Sunday, September 9, 2018

Cosmetic materiality

This week, a Press Release announcing the publication of AS MADARA Cosmetics ESG Report for 2017 caught my eye for several reasons. (1) Madara is a Latvian company - not too many of those publish reports - the GRI Database lists just 5 reports in 2017/2018 from Latvia. (2) It's a FIRST report - and you know how much I 💗 first reports. (3) It highlighted a CEO pay ratio of 1.68:1 and (4) It follows the NASDAQ ESG Reporting Guidefor Nordic and Baltic Markets.

Now, as some of you may recall, I wrote about this guide a while back in a post entitled: Materiality: from meaningless to differentiating. The thing about materiality is that so many companies today use it as a box to tick rather than a considered strategic framework for sustainable development and reporting. The low-level thinking on materiality where people, society and the environment are material to every company has rendered materiality fairly meaningless as all companies, no matter what sectors, are driven to report on the same thing. Advanced materiality thinking is differentiating; it identifies those unique impacts where a company has the power to change lives and society for the better. So, a broadscale, unimaginative, limiting approach to materiality doesn't serve to advance sustainable development, it simply serves the purpose of transparency and accountability, albeit that is also a worthy and necessary purpose. I call this operational materiality, and it is reflected in the NASDAQ reporting indicators for all companies, all sectors, all sizes.

Thirty-three basic measures of the ESG performance of the business provide a positive overview of how a company performs from a sustainability standpoint. 

Madara Cosmetics is a woman-led Latvian-based natural cosmetics firm traded on NASDAQ. The Madara report uses this framework, responding to all NASDAQ indicators (most are labelled - five are not labelled but the disclosures are present). Thus, in a refreshingly clean and attractively designed 50-page report, Madara covers off the bases using a compact set of universal indicators in a coherent way. 

However, the brand has gone beyond a simple response to a set of measures. It tells a story.

And it takes a stand.

Part One of the report is an education on organic and/or natural ingredients and the different certifications and standards that govern claims that cosmetics companies make on their labels. While intuitively, anything labelled natural or organic sounds environmentally friendly and healthy, this may not always be the case. 

It is clear where Madara stands here. A new ISO Standard 16128 for natural beauty products permits petrochemical and GMO-based ingredients, according to Madara, and is in general an inadequate and inappropriate standard for natural cosmetic products. Madara also attacks new EU regulation governing claims that can be made on cosmetic products, commenting that the new regulation compromises the rights of consumers to information about products they use and the ability to prefer products that do not contain certain ingredients. This is getting a bit messy according to Madara and may encourage greenwashing rather than science-based true and accurate product labelling.

A bold move. In this first report, Madara has chosen to take a strong and well-articulated stand against market regulatory developments that influence how consumers perceive natural cosmetics and influence competition for natural and organic share. This is a good use of the Sustainability Report. It helps us get to know the company and what it stands for. It places the company operations in a market context that showcases how Madara positions its brand and stands out from the crowd. This is part of the brand identity and a clear element of the way Madara impacts lives. Had the company developed a differentiating set of materiality topics, "accurate natural product labelling" and "influencing regulation governing natural cosmetics for the benefit of consumers" might well have appeared on the list.  

What I am missing, however, are the rest of these broader impacts. After the regulatory and ingredient-type discussions, the report continues in three sections - environment, social and governance - using the NASDAQ guidelines as a (mainly chronological) basis to report. However, beyond product formulations, I am wondering how the company reaches and impacts the lives of consumers. "Deeper than skin" is the company motto. I would like to understand why Madara's products are so transformational for consumers and what a difference they really make. What consumer needs are Madara products responding to and how successful are they? These impacts are overlooked in this report. 

However, this first report is a good example of an activist company using reporting to amplify its message and differentiate itself while observing stakeholder expectations on transparency and disclosure. In fact, with a report such as this, you wonder - would using the GRI Standards have made any difference? Or would it have simply complicated the reporting process? 

I tend to think that identifying material impacts is a positive step and creates a clear focus that guides the reader. A materiality assessment, robustly developed and clearly presented is a good backbone for reporting and I would have appreciated this addition in the Madara report. On the other hand, there are interesting and important disclosures in the NASDAQ framework that I believe all companies should report, whether or not their materiality assessment picks them up (and we all know that processes for determining materiality are somewhat arbitrary in most cases). A GRI-compliant report would probably not have included these disclosures.

In my post of last year, then, I talked about operational and differentiating materiality. Those who read GRI's Annual Report for 2016-2017 will have noticed a similar presentation.

As you can see, this matrix is split into two parts: operational and mission effectiveness, which, coincidentally or otherwise (who knows!?) are pretty much how I was seeing it in August 2017, a little before the publication of the GRI Annual Report in May 2018. Operational issues are the ones GRI directly controls - transparency, advancing people, and partnerships. Mission effectiveness are the indirect impacts - the difference the organization makes in society as a result of its operational activities - driving better sustainability performance, reporting and harmonizing the sustainability landscape. The thing you notice about this is that the operational impacts could relate to any company. The mission effectiveness topics are differentiating and unique to GRI. 

(As an aside, not all indirect impacts are linked to mission effectiveness. An indirect impact of GRI, for example, might be job creation in the sustainability sector, as more reports means more reporters. But this is not the mission.)

I think we are at the point where we must elevate our approach to materiality so that it refers to real ways that companies affect our lives, and not just the things that companies do. We are lacking a robust process for determining materiality. Currently, each company individually defines the degree of stakeholder engagement required to define material topics and ranks the topics raised in unclear ways. The was the big fail of G4 (and now GRI Standards) when it first put materiality center-stage in 2013. It made materiality pivotal but did not provide the tools for companies to apply it adequately. If materiality is at the center of sustainability strategy and reporting, and not just a cosmetic addition, the process for defining the material topics should be more clearly prescribed and evidence-based.

Well done to Madara Cosmetics for reporting and for speaking out on issues that affect people's lives. Materiality or otherwise, this is an authentic and credible report. I give it three cones -  🍦🍦🍦 - including one for a first report. 

elaine cohen, CSR Consultant, Sustainability Reporter, former HR Professional, Trust Across America 2017 Lifetime Achievement Award honoree, Ice Cream Addict, Author of three totally groundbreaking books on sustainability (see About Me page). 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 first / next Sustainability Report? Contact elaine: 
Elaine will be co-chairing  the  
second annual Asia Sustainability Reporting Summit 2018 in Singapore on 2/3 OCtober. Join me there!

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