Ford, Shell and Anglo American show why materiality matters

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Ford, Shell and Anglo American show why materiality matters

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BrownFlynn recently got a firsthand look at the G4 guidelines and summarized the top nine things one needed to know. No. 1 on this list: "Materiality is a must."

While previous guidelines encouraged companies to determine materiality, they tended to focus on the number of indicators reported on and the application level achieved. The G4 guidelines explicitly require reporting efforts to focus on materiality, with the first step in the process being a robust materiality assessment followed by disclosure of material topics.

In the wake of the release of the highly anticipated G4 guidelines, organizations have no choice but to determine what to include in a report and what not to include. Or, more specifically, they must now determine what is and is not material to their organization. The G4 guidelines aim to better answer this question, among others, and urge organizations to gain a clearer picture of what matters to them, where it matters and why it matters.

Easy, right? Not quite. But there is a silver lining. As Theodore Roosevelt famously said, "Nothing in the world is worth having or worth doing unless it means effort, pain, difficulty ..."

So, is conducting a robust materiality exercise worth it? We assert that organizations that have undergone thoughtful materiality processes are those that are making the most progress, realizing top-line growth and bottom-line savings, gaining internal and external stakeholder trust and, ultimately, achieving superior financial results.

Reports image by Federico Rostagno via Shutterstock.

A good example of a robust materiality assessment comes from Anglo American. In their Sustainable Development Report 2012, they dedicate two full pages to explaining how they assess material issues and the process they employ to determine materiality.

Anglo American takes into account its direct impacts as well as broader social, environmental and governance issues and trends. They employ annual internal risk management and stakeholder engagement processes to help them identify these material issues.

Furthermore, they assess the effectiveness of these processes annually to ensure they are yielding the correct results. As seen in the chart below, Anglo American identifies risks; analyzes these risks and controls to manage these risks; determines management actions required; and reports on these risks and continually monitors these risks for future management and reporting.

Having a robust materiality assessment and sustainability program helps companies emerge as sustainability leaders in general, as well as in their specific sector. It also helps companies yield better financial results and enhances brand reputation.

For example, Anglo American is eighth in the global materials sector on the Newsweek Green Rankings; second in the global materials sector on the CDP 2012 Climate Performance Leadership Index; and their Socio-Economic Assessment Toolbox (SEAT) won the International Association for Impact Assessment's (IAIA) 2012 "Corporate Initiative Award." SEAT identifies an effective process that helps create and implement corporate sustainable development policies. Launched in 2003 and enhanced in 2007 and 2011-12, SEAT has been implemented at all Anglo American operations across the globe.

Anglo American's materiality assessment

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Shell and materiality

Another good example comes from Shell.

They stress that their sustainability reporting focuses on the environmental and social challenges that matter most to their key stakeholders, and they use the process below to determine materiality.

Notice that, like Anglo American, Shell takes into account broader sustainability trends and issues, such as the WBCSD Vision 2050 report, as well as those that are significant to their stakeholders. This helps to keep issues in perspective and more accurately determine what is actually material versus what is perceived as material.

Also note that it is a fairly simple matrix to understand, demonstrating the point that materiality does not have to be complicated to be useful.

Shell has been included on the FTSE4Good Index since its inception in 2001 and was in third place amongst international oil companies in the Goldman Sachs GS SUSTAIN ESG, which focuses on sustainable investing in the energy sector.

 

How Shell determines materiality

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ford and materiality

Lastly, Ford takes an approach of casting a wide net and narrowing down topics via a three-step process.

After reviewing all necessary and appropriate documentation of possible material topics, Ford then notes the frequency with which these issues occur and mark each as low, moderate or high for current or potential impact on the company in a three- to five-year timeframe, as well as degree of concern to stakeholders (by stakeholder group).

From here, ratings are averaged separately according to the company and to the stakeholder, and then plotted on the matrix below. Again, notice the simplicity and accessibility of this matrix.

Even better is that each company not only publishes its materiality matrix, but its approach to materiality, rationale of material topics and any other supporting information.

Ford received the Earth Angel Award in 2012 for Most Earth Friendly Car Company and was 50th on the 2012 Newsweek Green Rankings (first in the vehicles and components sector).

Ford and materiality

 

 

 

 

 

 

 

 

 

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The GRI Global Conference happened to occur at the "end" of the reporting season so to speak, when many companies are winding down the reporting process and/or publishing their reports. This is a good time to reflect on the recent reporting season, share lessons learned and best practices, and study the current trends to see if any can be incorporated into the next reporting cycle. Another new aspect of the G4 guidelines is the dependency of scope and boundary on materiality. In the G3 and G3.1 guidelines , these reporting elements are slightly separate from each other, but in the G4 guidelines, boundary is determined during the materiality assessment. Scope is based on a company's impacts, risks and opportunities, and boundary may be different for each material topic depending on these different impacts.

Not only is materiality an effective way to manage sustainability impacts, risks and opportunities, but it also helps in establishing an effective sustainability program and driving positive organizational change. By regularly assessing material topics, an organization is able to effectively monitor and manage its impacts while keeping up with sustainability trends and potential issues.

So, in the end, is materiality challenging? Yes. Is it worth it? Absolutely.