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November 2006
In association with
The Materiality Report
The Materiality Report was produced by Company, The Gap Inc., Hydro Tasmania, Nike Inc,
AccountAbility in association with BT Group and Novozymes and Telefonica. We are grateful for the
Lloyds Register Quality Assurance (LRQA). It was insights provided by Karin Ireton of Anglo American;
written and developed by Maya Forstater, Simon David Bickerton, Adriana Mazry and Nicholas
Zadek, Deborah Evans, Alan Knight, Maria Sillanpää, Robinson of BP; Susan Morgan of BT; Dunstan Hope
Chris Tuppen and Anne-Marie Warris. of BSR; Krista Gullo and Andy Hobbs of Ford; Lucy
Candlin of Future Perfect; Darryl Knudsen and
Deborah Evans is Business Manager – Corporate Monica Oberkofler of Gap; Sean Gilbert of GRI;
Reporting and Assurance at LRQA Alison Howman of Hydro Tasmania; Charles Gatchel
debbie.evans@lrqa.com of Nike; David Owen of Nottingham University; Claus
Frier and Pia Carlé Bayer of Novozymes; George
Maya Forstater is a Senior Associate of Dallas of Standard and Poor’s; Susan Todd of Solstice
AccountAbility Sustainability Works; Rafael Fernandez Conazon of
maya@accountability21.net Telefonica; and Lars-Olle Larsson (independent).
Dr Alan Knight is Head of Standards and Related Jeannette Oelschlaegel, Eric Ripley and Meera Shah
Services at AccountAbility from the AccountAbility team also contributed to the
alan@accountability21.net development this report and Alex Chilton of Alex
Chilton Design was responsible for its design.
Maria Sillanpää is a Senior Associate of
AccountAbility Download this report, as well as further
maria@accountability21.net resources on materiality from
http://www.accountability21.net/materiality
Dr Chris Tuppen is Head of Sustainable
Development and Corporate Accountability at BT
Chris.tuppen@bt.com
As three organisations involved in sustainability reporting we have, in different ways, seen the concept of
materiality become an increasingly important word in the reporting lexicon.
There are two challenges facing reporters. One is to find an approach that provides the comprehensive data
that some stakeholders require, while still being able to show what’s really important to the success of the
organisation. The second is to do this in a concise and clear way. A successful materiality determination
process is key to meeting these challenges.
In this report we have explored the concept of materiality, reviewed how various companies have tackled it
and propose a Materiality Framework that everyone can use.
As we travelled this journey it became increasingly clear to us that the benefits of a robust materiality deter-
mination process go far beyond reporting. It provides the organisation with evidence that links sustainability
to commercial strategy, helps identify longer term value drivers and is a route to the convergence of sustain-
ability and the market place.
Ultimately we believe a greater emphasis on materiality in sustainability reporting will lead to an accelerated
convergence with financial reporting.
This is an exciting, experimental space please share your thoughts and experience with us.
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What
Counts?
Neither is materiality just about the size or cost of the So businesses need a simple, yet robust framework
activity in question, nor is it about the overall impor- for determining materiality. Emerging standards offer
tance of the issue to society. Ford’s 87 million dollar welcome and useful islands of clarity in working
support for a breast cancer charity over the past 12 out what counts in relation to particular issues.
years is not considered material since it is not aligned However, businesses will
to its business strategy. Its much smaller sponsor- “While everybody never be able to completely
ship of the World Business Council for Sustainable seems to be talking outsource their understand-
Development’s Sustainable Mobility Project might about materiality, ing of materiality to these
well turn out to me material, if it can help the busi- its definition is very wider societal dialogue
ness address the challenge of how to grow its busi- foggy. And if its processes because what is
ness in the long-term. definition is foggy, material depends on the
then guidance on particular company and its
Accepting that some stakeholders’ concerns are not its practical deter- evolving business strategy.
