GRI G4 – Materiality, Transparency, Comparability – FIGHT!

Saying whether the changes to GRI are good or bad reveals a lot about the commentator’s position. Here’s my guide to reading comments on the G4, and at the end of the post, my own comments.

Framework

I think that in order to analyse the latest version of the GRI, people need to understand that there isn’t a way to meet all the expectations of all stakeholders all of the time. For me, three important criteria stand out as competing for the attention of CSR pundits, investors and others who care about CSR: Transparency, Comparability and Materiality. In order to evaluate the G4, one needs to understand what those things mean, who cares about them and how they don’t align with each other.

Transparency

Transparency is disclosure of information about the impact of operations within organisations and also on wider civil society. And at some level, the greater the transparency, the greater the trust created for the readers of reports.

One of the great successes of the GRI is the increased trust in business through clearer reporting of issues that concern many stakeholders.

But for many NGOs and other interested civil society groups, the GRI doesn’t go far enough in providing the sort of information that is useful to evaluate organisations and then hold them to account for their actions. The G4 proposes a much greater level of transparency in relation to supply chains and transparency of impacts of suppliers.

Comparability

Comparability refers to the ability of someone to make relatively reliable judgments on information published by different organisations. When it comes to GRI, the common set of metrics means that information is often directly comparable.

There is a lot of value (especially for investors and managers) in understanding relative performance against other similar organisations and also other organisations generally, so the GRI has also helped with that.

Materiality

Materiality is the degree to which the issues covered are the most important issues for a particular organisation.

It’s not clear that the GRI to this point has helped much with that. For example, professional service firms talking about how much they have reduced their paper use (and how they use only recycled paper) is interesting and important, but not as interesting and important as the impact of the advice they give their clients (like in relation to tax avoidance, for example) or in relation to Governance issues.

There is also a great amount of value in understanding the areas of biggest impacts within a particular organisation. That allows outsiders to make judgments about the level of commitment to CSR of particular companies. 

Transparency, Comparability, Materiality … FIGHT!

This is where things get tricky. A focus on Materiality will decrease comparability because it will reduce the number of metrics common across all companies. It also has potential for reduction of overall transparency and comparability, because non-material issues might not be included in a report. The SRI community is desperately trying to connect CSR to corporate performance and presumably welcome the help they will get in identifying the most important CSR issues for companies.

Organisations, particularly companies, have long argued that Transparency is all well and good, but that GRI compliance causes them to waste resources on issues that didn’t really matter. But many NGOs have argued that GRI compliance doesn’t go far enough – they want more information and further into the supply chain than GRI had previously delivered.

And so I expect some NGOs will cry foul at the G4 changes (they won’t necessarily have the same breadth of data) while others will love the deeper supply chain penetration (better depth of data).

As a general rule, transparency will not be useful per se for materiality, but will often increase comparability. Speaking of which…

An increase in Comparability probably generally increases transparency, but may reduce the effectiveness of identifying the most material issues. Add to that the problem of false comparisons (such as comparing vastly different sectors with the same metric and assuming conclusions are valid) and comparability isn’t the patron saint of advancing the cause of CSR.

Putting it plainly, comparability either requires an exhaustive list of metrics or clear consensus for all concerned about what the comparable issues should be. Precious little such consensus exists.

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Integrated Reporting

In some ways, the GRI and IIRC are occupying the same space when it comes to organisational reporting. In other ways, and with the advent of the G4’s focus on Materiality, they are miles apart. Integrated Reporting is also treading the same path and it remains to be seen how they will strike a balance between the three important drivers, but it seems to be heading down a similar path, albeit from a slightly different perspective. The IIRC is keen to ensure its framework is aligned with value creation, while GRI in its most recent iteration is focussing on impact. Risk experts will be wildly gesticulating and concluding that those things are two sides of the same coin. But not everyone is a risk expert!

If Integrated Reporting takes a similar approach to Materiality in its take on value creation, then presumably they will happily co-exist. If they don’t, my guess is that companies will generally align themselves with one or the other and we may see IR and GRI pulling at different corners of CSR reporting.

Also in the mix is what seems to be a growing drive to have mandatory reporting of various ESG measures, such as the European Commission’s growing European Policy on CSR and a strange agglomeration of Governments who are publicly talking about the importance of ESG metrics in reporting (from the usual Scandinavian countries to some less expected South American and Asian countries). No doubt the experience of countries like South Africa who are now into their third year of compulsory report of ESG metrics will be informative.

My Conclusions

Materiality is likely to result in longer organisational discussion of certain issues (the material ones!). That will necessarily involve more resources than less thorough discussions, but has the potential for higher quality outcomes. The real question is one of return on time invested in the Materiality process, and that is probably best answered at opposite ends of the Materiality zoom: per organisation and also the sum of all organisations.

Simple Organisations

For simple organisations (please don’t ask me to define that), the G4 will probably result in shorter reports with a clearer focus and much better transparency. For anyone who spends time reading them, reports are about to (hopefully!) get quite a bit more interesting and informative. They will also reach deeper into the most important issues through the greater focus on impact and consequent reach into supply chains.

Complex Organisations

For complex organisations, we will possibly see longer reports, because such organisations will need to discuss materiality on a strategic-unit basis, which may mean different issues need to be addressed based on variation in business model, customer base and operational strategy. For some organisations, they will need to have multiple discussions of the same issue because of the different operational contexts and strategic units approach.

Controversial Organisations

For organisations which have controversial or detrimental impacts on society, they will probably suffer the worst of both worlds; having to fully disclose all GRI metrics (due to expectations of certain stakeholders) and identify their most material impacts. Those organisations are likely to bemoan the GRI changes because they will need to increase the resources needed to meet their social expectations and conform to the highest GRI and disclosure standards.

Steine-BalanceOn Balance…

For me, the focus on Materiality is a very good way to make the GRI relevant for the mid-term. It gives organisations the chance and an excuse to revise their views on CSR and to work out more specifically what the arguments are for and against particular CSR measures. It is also likely to result in more focus on performance targets and greater measurability. Many organisations have underachieved on those task and I think the G4 will be a much needed shot in the arm.

It also increases the transparency of the most material issues, which has potential to bring the SRI and broader investment communities closer to the fold than ever. AND it will mean that more companies will talk about the $ or £ value of CSR initiatives, just like they do in relation to other parts of their business. As a result, CSR programmes will be better embedded and drive a new round of value creation from CSR-aware thinking.

I suspect that the cost of reporting in accordance with GRI has gone up in the short term, but will decrease over the long run because the new Materiality focus will lead to more effective reporting and better return on investment for organisations who take the time to do it properly. For organisations who try to game the Materiality stuff (and there will be more than a few of those), they are probably in for a long-term increase in costs and run the risk of being targeted for lack of transparency and honesty and also of disenfranchising investors in the medium term. The G4 will be much easier for companies that have taken integrating CSR into their business seriously – in fact some might even think that the changes don’t stretch them enough. Those companies will probably be outweighed by the companies who think it’s too hard by several factors.

It also has to be noted that SMEs will need to prepare for the GRI as much as many larger companies – they will necessarily be more involved than ever in GRI reporting because of the increased ‘impact’ focus. This will be tricky for many of those organisations, but on balance I think they will also benefit from the changes to G4 if the focus is on creating long-term value.

 

Others’ Views

Of course, I’m not the only one with an opinion, and in the interests of a more balanced view, here are some links to what others have to say:

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