Materiality and topic boundary
1. Has materiality changed in the Standards
In the transition from the G4 Guidelines to GRI Standards, several clarifications were made in connection with the Materiality principle.
In the G4 Guidelines, the principle was stated as:
The report should cover Aspects that:
- Reflect the organization’s significant economic, environmental and social impacts; or
- Substantively influence the assessments and decisions of stakeholders
[…] Relevant topics are those that may reasonably be considered important for reflecting the organization’s economic, environmental and social impacts, or influencing the decisions of stakeholders.
The principle has not been changed for the GRI Standards. Instead, in related sections of the Standards the text has two key clarifications:
The meaning of ‘impact’. In the GRI Standards, unless otherwise stated, ‘impact’ refers to the effect an organization has on the economy, the environment, and/or society, which in turn can indicate its contribution (positive or negative) to sustainable development. It does not refer to an effect upon an organization, such as a change to its reputation.
Two dimensions. It has been clarified that an organization is required to identify material topics by considering the two dimensions of the principle: (1) the significance of the organization’s economic, environmental, and social impacts – that is, their significance for the economy, environment or society, as per the definition of ‘impact’ – and (2) their substantive influence on the assessments and decisions of stakeholders. A topic can be material if it ranks highly for only one dimension of the Materiality principle.
It is also important to note that it is the responsibility of the reporting organization’s management to determine material topics, based on applying the Materiality principle and the other principles for report content.
Why the clarifications?
As with the original Guidelines, the overall aim of the GRI Standards is to help organizations communicate about the impacts they have on the economy, environment, and society. This provides stakeholders with information about an organization’s contributions – positive or negative – toward the goal of sustainable development.
So the main aim of the clarifications is to ensure that in determining material topics, an organization considers the full picture of its significant outward impacts on the economy, the environment, and society – not only those impacts that have immediate consequences from a business perspective, such as financial costs or a damaged reputation.
In practice, some organizations interpreted the Materiality text in G4 – ‘the organization’s impacts’ – as meaning impacts experienced by the organization itself. This meant that when carrying out their materiality assessment, they focused only on impacts that might have significant consequences for the organization itself, instead of accounting for all significant impacts, as required by the principle.
The clarifications and your reporting practice
The clarifications aim to ensure that in applying GRI’s Materiality principle, an organization considers its significant impacts on the economy, the environment, and society as one of the dimensions by which a topic can be considered material; and does not overlook elements of this dimension, by focusing only on impacts that are significant for the organization.
The Standards explicitly acknowledge that an impact an organization has on the economy, environment or society can lead to important consequences for that organization. For example, high energy use is significant from an environmental perspective, and also has high financial costs.
But this is not necessarily the case for all impacts; and impacts exist regardless of their perceived importance to a reporting organization. Focusing only on those that are important for the organization can mean failing to disclose the full picture of an organization’s contributions – positive and negative – towards sustainable development.
The materiality assessment nevertheless fully recognizes the perceptions of the organization, through the assessments and decisions of key stakeholders such as employees, shareholders and senior management.
As noted earlier, a topic need not meet all the dimensions of the Materiality principle in order to be judged to be material. So a topic may be considered material if it is important to stakeholders, whether internal or external, even if the relative significance of the impacts on the economy, environment or society is lower than for other topics.
Impacts that are important for an organization, and the organization’s awareness of its business model and strategy, are also essential inputs for the holistic impact assessment required by the ‘impact’ dimension of the principle.
Identifying significant impacts on the economy, environment and society in a holistic way enables the timely discovery of less visible issues that, longer-term, may need action or have critical consequences, including financial ones.
To illustrate a materiality assessment, the section on Materiality in GRI 101: Foundation includes a matrix (included below) showing how topics may rank across the two dimensions. This matrix is an example of a possible approach – organizations are not required to use it.
2. How and why has the concept of ‘Boundary’ changed?
The concept of ‘Boundary’ has evolved significantly since the first version of the GRI Guidelines. It is arguably one of the most challenging areas of sustainability reporting, and was inconsistently understood by G4 reporters.
This concept has now been simplified in the GRI Standards, to be more clear and to align more closely with key international references.
The topic Boundary now requests a description of ‘where the impacts occur’ for each material topic, and ‘the organization’s involvement with the impacts. For example, whether the organization has caused or contributed to the impacts, or is directly linked to the impacts through its business relationships.’
The concept of ‘topic Boundary’ is based on the expectation that organizations have a responsibility not only for impacts they cause directly, but also for impacts they contribute to or that are directly linked to them through their business relationships – for example, with suppliers or customers. These concepts are covered in the UN ‘Guiding Principles on Business and Human Rights’ and the OECD Guidelines for Multinational Enterprises.
The topic Boundary can be found in Disclosure 103-1 of GRI 103: Management Approach. It also includes new guidance and examples for reporting the topic Boundary.