important at a strategic, corporate level is unpalat- mination is posi-
able to many in civil society, who see it as a move tively opaque. Such a framework must be
away from the stakeholder focus of sustainability Perhaps this is why useful first and foremost
reporting and an overemphasis on business opportu- a number of for the organisations that
nities and risks. However, it is a crucial step towards companies have create the impacts, seek to
rooting sustainable development within companies’ gone it alone and manage their performance,
business models rather than letting it remain a side have started to and look to communicate
issue. develop their own effectively with their stake-
approaches.” holders. It also needs to be
Businesses will still need to disclose their perform- Chris Tuppen, something that assurance
ance with respect to laws, commitments and volun- Head of Sustainable providers use in assessing
tary initiatives where they have identified a Development, reporting quality. Finally, it
compliance responsibility or an area of information BT Group Plc23 needs to be communi-
v Does BT have a policy on this issue? v Those issues that have significant current
v What is the financial impact of the or potential impact on the company
issue on BT? v Those issues that are of significant
v Are stakeholders interested in this issue? concern to stakeholders
v Is there societal interest in this issue? v Those issues over which Ford has a
reasonable degree of control
While all companies were trying to simultaneously on the competencies of its implementers and
assess issues for corporate and stakeholder signifi- their understanding of and influence on the
cance, there were key differences in their approach: company’s business strategy.
Some companies are beginning to build on their Businesses are still mainly concentrating on using
initial experimentation with their materiality determi- materiality to think about how they reflect business
nation processes to ask how it can be more closely strategy in their reporting, rather than how they can
linked with core decision making and performance use it in directing strategy and performance.
management processes. Although the businesses have indicated that the
process did feed back into strategic decisions, it is
“One of the interesting questions that we can begin to primarily used as an end-of-pipe filter to help
look at now that we’ve got this process is how it links produce more streamlined and useful annual sustain-
in with management and decision making. We’ve also ability reports.
got our KPIs, our CSR risk register, and there isn’t
exact alignment between the most material things The development of clear methodologies and criteria
and the things that appear on our risk register or the has enabled businesses to capture expertise within
things that are in our KPIs. Now we have developed the process itself, so that it can be widely and consis-
this new process we need to go back and take tently applied year on year, and within different sub-
another look at the processes we’ve had in place for units of the global business. But, with the focus on
some time.” developing standardised methodologies, there is a
Susan Morgan, BT danger of overlooking the underlying competencies
necessary to make the process effective in driving
Achievements Challenges
Tackles need for more strategically aligned Integration with mainstream measures
and useful performance reports. of materiality.
v Better understand the alignment between v A practical outline of the core process being
sustainable development issues and business used by leading companies to determine
strategy. materiality.
Material issues are those things that could make a major difference to an organisation’s
performance
Material information provides the basis for stakeholders and management to make sound
judgements about the things that matter to them, and take actions that
influence the organisation’s performance.
In terms of sustainability reporting, and more broadly managing sustainable businesses, the question of ‘what
is material’ is framed to include the information needs of both management and investors and other stake-
holders who take decisions which can affect a business’s performance in the long-term.
Sustainability approach
Long-term focus on
Traditional issues and stakeholders
approach Material issues that could affect
Short-term, organisational
narrow focus Things that could make performance
a major difference
to an organisation’s
performance
Material information
Information needed to
make sound judgements
Approaches will differ and develop but any successful methodology to determine materiality will need to
address a set of common issues and challenges:
It needs to be:
Rigorous
Replicable, defensible, assurable and credible.
Practical
Simple enough to be widely used and communicated, sophisticated
enough for the needs of complex organisations.
Purposeful
Able to trigger action, not just defend it.
Before embarking on the core approach outlined, a business would need to go though a number of design,
planning and preparation steps to tailor the methodology to their own needs and ensure they are able to
implement it effectively.
Understand existing • How do you engage with them and how is stakeholder based learning and
stakeholder information is used to inform decision making
engagement • Is a single corporate level materiality process sufficient or do you need to
cascade this to multiple reporting streams?
• Are you seeking to assess materiality of issues and information for reporting
Decide on the scope
and/or for action?
and objective of the
materiality process • Is there commitment to the process and to reviewing and signing off its
conclusions at board level?
• Will the process and its conclusions be subject to external review and
Embed materiality assurance?
decisions into
• What information streams do you need to draw on to capture the views and
governance process
actions of all key stakeholder groups?
• What are you seeking to capture in your internal and external rating of issues?
Tailor the materiality • What thresholds do you need to set in order to generate useful results (e.g.
methodology to reporting thresholds, action thresholds)
reflect own context
• Do implementers have sufficient skills and knowledge of stakeholders, corpo-
rate strategy and specific issues?
