The New GRI Definition of Materiality: Forward or Backward?

GRI recently issued an exposure draft for the revision of the universal standards GRI 101, 102 and 103, with comments ending by September 9. They include significant and extensive changes, but we will only discuss the new definition of materiality, and, by implication, that of stakeholders.

As in previous versions of the standards the issue of material topics is the guiding basis for sustainability reporting, so the definition will have a noticeable impact, not only on what gets reported, but by implication, on what gets done, on how firms manage their impacts on all stakeholders, and how the firm itself uses the report.

A comparison of the evolving guidelines

GRI 103 of 2016: Material topic: topic that reflects a reporting organization’s significant economic, environmental, and social impacts; or that substantively influences the assessments and decisions of stakeholders.

Proposed GRI 103 of 2020: Material topics are topics that reflect the organization’s most significant impacts on the economy, environment, and people, including impacts on human rights.

The significant change is the elimination of the sentence “or that substantively influences the assessments and decisions of stakeholders.”

The new definition differs from the current (2020) one by being of a one-way impact. The current one asks for reporting on social and environmental impacts of the actions OF the firm on stakeholders and the impacts of their reactions ON the firm activities – as in a two-way impact. The proposed definition only asks for reporting on the first set of impacts. The concern is the effect on stakeholders. In this new definition there is implicit a new definition of stakeholders, i.e. those that are impacted by the activities of the firm, in contrast with the previous definition of those that are impacted AND have an impact the activities of the firm.

A challenge to materiality

From the point of view of reporting what is of interest to stakeholders, i.e. those affected, the new definition seems proper enough. Report all your impacts regardless of the reactions of those stakeholders to those impacts. In the previous definition, the firm would also consider those reactions, which led the graphical representation of the materiality matrix. In the new definition the materiality matrix ceases to be relevant.

Can firms ignore the reaction of stakeholders? Of course not, it is a major component of the sustainability strategy of the firm. The firm will need to prioritize, given scarce resources, and within the prioritization will need to consider the magnitude, frequency, as well as the financial and reputational impact of stakeholder´s reactions. The proposed GRI standards are driven by the informational needs of some stakeholders, not what is material to the firm. With the new definition, GRI is driving a wedge between the information needs of stakeholders and the needs of firms to develop their corresponding sustainability strategy, and diminishes the relevance of the reports and widens the gap between what must be reported and what is material to the firm .

Presumably, the new definition wants to avoid overlapping with the Sustainability Accounting Standards Board, SASB, standards that are mainly concerned with financial impacts ON the firm, i.e. stakeholder´s reactions. But this does not serve firms well. And it is not complete. SASB offers a set of indicators that are selected on the basis on the potential impact on the financial condition of the firm, if the markets for virtue – as in investors, lenders, employees, and other stakeholders - react. But the indicators do not reflect impact, only the potential source of an impact. 

According to SASB, the indicators have been selected on the assumption, through experts’ opinions, of the impact potential and assume the likelihood of reaction, but still ignore context, power, and willingness to act. In an effort to standardize indicators, that apply to many cases, they are very general, even though they have been specified at an industry level. But, for instance, every energy firm is different, so the same value of the indicator for emissions, could elicit very different reactions from those that can have an impact on the firm. More granularity is needed in the indicators, depending on context.

What is needed is the assessment by the company of the reaction of the material stakeholders and that can only be done by the firm itself. And the new definition of the GRI standards, move away from it, and the SASB ones, even though in a potential financial impact context, they cannot assess impact. These indicators contain information on what to react to, but not on how and how much to react, on an average firm.

Where the GRI revisions take us

Neither is enough to guide strategic sustainability management, but the revision by GRI now forces the firms to produce a report that does not serve their needs well, only those of some stakeholders.

And the proposed definition moves it in opposite directions of the proposal by the European Commission, EC, which three days before issued the Consultation Document Review of the Non-Financial Reporting Directive, where its states: “This means companies should disclose not only how sustainability issues may affect the company, but also how the company affects society and the environment. This is the so-called double materiality perspective.” (emphasis added).

As GRI seems concerned only about the informational needs of stakeholders, for whom it is an end, not a mean, they are seen as passive agents. But management must consider the reaction of stakeholders, particularly stockholders that may affect the firm´s cost of capital and, in some cases (through approved resolutions), on the decisions on Board. and their impact on the firm activities to design this sustainability strategy and the corresponding actions.

This does not mean that all reporting frameworks should be revised to converge, different users have different needs, different firms have different strategies, but is does mean that users must be aware of the target population and that sustainability materiality is firm, context and time specific.

But the new GRI definition restricts the relevance of the reports and its usefulness to management that will need to consider, separately, the potential reactions OF stakeholders, not only their impact ON them, with the help of SASB indicators and their own assessments of material issues.

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