Sunday, December 28, 2014

Why the materiality matrix is useless

2015 is a new year - Happy New Year to everyone! And as we close out 2014, I thought it would be a good time to shake things up a little and get just a touch provocative. (Totally out of character, haha). See, I have begun to be really irritated by useless materiality matrices.  I am looking forward to a year in 2015 where materiality drives strategy and reporting in a profound way, and where we stop playing around with dots on a matrix just because that's what seems to be the de rigeur of sustainability reporting.

One of the things that is going to have to get a whole lot better if companies are really going to gain best value from a strategic sustainability approach is the way materiality is considered, analyzed, developed and communicated, as well as, more importantly, used as a basis to drive action. In many cases, it's near impossible to relate what are stated as material issues to the way the company approaches its sustainability activities. The more G4 reports I read, the more materiality matrices I look at,  the more I come to the conclusion that, by and large, many companies are just missing the point

This is probably not entirely intentional. Maybe many companies actually think they are doing a good job of defining materiality. Spending time plotting little dots on a matrix and moving them up or down a millimeter may actually be someone's idea of meaningful strategic planning. Maybe people think that's how it's supposed to be done. Maybe companies look at their materiality matrices and give themselves a big slap on the back. 

But actually, it's not being done well. It's not hitting the right spots. It's not generating the leverage that is needed. Materiality, so far, as a concept, is not proving itself. It's a nice buzz word, makes everyone feel good, sound intelligent and provides creative license to draw pleasant graphs, charts and multicolor, even interactive, visuals, but it's not doing what it intended to do. This is clear from the disconnect we are still finding in sustainability reports between what's supposedly material (because the matrix says so) and what companies are actually doing (based on what's reported). 

The basis for my comments is my personal review of many of the 500+ GRI G4-based sustainability reports that have been published to date. I am referring to G4, because G4 places material impacts squarely at the center of the reporting approach. Not because it's right for reporting. Because it's right for business. This is how GRI G4 defines materiality: 

In G4 reporting, companies are required to list material aspects and provide disclosures that show how  an organization "identifies, analyzes, and responds to its actual and potential material economic, environmental and social impacts". Performance indicators supporting  material aspects are designed to reflect how a company measures its performance in relation to those stated material impacts. While I know that the G4 framework is not always 100% logical, and there is, in many cases, a rather unfathomable connection between certain material Aspects in the framework and the Performance Indicators that are designed to reflect those Aspects, the underlying issue is whether companies are approaching materiality in a meaningful way. (Perhaps someone might even be able to explain to me why G4 chose the very odd word Aspects and did not use the very clear word Impacts when making materiality the G4 engine driver). The metrics, or indicators, can be adapted or developed to meet the need. The material impacts should first drive what a company does or should do, and therefore measures, and therefore reports. Creating a materiality matrix after you have done everything else is not exactly going about things in the right way.

Let's think about what materiality really means in a sustainability context. It means the material impacts IMPACTS IMPACTS on stakeholders. 

These are things that material impacts are NOT (or not only):
  • what's going to help us make more profit
  • what our stakeholders mention in passing
  • how we perform
  • what we think is politically correct
  • what everybody else is saying
  • what's easiest to report
  • what shows us up best
  • what's in fashion
  • what the  lawyers tell us to say
  • what we've always said
  • what the assurers can count
  • things we have data for
  • an afterthought
  • an easy option
  • a buzz word
  • a box to tick
  • lip-service
  • a way to appear as though we wrote a G4 Sustainability Report

Material impacts are: 
  • the way our business activities affect the lives of our stakeholders and our long-term business viability
  • the basis for creating a sustainable business strategy with relevant targets
  • defined as the result of an analytical process that engages internal and external stakeholders about what affects them and how
  • the basis for creating sustainability communications including reporting
  • specific to a business, a sector, a geography, an issue
  • a catalyst for planning and action
  • connected to a business's core social mission
A few examples? Sure. Wizness recently published a free download benchmark of 50 materiality matrices across 5 industry sectors. Almost all of them have loads of little dots carefully plotted on creatively designed squares, blocks and circles. Some of them have so many dots you begin to wonder how on earth the company even recognizes the dots, let alone creates a strategy to manage them. Whoever is selling dots is making a killing. And the relativity between the dots is often just incomprehensible. Here are some examples from the ones presented by Wizness:

You may be able to see, just about, that this company has loads and loads of dots, with the top 16 prioritized as the most material issues/impacts, supported by a detailed stakeholder matrix of what affects whom. The top 9 issues all have the same degree of importance to stakeholders, yet they are all at different coordinates on the matrix. Compliance with laws and regulations is only mediumly important to the business and to stakeholders while compliance with laws concerning products and services hits the top right box in the matrix. I wonder how these nine issues were plotted. What makes anti-corruption so much more important than anti-competitive behavior? The report gives no clue to how these issues were placed in the matrix. Their placement suggests that they are not equally most material and that some are more most material than others. What does this differentiation actually mean? To me, it suggests that there is a focus on moving dots around a matrix and not on the underlying drivers of sustainability performance. Notwithstanding the fact that the very act of defining a set of material priorities is an important part of the process and should be encouraged.  

