For true effectiveness, materiality consciousness must be embedded company-wide.
By Carol Adams
Part of the DōShorts series
Many years ago a group of accountants, sustainability leaders, advisors and activists and big accounting firms got together to develop a principles-based process framework to support organizational learning and “social and ethical, environmental and economic” performance. They drew on tried and tested accounting principles, adapting and applying them for “a path of sustainable development.”
From The AA1000 Framework to The International <IR> Framework
The AA1000 Framework was published in 1999, building on the work of many other organizations developing process or performance standards on single or multiple issues. The collaboration was an early example of “integrated thinking.”
The stated benefits of the 1999 approach included, amongst other things:
- An understanding of what matters about performance informed by stakeholders
- Better risk management
- Satisfying the demands for information from investors, including assessing the quality of management
- Facilitating the alignment of values, strategy, activities and outcomes
These ideas resonate in the language of the International <IR> Framework:
- Value creation for the organization and for others
- Identification of risk and opportunities
- Information for providers of capital
- Future oriented information and connectivity
Few Accountants Get The Message
By speaking to CFOs and corporate boards in a language they understand, the International <IR> Framework will, I hope, profoundly change business behavior. Accountants are the creators and keepers of knowledge about organizational performance and what they chose to measure and make visible gets managed and influences decisions.
The ideas in <IR> are not all new, but few accountants have got the message.
International Accounting Standard 8 defines material issues as those that influence the economic decisions of users, taken on the basis of the financial statements. Up until now, accountants have largely failed to capture issues that are not easily quantifiable in monetary terms, despite their likely materiality to economic, let alone social and environmental, decisions. This definition of materiality itself is arguably inappropriate in the context of worldwide social and environmental crises.
The issue is perhaps one of aptitude and timing.
And the timing is already too late for some. Accountants are only just beginning to understand the dependency of business success and the impact of business on nature. For example, the Puma Environmental Profit and Loss account attempts to put a price on Puma's environmental impacts.
Will <IR>, by recognizing the importance of value creation for the organization and for others in long term business success, address this failure of accounting?
The Materiality Report As Guide
Over the last few years, corporate processes for determining materiality for sustainability reporting have encompassed an increasingly broad range of issues not linked to sustainable development.
The Materiality Report (Forstater et al, 2006) demonstrates the benefits of linking the materiality process with strategy development, performance management and creating value.
Its Materiality Framework defines material issues as those that could make a major difference to an organization’s performance. Quotes in the Materiality Report from executives indicate that organizations were at that time already integrating materiality in annual and sustainability reporting processes.
Fuji Xerox Australia and the Royal Bank of Scotland Group
Fuji Xerox Australia and the Royal Bank of Scotland Group offer great examples of sustainability reports that identify material contextual issues on a whole of business basis.
The Fuji Xerox Australia Sustainability Report 2013 includes “responding to digitization through innovation” and “being customer centric” in the top ten material issues. Fuji Xerox Australia’s provider of capital, parent company Fuji Xerox Co Ltd, is included in the list of stakeholders and the company took steps in 2013 to involve staff in the final prioritization of material issues. They plan to develop this process linking it to risk and strategy.
The RBS Group’s 2012 Sustainability Report identifies customer trust and business lending as its top two “stakeholder issues.” The report’s list of top 14 stakeholder issues does not distinguish “sustainability” issues from others.
These examples show that processes for determining materiality for integrated reports already exist. But they need to be refined.
At an international level these processes have evolved through a collaboration between accounting and sustainability professionals. Such collaboration needs to develop at an organizational level and extend beyond the finance and sustainability teams to senior managers from all key functional areas.
About the Author:
Dr Carol Adams @ProfCarolAdams is a Director at Integrated Horizons consultancy and a Professor at Monash University. She is the author of Understanding Integrated Reporting: The Concise Guide to Integrated Thinking & the Future of Corporate Reporting (Foreword by Paul Druckman) published this week by Dō Sustainability which can be ordered here using code CSR15, for 15% off .