The missing piece of the materiality puzzle

Earlier this year, I had quite a lot of fun as a GRI-appointed Quality Control Officer, whose role is to attend GRI training courses as an observer and report back to GRI if certified GRI training is being conducted professionally, competently and in line with GRI standards. This is fascinating for me, mainly because it's so interesting to hear what training delegates ask about and comment on during the course. In one session, a delegate asked the ultimate G4 (now GRI Standards) question - the very same one that I asked GRI Standards leading architect Bastian Buck of GRI, three years back:

Is it OK to write a G4 report with just one material issue? 

The answer of course is Yes and No.

Yes, because technically, if you have determined that your organization has only one material impact, then disclosing this and using GRI to report it does actually tick the box.

No, because, I believe, no organization can be so simple that its impact is entirely mono-dimensional. Even micro-businesses operate across more than one dimension. No business has just one stakeholder.

Behind this ultimate question, then, is the deeper consideration of how organizations define their most material impacts for the purpose of strategy development and reporting. It's not so much about whether you can ride the framework with one material issue; it's about the value you derive from understanding what's material for your business. 

Materiality and Strategy 

One of the positive developments following the introduction of G4 was the elevation of materiality from dormant to active in the minds of companies and reporters. Transitioning to G4 has generally appeared to cause companies to engage in some level of thinking about what's material and how to define it. In some cases, this has been a meaningful exercise where materiality is the result of insightful stakeholder dialogue and the precursor to a multi-year sustainability strategy and basis for reporting. In other cases, we are still seeing the disconnect - where companies have, on the one hand, a sustainability strategy and, on the other hand, a list of material issues that bears no resemblance to the strategy and a report which covers everything except what is deemed material. The next stage in materiality maturity is helping companies to see that this all plays out on the same playground. Sustainability strategy has to be the result of materiality analysis. Materiality can never be in a vacuum.

Materiality and Impacts
Which brings me to another interesting and highly geeky thing I did this week. I listened in on the GRI Global Sustainability Standards Board (GSSB) meeting (for the second time). It's fascinating to be a fly on the wall as the GSSB debates the different aspects of developing GRI Standards. I have to commend GRI and GSSB on full transparency here - all the meeting documents are available and the meeting itself is audio live-streamed (shame about the video!) - and it's a truly illuminating discussion... if you are a reporting geek like me.

One of the topics that came up this time around was the definition of materiality and the clarification of this in the new GRI Standards. GRI maintains that to date, people have "misinterpreted" the definition of materiality, and that the new terminology in GRI Standards makes this much clearer. GRI Standards 100:1.3 states: "Relevant topics, which potentially merit inclusion in the report, are those that can reasonably be considered important for reflecting the organization’s economic, environmental, and social impacts, or influencing the decisions of stakeholders. In this context, ‘impact’ refers to the effect an organization has on the economy, the environment, and/or society (positive or negative)."

In G4, material impacts were defined as follows:

In the GRI 100 Glossary of the GRI Standards, it is now clarified as follows:

A Sustainability Report should therefore report impacts OF the business and ON the decisions of stakeholders. It is not about the impacts of sustainability on the business. The guidance matrix in the GRI Standards remains the same in the GRI Standards is it was in G4 (though the colors have changed a little 😌) (NB: I remind you that a matrix is NOT necessary for GRI Reporting - a list of priority issues is perfectly adequate.)

This the application of this matrix - or specifically, the focus of each of the axes -  has commonly been misused in G4 reporting.

3M's 2016 Sustainability Report, for example, uses reputation on the Y axis and stakeholders on the X axis:

The Fedex 2016 Global Citizenship Report uses stakeholders and business success:

Both these approaches do not reflect the actual intention of the GRI framework. The GRI approach is designed to create a report that reflects impacts on the economy, people and planet. The shape and size of the impact of your specific business is key to defining your positive (or negative) contribution to society. The primary focus in sustainability reporting should be the size and nature of the impacts OF your business and how your business affects our lives. In the GRI Standards, that should now be crystal clear. The outcomes of the way your business addresses mitigating negative impacts or enhancing positive impacts is reflected in your reputation, business success and value creation.

