Reporting and transparency en route to a one-materiality future
SustainAbility's recently released research See Change: How Transparency Drives Performance proposes a solution to the stalled state of sustainability reporting and transparency. See Change highlights three key elements that must be addressed in order to gain the most value from transparency and reporting efforts: materiality, valuation of externalities and integration. This is the first in a three-part series that explores those elements.
Most sustainability reports contain vast quantities of information about a company’s environmental and social impacts. While this generally means an increase in transparency, it also has led to lengthy, costly and minimally read reports. The resources devoted to gathering data and creating narratives ultimately are not bringing enough value to companies and their stakeholders. How can we improve these reporting efforts and ensure that the powerful data and narratives in these reports are leveraged to inform decisions?
Companies such as Fibria, PG&E, BASF and Novelis are using materiality to create more effective transparency efforts. Materiality — the prioritization of the most important issues — guides companies to gather only the most strategic information, thereby shaping concise, effective reports and offering the potential to better inform strategy.
While materiality is not an unfamiliar concept to sustainability professionals, SustainAbility sees materiality differently: as an essential tool to inform effective transparency efforts. Materiality can be used to create concise, relevant transparency efforts that communicate vital data and stories to stakeholders.
Pacific Gas & Electric goes transparent
PG&E demonstrates one example of materiality helping to shape effective transparency and reporting efforts. PG&E has leveraged materiality to identify 18 material issues, including water and renewable energy, and integrate them into its corporate strategy. The company’s robust process engaged internal and external stakeholders and assessed the interconnections between material issues.
PG&E also involved its corporate strategy team in the process. In fact, its latest corporate responsibility report is structured according to material issues and offers an interactive materiality matrix where users click on specific issues to better understand how they relate to each other, to the business and to its stakeholders.
PG&E has effectively navigated the increasingly complex landscape of materiality whereby numerous approaches, differing definitions and conflicting guidance have made materiality a less-than-straightforward process. Reporting organizations and expert groups such as GRI, IIRC, SASB and financial and accounting bodies such as FASB present dissimilar approaches to materiality. Financially material issues in annual reports often differ greatly from sustainability-related material issues presented in CSR reports, leading to mixed signals for investors and other stakeholders.
3 steps to better reporting
In "See Change," we present detailed guidance for effectively prioritizing material issues. Summarized here, the following are key takeaways.
1. Identify potential material issues, link them to the business model and operations, and explain the approach taken.
2. Prioritize a few select issues that are most material to the business and its stakeholders and map them along the value chain.
3. Use materiality to inform strategy and reporting efforts by engaging risk management and corporate strategy teams on most material issues.
For example, forest products company Fibria linked its material issues to its business model to explore where its greatest impacts and improvement opportunities exist. With the use of informative, albeit complex, infographics (PDF), Fibria illustrated where in its business model its material issues positively or negatively affect various stakeholders and resources.
Keep on task, but keep an eye on the prize
In the long term, we see a future where there is just one materiality — only one list of financially, environmentally and socially material issues that inform company strategy and stakeholder decision-making.
However, because the definitions of materiality used by investors, accountants and sustainability experts differ right now, we risk de-prioritizing critical issues if we enact just one limited definition of materiality. Until a one materiality state is reached, the best outcomes are derived when companies incorporate sustainability-related material issues into corporate strategy and into their internal and external transparency efforts.