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GreenBiz 101: The core of materiality? What matters most

Published July 22, 2014
GreenBiz 101: The core of materiality? What matters most

If you're a sustainability professional who got his or her start in environmental affairs, chemistry or toxicology, the word "materiality" probably wasn't part of your core curriculum. But the concept may be invaluable when it comes to prioritizing sustainability initiatives and communicating progress toward them — especially as awareness of these matters grows in the chief financial officer's office. With that in mind, we offer this brief accounting lesson.

What is materiality?

Practically speaking, materiality has its roots in corporate finance departments as part of generally accepted accounting principles. Here's the one-sentence definition most people throw around: "Information is material if its omission or misstatement could influence the economic decision of users taken on the basis of the financial statements."

Materiality is a guidepost for disclosure and reporting. An expense or write-off, therefore, would be considered material if the amount involved would affect how an investor or other stakeholder might value the company. A loss of $1,000 to a company with $10 million in revenue, for example, probably would be considered immaterial and unnecessary to disclose. But if the amount involved is larger — say, $100,000 or $1 million — good judgment suggests that it should be reported.

When you apply the concept of materiality beyond financials to environmental, social and governance factors, the rationale for disclosure takes on qualitative dimensions — many of which have no clear value. Often, the ESG factors are related external factors that may be a risk to revenue or income. The manner in which a beverage, food or semiconductor company reports on water conservation initiatives, for example, would differ dramatically from how these matters are considered by a financial services or construction firm.

Why is materiality increasingly relevant for sustainability reporting?

Discussions about materiality were thrust into the forefront of sustainability strategy and reporting dialogues with the release of the Global Reporting Initiative G4 framework in May 2013, which more explicitly names materiality as an integral part of sustainability reporting.

GRI's framework accounts for issues that have a "direct or indirect impact on an organization's ability to create, preserve or erode economic, environmental and social value for itself, its stakeholders and society at large." Yep, that definition covers plenty.

As already suggested, the concept of materiality is highly industry-specific. The 2013 GlobeScan/SustainAbility Issues Survey, which reflects the opinions of 881 sustainability executives from 91 countries, classifies the following as concerns that require both high levels of accountability and urgency: climate change, air pollution, access to energy, water pollution, bribery/corruption and biodiversity loss.

Credit: Africa Studio via Shutterstock

While most of the world's 250 largest companies disclose information about exposure to these factors, almost all of those disclosures currently are part of sustainability reports that live separately from traditional financial statements and annual reports. But those lines are beginning to blur, thanks to the push for integrated reporting.

"For many companies, the problem is not a lack of ESG issues that are important to stakeholders, but when and why these issues might become financially material," wrote two Deloitte experts on this matter, in an article for GreenBiz.

"This is particularly difficult for ESG issues because they are often related to externalities and are not properly priced in the marketplace. Thus, without a clear price signal, figuring out materiality is a more subjective rather than objective, endeavor especially if you are only looking at it from a traditional financial statement standpoint."

How does an organization assess materiality?

Figuring out which data is really important to external stakeholders — whether you're talking about employees, investors or the communities in which a company does business or operates facilities — is the high-level aim of materiality assessments.

This process involves convening meetings between sustainability teams, financial departments, line-of-business managers and other stakeholders. This will guide not only which factors demand attention but how that information should be presented, and to whom it should be disclosed.

"The best way to ensure engagement at all levels is to start with the C-suite and board of directors," Michael Muyot, president and founder of CRD Analytics, told GreenBiz in fall 2013. "If they don't agree to participate, that's a big red flag and almost a sure sign that project either will fail or be lackluster in its findings and recommendations."

What best practices are available to help with materiality assessments?

The sustainability reports of many high-profile companies are sprinkled liberally with mentions of where materiality assessments have been performed — from Anglo American (PDF) to EMC (PDF) to Marks & Spencer to Nestle to NextEra Energy to Sprint (PDF).

Accordingly, an increasing number of third-party consulting organizations are focused on assisting with facilitation. In addition, GRI, the International Integrated Reporting Council (PDF) and Sustainability Accounting Standards Board all offer specific guidelines regarding materiality that can provide a framework.