Determine who needs • Are the people involved at sufficient levels of seniority to take decisions and
to be involved in the challenge received wisdom?
process • Have you recorded a clear description of the methodology (including key
assumptions)?
• Have you set up a system to keep up-to-date records of its application and
Make sure the
evidence of how the results were used?
methodology is
assurable • Are both materiality of issues and information included within the scope of
your assurance specification?
The core process is based on a cycle of three broad stages: identify issues, prioritise and review, embedded
within an ongoing process of strategy development and performance management, and reporting and stake-
holder engagement.
Use to inform Stage 1: Identify issues from a wide range of Use as the basis
future strategy: stakeholders and sources for publishing
v Constraints v Business strategies, reports, risk register information on:
v Opportunities v Company policies and commitments v Policies
v Best practice norms exhibited by peers and v Actions
highlighted in relevant standards; v Performance
v Stakeholder feedback and engagement
v Public debate in the media, campaigns,
parliament etc…
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3 indicates a neces-
In each of the following stages n
sary step and ≤ indicates an optional consideration.
Internal
Sustainable development strategy, KPIs and previous reports
business
Internal risk analysis and corporate risk register
priorities
Financial reports and regulatory disclosures (10K, etc.)
issues that may impact ability to deliver on its strategic objectives
Internal sources
with different Shareholder resolutions, SRI questionnaires and investor
parts of the queries
business Feedback received on previous reports
suppliers)
External sources
Report review committees or stakeholder panels, and
Dialogue within industry and multi-stakeholder groups and
initiatives.
Best practice norms
consensus as
Multi-sector standards and agreements
reflected in
relevant Peer based norms, sector standards and benchmarks
Media reports
Parliamentary questions, bills and government white papers
Issues and
Public opinion surveys
debates
Published research
Civil society campaigns
External
action.
Internal
P
number of complaints, survey results or a
RI
OR
External
Internal Internal
hand and whether it is significant enough to 3 Use the criteria, thresholds and evidence to
n
provoke stakeholder action (and at what level) prioritise each individual issue. Issues are
on the other. plotted on the matrix within zone, represent-
ing their level of significance to the organisa-
This may be a simple division into mate- tion and to its most significant stakeholders.
rial/not material categories or it could be Each zone should correspond to a commit-
more sophisticated, indicating a scale of ment to address issues in an appropriate way.
levels of materiality for example – thresh-
olds on the internal axis might sort issues Most companies have started by classifying
into strategic performance, operational the issues into three or more zones relating to
performance, compliance and not material the decision to focus on, include or omit an
categories. issue from reporting.
External Factors
In defining material topics, take into account external factors, including:
• Main sustainability interests/topics and Indicators raised by stakeholders.
• The main topics and future challenges for the sector reported by peers and competitors.
• Relevant laws, regulations, international agreements, or voluntary agreements with strategic
significance to the organization and its stakeholders.
• Reasonably estimable sustainability impacts, risks, or opportunities (e.g., global warming, HIV-
AIDS, poverty) identified through sound investigation by people with recognized expertise, or by
expert bodies with recognized credentials in the field.
Internal Factors
In defining material topics, take into account internal factors, including:
• Key organizational values, policies, strategies, operational management systems, goals, and
targets.
• The interests/expectations of stakeholders specifically invested in the success of the organization
(e.g., employees, shareholders, and suppliers).
• Significant risks to the organization.
• Critical factors for enabling organizational success.
• The core competencies of the organization and the manner in which they can or could contribute
to sustainable development.
Prioritising
• The report prioritises material topics and Indicators.
Closing the loop with strategy, performance and • To feed into ongoing strategy develop-
reporting ment by highlighting rapidly emerging
issues and enabling them to be factored
The endpoint of the materiality determination into strategy development and possibly
processes is a map of the issues that could drive addressed as business opportunities,
business strategy and performance now and in the rather than ignored until they become busi-
future. It illuminates not only what a business should ness risks.
report on but where strategy needs to be responsive
to changing social and environmental circumstances. 3 The materiality assessment should be reviewed
n
It can be used in a number of ways: regularly allowing both its criteria and assump-
tions to be revised if necessary and enabling its
• To determine the scope of corporate analysis to keep up with the shifting state of
reports and other communications so that the issues and corporate strategy.
they are more strategically aligned and
useful to external stakeholders. This has 3 Internal review of the results of the formal analy-
n
often been the initial primary purpose for sis should consider its implications for reporting,
such materiality assessments. The matrix risk analysis and strategy development.
itself and details of the process and findings
should be included in the report. Ford for • The matrix can be used as a basis to begin
example uses it as one index for their online more detailed discussions of data require-
sustainability report, enabling users to click ments, for example how much to aggre-
through from the matrix to what the busi- gate information across different parts of
ness is doing in relation to individual issues. business operations, how much detail to
report on, and what indicators to use.