In the conversation at the GSSB, where I was a fly, a concern was raised that some companies have spent fortunes on materiality assessments that include this measure of "importance to business success". "What should they do now?", was the question. Well, it's not the end of the world. There is some overlap. Quite often, these issues will naturally coincide. Almost always, in fact. But in the next review of material impacts, there's an opportunity to better align with the letter and spirit of the reporting standard (and stakeholder expectations).

Which brings me to the more important question: How do you prioritize material impacts?

Materiality and Prioritization

The big weakness in the GRI Standards is the lack of robust guidance for defining the process for prioritizing material impacts. GRI could have been prescriptive in this area. The GRI Standards omit the guidance that was contained in G4 around the stages of defining material impacts: identification, prioritization, validation and review. However, even that guidance did not prescribe a robust process for getting from the universe of many impacts to the fewer most material impacts.  Few companies, if any, actually report this process in a way that help us understand the voices that counted in prioritizing specific impacts.

It's easy enough to define the landscape of relevant issues. But the prioritization has often been reduced to a number-crunching exercise, where different groups give scores to different topics, the numbers are added up and voila - you have a matrix. The outcome of this process can vary widely depending on which voices you count, what weight you give to each voice, how each voice assesses the value of each impact and the weighting factors you use to roll that up into one coherent list of issues. These details are rarely disclosed by companies. The entire basis upon which material impact reporting rests is therefore not transparent and possibly, not robust.

Lloyds Bank publishes a Materiality Report.

The bank describes its process for defining material impacts:

This looks like an invested process. A universe of 50 issues was established. Representatives of six stakeholder groups (including employees as one group) took part in an online survey to rank the issues in order of importance. The online input was supplemented by the opinions of Lloyds external Stakeholder Advisory Group who provided "proxy representation on behalf of some of these groups". The responses were weighted according to "stakeholder group sample and data quality with priority given to direct feedback and Stakeholder Advisory Panel feedback". Then it was all rolled up into a set of 14 issues in 5 categories that appear to have equal priority as the most material impacts.

The issues look to be a reasonable mix of what we might expect a large banking group to prioritize at a general level. But they could also be the issues of any bank anywhere in any country. Trust in business, job creation, access to products and services, customer satisfaction - this tells me nothing about Lloyds Banking Group that is specific to that company. This begs the questions: How detailed was the initial universe of material issues? How was the weighting of stakeholder responses constructed?

Another bank, for example, presents a more company-sector specific picture. Westpac Australia's materiality matrix includes impacts such as positive impact finance, financial capability and empowerment, digital product and service transformation (an issue which is sweeping the banking industry worldwide for obvious reasons) and macroeconomic and demographic trends that are current in the materiality assessment period.

 

Westpac's matrix refers to impacts that are important to stakeholder and important to the business, but, despite this bank's detailed disclosure of stakeholder issues and responses, we are still left in the dark about the process used to assign prioritization to these top 18 material impacts. What influenced the positioning of the dots on this matrix? How were the different stakeholder inputs evaluated?

Next week, I will be presenting the findings of an analysis I performed on behalf of BSI, the UK's national standards body, of sustainability performance and reporting standards that are used predominantly today. The presentation will serve as a basis for dialogue at an event hosted by BSI to consider where standardization or additional focused guidance may assist companies in advancing sustainability performance and reporting. 

If materiality is central to reporting, does the process of defining materiality not merit greater structure and transparency? Good process, good outcome. But what is the process for determining materiality? Every company uses its own logic to develop a process that delivers a result. But if the process is flawed, then the result is flawed. How can we know that companies are reporting the most material issues? If the process is different in every case, the outcomes are not comparable. One of the recommendations I am tabling for discussion next week is that there should be robust process standards for the determination of material impacts. What do you think? I'd welcome your thoughts as we consider this fundamental question that goes to the heart of relevant corporate transparency. The actual event is fully booked with a long waiting list, so if you have a strong view, write to me here or comment on this blog. I am very interested to hear your views.