Here is another example:

Pan American Silver Sustainability Report 2013

Wow. The entire 46 G4 material Aspects and Sector Disclosure Aspects all carefully ticked or unticked and slotted into place on a matrix that it took me half an hour to work out what's where. I wonder how long the plotting exercise took and how the little letters on the matrix were locked into position. The color coding of the different categories makes it almost impossible to tell without detailed study what is actually most material for this company. It looks to me like the top three - turquoise "a" is "local communities" as the top issue,  purple "c" is "occupational health and safety" one of the two runners-up and blue "d" looks like child labor as the second runner up. Why are these issues more important, than, say, anti-corruption, which appears much lower on the list, or labor relations which is not material at all?

In Pan Silver's report, there is a large section devoted to the most material Aspect, local communities. It's about how Pan Silver, while doing its core business, is engaged with local community projects to support economic and social development. A really fine array of projects that I am sure are highly commendable and make a genuine difference to local quality of life. But why is engaging with local community development projects the most material impact of this company? What about the impacts generated through the company's core business? What about materials use and ecological limits? Pan Silver produced 26 million ounces of silver and 150 thousand ounces of gold in 2013. What about water use in the mining sector? Total water withdrawn for Pan Silver in 2013 was more than 42 million cubic meters, that's about 15,000 Olympic swimming pools. Not to mention water discharge with potential toxic chemicals. Pan Silver has addressed these issues in the report, but what makes them less important local community projects? Does the materiality matrix indicate priority in allocation of the company's resources required to address material impacts, suggesting that a higher priority received more attention, more resources, more commitment? What I would really like to know from Pan Silver is its most significant impacts on stakeholders. The top 5 or 10. I don't really care where they are on a matrix. I don't really care about the tenth of a millimeter of space between the little letters. Does anyone? I don't even believe it is possible to differentiate between the most important material impacts at this level of detail. I am sure the process of thinking about what is most important should have been beneficial. I suspect that the part where the dots on the matrix slotted into place is simply a total waste of time.  

And here is another example from The Hershey Company 2013 CSR Report.

Hershey's has defined the priority issues and they are all dealt with well in the company's CSR report. It's great that out of a total of 25 issues, Hershey has selected ten that represent the most important impacts. However, what makes food safety so much less important than ethical sourcing? Why is child labor so much more important than GHG emissions? Why is ethics more important than governance? And if philanthropy is so low on the matrix, both for stakeholders and for the company, then what's it even doing on the matrix? Isn't that just a waste of energy, deciding where to put the philanthropy dot? And if the currency is dots, is philanthropy the only dot that is loooooooow priority? I could think of a whole load of additional issues that might have come up in a materiality discussion that are not on this matrix. The point is, selection of the top ten prioirities is great. Using these materiality priorities to define strategy is fantastic, and structuring your reporting around these material priorities is brilliant. Hershey does this fairly well.

But taking that to the point of plotting dots on a useless matrix is what I don't understand. Especially if no-one explains why these dots are where they are.

The GRI G4 guidelines does not require the presentation of material Aspects in a matrix. The reporting disclosure is:
The G4 guidance for determining what is material makes reference to defining thresholds for materiality and defining and documenting how the thresholds have been defined. The guidance also offers a matrix for presentation of material issues. But this is guidance... it's not a G4 requirement. In general, the companies that present materiality matrices define why issues are material but they do not make reference to the relative material priority of each dot on the matrix. So why bother with a matrix. Why not simply do what is asked: give a list.

Materiality and its importance were recently addressed by think-tank advisory firm SustainAbility

SustainAbility published an excellent paper on transparency and its use as a driver for improved performance. SustainAbility says: "Most companies are not gaining the value commensurate with the resources spent on reporting." This is a proposition that I wholly agree with, for many reasons. (Haha - you can see that from my red text). SustainAbility's response to this is to use materiality to drive the rest. 

