At Akira Consult Limited we are passionate about Sustainability, and when we come across new information in this ever expanding field, we test it. This article is inspired by Harvard Business School whose article on ‘How ESG Issues Become Financially Material to Corporations and Their Investors’ was shared by a friend, Margaret Kariuki, who herself is an authoritative Sustainability business leader.

So the article starts off by defining the concept of materiality as ‘that which would cause a reasonable investor to think differently about whether to buy or sell the stock’. In the not for profit world, such as in the case of Religious organisations (RO), where the aim is meant to be purposeful- such as spreading the gospel, the impact of a material event would be to lose would-be-followers, and as such lose its primary purpose altogether.

The article continues to state that the proposition that ESG issues can be financially or reputationally material has gained general acceptance not only among members of the public, investors but also among organisations themselves and increasingly among regulators or state organs. For example, thousands of organisations now produce materiality assessments of ESG issues leading to the prioritization of certain issues based on their identified materiality to the organisation itself and to society.

The two most popular global ESG reporting standards, the Global Reporting Initiative (GRI) and the SASB Standards ,sparked off this conversation by developing standards and thresholds for materiality. SASB supports the disclosure of financially material sustainability information to investors and other providers of financial capital. The GRI’s, meet the needs of a wide range of stakeholders for information about a company’s impacts on the economy, environment, and people.

The article, which is very well written, provides a framework offering a theory of change, focusing on how social progress prioritizing actors (governments and regulators, NGOs and impact first investors) can create incentives for organisations to behave more socially responsibly when it comes to offering products, services or for RO’s, inspiring a higher purpose for believers. The article gives very relevant examples on the effects of the 5 stages of materiality and the effect on companies not heeding to the signs had events of materiality affect their profits and operations. Some of the examples cover fields of healthcare, car manufacturing, pharmaceuticals, social media and so on.

With that in mind, we attempted to draw out an analogy using the Christian Church as an RO, where in the recent past, generally accepted spiritual practices such as fasting and prayer was abused and led to the death and starvation of many church goers in the Coastal region in Kenya. That event threatens the credibility of ROs as its effect on the society (the ‘S’ in ESG) was severely impacted. Let us apply these stages:

  1. Status Quo- The practice by those churches exposed the degree of misalignment between those ROs and societal interests. In the beginning, it seemed to be tolerated as more church goers were lured into these dangerous practices despite its negative effects. This has largely been blamed on the naivety of the church goers in not being grounded on the basis of their faith in order to avoid such manipulation.
  2. A Catalyst Event – These dangerous practices started becoming entrenched as the ROs sought more popularity and received greater financial increase in their coffers. In the meantime, word started getting out as churchgoers went missing and the cover was blown on the true state and effect of the dangerous spiritual practices. It is surprising that those events persisted for a long time before being exposed.
  3. Stakeholder Pressure- The general public, NGOs, media, state organs such as the police and other stakeholders reacted with anger to these dangerous practices and started seeking redress. Political stirring occured, but action was slow. The public however, was unrelenting, and became focused on the offending ROs and not on the practices of the Christian Church as a whole. Pressure was applied, that forced state organs to act.
  4. The Organisation’s Response- The RO tried to cover up and defend itself. Its attempt to regain trust failed. Other ROs not wanting the backlash start reflecting on how they can safeguard their own governance systems or align to industry self-regulation, aiming to minimize the the effects on themselves and to deter stakeholder pressure and regulation. State organs, Politicians and the President took action.
  5. Regulatory Response and Innovation – New regulation- The code of Conduct for the Church in Kenyaforced ROs to embed best governance practices, creating a new equilibrium. Alternatively, Churches had to self audit and ensure they remained on the narrow path with sound doctrine. So either through regulation or self reflection, the issue became integrated into the landscape of the Christian Church.

We are excited to adopt this framework, which can guide our thinking and practice on how ESG issues become financially or reputationally material for organisations and their stakeholders. Misalignment of organisation behavior with societal needs is a critical aspect that must be curtailed for the good of organisations and the society at large.

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