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Sustainability reporting: Materiality matters

The GRI G4 Sustainability Reporting Guidelines kick in after the end of 2015, and companies need to prepare for its main focus: materiality. Mint Kang reports.

This year, companies that adhere to international standards for sustainability reporting are preparing for something new: transition to the G4 Guidelines published by the Global Reporting Initiative (GRI).

GRI is an international non-profit organisation which develops sustainability reporting standards for use around the world, and the G4 Guidelines are the latest generation of its sustainability reporting guidelines.

The G4 Guidelines, released in May 2013, will be applicable to all sustainability reports published after 31 December 2015. They are notable for several new requirements: firstly and most importantly, reports following the G4 Guidelines must focus on materiality.

Materiality is an accounting principle that describes how important something is. In terms of sustainability reporting, materiality means that the report should focus mainly on those issues that are most important to the business and its shareholders.

A simple example is that of a manufacturer saving electricity in two ways: by keeping restroom lights turned off when not in use, and by rescheduling production lines to be more efficient. Under the G4 Guidelines, the second method has greater materiality, because it has a far greater impact on business costs. It should therefore be reported in greater detail than the first. 

However, the G4 Guidelines do not place a strict definition on materiality. Instead, those tasked to prepare sustainable reports are expected to use their own judgement. 

Materiality as a mainstay of reporting

Companies daunted by the prospect of implementing a new standard only need to keep one straightforward maxim in mind, says reporting specialist Ian Buckland, associate director of corporate responsibility consultancy Corporate Citizenship. That maxim is: report what matters to the people that matter, and the rest will follow naturally. 

This less structured approach may seem even more intimidating to some, because materiality is such a subjective principle; and without firm guidelines, it may be difficult to decide what is ‘accurate’ reporting. But Buckland, who describes it as liberating, points out that a focus on materiality means that firstly, the company is better able to communicate with its stakeholders on things that matter to it and to them.

Report what matters to the people that matter, and the rest will follow naturally

Ian Buckland, associate director of corporate responsibility consultancy, Corporate Citizenship

Secondly, it is not diverting its resources to areas that are of low significance in the long run. Instead, it can pay attention to more important aspects such as improving its processes, reducing its costs and reducing its social and environmental impacts.

In the above example of the manufacturer saving electricity, the management could spend time and money on a campaign to educate employees to save electricity – or the same resources could be spent on hiring a consultant to help it improve its production line efficiency such that the lines are not left idle while running. 

“Companies can make corporate responsible decisions more effectively if they approach the decision making process on the basis of what is material. Materiality is not just a way of deciding what to report. As such, materiality needs to be considered as an investment that will be as cost-effective and useful as the amount of effort that is put into it,” says Buckland.

The idea is the more effort a business puts into finding out what is important, the more useful that information will be to it. This approach is also highlighted in a 2013 Corporate Citizenship publication, “Taking materiality to the next level“, which defines materiality in terms of significance to the business – what the tangible impact might be on its bottom line, for instance, or how its reputation might be affected.

A number of organisations in Singapore have already recognised the importance of materiality in sustainability reporting. Energy, water and marine group Sembcorp Industries, for example, uses materiality analysis to define key sustainability issues in a series of focus areas: economic, governance, risk and compliance, people, health, safety and environment, and community. These were listed in Sembcorp’s 2013 sustainability report

Ng Lay San, Sembcorp’s vice president of group corporate relations, describes materiality analysis as a method of improving the company’s overall performance. She told Eco-Business: “The materiality analysis helped us to review a multitude of issues through our own lenses, as well as that of our key stakeholders, and led us to pinpoint the key issues which were important to us and our stakeholders. This focus enabled us to better manage and communicate performance.” 

In another example, the government’s National Environment Agency – which won Best First-Time Report at the ACCA Singapore Awards for Sustainability Reporting last year  – conducts analyses of sustainability-related risks and opportunities, as well as of its priority stakeholders, to identify key issues that it needs to focus on. 

“It’s not just about reporting, but putting in place a coherent and systematic framework to ensure that [our sustainability] efforts are sustained,” said NEA’s then-chief executive Andrew Tan at the award ceremony. He added that through its sustainability report, NEA hopes to motivate other public agencies to look into enhancing their own sustainability framework.

On the flip side, some companies may feel that the benefits of materiality analysis, especially applied to the supply chain, are outweighed by its onerousness. Collecting and analysing data from suppliers and customers can be time-consuming and costly, and requires the people preparing the report to exercise their own judgement on other companies whose situation they may not be completely familiar with.

They may also feel that material disclosures verge on divulging sensitive information such as specific sources of revenue and expenditure, which some companies prefer to keep confidential for reasons related to competition.

However, the use of materiality assessments, whether in reporting alone or in decision making, can in fact help companies to avoid difficult situations – such as being held liable for their business partners’ conduct. For example, some companies have landed in trouble with the authorities when their errant sub-contractors did not pay wages to their workers. The ability to identify and address such issues in advance can save companies a good deal of trouble.

As for stakeholder engagement and disclosures, this boils down to an issue of trust, says Buckland. “A business should trust its stakeholders [to be responsible with the information they are privy to] just like stakeholders trust companies to provide a product or service responsibly,” he explains.

A business should trust its stakeholders [to be responsible with the information they are privy to] just like stakeholders trust companies to provide a product or service responsibly

As G4 moves away from the prescriptive approach, companies need to exercise their own judgement in determining what should be disclosed. 

Companies new to this style of reporting, or those who do not have the resources to perform their own analyses, can seek external advice from sustainability consultants such as Corporate Citizenship, which has completed more than 300 sustainability reports worldwide. Such consultants provide guidance on determining what is material and what is not, which both beginners and seasoned reporters can benefit from.

In the interim, however, companies planning to adopt G4  still have more than a year to prepare. Buckland’s advice is to spend 2014 building internal competencies, including staff familiarisation with the G4 Guidelines and the materiality principle. 

Companies should also start establishing stakeholder engagement processes, such as identifying the feedback they need from stakeholders and coming up with surveys or other methods of getting the information.

In the year ahead, businesses should develop and implement whatever processes they need to capture the relevant information. So that come 2016, when the new standards kick in, these companies will find themselves ahead of the curve not only in sustainability reporting, but in the efficiency of their business decisions.

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