Menu
Home
Log in / Register
 
Home arrow Marketing arrow The Integrated Reporting Movement

The Sustainable Value Matrix

IN THE PREVIOUS CHAPTER, we suggested that the board exercise its responsibility to determine integrated reporting materiality through an annual "Statement of Significant Audiences and Materiality." This Statement forms the basis for the idea of the "Sustainable Value Matrix" (SVM), a tool that expands on the concept of a "materiality matrix." Like the materiality matrix, the SVM can be used for purposes of external reporting, stakeholder engagement, and resource commitment. It goes above and beyond this, however, in that the SVM can also be used to drive innovation to reduce or even reverse the tradeoffs that often exist between financial and nonfinancial performance. In doing so, it pushes the boundary of the Performance Frontier that represents the typical tradeoffs between financial and nonfinancial performance.1 When companies see that fostering innovation is one of its benefits, the SVM will become an accelerator for integrated reporting,

A SHORT HISTORY OF THE MATERIALITY MATRIX

While AccountAbility first articulated a formalized materiality determination process in their 2003 report, "Redefining Materiality,"2 the materiality matrix emerged, like many management innovations, in practice. For determining material issues, AccountAbility recommended a five-part materiality test embedded in a transparent process of stakeholder engagement, subjected to external assurance—with both the process and results under the direct responsibility of the board.3 BP, one of the first companies to turn this test into a materiality matrix, used it to select and prioritize issues to include in its 2004 sustainability report.4 Ford and BT followed, putting materiality matrices in their sustainability reports for 2004/2005 and 2006, respectively.5

While both AccountAbility and Global Reporting Initiative (GRI) originally saw the materiality matrix as a tool primarily for sustainability reporting, the process has evolved in practice to include interdependencies with financial information. AccountAbility observed an emerging commonality, stating, "These (matrices) were variations on the familiar matrix plots used in risk analysis, but with scales representing societal and business significance."6 GRI took it a step further by prescribing the following: "The threshold for defining material topics to report should be set to identify those opportunities and risks which are most important to stakeholders, the economy, environment, and society, or the reporting organization, and therefore merit particular focus in a sustainability report."7 In practice, however, the process continued to evolve, and companies did not always adopt all of GRI's guidance. For example, while GRI recommends the X-axis as "Significance of Economic, Environmental, and Social Impacts" and the Y-axis as "Influence on Stakeholder Assessments and Decisions,"8 many firms choose to define the X-axis as "importance to the company" or something closely related.9

Ten years after their invention, materiality matrices are starting to follow certain trends. As the clarity with which companies define "materiality" varies, companies tend to use the term interchangeably with "importance." While the tool appears in many variations, they all share a basic design. One axis, typically the X-axis, arrays the importance of different sustainability issues from the company's perspective, while the Y-axis does the same from "society's" or the "stakeholders'" perspective. The effort to make the latter determination typically involves some form of stakeholder engagement. Issues considered highly important to both the company and its stakeholders are deemed "material" and form the focus of the report.

As the materiality matrix is built on the notion of materiality, its use implies that the company using it knows what not to report on—that is, it implies a certain amount of discipline in its determination process. The company and its audience, both of which have limited bandwidth for how much information they can consider, must focus on what is important for their decision-making purposes. As a concept, materiality provides a discipline for dividing information into categories of "material" and "not material." Sustainability or integrated reporting is one use of the materiality matrix. Stakeholder engagement, resource commitment, and, through the evolution to the SVM discussed in the next section, innovation, are three others.

In the early days of the matrix, GRI, AccountAbility, and subsequent others viewed stakeholder engagement as part of the process for constructing the matrix—engagement for construction.10 It is through stakeholder engagement that companies determine how important or material something is to a stakeholder. The company must also decide how important or material the issue is to itself, the importance of which is a function of the nature of the issue, the ability of stakeholders to mobilize resources in support of the issue, and the impact this can have on the company—positive or negative. Once constructed, the materiality matrix can then be a platform for broader engagement in use with the company's stakeholders. Through it, the company can set the context for specific engagements so that each stakeholder sees its issue from the company's holistic perspective. Engagement for construction and engagement for use are analytically distinct. Engagement for use can help refine the company's understanding of differences in stakeholder perceptions on particular topics and in their expectations about what the company should be doing, as well as to facilitate collaboration on finding solutions to address issues of contention.

The materiality matrix can also inform resource commitments on the part of both the company and its stakeholders. From the company's perspective, issues it deems material to itself and its stakeholders logically deserve more resources (e.g., time, dollars, top management attention, and degree of stakeholder engagement) from a risk and opportunity perspective than immaterial issues. They become a key part of the company's strategy. From the stakeholder's perspective, the matrix can inform whether it should invest more (e.g., if its issue is rated low) or less (e.g., if its issue is rated high) resources in engaging with the company and mobilizing others to influence its decisions. Potential employees could use it to decide whether to work for the company. Customers may use it as a factor informing whether or not to buy its products. Suppliers could give the firm priority in times of shortages from high demand.

While reporting and resource commitment are analytically separate, a clear relationship exists between resource commitment decisions and external reporting, and it is indicative of the transformation function of corporate reporting. A company is more likely to report on topics to which it is devoting substantial resources. For example, a company may choose not to report on a material topic because it decides the litigation or competitive risk is too high. As noted in Chapter 4, while we are skeptical of this argument, it can be valid in certain circumstances.

 
Found a mistake? Please highlight the word and press Shift + Enter  
< Prev   CONTENTS   Next >
 
Subjects
Accounting
Business & Finance
Communication
Computer Science
Economics
Education
Engineering
Environment
Geography
Health
History
Language & Literature
Law
Management
Marketing
Mathematics
Political science
Philosophy
Psychology
Religion
Sociology
Travel