Making More of Materiality
Many large corporates have been reporting on CSR and sustainability, with reference to their materiality matrices, for several years now, but it is only relatively recently that the concept has begun to have a tangible impact on what they are reporting.
The Global Reporting Initiative’s (GRI) G4 Guidelines appear to have something to do with this; at least from my experience with companies whose turnover is between £1bn and £10bn.
Prior to the introduction of G4 in spring 2013, GRI’s reporting framework hadn’t really gained a great deal of support beyond the global top 500 companies. There are various reasons for this and it was time for a more appropriate - and meaningful - framework to be developed. Since the launch of G4 I’ve noticed three significant changes.
Firstly, companies that are reporting voluntarily are showing an interest in G4. They aren’t necessarily producing compliant reports, but they are starting to use the framework itself to base their reports around. This is good. It’s bringing some added rigour to reporting, it is also encouraging companies to think about what they report, why they report and to whom they report.
Secondly, the word “materiality” is creeping into everyday conversations I’m having with heads of CSR and sustainability. This is also good. Materiality is all about finding out which aspects of your business activities and performance your stakeholders – employees, investors, suppliers, customers, regulators- give a damn about. And which they don’t. The process of finding all this out can throw up some very interesting information; about your company, its products, the landscape in which you operate, and your marketplace. More and more client contacts are now asking me how they can understand the key sustainability issues and drivers for their business and their stakeholders. We largely have GRI’s G4 reporting framework to thank for this increase in understanding and implementation, because the framework requires and provides some underlying principles for a materiality process. It tells us where to look, and what to look for.
However, the G4 framework is intentionally one-size-fit-all and is therefore rather cumbersome. It contains nearly 50 aspects of sustainability, or potential “material issues”, and there are various pitfalls to be avoided. The first concerns meaning. Generic descriptions of the issues are inevitable because G4 needs to be applicable to a wide range of industries. The problem is that unless the aspect is described in a way that the stakeholder relates to it, feedback from them is going to vary, depending upon their interpretation. Compliance (one of G4’s societal aspects) is going to mean different things to different stakeholders, for example. (GRI has produced some useful Sector Disclosure guides -there are currently 10 including Construction and Real Estate, Electric Utilities and Mining & Metals- which help.) Next, we need to consider how the views of stakeholders are gathered.
At IMS we’ve developed an online platform that’s already been used to help undertake stakeholder engagement, and build materiality matrices, for organisations and businesses who want to use the G4 framework. One of the things we noticed early on was that the spread of answers to any single question about materiality follows the usual bell-curve. A question such as: “Do you consider biodiversity an important issue for the business?” with answers ranging from “not important at all” to “extremely important” would have outliers at each extreme, but the majority of responses will be aggregated towards the centre. This makes it hard to differentiate the most likely material issues. Techniques such as Net Promoter can be used to improve the spread, but we realised at IMS that a more meaningful technique should be developed to enhance data acquired within the GRI G4 framework. So, we set about developing an algorithm that would do the job. A software engineer and a statistician were locked in a room for most of the summer, testing models and developing question sets that provided the most meaningful results. A major part of this work was designing a system that minimises the subjectivity of responses, while maximising the spread of responses. Using the methodology developed, we are able to determine which issues are the most important and relevant, sifting out material issues from the long list presented to stakeholders.
The third challenge businesses face is actually having the courage to ignore the non-material issues. As the Sustainability Accounting Standards Board (SASB) says: The materiality concept is the principle in accounting that trivial matters are to be disregarded, and all important matters are to be disclosed. Materiality has as much to do with what you leave out as what you put in. Unfortunately, armed with a wealth of detail and data on up to 46 sustainability Aspects listed in G4, there’s a real temptation to report on everything – which is in part a hangover from GRI G3 which whether intentionally or not encouraged it. This is further facilitated by the increasing use of sustainability management and ERP software, which means companies are able to draw down data on virtually any KPI they care to invent!
As a result, while 82% of WBCSD members now disclose the use of a materiality process, only 30% actually focus their reporting on those issues they consider to be material to their business (Reporting Matters 2015, WBCSD). Yet, by continuing to report on everything, companies are not getting full value from having gone to the trouble of undertaking a materiality exercise.So, in conclusion the challenges for meaningful materiality are:
Agreeing definitions that are meaningful to stakeholders
Analysing results in a way that minimises subjectivity and aggregation
Discarding issues that are not material
There’s plenty of material out there if you want to read further on the subject. GRI is a good starting point: www.globalreporting.org
IMS Consulting provides online and facilitated stakeholder engagement services, tailored to the requirements of the GRI G4 framework. IMS is an Organisational Stakeholder of GRI.