Credit: Liljam via Shutterstock

One common refrain is the suggestion to embed assessments into everyday decision-making at senior executive levels; the table stakes includes an annual review. Unfortunately, the approaches laid out by each organization is slightly different. IIRC's emphasis, as you might expect, takes the position that investors will take a longer-term view that inspires companies to take a more analytical look at the non-financial factors that create corporate value. SASB is "betting" that regulatory bodies will dictate the way material issues should be disclosed. And GRI leans heavily on the role of external stakeholders.

"For both SASB and IIRC, the level of materiality ascribed to an issue that is important to nonfinancial stakeholders is entirely contingent on how much it influences decisions and assessments made by the providers of financial capital. … By contrast, for the GRI, the opinions of stakeholders have value in their own right, regardless of investors," wrote BSR managing director Dunstan Allison Hope and advisor Guy Morgan in an August 2013 GreenBiz article, How to navigate the maze of materiality definitions.

Why haven't more companies embraced materiality within their sustainability programs?

That disconnect and fear of the unknown are the things that makes materiality such a difficult concept for many sustainability managers to grasp right now. Some companies might worry that disclosing certain information will result in the loss of competitive advantages, while others are reluctant to discuss matters that are not entirely within their control. Still others may struggle with quantifying the cost implications.

"What really matters is how companies adopt or change each approach and how credible the resulting reports are for their users," wrote Hope and Morgan. "If the past 20 years of corporate responsibility have taught us anything, it's that we're all better off when companies create approaches that work in the real world."

Top image of calipers measuring dollar plant by Sergey Nivens via Shutterstock.



What makes the LEED Dynamic Plaque a game-changer?

Published July 22, 2014
What makes the LEED Dynamic Plaque a game-changer?

When the U.S. Green Building Council makes big changes to its systems or standards, the real estate industry takes notice — and with good reason. Its main initiative, LEED, has an outsize impact on the real estate industry, from building materials to investment criteria — and any major changes to the system have the potential to greatly affect green building for years to come.

Although you may not have heard more than a tidbit about the LEED Dynamic Plaque ahead of its launch earlier this year, make no mistake: This is the sort of innovation that drives widespread change.

Even for a building, a year's a long time

Without getting too deep into the technical details (USGBC explains it more extensively in a live web demonstration), the LEED Dynamic Plaque is an add-on to existing LEED certifications. It introduces an ongoing performance element to the traditionally static scheme. It's a platform — both physical and virtual, publicly displayed on an existing LEED building's site — that's designed to help property owners monitor, benchmark and update their LEED scores in five areas: energy, water, waste, transportation and occupant experience.

While a building's official score is recorded just once a year based on a recertification schedule, the Dynamic Plaque updates as frequently as it receives new information. For example, if your building has a LEED score of 72 but you think it could be higher, you might send out transportation and occupant experience surveys and perform a waste audit to look for potential improvements. After improvements are made, you can provide the platform with new data and the LEED score will be recalculated instantly.

Credit: U.S. Green Building Council

Faster adoption of improvements

Why is this system such a potential breakthrough? Consider the following abridged version of how the commercial real estate industry makes decisions about green building: Investors want to make sure that their real estate investments carry minimal risk and maximum appropriate return. For some investors, particularly pension funds such as CalPERS, sustainability is finding its way into these calculations.

Asset managers are then tasked with implementing an investors' plan. Many real estate asset management groups (think Bentall Kennedy, TIAA-CREF and Prudential Real Estate Investors) view green building as a way to minimize risk and improve returns — and LEED certifications are an accepted standard for implementing sustainability in a commercial real estate portfolio. Therefore, we find more asset managers want to know if potential acquisitions are LEED-certified, as well as an increased willingness to pursue LEED for existing portfolios.

[Learn more about next-gen buildings at VERGE SF 2014, Oct. 27-30.]

The responsibility for pursuing LEED certification typically falls on the property management firm, a green building consultant or both. Major property managers such as CBRE and Cushman & Wakefield have boosted their internal capabilities to handle the increased demand for LEED.

However, the relatively static nature of LEED certification leaves the system open to criticism that it is more about strategies than performance. In reality, we see some asset and property managers who consider LEED as a sort of "set it and forget it" commitment. By further opening up LEED certification to continuous monitoring, the LEED Dynamic Plaque allows investors, asset managers and even tenants to demand an actively managed LEED score.

