CSR: Living in a Material World

Materiality is an accounting concept relating to the importance of an amount, transaction or discrepancy. Information can be considered material, according to international accounting standards, if its omission or misstatement could influence the economic decision of users?investors, regulators and suppliers. Thus, materiality provides a threshold or cut-off point to guide companies in making decisions about what information to disclose. Despite many years of financial accounting practice, opinions can still vary radically on what is or is not influential.

What does this mean in the context of corporate social responsibility (CSR)? The main driver for discussing materiality in the CSR context is the increasing importance of sustainability reports.?The growing numbers of issues companies are asked to include in their annual CSR reports cause them to question which ones should be the main focus and which ones are less seminal. Companies must be able to prioritize issues they will manage, and materiality is a foundation for making those decisions.

Most businesses understand they must keep track of the changing economic and consumer trends that affect their industries, as these can greatly impact their financial success. Yet they are less adept when it comes to identifying emerging social and environmental issues. This is where external stakeholders can help.

To assist in determining materiality, some companies recruit external advisors who share a commitment to transparency and multi-stakeholder engagement to form a CSR report review committee. They typically have expertise in labor, human rights, environmental, social, economic and diversity issues. Others utilize internal managers to assess what information is material and should be included in the CSR report. In this process, the managers consult a variety of sources?both internal and external?as part of the materiality assessment to determine economic, environmental and social issues that influence the decisions of stakeholders. These sources include:

• company objectives, strategies, policies, programs and risk factors
• employee surveys and input gathered through various other feedback mechanisms
• customer-contact feedback
• input gathered from stakeholders and suppliers
• media coverage of company issues

The most material issues are prioritized for inclusion in the report, based on the importance of the issue to (and potential impact on) the company?s business and stakeholders, as well as the amount of reasonable control the company has over that issue.

Of course, reporting is not an end in itself. A materiality assessment is an essential first step in CSR strategic planning, to identify the material issues that senior management must consider in order to minimize environmental risks and maximize opportunities for corporate shared value. A first-rate CSR strategy provides a structure for managing all sustainability challenges and impacts, and puts responsible practices at the core of a company?s business planning. This includes supply chain accountability, environmental impact assessment, governance, policy, stakeholder engagement, social community commitments and transparency.

Additionally, studies indicate that publicly reporting social and environmental performance issues keeps a business on its toes. Facing the annual deadline for submitting metrics and numbers for the CSR report, the business manager focuses on the commitments made the year before and the pending public disclosure of how things have improved?or not.

In the end, businesses need to understand the impact that their operations and sourcing decisions have on local communities, workers and the environment and to then take action to ensure this impact is positive. Ultimately, transparency is enhanced when companies use reliable indicators of CSR progress and then communicate honestly with various stakeholders about CSR policies and practices.

To learn more about the Global Reporting Initiative, click here. To learn more about the Shared Value Initiative, click here.

An unabridged version of this article originally appeared in CR Magazine.