Friday, July 24, 2020

GRI Standards: Materiality: You’ve Been Doing It All Wrong

There you have it. The infamous materiality matrix has disappeared from the GRI Standards (in the new Exposure Draft of the Universal Standards). Haha. About time. I have always maintained that the matrix and the plotting of dots was nothing but a distraction. (Check out my post from 2014, “Why the materiality matrix is useless”, before GRI Standards became G4, and another from 2016, “The missing piece of the materiality puzzle”.) 

Is this a total U-turn by GRI or is it an attempt to realign reporters with what’s really important, that is, defining the material topics, rather than developing creative visualizations of arbitrarily prioritized dots? I am reminded of a quote by the late Stephen R. Covey, the Seven Habits creator, who said: “If the ladder is not leaning against the right wall, every step we take just gets us to the wrong place faster.” 

And so it has been with materiality matrices, where most companies have taken to plotting material topics on two axes – importance to stakeholders and importance to the business, and prioritizing the topics that scored high on both axes. This was never the intention of GRI and it’s rather odd actually that the practice developed in this way. The intention of GRI Standards was that (1) companies should list the priority material topics (2) topics are most material if they score high on EITHER axis, not necessarily on both of them and most importantly, (3) that the horizontal axis represents the significance of the impact OF the business, not ON the business. Such a lot of companies reporting for such a long time on topics that were all prioritized against the wrong wall. How weird is that? 

I asked the GRI experts, Bastian Buck, Chief of Standards and Laura Espinach, Head of Technical Development, about this. 

ME: What are companies going to do now with all their materiality matrices? Many have invested loads of time and money perfecting the dots. Has this all been a waste of time? 
LAURA: “Let’s be clear that the use of the matrix was never a requirement. It became the practice that companies were including the matrix. We have now removed it first and foremost because the definition of material topics has changed. This also helps us address issues of how the matrix was applied in practice, with companies prioritizing topics that ranked high on BOTH axes, even though GRI Standards say that topics are material if they score high on one dimension. Will companies continue to use the matrix? Well, we don’t know. They can still choose to display the selection of material topics visually. What’s important is that if they opt to use a matrix, they must include the topics as required in the new GRI 103 Standard.” 

ME: Is the expectation that companies will now redo all their materiality assessments in order to align with the new definition of materiality? 
LAURA: “The answer is no, if they have been following the materiality principle as intended, that is, based on significant impact. That’s still the case. What’s different is that we recommend the approach to prioritizing impacts based on severity and likelihood but this method is not specifically required and organizations can select their own method and explain it. This may not therefore result in many changes to the material topics. But, if the company did not use a method that is aligned with the intention of expressing impacts through the material topics, then the new definition may require some changes.” 

ME: But what about all this new guidance on assessing the scale, scope and likelihood of topics? Wouldn’t it be better if GRI had provided some more specific guidance here? It’s still rather vague.
BASTIAN: “It’s important to note that the identification and assessment of material topics is not done for reporting purposes. The report reflects the impacts and actions of the companies throughout their activities. We offer options to use different methodologies and dimensions to assess material topics, but actually, GRI is not the tool that determines this. GRI is the disclosure tool, and we require companies to report their approach and methodology. The Standards do not prescribe the methodology.” 

I am pleased to see the revised definition of materiality in the proposed Universal Standards and new guidance – minus matrix. Material topics are redefined as topics "that reflect the organization’s most significant impacts on the economy, environment, and people, including impacts on human rights."  This is clear enough. (See my post entitled GRI Standards: Human Rights: Quadrupled for a discussion on how human rights snuck into that definition). 