Engage the occupants

What does an active score mean to the commercial real estate industry? Everyone working to make their buildings more energy-efficient knows the phrase "you can't manage what you don't measure" by heart, but not everyone may be as familiar with the closely related, "what gets measured gets scrutinized, written about, argued over and eventually added into contracts." By making it feasible to include something such as regular occupant surveys into an accepted sustainability standard, USGBC is attempting to rewrite how the industry defines sustainable operations.

Credit: U.S. Green Building Council

For example, picture a large national office user with a significant commitment to sustainability that includes targeted reductions in energy, waste and water over a certain time period. The company already requires LEED or ENERGY STAR certification for most office locations. Through the LEED Dynamic Plaque, however, the company's real estate team can ask landlords to more frequently report on those targets at each location, as well as conduct regular occupant satisfaction surveys. They can ask that the LEED Dynamic Plaque score never drop below 70, or that occupant satisfaction never dip below 80 percent.

Similarly, consider an asset manager deciding whether to renew a property management contract. If the hiring decision already considers the manager's ability to help the property achieve LEED or ENERGY STAR, why not go one step further and incorporate new elements of the LEED Dynamic Plaque platform?

Dynamic Plaques motivates more players

Could a sustainability-minded asset manager ask prospective property managers for an annual score increase? Or, if some of those goals already exist in the property management contract, could they be managed more collectively through the new platform?

The LEED Dynamic Plaque is exciting because when a market standard as big as LEED introduces a new option, it speeds up the adoption process. Performing a waste audit is not a groundbreaking idea. Performing a waste audit to bump up the LEED score that your building's occupants can see as they walk into the lobby every morning — now that has the potential to motivate an industry.

Learn more about this in person from LEED senior VP Scot Horst  at VERGE SF, Oct. 27-30. Top image of LEED Dynamic Plaque Survey by U.S. Green Building Council.



How to make the most of your sustainability Master’s degree

Published July 22, 2014
How to make the most of your sustainability Master’s degree

If you have a question for Shannon, send it to shannon@walkoflifeconsulting.com.

Dear Shannon,

I'm a recent graduate with a bachelors in environmental management, and am now looking at whether I also need a masters. I'd like to work in corporate sustainability, so have been investigating Green MBAs and CSR courses at various universities in the U.S. and Europe, as well as doing online research. But the more I read the less certain I am that a masters is worth the investment. If I decide to proceed, how can I make sure it's worthwhile? Is work experience more valuable to an employer than a degree?

Elizabeth, New York

 

Dear Elizabeth,

I'm so glad you asked! It's one of the biggest dilemmas facing sustainability job seekers and one of the most common questions I get asked by career-coaching clients looking to transition into impact and CR roles. You've already made a huge investment in going back to school for your undergrad, and now you're naturally asking yourself whether you really need that masters. Annoyingly, the answer is yes and no.

There is a distinct trend in the sustainability jobs market showing that companies are hiring from within. This points to the importance of on-the-job experience and a deep knowledge of the industry, the company and its products or services. Practical, tangible work experience is worth its weight in gold in the sustainability space. But at the same time, everyone has a master's degree these days and the competition is fierce. By not having one and pitting your CV alongside others that do, you might be shooting yourself in the foot.

Master's degrees are expensive, intense and time consuming, and not — I repeat, NOT — guaranteed to get you a job. The belief that you can walk out of your masters graduation ceremony and into a great role is outdated. Besides, most university career centers don't understand the sustainability jobs market and only give generic advice. If you decide to go for it, it's up to you to make the most of your master's degree and squeeze out every last drop of opportunity. Here are some tips on how to do just that.

Before you start your masters ...

A masters helps you to build your networks and your knowledge, but it doesn’t automatically convert into a career change. You have to own that process and make it happen — that's why it's important to have realistic expectations of what your masters will do for you.

In her recent GreenBiz article, Nikki Gloudeman highlighted a few key questions to help prospective students determine what type of sustainability program is right for them, and pointed out some top programs in the U.S.

The point is, owning the process involves taking the bull by the horns and developing a career positioning strategy, of which the program itself will only be one aspect. Map out:

  1. the reasons why you chose the program,

  2. the key people you want to network with during it,

  3. what tangible takeaways you want to leave with, and

  4. how you plan to achieve them.

