Wednesday, October 12, 2011

31 ways of looking at materiality

If everything is material, it's not material. Everything cannot be top priority. Everything cannot be most important. The complexity of sustainability, especially for large, global businesses, is vast. A list of potential material issues can run in to hundreds of issues. Ford, for example, started out with a list of over 500 issues and whittled those down to a mere 57 issues which the company considers material. Identifying and prioritizing material issues is one of the most difficult tasks of companies on the sustainability journey. Most ignore it. In Sustainability Reporting, most skip over the materiality piece, presenting instead what I call a shopping list of activities which includes just about anything which can be crammed into the heading of CSR. However, some do it better. The best reporters include a Materiality Matrix, which, arguably, is the most important part of any Sustainability Report, and certainly the thing I look for as soon as I have finished reading the CEO statement.

That's why the new report, Materiality Futures, from the recently formed consulting firm, Fronesys is a fascinating look at how companies report materiality. Chris Tuppen, formerly BT CSO, together with Jyoti Banerjee, a business application software professional, partnered up to found Fronesys and start making a material impact.

For those of you who can't remember what a Materiality Matrix looks like, here is the basic format that is included in the GRI Reporting Framework:
Issues appearing in the top-right part of the matrix are the most important ones which both impact the business results and are important to the organization's stakeholders.

Materiality Futures analyses the Materiality Matrices of 31 sustainability-reporting companies for reports published before August 2011, presenting a refreshing and innovative look at how materiality gets reported. Overall, Fronesys discerned 140 separate issues listed somewhere on these 31 matrices, quite a low number when you think that the companies analyzed listed between 8 and 65 issues with the overall average being 27 issues per company. The analysis whittles this down to 50 core issues which were listed by at least 5 companies, and are not industry sector specific, and mapped these issues in what Fronesys calls the Matrix of Matrices.

The top 10 issues which emerge as important both for businesses and stakeholders in terms of number of times mentioned and relative importance to business and stakeholders are:

1 Sustainable Products
2 Product Carbon Footprint/Energy Efficiency
3 Economic Development/Emerging Markets
4 Customer Relationships/Satisfaction
5 Economic Stability/Recession
6 Climate Change (policy/strategy)
7 Energy Use/Own Greenhouse Gas Emissions
8 Employee Retention and Attraction
9 Legal Compliance
10 Product Safety

It is interesting that Sustainable Products takes top place. Perhaps this is an indication that companies are hoping to make some money out of sustainability. The fact that Legal Compliance appears in the top ten is perhaps an indication of the efforts companies need to make simply to keep up with changing legislation in the area of sustainability. Although compliance is often thought of as a precondition for voluntary sustainability efforts, the fact is that compliance is by no means something to be taken for granted.

Issue number 50, right down at the bottom of the materiality ranking list, is Senior Executive Remuneration, something which is starting to affect more companies as shareholders, not only stakeholders, are taking a stronger stand and demanding more proof of performance and bang for the executive buck.

The two issues which were mentioned somewhere on the matrix by most companies (irrespective of their positioning) were Health and Safety (25 times) and Climate Change (24 times). This is what the overall matrix of companies looks like for climate change - you can see that most companies have it right up there with the leading issues.

Fronesys also offers two additional ways of looking at materiality:

Issue Coherence Level: This is the degree to which companies (and their stakeholders) agree that an issue is material. In any given set of companies, each will note specific material issues in at different points on the Materiality Matrix. The degree to which all companies are synchronized regarding the relative importance of the issue as noted on their matrix, is the Issue Coherence Level (ICL). Across the 31 companies analyzed, the highest coherence is achieved for Economic Stability / Recession, Stakeholder Engagement, Employee Retention and Attraction, Customer Relationships/Satisfaction. Sustainable Products, however, has a much lower level of coherence, demonstrating that, although many companies include this on their matrix, not all agree about how important it is. The lowest level of coherence is biodiversity. This is indeed an issue which is either high on the radar or or very low, depending on sector, I think, so it doesn't surprise me to see companies placing this in different corners of the matrix.

