Double or Nothing – Prove it, or lose it

All of the big reporting frameworks are doubling down on materiality. Rightly so.

It’s time to prove that materiality is a worthwhile activity, or lose it from our vocabulary.

GRI’s G4 has much more stringent materiality requirements to show how companies arrived at their most important sustainability issues than under the G3. It’s also core to the Integrated Reporting framework from the IIRC. And although it uses a totally different definition of materiality, SASB is also doubling down on it. But how did we get here?

History of Materiality and Sustainability

Materiality has been gaining traction in the sustainability realm since 2003, when Simon Zadek and Mira Merme tried to conceptually replace ‘shareholders’ with ‘stakeholders’ in the US Supreme Court’s definition of materiality as it related to investors and investment decisions. The publication, “Redefining Materiality”, didn’t quite achieve that, but it did keep momentum moving toward CSR issues being taken more seriously as an important factor in corporate performance. It also gave rise to a whole lot of discussion among CSR and civil society sectors about how much transparency should be required of companies, and also on how to determine which issues companies should be required to report on, as well as which CSR issues were most relevant.

That approach has its roots in the battle between Milton Friedman and R. Edward Freeman on the validity of shareholder and stakeholder approaches as a basis for corporate legitimacy. That debate still isn’t settled, and although some commentators still insist that there is a fiduciary duty on directors to make as much profit for the shareholders as possible (which is, at best, marketing for a Friedman-esque approach), CSR and stakeholder approaches to understanding corporate value creation has a lot more traction than it did when the AccountAbility booklet (left) was published.

GRI inserted a materiality test into the G3 in 2006, but it was always difficult to see any serious commitment from companies on reporting the processes they used to determine their most important sustainability issues. Companies seemed to be focussed on compliance with the long list of metrics, which is a fair response to the compulsory nature of most metrics. However, GRI’s inclusion of a test for materiality is at least in part responsible for the commonality of the materiality matrix as we now have it. And while that is a welcome development, the materiality matrix has often been something of a disconnected and sundry process, abstracted from business-as-usual processes. Walk around back of most materiality matrices and give them a bit of kick and they fall over because they aren’t supported by or supporting normal business processes.

It has always been a challenge to see how a materiality matrix frames the nature and extent of management and reporting of the identified issues. Which is a real shame, because a decent materiality process will help companies to identify strategic opportunities, properly allocate resources between CSR projects and frame high-quality, stakeholder driven reporting. The difficult in getting more traction from a materiality matrix has partly been because it’s difficult to balance competing stakeholder interests, but partly also because the drivers for taking conclusions from the materiality matrix seriously have been in tension with transparency concerns. There has also been concern that CSR isn’t or wont be profitable, and therefore shouldn’t be talked about in the same way as value creating initiatives.

If you want to know more about the recent history of transparency and materiality as it relates to CSR, sustainability reporting guru Elaine Cohen has written a great article on the period from 2010-2014.

So What Now?

But we are where we are, and now that it’s 2014, what’s different about this round of focusing on materiality?

One of the differences is that there are many robust studies that now show the importance of CSR for value creation, and many kinds of ‘business case’ arguments for CSR. Another difference is that SASB is returning to the traditional definition of materiality, but with a sustainability spin as a way to get sustainability issues into corporate reports, and managed using the same kind of risk modelling that often drives Board behaviour. They plan to provide a list of industry-specific measures that companies use to report on the most ‘material’ sustainability issues. All of that means that CSR issues are more mainstream than a decade ago.

Meanwhile, GRI and IIRC are asking companies to reach far into their supply chains to understand how important CSR issues are to their business. At the same time, both those reporting bodies are explicitly asking companies to report in some detail how they determined their most important issues, identify why the are the most important issues and provide details of expected future performance on critical issues.

Those last three things are sadly lacking from most current corporate reporting of sustainability, as highlighted by repeated surveys that conclude that companies don’t do enough to tell investors which CSR issues matter the most and what the companies are doing about them. A much greater focus on integrating stakeholder perspectives and feedback from outside the business, like that shown in the diagram below, seems like a necessary reaction the current lack of traction of the most relevant CSR issues in many companies.

Business and Materiality Processes

 

 

 

Better Focus, Better Integration, Better Performance

The focus on materiality is on better prioritisation of the thousands of CSR issues that face companies and making the ones that matter most more like business as usual issues. With a stronger sense of why their top CSR issues really matter to the organisation, and a sense of future performance as a focus, we should see much sharper reporting of CSR issues and a higher quality use of the materiality matrix.

Strangely, in spite of the wildly different definitions they have of materiality, and although they take very different paths, SASB, IIRC and GRI all seem likely to increase the levels of disclosure and management of the most relevant CSR issues for companies.

All that probably means that if companies don’t double down on materiality and related processes, and do a better job of proving that they understand their most important CSR issues, they will lose some corporate legitimacy.

 

Dwayne Baraka is the author of the DoSustainability book, “Making Sustainability Matter – How to Make Materiality Drive Profit, Strategy and Communications“.

You can buy a copy of the book from the Shop.

 

This blog first appeared on CSRWire on 13 March 2014

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