Materiality Analysis and Strategic Sustainability: Part 1

Getting It Right:
Materiality Analysis and Strategic Sustainability

Welcome to Framework:CR’s five-part blog series on materiality analysis. In this series we discuss:

  • our methodology, using the CRO100 Best of 2010
  • how many companies conducted materiality analyses
  • whether the materiality process and results were described or presented
  • the connection between GRI A-level reporting and materiality analyses
  • how materiality analyses helps companies to act more strategically and prepare for integrated financial and sustainability reporting

Part 1 in a Series

The Lay of the Land
Are sustainability leaders identifying and reporting on material issues?

  • What are your company’s major challenges, risks, and opportunities? How do you know?
  • Is it clear what steps you’re taking to address top-priority issues?
  • Are the top-priority issues reflected in your financial filings and disclosures?

These questions, though perhaps not asked as often as they could be, are surely fair questions for analysts, shareholders, customers, employees, community members, and other stakeholders to ask of any company reporting on sustainability issues today. Indeed, as accountability and transparency become ever-more important aspects of a company’s public persona, stakeholders want to learn about the issues that truly matter, not sift through a mass of undifferentiated information.

What, then, are we to think of the following?

Of the sustainability reports issued by companies listed on the 2010 100 Best Corporate Citizens ranking (published by Corporate Responsibility Magazine), fewer than half provided an adequate answer to the first question. Only one out of four presented information adequate to answering the second. And fewer than one in ten was able to answer “Yes” to the third.

Materiality Matters

Materiality has long been an essential component of financial reporting. We believe it can and should play just as important a role in sustainability strategic planning and reporting.

After all, sustainability is complicated. It covers a multitude of issues—economic, social, environmental, and more. Like traditional enterprise risk management, sustainability strategic planning is a matter of carefully assessing risks and opportunities, and it both guides and reflects core internal decision making touching upon all aspects of company operations.

But in its sustainability planning and execution, a business is answerable to many interests other than its own. It is answerable to the needs, concerns, and perceptions of a wide range of stakeholders: investors, yes, but also business partners, employees, customers and consumers, communities, regulators, and the media. In fact, companies that consider the diverse interests of stakeholders are much better positioned to excel in today’s marketplace than companies ostensibly focused only on the bottom line.

Strategic sustainability planning and reporting thus require something more than their financial counterparts: namely, an openness to external input and discernment. It is not so much different as more expansive. More inclusive. More comprehensive.

To be so comprehensive, reliable, and effective, we believe sustainability planning and reporting must rest on a formal process of prioritizing issues, risks, and opportunities that is both rigorous and methodical—in short, on a process of materiality analysis.

Testing the Leaders

We decided to put purported sustainability leaders to the test. Using the CR 100 Best Corporate Citizens list of 2010, we asked: Did they conduct a materiality analysis as part of the thinking, planning, and execution described in their sustainability reports for the year?

We examined the reports of all 100 companies with these questions in mind:

  1. Did the company conduct any kind of formal process—a materiality analysis—to identify and prioritize its sustainability issues? And, was this process described in detail? For example, what steps did the company take to identify issues; gather stakeholder input; and evaluate potential impact on company performance?
  2. Did the company provide a visual representation (matrix, chart, diagram) of the results of the materiality analysis?
  3. Were the results of the materiality analysis clearly, even visibly, brought to bear on the structure of the report, selection of key topics, narrative emphasis, provision of data and indicators, and definition of goals and targets?
  4. And finally, in the spirit of moving towards integrated sustainability and financial reporting, were the issues identified as high priority in the materiality analysis reflected in the company’s 10K annual financial filings?

We’ll discuss our findings in Part 2 of this series.

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