October 21, 2014

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Corporate Legitimacy & Doubling Down on Materiality: Prove It or Lose It?

It has always been a challenge to see how a materiality matrix frames the nature and extent of management and reporting of identified issues.

Dwayne_baraka_pro_photo

By Dwayne Baraka

Part of the DōShorts series

All of the big reporting frameworks are doubling down on materiality. Rightly so. It's time to prove that materiality is a worthwhile activity, or lose it from our vocabulary. GRI's G4 has much more stringent materiality requirements to show how companies arrive at their most important sustainability issues than under the G3. It's also core to the IIRC's Integrated Reporting framework. And although it uses a totally different definition of materiality, SASB is also doubling down on it. But how did we get here?

From "Redefining Materiality"…

Materiality has been gaining traction in the sustainability realm since 2003, when Simon Zadek and Mira Merme tried to conceptually replace 'shareholders' with 'stakeholders' in the U.S. Supreme Court's definition of materiality as it related to investors andDwayne Baraka_LR investment decisions. Their thinking, published in the AccountAbility brochure "Redefining Materiality," didn't quite achieve that, but it did keep momentum moving toward CSR issues being taken more seriously as an important factor in corporate performance.

It also gave rise to a whole lot of discussion among CSR and civil society sectors about how much transparency should be required of companies, and also how to determine which issues companies should be required to report on, as well as which CSR issues were most relevant.

That approach has its roots in the battle between Milton Friedman and R. Edward Freeman on the validity of shareholder and stakeholder approaches as a basis for corporate legitimacy. That debate still isn't settled, and although some commentators insist that there is a fiduciary duty on directors to make as much profit for shareholders as possible, CSR and stakeholder approaches to understanding corporate value creation have gained a lot more traction than they had when the AccountAbility booklet was published.

…to Compliance sans Commitment

GRI inserted a materiality test into the G3 in 2006, but it was always difficult to see any serious commitment from companies on talking about how they determined their most important sustainability issues. Companies instead seemed to be focused on compliance with a long list of metrics, a fair response to the compulsory nature of most metrics.

However, GRI's decision to include a test for materiality is, at least, in part responsible for the commonality of the materiality matrix today. And while that is a welcome development, the materiality matrix has often been something of a disconnected and sundry process, abstracted from business-as-usual processes. Try to dig behind most materiality matrices and they fall over because they aren't supported by or support normal business processes.

Moving Beyond the Complexity of a Materiality Matrix

It has always been a challenge to see how a materiality matrix frames the nature and extent of management and reporting of identified issues. Which is a real shame, because a decent materiality-matrixmateriality process can help companies identify strategic opportunities, properly allocate resources between CSR projects and frame high-quality, stakeholder driven reporting.

Getting more traction from a materiality matrix has also been difficult because of companies' inability to balance competing stakeholder interests as well as the continued tension between driving actionable conclusions from the materiality matrix and concerns about transparency. There is also concern that CSR initiatives aren’t or won't be profitable, and therefore shouldn't be talked about in the same way as financial issues. [For more on the history of materiality and transparency, read Sustainability Reporting guru and CSRwire Talkback Contributor Elaine Cohen's article.]

What's Different About Materiality in 2014?

Now that it's 2014, what's different about this round of focusing on materiality?

One of the differences is that there are many robust studies that now show the importance of CSR for value creation, and many kinds of 'business case' arguments for CSR. Another significant development has been SASB's return to the traditional definition of materiality, but with a sustainability spin as a way to get sustainability issues incorporated into corporate reports, and managed using the same kind of risk modeling that often drives Board behavior. SASB has also started to provide industry-specific measures for companies to report on the most 'material' sustainability issues.

The result: CSR issues are more mainstream today than a decade ago.

Meanwhile, GRI and IIRC are asking companies to reach far into their supply chains to understand how important CSR issues are to their business. At the same time, both reporting bodies are explicitly asking companies to report in some detail how they determine their most important issues, identify why they are important and provide details of expected performance on these critical issues.

Those last three things, however, are sadly lacking from most current corporate reporting, as highlighted by repeated surveys (such as this one) that suggest companies are not doing enough to tell investors which CSR issues matter the most and what companies are doing about them. So, again, now what?

Better Focus, Better Integration, Better Performance

A much greater focus on integrating stakeholder perspectives and external feedback, might be the best step forward to address the current lack of traction of the most relevant CSR issues in many companies [See framework below].

Materiality-Process

A focus on materiality means better prioritization of the thousands of CSR issues that face companies and making the ones that matter most become business as usual issues. With a stronger sense of why their top CSR issues really matter and a focus on future performance, we should see much sharper reporting of CSR issues and a higher quality use of the materiality matrix, which should in turn result in better quality sustainability reporting.

Strangely, in spite of the wildly different definitions they have of materiality, and very different paths, SASB, IIRC and GRI all seem likely to increase the requested levels of disclosure and management of the most relevant CSR issues from companies.

And companies that don't double down on materiality and start to do a better job of proving that they understand their most important CSR issues will inevitably start to see a decline to their corporate legitimacy.

Editor's Note: Join author Dwayne Baraka for the Mastering Materiality course June Wednesday, 4 June 2014 from 10:00 to 16:00 (BST), London, United Kingdom.

About the Author:

Dwayne Baraka (@baraka_dwayne) is Founder of valueCSR and the author of Making Sustainability Matter - How to Make Materiality Drive Profit, Strategy and Communications. CSRwire readers can use code CSR15 to save 15% off books or single-user subscriptions in the DoShorts Sustainable Business Collection.

The opinions, beliefs and viewpoints expressed by CSRwire contributors do not necessarily reflect the opinions, beliefs and viewpoints of CSRwire.

The opinions, beliefs and viewpoints expressed by CSRwire contributors do not necessarily reflect the opinions, beliefs and viewpoints of CSRwire.

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