Pin it up somewhere prominent in your study space.

During your masters ...

Sustainability is a broad topic with branches that reach into all aspects of business so you'll need an overview of the entire agenda. The jobs market tends to value specialists now more than generalists. So to get a job, you also need to have detailed knowledge in one or two particular areas.

Pick your specialism now and plan to focus all your coursework and networking on this one area. It could be energy, climate change, natural capital, poverty, sustainable supply chains or women's empowerment, for example.

Leverage your dissertation, a consulting class or practical project to show hands-on corporate sustainability experience on your CV with an accomplishment statement like this:

"Led an MBA team of four to develop and propose new business models for client, Unilever, to bring distributed energy solutions to emerging markets and align with its Sustainable Living Plan."

Then give yourself a head start by kicking off your personal branding and job search six to nine months before graduation. Personal branding involves writing a compelling CV with 12 tangible accomplishment statements, designing a 2,000-character bio that translates into a LinkedIn summary, and also building your online presence through blogging your thought leadership on Twitter and LinkedIn. It's important to allow plenty of time for the job search process. With the tight competition six months is a minimum to start building your networks (remember, most roles are landed via word-of-mouth referrals) and getting the word out about what you are looking to do next.

After your masters ...

Make the most of your alumni network by getting active on social media. LinkedIn is particularly good for this — there may already be an alumnus group for your program, so join it and reach out to others who are already doing your dream job by sharing relevant articles or asking career questions. Always good to ask others about their career journeys and how they got where they are, lessons learnt, advice they may have for you. People love talking about themselves.

Lastly, make sure to stay connected to your university and give back where you can. Offering to speak at events and conferences to engage future students is a great way of maintaining that link with your old lecturers, some of whom might have professional contacts of value to you. This also allows you to build credibility and show leadership abilities. And don’t forget to put this on your CV. It's a two-way street and you get what you give, so be as generous as you can.

Good luck embarking on this next stage of your education. University is a fantastic opportunity to look beyond your day-to-day horizon and take the baby steps to get you where you want to be in three to five years. Let me know how you get on! And in the meantime, if you'd like some one-on-one support on aligning your educational opportunities to your future career, get in touch with me for a free 15-minute consultation.



Why addressing low-income poverty is good for business

Published July 22, 2014
Why addressing low-income poverty is good for business

For the first time in decades, NGOs, foundations and mainstream media are speaking optimistically about the end of poverty. Between 1990 and 2010 over 1 billion people lifted themselves out of poverty, an upwards-social mobility that Bill Gates argues has “completely redrawn the global picture of poverty.” While abject poverty, defined as living below $1.25 a day, might be on its way out, the increase in low-income poverty and inequality is changing the conversation about what it means to be poor.

Low-income poverty does not mean lack of access, but otherwise lack of access to quality. It does not mean being on the lowest rung of the socio-economic ladder but otherwise being unable to bridge the continuously widening space between low-income and middle class. As low-income poverty continues to be an unrelenting social issue, the business community will be pressed to interact with and account for that population for the following reasons:

Low-income populations are a company’s employees. Addressing poverty among a company’s employees requires changing a company’s wage standards, developing individuals’ capacities and increasing benefits. Proactively doing so increases productivity and has reputational benefits; abstaining is a material risk. Some companies, such as Gap, have increased their minimum wage, while other companies, including Apple, GM and Ford, have committed to redesigning their hiring practices to avoid discriminating against the long-term unemployed. Starbucks has been particularly proactive on this issue, providing employees with decent wages, stock and retirement benefits, and healthcare.

Low-income populations are consumers. Low-income populations have purchasing power. Even if it’s marginal, how and what low-income populations buy affects a company’s bottom line. While it is an unfortunate reality that low-income populations have, in the past, been forced to buy less expensive, lower-quality food, medicine and life necessities, trends suggest that this is changing. A new partnership between City Harvest, NYC health officials, and Cash and Carry (a wholesale warehouse in the Bronx) for example, is bringing healthier food to New York City bodegas, which often service low-income populations. Similarly, governments in India and South Africa are invoking their right to use compulsory licensing to bring down the cost of medicine for their populations. Companies have a choice — they either can improve the quality and price of the products they offer to low-income populations or they can risk losing an important consumer segment as better alternatives emerge.