• To promote internal understanding of
the link between sustainable develop- • Issues identified as material for the purpose
ment issues and business strategy. The of sustainability reporting should be
materiality determination provides a link considered for inclusion within mainstream
between issue experts and strategic and corporate risk registers and reporting.
operational managers.
Stretching the horizons of decision making One of the key challenges raised by practitioners was
the need for a Materiality Framework able to address
The businesses within this study that checked the different levels of control and influence. In part this
material corporate responsibility issues against may be addressed by future methodological refine-
corporate risk thresholds found that nothing new had ments, but it also calls into question governance and
crossed the barrier into the realm of financial materi- accountability in joint ventures. Governance, finan-
If businesses are going to succeed in understanding important now and in the future, and putting this
and shaping their environment in a way that information in the hands of the business leaders,
addresses urgent sustainable development chal- managers and stakeholders with the power to direct
lenges, they need a rigorous approach to materiality business strategy and influence actions.
which can direct, rather than just reflect perform-
ance. The Materiality Framework outlined here, Focusing the materiality lens on those sustainability
based on clear and transparent criteria, inclusiveness issues that could drive business strategy and
in engagement with stakeholders, alignment with performance is the most effective way to test busi-
corporate strategy and embeddedness in decision nesses’ real commitment to the sustainability imper-
making structures, offers the basis for such an ative. Businesses that deem issues to be immaterial
approach. It is compatible with leading standards that the majority of stakeholders consider important
such as the Global Reporting Initiative G3 Guidelines, are revealed as not having an embedded response.
the AA1000 Assurance Standard and ISAE3000. The ‘gap’ thus illuminated between issues consid-
ered important and those seen to be material is a
A rigorous and useable materiality lens on sustain- measure of a business’ will and capability to truly
ability issues can enable: respond to what stakeholders think should count.
The movement of issues, such as climate change or
v managers to make decisions in line with human rights, from the category of ‘important but
long-term objectives without being immaterial’ to ‘important and material’ is, similarly, a
hamstrung by an overwhelming focus on the measure of progress of business in reshaping their
more clear-cut short-term financial, compli- success models to deliver sustainability outcomes.
ance or technical goals. Real business leaders, those who have ‘got it’, can
be distinguished from those who are still primarily
v investors, partners and other financial focused on avoiding problems.
stakeholders to direct their financial and
organisational capital towards businesses that Advancing this approach to materiality has one addi-
can demonstrate they are fit for the future. tional, crucial implication in opening the way to a
progressive integration of sustainability and financial
v governments, civil society and other stake- accounting, assurance and reporting. Much of
holders to have a clear picture of which issues today’s traditional and regulated corporate disclo-
businesses are taking seriously, which would sures fail to illuminate businesses’ underlying,
make them better able to target criticism, longer-term prospects. The Materiality Framework
reward, regulation or contracts. set out in this report, based on emerging sustainabil-
ity practices, metrics assurance and reporting may
Of course no framework can be effective simply as a provide the missing link. The Framework extends the
mechanistic tool. Insightful judgement and good scope of measurement and reporting, to issues and
leadership remain crucial. Materiality drives perform- performance drivers that are not yet manifested in
ance by highlighting the issues that are likely to be market opportunities or risks, and have not yet been
Moving Forward
This report and Materiality Framework has been developed through the cooperation of leading busi-
nesses, assurance providers, research networks and standards developers, and it is these same actors
which have a large part to play in pushing forward developments in materiality:
v Businesses can build on the materiality concepts and processes outlined here and contribute
their experience to the open source development of an evolving Materiality Framework.
v Assurance providers will need to develop their approaches and competencies to attest to both
the strength of a business’s materiality assessments as well as the quality of information reported.
v Research and learning networks should continue to analyse and support ongoing develop-
ments in the practice of materiality by businesses and assurance providers.
v Standards bodies can build on this experience to develop clearer guidance on materiality deter-
mination and the links between issue materiality, information users and information quality.