The proposed new standard GRI 103: Material Topics includes guidance for identifying material topics and related disclosures. There are three required disclosures in the new GRI 103 (all mandatory for reporters wishing to claim “In Accordance”): 

Disclosure 1: (MT-1 Identification of material topics and related impacts) Includes the way an organization has identified its material topics and prioritized them, as well requiring disclosure of the stakeholders whose views informed the identification of material topics. Also, organizations should point out changes in materiality from the prior reporting period.
Disclosure 2: (MT-2 Material topics and related impacts) Includes listing the material topics, describing the impacts related to each topic and whether the organization is involved in negative impacts directly through its activities or as a result of its business relationships. 
Disclosure 3: (MT-3 Management of material topics and related impacts) Replaces and extends the scope of the Management Approach Disclosures of the former GRI 103 Standard. It requires for each material topic a whole load of information: 
  • Policies or commitments 
  • Actions taken to manage the topic and its related impacts 
  • Actions taken to prevent or mitigate potential negative impacts, or address actual negative impacts through remediation 
  • Effectiveness of actions taken 
  • Process for tracking the effectiveness of actions taken including goals and targets, evidence of effectiveness and lessons learned 
  • Ways stakeholder engagement has informed the actions taken and if the actions have been effective
  • Reason for not addressing a material topic if the organization does not do anything at present and plans to manage it in the future if there are any. 
There are a few things worth noting here. Most of these requirements were already part of GRI Standards, but some bits that stand out are:

First: Change materially. Do you find yourself scrambling around to see what companies said were material last time? Ever since the G4 Framework, a disclosure requirement was for companies to report significant changes in material topics from previous reporting periods. Although, honestly, I have noticed only a few companies actually including explicit information about what changed. So you had to do a bit of scrambling around. The new requirement in MT-1 requires organizations to report changes in the material topics compared to the previous reporting period. That is, all changes. I suspect this won’t be such a burden as most companies revise their material topics every few years, and even then, not much actually changes. But it's worth reminding organizations of this requirement, as no report is standalone, it's always part of a disclosure continuum and changes in materiality by definition are not incidental.  

Second: Get descriptive. In addition to the requirement to report how the organization has identified actual and potential, negative and positive material impacts and how it has prioritized them, the new requirement is to describe the impacts for each material topic. Currently the requirement is to report why the topic is material - which can be a bit repetitive as most companies are fairly generic about why child labor is not good or why diversity is fantastic. The move to describing impacts could lead to greater specificity in what material actually means in terms of how the organization affects our lives.

Third: Preventive precaution. The requirement to state how you uphold the precautionary principle (currently General Disclosure 102-11), which most reporters didn’t really understand anyway, has now been changed. The proposed Standard (RBC-2) asks companies to state whether the precautionary principle is applied as part of its policy commitments. The precautionary principle is seen as one form of prevention of negative impacts, which applies in specific situations (where there is sufficient reason to expect serious or irreversible damage even though there is no complete scientific understanding or evidence of that). So maybe it's time to revisit how you talk about this and update your policies to bring precaution into the frame.

Fourth: Get authentic. You can not report any of the above on any material topic as long as you explain why you are not doing so. Hah! I don't recall seeing many reports saying we have loads of material impacts but we are not doing anything about them. But, the “report or explain” principle has been fairly effective in some jurisdictions, e.g. Denmark, in catalyzing action, so it worth reminding organizations of this requirement, which was included in current and prior GRI iterations. It's a recognition that not every company has all the answers all the time, and that it is better to disclose that this is the case than simply omitting reference to what might be an important impact of the company. It's rather uncomfortable to do this, and I suspect it's easier to conveniently deprioritize an impact which you are not prepared to deal with. The optimistic view is that companies will realize there's value in telling it like it is and will use this as a way to either report more authentically or get a meaningful approach and an action plan in place before their report is published.

In general, while there is still a lack of more explicit methodology for defining materiality, I am confident the new materiality definition will help improve the quality and relevance of disclosure. If you agree, or disagree, have your say before it gets locked down in the publication of the new Universal Standards sometime in the near future. The Exposure Draft is open for comments until 9th September 2020

Stay tuned for the next post in this series which focuses on the changes in disclosures on governance. 

Stay safe, stay well, stay optimistic! 

elaine cohen, CSR consultant, Sustainability Reporter, HR Professional, Ice Cream Addict. Owner/Manager of Beyond Business Ltdan inspired Sustainability Strategy and Reporting firm having supported 107 client reports to date; author of three books and several chapters on Sustainability Reporting and the Human Resources connection to CSR; frequent chair and speaker at sustainability events and judge in several sustainability awards programs each year. Contact me via Twitter , LinkedIn or via Beyond Business

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