Material world
AccountAbility’s latest report calls on companies to move beyond basic compliance when dealing with social and environmental issues and to, instead, integrate them into their core business strategies. ‘The materiality report: aligning strategy performance and reporting’ is a toolkit which can help managers identify exactly which issues are ‘material’ to their underlying performance and how best to report them.
There is a significant lack of information on how to understand and apply the concept of materiality to corporate responsibility. The concept is central to the AA1000 series of standards but, while the series provides information on what is required, as standards they do not and cannot define how to meet the requirement. AccountAbility published ‘Redefining materiality’ in 2003. This was a good first step and was influential during the development of the UK operating and fnancial review legislation. Since then, however, there has been no significant publication that has advanced practice. At the same time the issue has become prominent in discussions of corporate social responsibility (CSR) and reporting. Its value and applicability was questioned in the 2006 review of CSR reporting published by the communications company, Context. Many others have danced around the issues but never adequately addressed it, much less provided practical guidance on how to apply the concept. As a result, there has been confusion about the use and meaning of the word in a financial and non-financial context. There is real current demand in the marketplace to create a clearer framework and establish best practice in this area.
Materiality in a CSR context means managing the right things and ensuring that accurate management information is available to decision makers. The report describes material issues as those that could make a major difference to an organization’s performance. Furthermore, material information enables stakeholders and management to make sound judgements and take action which influences the organization’s performance.
In a financial context, the definitions are mature and well understood but in a sustainability or CSR context this is far from the case. And the trouble is that it is not particularly helpful to try to directly apply the financial definition of materiality to non-financial issues. So work needed to be done to redefine the concept so that it can be usefully and beneficially applied to all sustainability issues (including financial issues).
An assurance provider needs to be able to evaluate what a company is doing against agreed criteria. In the ‘AA1000 guidance note on principles’ it says that, when evaluating, adherence to the principle of materiality it is important to look for evidence that:
- there is a process in place to determine what is material
- the process includes an evaluation of relevance and importance
- the process fairly represents the views and importance of stakeholders
- the evaluation criteria are clear and understandable
- the process has been systematically applied
- there are no material omissions or misrepresentations
To meet these requirements organizations need to have a credible and defensible process in place for determining materiality. While there has been innovation and progress among the leading companies, they have contributed little to the overall state of understanding and practice. There is a lack of systemisation and even less comparability. Assurance providers, like investors and other stakeholders, look for both.
The report provides a materiality framework for practitioners that will allow them to compare how other companies are doing it and develop a systematic approach to identifying, prioritising and reviewing their material issues. Assurance providers can then more readily challenge the process and suitability of criteria being applied; assumptions which previously were part of a ‘black box’ are brought into the open. This improved transparency not only allows debate by assurance providers but also by external and internal users.
Assurance providers need to evaluate two key issues. First, they must ensure that the sustainability or CSR reports are complete, fair, and unbiased while retaining the assurance provider’s professional independence. And it is impossible to determine completeness without evaluating whether or not the company has identified and prioritised its material issues. Second, they must gain access to senior management to confirm whether material issues are actually aligned with their company’s strategy and performance.
In terms of translating some of the reports recommendations into practice, it is vital that practitioners ensure that the dialogue with stakeholders is comprehensive and reflects the ‘voiceless’ (the environment, future generations) as well as the vocal communities (for example, by using the AA1000AS 5 phases approach in conjunction with media reportage as a mechanism to validate the issues). Then check that management controls and performance are embedded into governance and management systems frameworks. In the environmental area, for example a material issue such as climate change or energy efficiency can be managed through ISO 14001.
If an assurance provider is applying the AA1000 assurance standard it is necessary to ensure that the organization has identified all of its material issues and has a complete understanding of them. If an assurance provider finds that this is not the case, it must be brought to the attention of the organization. If the organization does not make the necessary changes to address the situation (both in and outside the report) the assurance provider must express his professional opinion by recording this in the assurance statement.
AccountAbility is an international, non-profit membership organization promoting accountability innovations aligned to sustainable development through standards development, leading edge research and engaging in change-making practitioners, organizations and initiatives. Find out more about AccountAbility’s work on www.accountability21.net
BT is one of the world's leading providers of communications solutions serving customers in Europe, the Americas and Asia Pacific. Find out about BT's approach to materiality at www.btplc.com/Societyandenvironment
LRQA is part of the Lloyd's Register Group. It is the leading supplier of management system certification to international standards. Find out more about LRQA's services at www.lrqa.com