The SustainAbility paper provides two examples of materiality presented in reports: PG&E and Fibria. 

The PG&E Sustainability Report for 2013 presents a materiality matrix in a pretty familiar way - using dots. (SustainAbility helped PG&E create this matrix.) It has an element not usually found in materiality matrices: the addition of arrows showing the interrelation of issues. The online presentation of the matrix is interactive - when you click on an issue, it turns blue and a number of little orange dots show up connecting things to the blue dot, as in the version shown below. No connection between Public Safety and Employee Engagement, for example. Seems rather odd to me. However, SustainAbility writes in their report that highlighting interconnectivity between issues "provided insight into how PG&E might approach issues in a more integrated way." Intuitively, that sounds sensible to me. Although, if I were to be truly provocative, I would say that pretty much everything is connected to pretty much everything.   

In the PG&E matrix, however, we again we have a nicely arranged set of dots. It is not clear, based on the description of the process, what criteria were used to actually decide where each dot should be carefully placed. On what basis do you assess the scale of business impact? Is this an opinion based assessment or a fact-based analysis? Interestingly, PG&E states that: "PG&E’s materiality assessment identified 18 issues. Every issue is material to PG&E’s long-term sustainability, regardless of its placement on the matrix." Sounds to me that there is no need for a matrix. The real value of the process was the engagement benefit. See this quote from the Corporate Sustainability Director.

The Fibria 2013 Sustainability Report, on the other hand, uses the list method. Isn't this super-clear? Ten key issues, all equally important, all top priority. Businesses are complex things. It's OK to have more than one top priority. 

For those of you who like a little more detail and to know where things fit, Fibria provides an infographic: 

However, the plain, no-dots list of material issues, and its use in defining strategy and reporting is.... for me.. the way to go. I like the list. I don't like the meaningless matrix.

In addition to the list of top priorities, for completeness, companies may also select to indicate other topics that are on the radar, but not considered to be most material. This could be another (not too long) list. All attempts at creating flurries of dots is simply a waste of energy.

So here's to a great 2015 and clear, focused, material reporting.
Down with the matrix.
Up with the list. 

elaine cohen, CSR consultant, Sustainability Reporter, HR Professional, Ice Cream Addict. Author of Understanding G4: the Concise guide to Next Generation Sustainability Reporting  AND  Sustainability Reporting for SMEs: Competitive Advantage Through Transparency AND CSR for HR: A necessary partnership for advancing responsible business practices . Contact me via Twitter (@elainecohen)  or via my business website   (Beyond Business Ltd, an inspired CSR consulting and Sustainability Reporting firm).  Need help writing YOUR Top Ten Report in 2015? Contact Elaine:   


Jordi Morrós Ribera said...

From years ago I have been an enthusiastic and big fan of the use of materiality matrix, and I also consider that is a top-priority to review the misusing of such tool. I express my thankfulness for your post.

Unknown said...

I like your post because I do not really understand the meaning of a matrix and I think that your way is has to be the way to do sustainability reports.
But a little correction, there is a connection between Public Safety and Employee Engagement in the PG&E matrix. But only if you click on Employee Engagement.
Anyway, your post was great.

Anonymous said...

I agree with Marjella on the following points:
• Many companies are missing the point. Why? Because GRI assumed fundamental knowledge of sustainability among reporters and did not provide that needed training or even a reference in the guidelines. GRI’s Guidelines assume people understand sustainability and how sustainability reporting will lead them to it. This is a major oversight. Also, corporations have their own value systems and those systems have (usually) never recognized the diverse values inherent in the concept of sustainability. (That’s a major reason why we got into our current dire situation… right?)
• Impacts should be more central to an organization’s analysis of materiality. It is easier to think first of impacts and then categorize them into aspect (topic) groups.

Answer to Aspect question:
• Impacts are not always easy to identify or relate to organizational operations. They often have multiple causes. Using standardized aspects makes the analysis of materiality systematic and requires reporters to methodically (we hope) evaluate all aspects and then study the impacts related to their most material aspects.
• In developing the GRI Guidelines, ISO 14000 was consulted and the aspect/impact combination is standard for environmental management systems (EMS).
• Aspects are better for data comparisons (between organizations) as well as for classifying impacts
• Not all sustainability topics are part of the guidelines, aspects are defined as part of the guidelines (vs. topics)

Other Comments:
• The materiality matrix is not useless; users just need to learn why it is important and how to use it to determine materiality.
• Your call to use a simple list instead of the graph reminds me of the debate over Application Levels. I don’t think the tool is at fault; it is the guidance on use of the tool that needs the work.
• Per G4, materiality is defined by objective (& subjective) analysis of two main variables: “stakeholder influence” and “impact significance”. Both are important, not just stakeholder’s views. Stakeholders often know nothing about sustainability. If you marginalize impact significance, you have taken the sustainability out of sustainability reporting!
• Your list "Material impacts are:" is stakeholder-centric!……You need to add the x-axis of the prioritization graph… (Sustainability) Impact Significance!

elaine said...