In the meantime, the good news is that companies are making efforts to define material impacts. Even an imperfect, undisclosed process is a start. As I often say, 80% of something is better than 100% of nothing.

 

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 www.b-yond.biz   (Beyond Business Ltd, an inspired CSR consulting and Sustainability Reporting firm).  Need help writing your first / next Sustainability Report? Contact elaine: info@b-yond.biz   

Dr Sustainability and The M Factor

It's been a long while since Dr. Sustainability came to visit. She has been sooooooooooo busy. All these conversations about G4 have completely caught her up in a whirlwind of activity. In fact, Dr Sustainability told me that she is considering calling herself Dr. G4, but that doesn't quite roll off the tongue in the same way that Dr. Sustainability does. And of course, when G5 comes out, she would have to change her name again. However, Dr. Sustainability is definitely thinking that G4 has the M Factor. 

Dear Dr. Sustainability: I have heard you talk about the M Factor. What does M stand for? Magnificent? Mammoth? Mega? Misguided? Myopic? Monstrous? Minimalist? 

Dear Curious: You have certainly come up with some options I hadn't thought of. But in the context of G4 reporting, The M Factor is of course Materiality. Delivering a sustainability report without The M Factor is going to get harder and harder. In fact, it's The M Factor that makes it a sustainability report. 

Dear Dr. Sustainability: I have written a G4 report. How do I know if it has the M Factor? 

Dear Stupid: Check out the Content Index. If there is no "omission" next to the disclosure that asks for the list of Material Aspects (G4-19), that's a good start. The next thing is to check whether you have described your process for defining Material Aspects. After that, you should check if stakeholders have provided input and if the frequency of engagement has been noted. Then you can look to see if your Specific Standard Disclosures and Disclosures on Management Approach are in line with the Material Aspects. Of course, don't forget to check whether your Aspect Boundaries are internal or external to the organization. Then, you can make a quick scan of the Principles for Defining Report Content and the Principles for Defining Report Quality. Then check if you have responded to all the General Standard Disclosures. You can also take a quick look at the CEO statement to see if it includes a description of strategic priorities for the short and medium term, including respect for internationally recognized standards and a reference to macroeconomical and political trends. After that, if you don't know whether your report has The M Factor, it probably won't matter. You will be in an institution.

Dear Dr Sustainability: Thanks for your reply. Next time, please reply in English. 

Dear Dr. Sustainability: Did you call it The M Factor just to cash in on a little free publicity? Is it a way to associate sustainability reporting with the incredibly popular mega-rating fabulously universal TV show The X Factor? Perhaps you think that The X Factor may lend a little spotlight to sustainability reporting and help it go viral? 

Dear Simon Cowell: The X Factor seeks out talented people by selecting a small number from the hundreds that start out claiming they have The X Factor. Almost all of them fall by the wayside. It's the same with sustainability reporting. Thousands of reports claim they have The M Factor, but eventually you come to realize that The M Factor is rather elusive and only a few reports are privileged to make this claim genuinely. By the way, isn't it time The X Factor produced a Sustainability Report? You could call it The XM Factor.

Dear Dr. Sustainability: Are there any other TV shows that you think are similar to Sustainability Reporting? 

Dear TV Addict: Actually, I don't watch much TV, but since you ask, Grey's Anatomy could be an interesting analogy. The skills required of the docs that run the ER are very similar to those required of today's Sustainability Officers. You have to be quick-thinking, know how to lead a team, make intuitive connections and improvise if you have to, think on your feet, act decisively and be prepared to amputate if you need to. That's just like publishing a Sustainability Report. Especially the amputate bit. In some cases, you might need to amputate the entire report. In other cases, just the CEO. 

Dear Dr. Sustainability: Is The M Factor an absolute thing? I mean can a report have The M Factor partially? Or does it have to be completely in full comprehensive M Factor? 

