Materiality – unlocking its potential for reporting and business improvement

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1. Materiality – unlocking its potential for reporting and business improvement Paul Davies - Senior Sustainability Manager at Northwest Rapid Transit (NRT) The…

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  • 1. Materiality – unlocking its potential for reporting and business improvement Paul Davies - Senior Sustainability Manager at Northwest Rapid Transit (NRT) The significance of, and approach to, materiality has been strengthened in the latest edition of the GRI’s sustainability reporting guidelines (G4), by encouraging reporters to think beyond their company’s physical and legal boundaries in relation to their impacts. But this also compels reporters to be more disciplined and definitive in relation to what’s material to their business. G4 has given materiality greater opportunity to realise its inherent strengths in terms of enhancing reporting, but for many reporters this potential will remain unrealised if they don’t truly give it the attention it deserves. But materiality also has a role to play beyond reporting, equipping businesses to anticipate and cope with a changing world, to seek opportunities to achieve or enhance competitive advantage, to better embed sustainability within their broader business approach, and to build their capabilities and reputation around inclusiveness, responsiveness and accountability. Materiality and sustainability reporting Whether we’re talking about disclosing financial performance, sustainability impacts or value creation, reporters should look to frame their accounting of performance in relation to stakeholders’ interests. Only by doing so does reporting support robust, meaningful communication and raise stakeholders’ trust and engagement with the business – be they investors, employees, customers or regulators. Although materiality is a key link between stakeholder inclusivity and accountability, the true value of materiality to reporting is still not widely understood or appreciated. The reasons for this are fairly clear. Firstly, its purpose is often misunderstood – materiality is seen as an outcome rather than a process. Reporters can expend a lot of time, money and effort to produce a list of material issues, which they see as the end product. But then they fail to connect those materiality outcomes to the topics and performance indicators they report. Secondly, the materiality process itself can be undermined by the quality and breadth of inputs feeding into it, or the lack of sound and meaningful issue prioritisation criteria. Thirdly, many reporters believe that materiality can be a recipe-driven approach (i.e. A + B = C), but fail to realise that there is often significant professional judgment needed in refining the outcomes of the process. Taken together these weaken the materiality approach – producing vague and ill-defined outputs that identify generic material “areas” such as “diversity”, “safety” and “emissions”, rather than tightly defined material issues that can be accounted for and responded to in the report. In the end, the result is an unfocussed report that does little to enlighten stakeholders or to influence their decisions. On the flip side, there are things reporters can do to extract more out of materiality. If reporters make the extra effort to define their material issues as tightly and specifically as
  • 2. possible they will be able to respond, monitor and report on them much more effectively and confidentially. By sticking to reporting only on material issues and pinning down just the key performance indicators that are most relevant to those issues the result will be a much more punchy and concise report. Don’t spend time collecting and reporting data and indicators on immaterial issues – they simply clutter the report and distract readers from what’s important. Is materiality is worth that extra effort? Based on my experience of both assuring and writing more than 50 sustainability reports over the past 6 years (and preparing annual reports for 20 years before that), the effort invested in getting your materiality process right is well and truly justified – saving you time and money in reporting and producing something that your organisation will be proud of and your stakeholders will value. What about materiality and integrated reporting? The approach to applying materiality to integrated reports is not fundamentally different to the approach used for sustainability reports. Material issues in sustainability reports are those outcomes or aspects of the business or its operating environment that significantly impact the organisation and its stakeholders in a positive or negative way, and thus affect business performance and reputation, and influence stakeholder decisions. For integrated reports, the emphasis in materiality shifts from impacts to value creation. A material issue in an integrated report is one that significantly affects how the business maintains, creates or destroys value in its range of assets or resources (called ‘capitals’), and thus is of particular relevance and interest to investors and other stakeholders. A material issue in an integrated report can also be a material issue in a sustainability report. For instance, if you have a key externality that is going to negatively affect your share value, that information could rightly sit in both reports. If you have had a positive impact on your local community by investing in its growth and prosperity, thus adding social value, then that is also material to both types of report. The power of materiality is its adaptability. It is this capability that leads me on to the final aspect that I believe has the greatest potential in terms of its application as a business improvement tool. Why stop at applying materiality just to reporting? Whilst many businesses are focussed mainly on getting the best out of materiality for their reports, they should start to look beyond that to the real value materiality can add to the business itself. Materiality’s real power lies in its intrinsic capability to sort through the clutter and identify things that can both help and hurt the business, or its stakeholders, across a broad spectrum of areas. In Banarra’s experience from working with a range of clients, it would be fair to say that the application of materiality is typically siloed in one particular part of the business – often within the sustainability or communications team. We often ask our clients if there is any awareness or use of materiality in other parts of the business and the answer is usually “no”. Materiality is still seen largely as a reporting tool.
  • 3. Materiality shares a lot of common ground with strategic planning, risk management and business continuity planning (BCP), but they are not one and the same. Materiality is as much focussed on identifying opportunities as it is on uncovering risk. Materiality also has the added benefit of applying an external lens on the business through its emphasis on stakeholder inclusivity, something not typically core to internal planning or risk evaluation processes. By positioning materiality as part of the input process into strategy development, business decision-making, risk management etc, you are able to really leverage its full capabilities beyond reporting. Rather than sitting in isolation, reporting itself becomes the business’ accounting mechanism for how well its management and decision-making processes are working. The following illustrates this: This approach enables a flow of inputs and outputs to be established within the business that ties together stakeholder engagement and accountability, materiality and reporting, business planning and goal-setting in a meaningful, synergistic way that helps drive business performance. To sum up Materiality can deliver much to your business in terms of identifying key issues for your reporting thus enabling a much more concise, focused accounting of performance. It provides your business and the users of your report (i.e. your stakeholders) with greater confidence that critical issues are being addressed and that the key performance indicators in your report are those most relevant to your business. Beyond reporting, materiality can help your business to identify opportunities that deliver longer term value to the business, to better uncover and manage key business risks, to focus limited business resources on what matters most, and to better measure performance by zeroing in on the critical indicators.
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