Crucially, ongoing development, research and dialogue should bring together learning from the field
of sustainability reporting with developments in risk assessment, internal assurance and financial
reporting.
Businesses therefore need a robust and usable method for working out what is material, and for communi-
cating this credibly within the business and to investors and other stakeholders.
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The Materiality Framework outlined in this report is a practical and rigorous approach to determining the
strategic significance of social and environmental issues
3 It puts the business significance of sustainable development issues at the centre of corporate respon-
n
sibility thinking.
3 It is compatible with leading standards such as the GRI G3 Guidelines, the AA1000 Assurance Standard
n
and ISAE3000.
1 There are significant differences between the pressures and time horizons on organisations with investors and
customers, to those with voters and citizens, political masters and statutory clients, or funders and beneficiaries.
AccountAbility Forum (Issue 11- Autumn 2006) looks more widely at materiality practices across different sectors.
http://www.greenleaf-publishing.com/af/afframe.htm
2 This is a phrase coined by CK Prahalad and Stu Hart in 2002 to describe the opportunities for businesses to success-
fully market to the 4 million consumers with less than $5 per day to spend. The Fortune at the Bottom of the Pyramid.
Prahalad, C.K. and Hart, S.L “The Fortune at the Bottom of the Pyramid”, Strategy and Business, Fall 2002.
3 Time Magazine (2005) Getting Smart at Being Good ... ... Are Companies Better Off for It?, Monday, Dec. 12, 2005.
http://www.time.com/time/insidebiz/printout/0,8816,1139825,00.html
4 See for example, General Motors: http://www.gm.com/company/gmability/workplace/index.html or Volvo:
http://www.volvo.com/group/global/en-gb/Volvo+Group/our+companies/volvotechnologycorporation/vtecabout/
5 Context (2006) Global Corporate Responsibility Reporting Trends
http://www.econtext.co.uk/cover_scans/InContext2006.pdf
6 Forstater, M and Raynard, F (2002) CORPORATE SOCIAL RESPONSIBILITY; Implications for Small and Medium
Enterprises in Developing Countries, UNIDO, Vienna. http://www.unido.org/userfiles/BethkeK/csr.pdf
7 Knight, P (2005) Foreword to Corporate Responsibility Report FY04, Nike Inc.
8 AccountAbility/CSR Europe (2002) Impact of reporting, AccountAbility, London.
9 AccountAbility (2006) The Future of Transparency (forthcoming).
10 See for example AccountAbility (2002) The Impact of Reporting, Pleon (2005) Global Stakeholder Report 2005 and
Sustainability/UNEP (2002) Trust Us: The 2002 Global Reporters Survey of Corporate Sustainability Reporting.
11 S&P/UNEP/Sustainability (2004) Risk & Opportunity: Best Practice in Non-Financial Reporting The Global Reporters
2004 Survey of Corporate Sustainability Reporting.
12 Quoted in Pleon (2005) op cit.
13 Statement of Financial Accounting Concepts No. 2, Qualitative Characteristics of Accounting Information, Financial
Accounting Standards Board (FASB).
14 The EU Emissions Trading Scheme definition of materiality states that: “whether an individual or aggregation of omis-
sions, misrepresentations or errors that affects the information reported for an installation will reasonably influence the
intended users’ decisions. As a broad guide, a verifier will tend to class a misstatement in the total emissions figure as
being material if it leads to aggregate omissions, misrepresentations or errors in the total emissions figure being greater
than 5 percent. An emissions report and related disclosures shall be free of material mis-statement, avoid bias in the
selection and presentation of information and provide a credible and balanced account of an installation’s emissions”
15 AccountAbility (2006)What Assures? AccountAbility, London.
16 AccountAbility/World Economic Forum Roundtable on Investment quoted in Zadek (2006) The New Competitiveness,
Harvard Business School. (forthcoming).
17 Graham et al. (2004) “The Economic Implications of Corporate Financial Reporting”, Duke University, Durham
18 SustainAbility (2004) Video interview by John Elkington of George Dallas.
http://www.sustainability.com/insight/article.asp?id=278
19 AccountAbility 2003 AA 1000 Assurance Standard.