Dear Nitpicker:  There is only one M. Either you have it or you don't. Watch out for fakes. And watch out for companies who claim they have The M Factor when in reality they have one of any number of other factors:

• The D Factor: D stands for Drivel. No explanation needed.
• The Y Factor: Y stands for Why on earth did this company publish a sustainability report when they have nothing to report?
• The OMG Factor: OMG stands for WOW, the CEO actually read this report he signed off on. 
• The PR Factor: PR stands for Press Release. This is a report that looks great in a Press Release but not in a report.
• The COTW Factor: This stands for Completely Off The Wall. Reports which are so out of sync with the issues that matter that they were probably written by PR firms. Or politicians.  
• The JK Factor: JK stands for Just Kidding. You must have seen reports like this. As you read them, all you can say to yourself is: Are you kidding me? Sometimes this is called the S Factor. S stands for: Seriously? 
• The A Factor: A stands for Awesome. Not many reports have this factor. It's when the report is fabulously designed, incredibly creative, pyrotechnically sophisticated and sleekly presented online, but the content is anything but material.  

Dear Dr. Sustainability: I hear that GRI is starting out with a new G4 Application Level Check, to see if G4 reports have The M Factor. What do you think of that? 

Dear Checker: It's a brilliant move on the part of GRI. According to the initial information GRI has provided, they are charging the same price as the G3 Application Level check while promising to check the presence of just 11 disclosures out of a possible 58 general disclosures, with no reference to all the DMAs and performance indicators that support material disclosures. In other words, half the check, half the report, same money. I definitely think that GRI has The M factor. M for Mastermind.  

Dear Dr. Sustainability: Did you manage to work out what the material Aspect Boundary in G4 is all about? GRI G4 says it's about where the impact occurs. But all of my impacts seem to occur in lots of places. How can I define my material Aspect Boundaries? 

Dear Boundary-challenged: Look, it's very simple. Think of it this way. You like ice-cream. You want to eat an ice-cream, but first you have to buy it. When you buy an ice-cream, the impact is external because you have contributed to creating economic value, enabling the ice-cream seller to earn a livelihood, pay back her small-business loan and send her kids to university. Buying an ice-cream has a fabulous impact on the world and therefore the Aspect Boundary is external. On the other hand, now that you have bought the ice-cream, you eat it. Here is impact is internal. Tomorrow morning, when you step on the scales for your daily weigh-in, you will find that the needle has moved a little more to the right, and when you get dressed you will notice a certain tightness around your waist. This is because the ice-cream is now stored in your body as superfluous calories, may contribute to your becoming seriously obese, preventing you from being a productive human being. This impact is most definitely internal, but it also has an external consequence as your obesity presents a worrisome drag on the healthcare system and society at large and your lack of productivity means that you are a burden on the state and ultimately people will have to pay more taxes.  Therefore, buying and eating an ice-cream has predominantly external material Aspect Boundaries, and if anyone tries to tell me otherwise, I will show them the G4 Implementation Manual. That should definitely clear things up.

Dear Dr Sustainability: You mentioned Aspects. I really don't understand this in G4. What if my material issues don't fit into the Aspects? Can I just create my own Aspects? And if so, what's stopping me from using only my own Aspects? Why do I need to force-fit my Aspects into the G4 template? 

Dear Rebel: Look, son, sometimes you just have to conform. GRI has spent hundreds of thousands of Euros developing G4 and creating a universal table of material Aspects. What sort of business are you in that makes it so different that none of the Aspects fit at all?   

Dear Dr Sustainability: My company makes Smoked Haddock Scented Air Fresheners

Dear Smelly Rebel: Enough said. 

Dear Dr Sustainability: What other parts of G4 are hard to understand?

Dear Easylife: The hardest part of G4 to understand is why everyone thinks G4 is so hard. It's not. It's just extremely difficult. Unless you have a great consultant. 

Dear Dr. Sustainability: There are some that say G4 is just a stepping stone to Integrated Reporting, and that when Integrated Reporting takes over, G4 will die. What do you think? 

