Materiality is an area of reporting that many companies find hard to do well. Kye Gbangbola on determining what is critical to the firm and its stakeholders
Determining “what is material and where” is arguably the main focal point of sustainability reporting. The Global Reporting Initiative (GRI) states that: “Material topics for reporting should include those topics that have a direct or indirect impact on an organisation’s ability to create, preserve or erode economic, environmental and social value for itself, its stakeholders and society at large.”
As such, it is important that organisations know how to identify what is material or most important to their stakeholders. The objective in determining what is material is to identify topics from an organisation’s day-to-day activities that have the greatest impact on its sustainability.
The GRI notes that the materiality focus of sustainability reports is broader than the traditional measures of financial materiality. “In financial reporting, materiality is commonly thought of as a threshold for influencing the economic decisions of those using financial statements, investors in particular. The concept of a threshold is also important in sustainability reporting, but it is concerned with a wider range of impacts and stakeholders.”
The outcome from determining the material topics is a priority focus on measuring and monitoring what matters; those topics that have the greatest impact, relevance and risk. The reason for this approach is highlighted by the analogy of packing a backpack for a hike: you take only the supplies that are critical, otherwise the weight will slow you down and eventually bring you to your knees.
The problem for many businesses is a lack of methodology to focus on what matters, resulting either in an initiative overload and failure to achieve sustainability objectives by trying to do too much or insufficient understanding of which areas of sustainability enhance the organisation’s performance.
Starting the journey
Sustainability reporting requires stakeholder participation. At times, this can be broad and involve large numbers of stakeholders; at other times, it can be narrow and involve only the key stakeholders. This engagement is crucial to materiality.
Reporting is commonly considered to encompass the development of knowledge of how the organisation’s operations affect communities and how performance can be improved. Briefly, an organisation must prepare itself for change. It should then connect with its broad range of stakeholders in a structured manner to consider the areas and aspects to be addressed. The next phase is known as define, which considers the list of material aspects gathered from the previous two phases.
This third phase is where organisations identify what is material. During this stage, it is best to reduce the number of stakeholders to the few that are most knowledgeable and experienced, and who hold most corporate strategic authority. I liken this transition to panning for gold – having collected material from a given source, the sieving process that follows reveals the precious material topics sought.
The sieving uses a methodology called materiality testing. Its focus on the material enables reports to be more concise and act as strategic tools of engagement to reinforce how an organisation’s business model creates and sustains value.
A helpful example of the sieving effect was used in the reporting for London 2012. The games had a huge array of national and international stakeholders in the connect phase, including athletes, team officials, broadcasters, suppliers, workforce, and spectators.
The types and groups of stakeholders that organisers LOCOG consulted for the define phase and to determine what was material was much smaller, consisting mainly of the executive and key delivery partners, including the London 2012 delivery authority and the International Olympic Committee.
Locog engaged these key stakeholders to consider a shortlist of sustainability issues through several workshops, the outcomes of which was the set of material issues.
In identifying what is material, an organisation should determine the “boundary”. This refers to the extent of the organisation and supply chain it wishes to include or exclude – for example, the US, European and Asian operations. The parts of the supply chain to be included should also be identified where there are activities that have a material impact on the organisation’s ability to be sustainable. It is no longer good enough to turn a blind eye to impacts because the organisation does not have full control over them.
The G4 GRI guidelines place greater emphasis on boundaries when determining material issues. They advise that when setting boundaries, an organisation shoould consider both internal and external impacts. Boundaries should be described in sufficient detail in reports to identify where exactly in the organisation the impacts occur or where outside of the organisation the impacts take place, the guidelines say.
The outcome of using a materiality methodology and identifying boundaries can be shown on a materiality matrix (see example, above), which indicates and ranks the importance, relevance and risks of material impacts. For example, those in the upper right-hand corner are the organisation’s greatest material impacts, as considered important by stakeholders, management and for the planet.
A focus on material items distils the key issues for an organisation to help generate clear, concise reports that concentrate on the “value-creation” story – that is, what you did, what you gained from it, how you did it and the outcome.
However, an organisation remains free to measure, manage, change and self-improve any of its lower priority sustainability impacts in the lower quadrants of the materiality matrix, while the final report focuses on the priority areas. The materiality matrix itself should be placed in the final sustainability report.
If materiality is done well, the organisation will have prepared itself for the next stage of the journey, which is the monitor phase. By following the first three steps, the organisation will have heeded the warning to take forward only what is needed to avoid being overburdened and overloaded with measurements that detract from the key purpose of improving margins and creating efficiencies while reducing risk.
Avoid overloading an organisation with a host of different things to measure, as this risks bringing it to its knees. Aim instead for seamless transitions that focus on the material and which enable effective benchmarking of performance. During this phase, the principal question an organisation should ask is: what does an adequate response to the material issues identified in the define phase look like, based on the organisation’s level of ownership, control and influence?
Identifying what is material, accompanied by an effective methodology to measure and monitor performance, will ensure that sustainability or corporate responsibility reports meet the requirements of all stakeholders, including investors and policymakers, as well as improving business performance, credibility and reputation.
Kye Gbangbola is director and founder of consultancy Total Eco Management. His book, How to produce a sustainability report – a step-by-step guide to the practices and processes, provides more detail on how to determine materiality. Readers can use the code IEMA15 to receive a 15% discount (dosustainability.com).