Thank you Jordi, Antonio and Anonymous! for reading and for your comments.

Antionio - thanks for the insight, I will look again!

Anonymous - great insights on the G4 guidelines and defining aspects. Thank you! Re the matrix - I don't suggest we marginalize impact significance - I just do not find evidence in most of the materiality matrices that I view of a clear process for defining what's most significant (relativity of material significance)and what that actually means for the company. Small differences in positioning on the matrix do not appear to me to add value. In another discussion, I made the comparison - you can be pregnant with quadruplets or quintets... they are all equally important. There is a point at which something has a MOST MATERIAL IMPACT. Once that's defined, for the top 5 - 10 or so issues, I see no value in trying to prioritize among them. Companies need to deal with all with equal attention. The Application Level debate was another issue altogether. Ultimately, what's an impact? It's an impact on stakeholders. Therefore, the two axes are not necessary - impact and stakeholder influence to me sooner or later boil down to the same thing. How can they not ?

Anonymous said...

Sustainability impact significance (x-axis of G4 prioritization graph) and stakeholder influence (y-axis) do not boil down to the same thing because they aren't the same thing. A sustainability impact is not only an impact on "stakeholders" (aka "people"), it often is an impact on the biophysical environment (i.e. ecosystems) and the other species living on planet Earth. Every "stakeholder" list you look at is comprised of subgroups of one species...human beings. Sustainability is not anthropocentric. It is an effort to overcome anthropocentrism. Sustainability for businesses and other human organizations is not only about the sustainability of the organization. Maybe you are assuming that there are human stakeholders adequately representing the interests of the biosphere, including other species? If that were the case, how did we get into our current predicament? After spending decades trying to protect the natural environment, I can assure you that assumption is not valid. Keep the prioritization graph & teach your clients how to use it... or risk taking the sustainability out of sustainability reporting.

elaine said...

Hi anonymous... thanks for the discussion and for challenging my thinking. My point is about how things are prioritized. The x axis is about sustainability impacts (economic, social or environmental) "that influence an organization's ability to deliver on its vision and strategy"(GRI) i.e. this is not sustainability in a vacuum. It is about sustainability issues that prevent the business succeeding long term. The y axis is about what influences the way stakeholders react to the business and the decisions they make. I guess I do make an assumption that stakeholders include those who speak for the environment. My point about the matrix is that it sort of drives us to an either/or kind of thought makes us choose one thing over another. If A is most important overall, then B is not most important. My point is that in many cases, A, B, C, D and E may all be most important. A,B,C,D and E may be highest on either axis or on both. What I don't get today is how companies are making this prioritization. How do you define the extent of an impact in such great detail relative to another, and how do you prioritize the reasonable expectations and interests of stakeholders of one group over another group, or one issue relative to another. Is the x axis equal to the y axis in terms of importance? I see little evidence of structured methodologies employed here. Rather than encourage reporters to get into a philosophical debate about where the dots should be on the matrix, I find that it is equally as effective to create a shortlist of the most important issues developed through engagement and analysis, where impact on the business and impact on stakeholders are identified as most critical on one or both axes. However, I respect that your different opinion!

Anonymous said...

Dear Elaine,

reading your post with great interest, I developed a hypothesis on why detailed materiality matrices are so often (mis-)used. It's not only the whish to impress with a seemingly scientific evaluation, but also the attempt to play off most relevant topics against each other. In consequence the reporting corporation can explain, why 'most' most material issues justify for more action and expenses than other. This means it is easier to explain, why many issues cannot be addressed adequately. I believe that this motivation is driven by a limited perception of sustainable economic behaviour and fails to meet the idea of a sustainable business case, that inplies an integrated management of many different aspects. I hope that this hypothesis, even if not verifyable, my drive your line of thoughts a little further.


Anonymous said...

Great article and great comments. As a newcomer to materiality assessments, I have a major question. The article mentions fault in not disclosing HOW dot positioning is determined. Any suggestions on how to actually determine the positioning? I have a list of aspects but not sure HOW to place them in the matrix.

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