[Ed. note: This guest blog comes from Dinah Koehler, ScD of CSO Partner. Dinah has extensive experience in environmental and climate matters and holds a doctorate in environmental risk assessment and management from Harvard School of Public Health. This is the third in a short series of blogs to help practitioners of any level better understand the concept of materiality in sustainability/climate reporting. Part 1 on stakeholder input is here.]
In Part 1 on engaging with stakeholders to identify material impacts, I pointed out how different groups perceive risks differently. This means that group characteristics (sex, age, race, occupation, income, etc) need to be incorporated into survey questions. Today, I focus on how to make sense of survey responses. It turns out that stakeholders’ responses to questions about climate change or pollution can be understood through the lens of psychology.
According to EFRAG’s Materiality Assessment Implementation Guidance, credible scientific reports are an important objective input into materiality determination. “The undertaking is [also] required to … understand how [affected stakeholders] may be impacted” (3.5 para 102). However, companies face difficult choices when evaluating “credible scientific reports” and input from affected stakeholders.
Soliciting expert opinions and comparing them to laypersons (non-scientific stakeholders) is a long-standing practice in risk perception research. It arose from the understanding that stakeholders don’t always agree on the severity of environmental or health risks, and these differences must be acknowledged because they carry financial implications. For example, J&J proposed to pay $120,000 per plaintiff in the talcum powder lawsuit as part of its pending bankruptcy filing process. If the company uses the entire $11 billion reserve it has set aside, payments for ovarian cancer and other health impact claims could potentially exceed $200,000 per plaintiff (not considering attorney fees). Plaintiffs in Bayer’s Roundup lawsuit received on average between $120,000 and $180,000 for cancer claims. One plaintiff was awarded $2.25 billion just this January! Each plaintiff, juror, lawyer, expert and judge has a different implied “severity threshold.” Settlement determinations are also influenced by state tort laws and precedents.
Assessing impacts based upon “likelihood” and “severity” as instructed by EFRAG is very hard. Rather than looking through the lens of frequency/severity, people generally anchor on characteristics such as:
1. “Dread risk” – perceived lack of control, dread, catastrophic potential, fatal consequences, and the inequitable distribution of risks and benefits, e.g. flooding, pandemics, industrial accidents, and
2. “Unknown risk” – unknown or new hazards that cannot be observed and where harm manifests over time; e.g. women and exposure to asbestos in Baby Powder, cancer risks, climate change, developmental risks.
Affected stakeholders will be overcome with dread when they cannot see the risk, are exposed to it involuntarily and it evolves over time. This perceived lack of control can overshadow their objective evaluation of evidence.
A third important factor (incorporated into ESRS) is the extent of exposure. For example, a significant portion of the US population has detectable levels of forever chemicals (PFAS) in their blood, and climate risk impacts the entire global population. When a large segment of the population is affected, stakeholders are more likely to perceive the risk as severe, which consequently raises the likelihood of significant financial materiality.
Risk perception researchers use “risk ladders” to compare stakeholder perceptions – see the ranking table, high (1) to low (30). Risk ladders, like materiality surveys, ask respondents to do a difficult task: weigh risks and benefits associated with an activity and its outcome (electric power vs air pollution and climate change) and to what degree the outcome is acceptable (kWh vs the likelihood of suffering from air pollution and extreme weather-related illness and mortality). However, the key difference is that risk ladders expect respondents to develop a relative ranking, not individually assess a sustainability matter as is done with a sequential questionnaire. This serves to minimize logical inconsistencies (If A>B, B>C, then A>C).
Source: Paul Slovic, Perception of Risk, Science, 1987.
Stakeholder engagement, informed by scientific evidence, should incorporate two crucial aspects: 1) group characteristics and 2) perceptions of sustainability risks, particularly regarding dread and knowledge. To fully understand the responses of “affected” stakeholders, results need to be segmented and analyzed by group. Risk rankings are essential for evaluating the likelihood that significant impacts – such as exposure to air pollution, cancer-causing chemicals, or extreme weather – will provoke stakeholder reactions such as lawsuits, consumer boycotts, regulatory challenges, or reputational damage, potentially leading to financial materiality.
Our members can find more information about materiality in ESG here.
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