Material Gains: Why Sustainability Governance Now Demands a Broader View

Sustainability is no longer just about what’s material today. For boards, the real risk lies in what may soon become so.

For the better part of two decades, corporate sustainability has been defined largely through the lens of ESG: environmental, social and governance. Boards became conversant in carbon disclosures, diversity statistics and governance scores. A sprawling infrastructure of standards and rankings has grown up around these metrics, with much of it focused on what regulators, investors or stakeholders wish to see.

Yet the world has moved on. ESG, once a useful organising principle, now risks becoming a limiting one. As geopolitical tensions flare, technological disruption accelerates, and ecological boundaries are breached, it is increasingly clear that the sustainability conversation must expand. The question is no longer whether a given issue fits neatly into an ESG framework, but whether it threatens, underpins or reshapes the strategic viability of the business.

Materiality and Its Discontents

Two dimensions of materiality dominate current practice. Financial materiality asks whether a given issue, say water scarcity or labour unrest, could affect a firm’s balance sheet or share price. Impact materiality, popular in Europe and among mission-driven investors, goes further and asks how a firm affects the world around it. The first is shareholder-centric, the second stakeholder-focused.

Both are valid; neither is sufficient. Relying solely on what is material today blinds companies to what may become so tomorrow. Equally, chasing every conceivable impact risks spreading resources thin and confusing moral purpose with strategic clarity.

The prudent course lies somewhere in between: focus on the risks and dependencies that matter most, while staying attuned to how global conditions are shifting around the enterprise.

ESG: Settling into a Role

None of this requires discarding the underlying principles of ESG. It has helped institutionalise sustainability, imposed a degree of rigour, and clarified expectations in boardrooms and capital markets alike. For many firms, ESG reporting is now as routine as financial audit. That is no small achievement.

But ESG is becoming, in essence, a compliance function - a way to meet disclosure requirements, placate stakeholders, and remain legible to investors. Its strength lies in structure; its weakness, in foresight. ESG is reporting and disclosure, and not designed to detect geopolitical flashpoints or the second-order effects of AI and emerging technology. Nor can it account for the subtler ways in which ecological degradation, financial contagion or supply chain concentration can ripple through a business.

Boards would do well to treat ESG as a baseline which is necessary, but no longer sufficient.

Scanning the Horizon

The real work lies in horizon scanning. This means thinking beyond the balance sheet and imagining the conditions under which today’s strategy might falter. Not all risks are born equal, and not all come dressed in ESG clothing.

• Geopolitics, once the preserve of diplomats, now shapes everything from energy prices to semiconductor supply.

• Geoeconomics, including tariffs, export controls and industrial policy, increasingly determine where and how businesses can operate.

• Technological disruption, led by artificial intelligence, is redrawing competitive lines faster than governance frameworks can adapt.

• Environmental stress, including biodiversity loss and pollution, is becoming an input risk, not just a reputational one.

• Demographic shifts - aging populations in rich countries, restive youth in poorer ones, and mass migration between the two, will reshape consumer markets and labour forces alike.

These may not be material in the financial sense - yet. Nor are most companies directly responsible for them. But the assumption that such factors lie outside the remit of corporate sustainability is increasingly untenable.

Measurable, But Not Always Meaningful

Much of modern corporate governance is built on the idea of measuring what matters. But in a world of deep uncertainty, what matters most may not yet be measurable. That calls for a change in orientation: from tracking indicators to interrogating assumptions; from managing known risks to stress-testing strategic blind spots.

Boards should ask not only what their sustainability reports are capturing, but what they are missing. What geopolitical risks are lurking in the supply chain? What technologies could make today’s products obsolete? What ecological dependencies, taken for granted, could suddenly become liabilities?

The best-prepared firms will be those that treat sustainability not as a quarterly disclosure exercise, but as an ongoing process of situational awareness.

A Broader Mandate

There is no shortage of frameworks. What is needed now is judgment. Directors should remain vigilant on financial and impact materiality, focusing on the issues that most affect or implicate the firm. But they must also recognise that the greatest threats are often contextual, not operational. To govern effectively in this new era, boards must look beyond ESG and ask a harder question: not “What are we measuring?” but “What are we missing?”

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NB: A useful guide on the foundations of scenario planning for boards was written by Trudi Lang of the University of Oxford’s Saïd Business School for ICAEW in 2022. Please find the link here.