Low-income populations are the new supply chain. Supply chains are changing. Once defined by labor abuses and lack of career prospects, supply chains are now expected to be workplaces with human rights standards, career development processes and wages that allow for decent living outside the factory walls and farmlands. As access to the Internet increases, supply chain workers are realizing that they have choices and rights beyond a minimum wage. In China, workers are demanding better benefits, wages, and working hours. In farming regions, the children of farmers are choosing to urbanize to find better career prospects that will move them out of the cycle of poverty that often plagues farming generations. To ensure continuity of product supply and labor, companies must work to build capacity, favorable workforces, and career progression programs that will retain employees. Furthermore, increasing career prospects and wages in a company’s supply chain has proved to be financially profitable. Impactt’s Benefit for Business and Workers recently conducted a study on the impacts of higher wages among factory workers and found that increasing pay leads to an 18 percent gain in efficiency and reduced absenteeism by 34 percent.

Low-income poverty always has been a social issue but has often been overshadowed by the prevalence and devastating effects of extreme poverty. Whereas eradicating extreme poverty lay in the hands of NGOs, governments, foundations and aid organizations, eradicating low-income poverty can be most deeply influenced by business. Companies can change their hiring practices and wage-policies as well as develop products that are affordable, high-quality and meet the needs of low-income populations.

Beyond benefiting society, helping bridge the equity gap just makes good business sense.  

Top image: Bangladesh garment workers at a Dhaka factory by Primenews.

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9 key trends in corporate sustainability reporting

By Victoria Knowles
Published July 21, 2014
Email | Print | Single Page View
Tags: Business Models, Business Operations, More... Business Models, Business Operations, Commitments & Goals, Corporate Reporting, Data Centers, Measuring, Reporting, & Verification, Reporting & Transparency, Social Responsibility, Socially Responsible Investing
9 key trends in corporate sustainability reporting

Nearly three-quarters of sustainability professionals ranked CSR above seven out of 10 in relation to their business objectives (with one being low and 10 being high.)

Meanwhile, most organizations dedicate between $34,000 and $84,000 of their budget to CSR reporting activity.

These are just some key findings from a recent 2degrees CSR reporting survey, which aims to help organizations identify key trends in CSR reporting, stakeholder engagement and materiality.

In total 110 organizations were surveyed, most of which indicated that transparency with stakeholders, promoting their sustainability progress or successes and reputation management were their main motivation behind CSR reporting. Meanwhile, the main benefits of reporting were cited as enhancing reputation both internally and externally and stakeholder engagement.

In terms of the stakeholder groups, customers are overwhelmingly the target, identified by just under half of respondents (45 percent) as being most important to their CSR strategy. Meanwhile, suppliers are clearly still new to the agenda, with only 3 percent aiming their efforts at this group.

And what about the challenges around reporting? The biggest hurdle for respondents overwhelmingly was time, getting people to read the report and stakeholder engagement and dialogue.

The most popular time of year to publish the report was Q2 (35 percent) with just over half (54 percent) regularly communicating CSR updates throughout the year alongside the annual report.

Following the results of this survey and the CSR reporting challenges it has highlighted, 2degrees, in partnership with PE International, will run a peer-to-peer event around this topic Sept. 17 in London. The event is by application only; for more details and to register your interest, please get in touch.

This survey was conducted as part of the 2degrees Stakeholder Dialogue Service. Find out more.

Click chart below for larger image.

This article originally appeared at 2degrees.

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    Why we need a national infrastructure bank

    By Leanne Tobias
    Published July 21, 2014
    Email | Print | Single Page View
    Tags: Finance & Job Creation, Funding & Finance, More... Finance & Job Creation, Funding & Finance, Government
    Why we need a national infrastructure bank

    In 2011, I journeyed to Taiwan to attend the green unveiling of the Taipei 101 skyscraper, the world’s tallest LEED Platinum retrofit. At 101 floors with the fastest ascending elevator on the face of the planet — 37.7 miles per hour — Taipei 101 was mighty impressive. 

