Sustainability leaders discuss the function and future of materiality analysis
Part three of our materiality blog series
In the previous segment of our materiality blog series, we analyzed GRI reporting criteria to determine whether materiality analysis is truly an integral component of a report based on the GRI G3 Sustainability Reporting Guidelines. We found that while the language in the GRI Guidelines strongly encourages the use of materiality, there is no formal requirement for companies to follow any particular analysis process.
Extending our inquiry, we reached out to sustainability professionals at companies currently using the GRI Guidelines—hoping to better understand the perceived role of materiality analysis within corporations themselves.
A powerful tool
- Have you conducted a materiality analysis within your company? If so, how?
- Do you believe that materiality analysis has a role to play in the evolution of integrated reporting?
- What do you see as the primary challenges to the adoption of integrated reporting?
Across the board, practitioners expressed that materiality analysis is a valuable tool for prioritization of issues and strategic planning and represents the initial basis for a more integrated approach to sustainability strategy and reporting.
“One of my tasks is to work toward the integration of sustainability throughout our business. A materiality survey acts as a driver of issue prioritization in this respect, and is a key component to understanding where the company should go. It has a future-focus.”
Mark Stephan, Principal Program Manager, Office of Sustainability – EMC
Bridging sustainability and integrated reporting
Practitioners regarded materiality analysis as a core element of future reporting structures and a possible bridge between the sustainability and financial worlds. Many expressed interest—and concern—about the development of an integrated reporting framework.
The powerful momentum towards integrated reporting, headed up by the International Integrated Reporting Committee (IIRC), was manifested in a draft discussion paper released by the IIRC in September 2011. While the respondents appreciated the concepts presented in the discussion paper, they noted that the idea of integrated reporting is still fledgling and ill-defined, and that the lack of participation of key financial industry players, including mainstream analysts, could hamper the creation of a truly useful crossover standard.
“Philosophically, it’s the right direction, but I am concerned about the rush for companies to do a single, integrated report. We need to have a better understanding of the end game and what the best format is to accomplish that. It may be a single report – or it may be just making stronger connections across a company’s existing investor and sustainability communications channels.
One of the key challenges I see is that there isn’t a clear, specified need for integrated reporting from the financial sector. If it’s just us “usual suspects” from the sustainability world trying to define integrated reporting, it’s difficult to see where the acceptance and use of integrated reporting by mainstream analysts will come from.”
Suzanne Fallender, Director of CSR Strategy & Communications – Intel
The meaning of “materiality” itself did not escape scrutiny. Some respondents felt that the term was being used too casually among sustainability practitioners. The lack of a standard definition could cause confusion as practitioners begin to engage with internal risk and investor relations departments as well as the CFO.
Commentary also centered on the difficulty of determining the degree of materiality for issues that aren’t easily quantified, for example, employee satisfaction and its impact on employee productivity. Respondents agreed that the practice of assigning dollar values to most ESG issues is still in its infancy. They are hopeful, however, that current initiatives (such as Puma’s environmental P&L and HIP Investor’s Human Impact + Profit assessments) will lay the groundwork for a more standardized approach to incorporating ESG into financial statements.
Looking to the future
The general consensus among our interviewees is that materiality analysis represents one of the few tools capable of demonstrating the cross-cutting significance of ESG issues. Whether equated with a broad view of risk and opportunity or constrained to a stricter financial definition, the language of materiality is understood and accepted by audiences that extend well beyond the ranks of sustainability professionals. It is a common platform upon which our most significant and forward-thinking conversations about sustainability might be staged, if the right people are part of the discussion.
“We are at a very critical point to improve the influence and relevance of reporting. If we [the larger CSR sector] just evolve the same models, we are missing a big opportunity to shift the conversation to business value (including the relevance of sustainability for long-term business health and financial returns).
My biggest concern is that we’re still talking to ourselves in a vacuum—the pull from the financial side doesn’t seem to exist. If the financial community is an important stakeholder, we need them to sit at the table to inform future standard development. Their partnership is important in this building period.”
Beth Holzman, Manager of CSR Strategy and Reporting – Timberland
What is clearly evident to us at Framework is the need for companies to use their reporting to more effectively illustrate the business value related to sustainability—in essence, to turn to forward-looking discussions as opposed to recitations of past achievements.
We believe that materiality analysis provides a mechanism to effectively surface key issues and set the foundations for financial valuation of sustainability priorities, and thus help to align sustainability objectives, business strategy, and value creation.