G4: It’s all about materiality

As I reflect on the proceedings here in Amsterdam, less than 24 hours after the official release of the new GRI G4 guidelines, the underlying theme is clear: it’s all about materiality. Regardless of whether you seek the “core” or “comprehensive” in accordance with GRI option (which replaces the A, B or C levels), the new/enhanced governance disclosures around the materiality process are the same. Not only do you have to list all the aspects you determined to be material, but you need to specify where the aspects are material -- in which parts of your organization or upstream or downstream in your value chain. You also need to describe the underlying process used to determine materiality.

The difference between “core” and “comprehensive” lies in the disclosure of specific indicators: “core” requires disclosure of only one performance indicator for each material aspect whereas “comprehensive” requires disclosure of all G4 performance indicators relevant to each material aspect. In both cases, you must include a Disclosure on Management Approach (DMA) for all material aspects.

There is both good news and potential concerns about this new emphasis on materiality (strongly reinforced in various presentations by GRI representatives). As Carol Singer, executive director of National Association of EHS Management, remarked, “It reminds me of ISO 14001 management system approach,” where an organization can apply its own process to determine what its significant aspects are and what needs to be managed in its environmental management system.

The following positives and areas of concern about the new criticality of materiality assessment process reflect my own views as well as discussions with a number of GRI conference participants, including Rick Pearl of State Street Corporation and Leo Perkowski of AES Corporation.

On the positive side, this will help avoid the problem of spending time collecting data and reporting on performance indicators that are, objectively, not all that important. It will help make reporting a more strategic/targeted process and less of a check-the-box activity. Could this process even result in meaningful information to feed into the company’s strategic planning and annual operating planning processes or its enterprise risk management process? Hopefully, this will result in shorter and more focused reports that will be read by more people and will be more useful for readers.

There are a number potential issues and concerns:

Screening out important issues: Some may argue there is too much flexibility and the process has the potential to result in companies setting the materiality bar too high (or setting it unevenly), leading to selective reporting. Could reporters avoid issues they prefer not to talk about?

Comparability: The ability of investors or other external stakeholders to compare programs and results across companies in the same sector could be compromised as companies decide not to report on certain issues -- for example, if one mining company or electric utility reports on water use and associated programs globally and another company in the same sector only reports on water use in water-scarce regions.

Sector-specific issues: Indicators in sector supplements are no longer required to be reported on unless the associated aspects are determined to be material. During one GRI conference panel discussion, a panelist commented that maybe industry associations could help fill the gap by specifying material issues to be addressed. My feeling is that a full complement of sector supplements that identify specific issues that should be addressed at least in the DMA would be an improvement. Of course, Sustainability Accounting Standards Board in the US is in the midst of an ambitious multi-year project to define key performance indicators for a full range of industry sectors. How will those fit in as they are completed?

Process design: There are a number of issues here.

The materiality assessment process is scalable. We’ve worked with companies who spend person-days on it and others who spend person-weeks (or more!). Analysis quality is very uneven. This is similar to the situation with G3.1, but it may be more of an issue now with the more critical role the materiality assessment process plays.

  • Will the process focus on material issues during the reporting period or ones likely to be relevant in the years ahead (something investors and other stakeholders are likely to be more interested in)?
  • When determining materiality -- material to who? Material to the company or society in general? A panelist representing labor voiced concern that labor practices will be screened away as not being material.
  • Will companies screen out issues based on their opinion that they are currently being managed effectively? We’ve seen this before with ISO 14001, where aspects were determined to be insignificant based on the company’s assessment of controls in place.

The extent to which these issues are problematic and result in less credible reports remains to be seen. Let's hope companies will take care to anticipate and address them as G4 takes root.