    But even more impressive was the body of infrastructure and building construction being carried out by the project’s manager, Siemens, throughout East Asia. As I recounted then for GreenBiz, Taiwan, Hong Kong, Korea and mainland China have been rebuilding themselves — and increasing their competitive positioning on the world stage — at a time when the U.S. has been standing still.

    The disturbing realization that the U.S., despite its technological prowess, might be falling behind other nations has stayed with me. My concern about American economic competitiveness is why I’ve become increasingly engaged on infrastructure over the last two years, including highways, roads, bridges, water, wastewater and solid waste facilities, the energy grid, schools and other public buildings. Infrastructure represents the critical underpinning of America's local and regional economies. "First class jobs gravitate to first class infrastructure," President Barack Obama noted in his 2014 State of the Union address.

    First class infrastructure increasingly is defined as sustainable infrastructure. Upgrading of the electricity grid and greater use of energy efficiency strategies by utilities, businesses and households both will control long-run costs and reduce our carbon footprint. Green strategies, including the use of environmentally sound stormwater management techniques and advanced recycled materials, are also being incorporated into the improvement of roads, waterways and flood barriers to enhance project performance and reliability at reduced cost relative to conventional approaches. Life cycle planning, to ensure cost-effective construction and maintenance over a project’s useful life, is now entrenched in infrastructure best practices. Envision, a sustainable rating system, also has been introduced by the Institute for Sustainable Infrastructure.

    Despite the growing interest in sustainable infrastructure, the heightened concern is well founded. The nation’s infrastructure earned a grade of D+, barely passing, in the American Society of Civil Engineers’ last report card, issued every four years. An estimated $3.6 trillion in new investment is needed by 2020 to improve U.S. infrastructure to a grade of B. The U.S. faced a $210 billion yearly gap between actual and required funding from 2013 to 2020, according to the report.

    Building on the ASCE findings, Autodesk, in association with CGLA Infrastructure, led 45 corporations, think tanks, academic institutions and others in developing a newly released study, “Making the Grade" (PDF), on solving our national infrastructure crisis. The report, on which I served as an expert advisor, lays out a six-point plan for regaining America’s infrastructure leadership:

    1. Make infrastructure a cabinet-level priority.

    2. Form U.S. infrastructure regions.

    3. Establish a national infrastructure bank.

    4. Sell "opportunity" bonds to corporations and/or the public to finance the bank.

    5. Create a national infrastructure index.

    6. Engage the American people to build support for the importance of infrastructure policy.

    Infrastructure investment is good business that would boost America’s economy. An estimated $150 billion annual infrastructure program would create 1.8 million jobs and add $300 billion to $400 billion to our GDP, according to economist Laura Tyson. McKinsey also notes that $1 in infrastructure spending typically yields an estimated $1.59 in additional economic activity, while infrastructure upgrades ultimately could unlock $1 trillion in productivity savings worldwide.

    I believe the key issue in returning America to infrastructure leadership is mustering the political will to establish and finance a national infrastructure bank. While additional infrastructure spending long has been supported by a wide coalition that extends from the U.S. Chamber of Commerce to the AFL-CIO, fear of engaging in the necessary spending has sapped political interest. In order to raise the required financing, the “Making the Grade” report supports the sale of bonds to the public and corporations, much like the war bonds that helped to produce an American victory in World War II. 

    As conceived by many leading policymakers, a U.S. infrastructure bank would use innovative financing tools to leverage additional private investment for significant infrastructure projects identified at the state and local levels. The bank could use a wide array of tools, including grants, low-interest construction and permanent loans, and credit enhancements, including the provision of capital reserve funds for bond issuances, bond insurance support, lines and letters of credit and loan guarantees. These vehicles would be used to improve the financial security and reduce the cost of financing for state and local infrastructure. Transparency would be maintained by the use of rigorous underwriting criteria to ensure sound project selection. An infrastructure bank also could be used to encourage the use of public-private partnership contracts, which can help to attract private equity and pension fund capital and promote best practices

    Interest in an infrastructure bank has been growing. Several infrastructure bank bills (S. 1957, HR 2084, HR 2553) have been introduced in the current Congress. On July 17, the White House announced a new Build America Initiative, which would establish a Transportation Investment Center inside the U.S. Department of Transportation. The new center could serve as a pilot for more comprehensive infrastructure bank legislation. 

    Highway image by donvictorio via Shutterstock.

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