Does materiality matter?

There is a common consensus that companies should focus their social responsibility or sustainability reports on the topics that matter most. These topics, referred to as “material” in the reporting field, are part of the process of verification known as materiality analysis.

But who defines which topics are material for an organization?

We find that there are two contrasting practices to approach this: the authoritarian approach and the democratic approach.

The authoritarian approach involves an external body (a government, a certifying body or standardizing organization), which defines the topics a “good” company should report on and how they should be reported.

The democratic approach empowers the organization to define its own materiality but prescribes the process on how to select the most relevant, e.g. material topics.

The advantages of the first approach are that it is clear and that the data is comparable. On the other side, it has the same weakness as all top-down approaches: it lacks flexibility, commitment, and support from the bottom.

With the 2014 transition from G3.1 to GRI 4, the Global Reporting Initiative (GRI) has made a fundamental U-turn. The predefined core and additional indicators were replaced by a flexible system through which the company defines material topics and their boundaries. A company should define material issues based on two key considerations:

• Importance for Stakeholders
• Significance of the social, environmental and economic impact

 

The first consideration seems to have become commonly adopted by companies. I rarely see a materiality matrix that doesn’t consider the opinion of the stakeholders. Regarding the second component, there is a lot of confusion, and it could be that GRI contributed significantly to this confusion with its note that, “Impacts on the economy, environment, and/or society can also be related to consequences for the organization itself.”[1]

As a certified GRI trainer, we are clearly instructed to clarify that by “impact” we mean the impact of the organization on others, not the impact on the company, and definitely not what is important for the organization.

By following this instruction, we must recognize that many current sustainability reports which state that they are in line with the GRI Standards are actually missing this consideration. This means that the materiality principle is not satisfied and therefore, the report not in accordance with the Standards!

There is another reason for this confusion. Other leading organizations, such as the Sustainability Accounting Standards Board (SASB), define materiality in the traditional way by considering the stakeholders’ assessment and the importance for organizations. Therefore, many will have the dilemma of choosing between GRI and SASB. There are three ways out of this dilemma:

1. Using the materiality analysis in the sense of SASB, assessing the sustainability issues on where they are important for the organization. There is a high probability that neither GRI nor an external auditor will notice this!
2. Do the materiality analysis in accordance with GRI, assessing the social, economic and environmental impact of the organization with the risk of missing some material issues from an investor’s perspective.
3. Try to combine both definitions when analysing the material issues of your sustainability report and present an Extended Materiality Matrix.

 

What this combined approach could look like is shown in the chart below. In this example, the red line delineates the threshold between material and non-material issues. Acknowledging the two approaches in this way, you are fully in line with the GRI Standards and don’t miss issues that could be material from an investor’s perspective.

We are encouraging our partners to give it a try.

 

 

 

 

 

 

 

 

 

 

 

[1] GRI 101 Foundation 2016. Global Reporting Initiative.