Firms Should Supplement GRI and SASB Definitions of Materiality With the New Risk-Based Thinking in the Revised ISO 14001
Firms continue to struggle with the linguistic and operational muddle of materiality. The Global Reporting Initiative (GRI) defines materiality in the context of a sustainability report: “The report should cover aspects that both reflect the organization’s significant economic, environmental and social impacts and substantively influence the assessments and decision of stakeholders.” This concept of materiality is based on a redefinition of a financial term. The IIRC defines materialityas “information about matters that substantively affect the organization’s ability to create value over the short, medium, and long term.” SASB is using the U.S. Supreme Court definition of materiality in its development of sustainability accounting standards. It has been pointed out that the legal field offers no specific definition of the financial term and the U.S. Supreme Court has asserted that the determination of materiality must be based on both qualitative and quantitative factors based on the “total mix” of information made available. Gavin Power (Deputy Director of the United Nations Global Compact) sums it up, “Materiality around sustainability issues is a shifting notion."
Most firms use a two-by-two materiality matrix. On the x-axis, the firm rates its significant economic, environmental and social impacts. The y-axis is used to rate the impacts that substantively influence the assessments and decisions of the external stakeholders. GRI provides standard disclosures for the stakeholder engagement process. GRI does not require a disclosure of how the materiality determination was designed and implemented.
The materiality process is similar to the aspects and impacts determination in ISO 14001:2004environmental management system. The revised version will be released this fall with a requirement to define the internal and external context of the firm while demonstrating an understanding of the needs and expectations of stakeholders. By establishing the context, the firm articulates its objectives, defines the external and internal parameters to be taken into account when managing risk, and sets the scope and risk criteria for the remaining process of risk assessment. Use of a risk-based international management system standard that can be independently audited and disclosed will allow firms to determine the materiality of their disclosures without the muddle factor.