Dear Pessimist: When Integrated Reporting takes over, I will die. Haha. Joke. Integrated Reporting has some merits when it is done well. The new Westpac Report, for example, can teach companies a thing or two about Integrated Reporting. However, we are far from the day when Integrated Reporting will become an effective reality for most companies. G4 can be a useful stepping stone to a more integrated approach. Before Integrated Reporting can take over, G4 must take over. 

Dear Dr. Sustainability: What's the best G4 report you have seen so far? 

Dear Optimistic: The one that hasn't been published yet. 

Dear Dr. Sustainability: What advice would you give a company wanting to publish its first Sustainability Report?

Dear Beginner: Stock up on ice-cream. 

elaine cohen, CSR consultant, winning (CRRA'12) 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 www.twitter.com/elainecohen   or via my business website www.b-yond.biz   (Beyond Business Ltd, an inspired CSR consulting and Sustainability Reporting firm

CSR Reports: Print 'em.

Last week, I received an email  from a valued CSR Reporting blog reader in South Africa. Her name is Reana Rossouw and she founded and runs an award-winning organization development and sustainability consulting practice called  Next Generation. Reana presents a master class in South Africa on Sustainability Reporting, a place where lots is happening right now.

Anyway, amongst other things, Reana said this (quoted with permission):

Many a time I receive your articles and comments I immediately go on a hunt for that particular report.　 However, getting copies of sustainability reports are becoming a nightmare.　 Why is everyone so fixated on publishing online reports only?　 I know they claim it is to save trees, however, is the real objective not to communicate with stakeholders?　 I would really appreciate it if you could address this issue in one of your upcoming columns, just tell people there are still some of us who prefer to actually READ a real PRINTED sustainability report.　 We use copies of the reports as a teaching tool and aid in our classes.　 I would have thought companies would really appreciate it if they get requests for copies of their sustainability report – at least someone is planning to read it – but no, they prefer one to go onto a website. Which shows so much ignorance – in South Africa unlike the rest of the world we do not have unlimited bandwidth – and sometimes no connectivity – downloading a 100 page report of about 20MGB takes sometimes days as we get cut off, our connection is interrupted and then we still have to print it anyway – so they only transfer their environmental responsibility to me.

Well, I sympathise with Reana's point and have blogged about this before. I continue to find it incredible that companies claim that they are not printing Sustainability Reports in order to protect the environment, when they have no qualms about printing every other communication in the business. I find it much easier to read and review hard copy reports, even if these are summary reports. There is no reason  to print hundreds of pages, I agree, and there is no reason not to print on recycled paper. The Westpac summary report is one of the best examples of this. It is backed up by a good sustainability website, a nicely navigable annual and sustainability reporting site, and  a 2.67 Mb downloadable PDF report. The report itself is a flimsy 49 page magazine-style brochure, weighing next to nothing, nicely designed but not flashy, and containing all the important information I would look for, including a Materiality Matrix, full Performance Scorecard with quantitative targets, just enough photos to get a sense that real people work at the bank, and a pleasant overall look. In fact, it is one of the reports that I keep in my bag to show to clients when I meet with them to talk about the concept and design of their next report.

I think Sustainability Reports are important enough to print. Doing business sustainably does not mean adopting a Fred Flintstone lifestyle. We can still do busines with an eco-conscience and with care, even if we print an annual sustainability report. I prefer to read hard copies. I am much more inclined to write a review of a sustainability report if I can read it without having to be glued to my PC screen.

In fact, I invite all companies producing a hard copy report, summary or otherwise, to send me one, with a clear conscience :)  I will do my best to review it on CorporateRegister.com  or on this blog. 

So, Reana, thanks for giving me the opportunity to rant about this (again!). More importantly, thank you for reading the ole blog and taking the time to let me know that you find it useful. There is no sentence sweeter to a blogger's ears than "I read your blog".  

elaine cohen, CSR consultant, Sustainabilty Reporter, HR Professional, Ice Cream Addict. Author of CSR for HR: A necessary partnership for advancing responsible business practices Contact me via www.twitter.com/elainecohen  on Twitter or via my business website www.b-yond.biz/en  (BeyondBusiness, CSR consulting and Sustainability Reporting firm)