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G4 Revamps Materiality While Staying True to Its Roots

If the Global Reporting Initiative (GRI) created a semantic “heat map” of the most-used terms at its Global Conference on Sustainability and Reporting this week, Materiality would win hands-down.

If the Global Reporting Initiative (GRI) created a semantic “heat map” of the most-used terms at its Global Conference on Sustainability and Reporting this week, Materiality would win hands-down. It’s no surprise, as the 2010 Board Resolution that set the ball in motion for drafting G4 — the fourth generation of sustainability reporting guidelines — specifically mandated for the new framework “to improve guidance on identifying ‘material’ content — from different stakeholder perspectives — to be included in the sustainability reports.” With the launch of G4 at the Conference, we now see that GRI has revamped Materiality, while also staying true to its roots.

The core definition of Materiality, included in Part One of G4 — Reporting Principles and Standard Disclosures — remains essentially the same:

“The report should cover Aspects that:

  • Reflect the organization’s significant economic, environmental and social impacts; or
  • Substantively influence the assessments and decisions of stakeholders.”

Perhaps the most significant change merges Materiality determinations with Boundary-setting, a move that expands Materiality across the value chain:

“The organization should identify Aspects and any other relevant topics based on the impacts related to all of its activities, products, services and relationships, regardless of whether these impacts occur within or outside of the organization,” states G4 in Part Two — the Implementation Manual.

So G4 extends organizational accountability beyond its direct material impacts (equivalent to Scopes One and Two in GHG Protocol-speak, which increasingly applies beyond carbon), to its indirect (or Scope 3) material impacts.

As well, G4 links Materiality to its new In Accordance procedure — which thankfully abandons the misleading “A,B,C” and “+” grading-like system, replacing it with Core and Comprehensive In Accordance levels that companies document directly in the GRI Content Index. These interlinkages strengthen and streamline G4 in welcome ways.

G4 also says that Materiality “identification is based on the Principles of Sustainability Context and Stakeholder Inclusiveness,” another welcome interlinkage. Indeed, this particular triangulation between the Principles of Materiality, Sustainability Context and Stakeholder Inclusiveness has long warranted a more integrated approach, as the three primary Content Principles operate completely interdependently. Indeed, more explanation and guidance on how exactly to implement this key triptych of Principles would greatly aid reporters.

And this points to the primary critique of Materiality that has emerged at the Conference: While attendees applauded the conceptual advances of Materiality, they scratched their heads over how exactly different companies would implement it, prompting Brad Monterio of the Colcom Group to tweet, “what ensures we all approach materiality CONSISTENTLY? Inconsistent approaches/methodology make comparability a challenge.” Aleksandra Dobkowski-Joy of Framework added, “Judgment is worrisome, esp if co's aren't clear on thresholds.”

Stepping back raises an even more fundamental question about the emerging definition of Materiality, with several start-up standards such as the Sustainability Accounting Standards Board (SASB) and International Integrated Reporting Council (IIRC) placing significant emphasis on Materiality. SASB Board Member Steve Lydenberg authored a paper, On Sustainability and Materiality, and SASB hosted a Delta Series event recently where a panel debated the “dynamic” definition of Materiality. Meanwhile, IIRC recently released a Background Paper on Materiality. While there is significant overlap between definitions, there’s also enough distinction to create confusion in the marketplace, as reporters grasp for which version of Materiality to follow.

That said, some confusion has surrounded the term ever since the sustainability field borrowed it from the financial field, which defines the term (in the TSC Industries v. Northway Supreme Court decision) as “disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of the information made available.” Just replace “reasonable investor” with “reasonable stakeholder” and you’ve got Materiality for sustainability. If only it were that simple.

Indeed, it may have been a strategic mistake for the sustainability field to co-opt this term that hews so closely to the shareholder primacy doctrine. For years, applying the concept of Materiality to sustainability issues has been a bit like shoving a too-big foot into a too-small shoe.

materiality matrix

Which brings me to how G4’s Materiality stays true to GRI’s roots. G4 contains essentially the same Materiality matrix (right) as in G3, with “Influence on Stakeholder Assessments and Decisions” on the vertical axis and “Significance of Economic, Environmental, and Social Impacts” on the horizontal axis.

As Mark McElroy astutely points out, most company Materiality matrices replace the horizontal axis with “Potential Impact on Our Business,” thereby departing from GRI’s intention of comparing real-world impacts to stakeholder sentiment. Perhaps the best outcome of G4 would be for companies to return to GRI’s intended measurement of Materiality, rooted as it is in a more sustainability-focused definition. As they say, if the shoe fits…


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