Materiality Convergence: This is another metric invented by Fronesys which shows the degree to which a company and its stakeholders agree or disagree on the relative importance of a particular issue. For example, a company might rate customer satisfaction, as Cisco does in their 2010 materiality matrix , as very important to the business but not so important to society.

Fronesys says that total convergence of issues between a company and its stakeholders would be "odd" where as "a total lack of convergence would suggest the company is out of touch."

So far, this is all very interesting, but ...err... what's the point? Why is comparing materiality of different companies important? Well, first, Fronesys says, this represents a benchmark for all companies battling with materiality prioritization. If each company in your sector (and its stakeholders) confirms that renewable energy is one of its most material issues, but it's nowhere on your radar, perhaps you should be asking why not.

However, there is another important motivator for this analysis - the run-up to integrated reporting. Fronesys maintains that the integrated thinking which necessarily precedes integrated reporting will require good materiality work.

"It is hoped that the IIRC framework will not only lead to a consolidation of the reporting of a companyʼs most material issues, but also lead to more forward looking reports that illustrate a more strategic alignment between sustainability and conventional business objectives. For any company adopting the IIRC framework, the process of materiality determination will need to be at the core of their thinking."

I am not so sure. Right now, the materiality matrices contained in sustainability reports are based on sustainability issues and do really address core (financially material) business issues. There is some overlap, but broadly, sustainability matrices do not truly serve Integrated Reporting in their current form because they mainly address sustainability as separate from the business. For Integrated Reporting, a business materiality matrix containing financial and sustainability issues will need to be created. As mentioned in a previous post, I hope that when all the issues are put together,  the issues which are primarily sustainability driven won't drop off the bottom of the matrix. However, maybe the development of Materiality Matrix Muscles will help and I concur that companies need to get better at "the process of materiality determination".

The issue that the Materiality Futures Report does not cover is whether, having developed the Materiality Matrix, a company adequately discloses on the material issues in the Sustainability Report. I often find that a Matrix is stuck somewhere in the report but the actual issues are not addressed in any depth. The whole point of identifying material issues is to understand them, make decisions about them and report on them to stakeholders. If you see a Materiality Matrix in a Sustainability Report, look for disclosure on the highly material issues.

There is another whole debate (which Materiality Futures references) and that is the process for determining material issues, stakeholder inclusion, diversity of stakeholder voices and how issue are prioritized. The fact that a Materiality Matrix exists is not necessarily an indication of good process, which Fronesys highlights as another area where disclosure should be improved. Sustainability is as much about the "how" as it is the "what". If you see a Materiality Matrix in a Sustainability Report, look for disclosure on how the Matrix was developed.

If I were to do a materiality matrix of issues in my life, I would probably find that 24/7 Ice Cream Supply probably comes out as the top issue, but don't ask me about process or the convergence score or the coherence level. 
elaine cohen, CSR consultant, Sustainability Reporter, HR Professional, Ice Cream Addict. Author of CSR for HR: A necessary partnership for advancing responsible business practices   Contact me via  on Twitter or via my business website  (BeyondBusiness, an inspired CSR consulting and Sustainability Reporting firm)


Unknown said...

Hi Elaine, You rightly raise the issue of the process for determining materiality. In your experienced, what have you found to be en effective model or process for identifying material issues and then creating a matrix? Thanks, Cindy

elaine said...

Hi Cindy, the best way to develop the matrix is to first engage in a process of intelligence gathering from internal and external sources - strategy, benchmarks,global issues, dialogue, surveys, leadership input etc to create a long list of issues categorized into groups. Then, the management team have to make a judgement which should be informed by clear critera - similar to a risk prioritization process. A two tier process is good, first broad high, middle and low, and then prioritize within each group. I don't think there are too many companies who do this rigorously. elaine

Cindy M. said...

Thanks, Elaine. I think that you are right -- not too many companies take such a methodical approach to materiality. In my experience working with clients on their reports, they tend not to budget the time and/or money to do this work up front. They want to plunge into to the report writing. Cindy

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