Assessing materiality: Identifying issues and messages

Novartis conducted its first stakeholder mapping exercise in 2006.  The purpose was to help the company understand which sustainability issues were of interest to their stakeholders including patients, regulatory authorities, academia, suppliers, customers and, of course, investors.

The stakeholder mapping exercise began as a basic quantitative survey but has evolved over time to include qualitative elements and direct stakeholder dialogue - such that it has now become a formal materiality assessment process which takes place every four years at the corporate level.

The most recent iteration included 30 internal and 30 external stakeholders.  Both SRI specialist and mainstream investors are keen take part in the materiality mapping exercise - such that Novartis has had to prioritise key shareholders for inclusion within the exercise.

The materiality mapping exercise helps Novartis steer its corporate strategy (including its ESG strategy) and also its reporting and disclosure activities.  It also helps Novartis to understand which issues to prioritise in its sustainable investor communications. 

How materiality assessment feeds into investor communications

Novartis actively focuses on its investor communication on the top material impact clusters: Access to Healthcare, Patient Health and Safety, Innovation and Ethical Business Practices. Questions on other sustainability related issues are addressed but not actively promoted. 

Materiality webinar series

Every year, Novartis conduct a series of webinars on key topics through which the firm shares progress on how it is implementing the outcomes of our previous materiality assessments.  Each webinar features internal and external speakers and attracts participants from industry, non-governmental organizations, access-related and sustainability groups and investors.

CR material clusters identified in 2017:
Access to Healthcare
Patient H & S
Innovation
Ethical business practices

Novartis' sustainable investor communications

At Novartis, responsibilities for sustainability communication among investors sits with the Investor Relations team.  Growth in demand for sustainability information from investors now means that there are two people dedicated specifically to sustainability communications.  Alongside this team,  parts of the Financial Reporting and Accounting team as well as of the Communications team are in charge of reporting and continue to inform and shape sustainability communications to other stakeholders. The strategic lead of sustainability efforts lays with the ESG Management Office linked to corporate strategy. 

Over the course of a year, Novartis will typically:

• Host an annual ESG investor day
• Organise ESG roadshows, comprising a series of smaller group meetings 
• Arrange numerous one-to-one investor meetings on a variety of ESG topics 
• Send quarterly ESG updates to investors

Benefits and limitations of materiality assessments

Frequent materiality assessments help Novartis to:

• Keep up to date with the changes in stakeholder concerns on issues of relevance to Novartis and their views on Novartis' response to these
• Understand and prioritise what is important to different stakeholders
• Adapt corporate strategy as necessary to align with the interests of all stakeholders
• Focus communications on these issues, so management time is not wasted on issues that are immaterial and of little interest to stakeholders
• Focuses investor meetings on sustainability issues where Novartis has a competitive advantage in providing positive impact or innovative solutions

The materiality process, however, does not address all sustainable investment challenges as gaps can emerge between:

• the material issues identified in the materiality assessment and
• the generic data requested by some of the ESG ratings agencies and the frequent requests for current and granular data made by these research providers.

To address investor and analyst demands for frequent data, Novartis publishes quarterly ESG newsletters.

"There is much that is important to wider society but which does not appear in our usual financial reporting. The materiality exercise has shown us that - when it comes to the major material sustainability issues - there is actually good alignment between investor interests and those of wider society. This is very useful in the wider strategy development process."

Looking forward

As the practice of conducting materiality assessments matures, the insights generated will need to become more granular and reflective of the short-term dynamics in the ecosystem to stay decision useful. The rather static approach of conducting assessments across the entire spectrum of topics every four years, might thus need to be complemented by stakeholder specific topic deep dives. Further, it will need to shed more tangible insights not only on Novartis’ impacts on society and the planet, but also on how long-term consequences of our actions as well as other external dependencies translate into an impact on the company and its financials.   

Lessons learned and advice for other companies 

In reviewing Novartis' programme, we asked Denise Weger of Novartis to suggest two advantages, two challenges and two tips for other companies considering undertaking a materiality exercise as a contributor to their sustainable investor relations.  She answered:

• Advantage #1: "Conducting a rigourous materiality assessment can support the company in institutionalizing stakeholder expectations thereby enabling the relevant economic, social and environmental impacts of core business activities to be brought into business strategies and decisions.   
• Advantage #2: "Having transparency on stakeholder expectations helps to understand the different and sometimes even conflicting stakeholder expectations. This, in turn, enables a company to address these conflicting expectations and position the company’s opportunities as well as limitations and challenges in the stakeholder dialogue." 
• Challenge #1: "Is how to avoid gathering feedback that is either retrospective or only addresses the status quo. It is in the strategic interest of the firm to understand what future changes and expectations might look like.  The aim should be to anticipate stakeholder expectations rather than to respond to ones that have already arisen."
• Challenge #2: "As the maturity of the materiality assessment grows over time and results are being considered in strategies and decisions, the required level of depth of the insights increases. This causes a (topic) breath vs. depth dilemma.  It is hard to address these through one global assessment that takes place once in four years.  (This frequency is chosen to avoid overburdening stakeholders and to allow the company to digest the results.)
• Tip #1: "The process does not need to be all consuming,  A small scale systematic process taking to a few key stakeholders can lead to valuable feedback being embedded into sustainable investor communication. Regular systematic engagement of this nature can avoid a belief that there is conflicts around strategic priorities for each stakeholder group". 
• Tip #2: " Materiality Assessments evaluate stakeholder perceptions.   But, it is also important to measure the actual performance of the most material business activities and not just the perception of these by stakeholders. This performance must be measured according to the impact that it has and reported in a  language that can be understood by the business (Typically by reporting impacts in monetary terms). Only in that way can a business activity’s economic, social and environmental impact be integrated into daily decision making and reporting processes. For this reason, Novartis created its impact valuation indicators which are based on the materiality assessment results.