Materiality and the GRI

Materiality and the GRI

In this second installment of our materiality research blog series, we examine the nexus between companies’ use of the Global Reporting Initiative (GRI) Sustainability Reporting Guidelines and materiality analysis.

(Start with Part 1 or download the research results and methodology)

As part of our continuing research into the uptake of materiality analysis among sustainability leaders, we evaluated whether companies on CR Magazine’s 2010 and 2011 100 Best Corporate Citizens Lists who used the GRI Guidelines also conducted materiality analyses.

Materiality is one of the GRI’s central reporting principles. Companies, especially those pursuing higher GRI Application Levels, are expected to disclose their rationale and methodology for assessing which issues should feature prominently in strategy setting and disclosure.

In our research subset, we found that:

  • All companies on the CR 100 Best list that secured external assurance for their reports (a GRI “+”) conducted a materiality analysis. We were pleased to confirm this result for both research cycles, as assurance standards commonly in use for sustainability reporting today require companies to assess the materiality of key issues. (For reference, see AA1000 and ISAE 3000)
  • A more disappointing finding was that only 60 percent of companies in 2011 that declared a GRI A or B Application Level also conducted a materiality analysis—with virtually no change from last year’s results.

Most surprising was the segment of companies that either did not declare an Application Level (approximately 30 percent of companies in both years) or did not use the GRI Guidelines at all (approximately 15 percent in 2010 and 12 percent in 2011). Given the global acceptance of the GRI as a basis for disclosure, we would expect companies that are recognized as sustainability leaders to at least reference the guidelines in their reports.

Visit our “Where are the Application Levels?” post to explore some of the reasons companies do not declare an Application Level.

Given these findings, we developed a three-pronged approach to probe more deeply into the GRI’s formal stance on materiality and perspective on companies’ declarations of Application Level.

  • First, we extracted key materiality language from the GRI guidelines to assess how it might be interpreted by individuals, organizations, and other stakeholders.
  • We then asked the GRI Secretariat to clarify the technicalities of materiality disclosure at each Application Level.
  • Finally, we developed a series of interview questions to solicit the opinions of corporate practitioners in charge of authoring and influencing the content of sustainability reports.

Here’s what we found.


Step One: Parsing Materiality Disclosure Requirements in the GRI G3

 As a primer for those unfamiliar with GRI reporting language, materiality is one of the key reporting principles that the G3 Guidelines put forth as the basis of defining report content—essentially, what should go into a report. The other principles to define report content include: sustainability context, stakeholder inclusiveness, and completeness. The GRI states that

“Materiality for sustainability reporting is not limited only to those sustainability topics that have a significant financial impact on the organization. Determining materiality for a sustainability report also includes considering economic, environmental, and social impacts that cross a threshold in affecting the ability to meet the needs of the present without compromising the needs of future generations.”

The GRI Guidelines and Technical Protocol documents provide an excellent conceptual foundation for the value and purpose of using the materiality principle—citing a range of strategic and operative processes the principle can influence. Reporters are encouraged to evaluate their impacts internally and externally, upstream and downstream, while paying heed to a broad spectrum of stakeholders and externalities associated with company operations.

“Material topics for a reporting organization should include those topics that have a direct or indirect impact on an organization’s ability to create, preserve or erode economic, environmental and social value for itself, its stakeholders and society at large.”

Yet a fundamental disconnect exists between the GRI reporting principles and what’s required in the GRI profile disclosures themselves. Within the pages of the Reporting Guidelines, the Technical Protocols and the Application Level handbooks, 44 unique references are made to “materiality.” In the actual G3 profile disclosures, the term is used only once—in Indicator 3.5, in which reporters are asked to disclose their

“Process for defining report content…including determining materiality.”

This single required disclosure on materiality seems wholly inadequate, even considering that many other indicators allude implicitly to the expectation that companies have a process in place to identify material issues. Perhaps this singular reference begins to explain why only about 60 percent of the companies in our 2011 research findings felt compelled to integrate explicit descriptions of their materiality analysis processes into their reports.


Step Two: Reaching Out to the GRI

To shed some light on the technicalities of GRI reporting rules, we reached out to members of the GRI Sustainability Reporting Framework Development team. Based on the GRI Application Level document, we knew that all reporters are expected to disclose Indicator 3.5, while A-Level reporters have an additional requirement to report on all core G3 Indicators, making specific reference to the Materiality Principle.

“Application Level A is intended for advanced reporting organizations. These reporting organizations are expected to have executed a thorough materiality process in consultation with their stakeholders.”

We wanted to determine how companies using the GRI guidelines were accountable for their disclosures on materiality, and whether omission of these elements would result in “non-compliance”. Here’s what we asked:

  • If companies at the A or B Application Level do not provide sufficient evidence that materiality analysis was conducted, are they technically non-compliant with the GRI guidelines? (Specifically, indicator 3.5)
  • Is there any oversight of the use of materiality by GRI reporters by the GRI Secretariat?
  • Has the GRI received any feedback suggesting why some companies—particularly those noted for their sustainability practices—would choose not to use the GRI reporting guidelines at all?
  • Without a formally declared GRI Application Level, is a company technically non-compliant with the GRI guidelines? Does the GRI Secretariat undertake any efforts to encourage (or enforce) the requirement to declare an Application Level?

The responses we received reveal some of the limitations of the current G3 Guidelines. Notably, the responses underscored the difficulties faced by the GRI Secretariat in “enforcing” and maintaining the integrity and consistent application of what are essentially voluntary, non-regulatory, and non-binding disclosure requirements.

From the GRI’s response, we learned that

  • In official GRI parlance, “All organizations are required to explain the process they use to define report content in Indicator 3.5.” This definition does not technically require organizations to use a specific materiality analysis process.
  • Nor is it the case that materiality discussion must be integrated throughout a report. Instead we were told that while A-Level reporters in particular are expected to disclose a fuller snapshot of their materiality processes, companies at any Application Level are technically able to state that they simply do not have materiality assessment procedures in place—as transparency, even if it is to say that there is no process in place—is the ultimate goal of reporting (as per GRI).
  • While Application Level declaration is encouraged by GRI, it is not compulsory. In fact, more than 400 of the 1,864 reports (roughly 21 percent) submitted to the GRI Reports List in 2010 indicated an “undeclared” Application Level.
  • As for our question regarding the GRI’s approach to encouraging all companies to use the GRI Guidelines, we were told that although the GRI welcomes all inquiries, resource constraints limit the proactive outreach the Secretariat can undertake. That said, we have noted the rise in regional and country-level GRI offices designed to raise the visibility of the GRI globally and provide support to companies wishing to learn more.

It is clear that the structure and disclosure requirements of the G3 Guidelines are hampering the broader uptake and explicit discussion of materiality analysis in reports—a significant concern given the central importance of materiality for the transition to integrated reporting.

As such, the current open comment period on the forthcoming G4 Guidelines is an opportunity for all stakeholders to weigh in on the importance of materiality in informing the disclosures that should be made in sustainability and integrated reports. We urge all stakeholders to participate in this formative survey at Public Comment Survey.


Step Three: Seeking Input from Corporate Practitioners

As the third prong of our inquiry into materiality uptake among sustainability leaders, we are asking corporate sustainability practitioners to weigh in with their own experiences in responding to the GRI requirements while balancing both internal and external expectations and limitations on disclosure.

See Part 3: Practitioners’ Perspectives 

We would like to thank Nelmara Arbex, Lucy Goodchild and Ian van der Vlugt for responding to our questions and helping to clarify GRI terminology.

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