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August 08, 2014

Corporate Reporting and Materiality
    by Robert Kropp

A report by the Governance & Accountability Institute assesses the materiality of key indicators in reporting to the Global Reporting Initiative by more than 1,000 corporations in 2012.

SocialFunds.com -- If sheer numbers are any indication, then corporate reporting is one of the fastest-growing aspects of sustainability. US corporations have traditionally lagged behind their European counterparts in publishing sustainability reports; as recently as 2011, for example, only 19% of S&P 500 did so. But by the next year, 53% of S&P 500 published sustainability reports.

In a report issued in June of this year, the Governance & Accountability Institute found that the percentage had shot up again, to 72%.

Of course, while corporate sustainability reporting has a measure of intrinsic value, it can be frustrating to investors and other key stakeholders if such reporting does not account for materiality by addressing the issues of greatest importance to specific industry sectors. A recently published report by the G&A Institute—the result of a year-long research project—seeks to provide and increased understanding of what key performance indicators (KPIs) matter to 35 industry sectors. The 84 KPIs ranked in the report are those of the Global Reporting Initiative (GRI), whose Sustainability Reporting Framework is the most widely used in the world.

“A requirement of the GRI framework's reporting process is to conduct a thorough materiality process, taking into account stakeholder views, to determine report content including the indicators selected for disclosure,” the G&A Institute stated. Furthermore, the report points out, “most companies and institutions utilizing the GRI Framework for their ESG (environmental, social, and corporate governance)and structured reporting conduct materiality reviews. That is, what is the material information for disclosure by management, and what are the expectations of the stakeholders, and their views of materiality (and the specific material information that they expect to be disclosed).”

Reporting to the GRI is voluntary, and over the years there has been criticism of aspects of the organization's Framework, in particular as it pertains to the concept of context. In 2012, Mark McElroy, the Executive Director of the Center for Sustainable Organizations (CSO), told SocialFunds.com that the GRI's standard fails to account for a context in which performance can be accurately linked to targets that must be met to achieve sustainable business practices.

"Most of what passes for mainstream sustainability measurement reporting fails to express sustainability performance in any literal or authentic way," McElroy said. "While I applaud the fact that so many companies are focusing on this and putting out reports, few of these reports actually express sustainability performance."

But in an email, Louis Coppola of the G&A Institute argued otherwise, stating, “GRI does have an entire section of the framework about context. In our view, it is not that GRI does not have this, to be clear -- it is that in some cases the companies using the GRI framework for their reporting are not applying the framework to its full extent. That is the real problem, we believe.”

“We believe that if companies faithfully followed these key principles, which are really the centerpiece of the GRI framework, then we would be having better examples of context in reporting to consider from reporters,” Coppola continued.

By the end of next year, organizations reporting to the GRI will be required to use the G4 Sustainability Reporting Guidelines, which were developed by the organization “to increase emphasis on the need for organizations to focus the reporting process and final report on those topics that are material to their business and their key stakeholders.”

In its report, the G&A Institute converted the indicators from earlier versions of the GRI Framework to G4, “in order to enable forward-looking discussions and planning.”

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