bring additional practical experience to designing an approach that works for your business.