Thursday, January 18, 2007

Materiality: The Porter approach

Those of you engaged heavily in the reporting world will know the term 'materiality' and the continuous global discussion underway to define it vis-a-vis sutainability reporting. When applied in the sustainability context, it differs from the traditional financial reporting definition - that much we can agree on - but what is the right definition, and should we be 'importing' this concept at all? Check the G3 Guidelines for GRI's conclusion:
http://www.globalreporting.org/ReportingFramework/G3Online/DefiningReportContent/

But there are others. I was reading Michael Porter and Mark Kramer's article in December's edition of the Harvard Business Review and although the authors do not consciously attempt to define materiality, they do present a framework for prioritizing sustainability issues that I thought was quite simple and practical.

They identify three categories, and present the case of HIV/AIDS and carbon emissions as illustrative examples:

1. Generic issue/impacts: Those that have been recognized as important to society but do not affect, or are affected directly, by a company's operations.
-HIV/AIDS could be considered a generic issue by a company like Home Depot
-Carbon emissions could be considered a generic issue by a company like Bank of America

2. Value chain issue/impacts: Those that are significantly affected by the company's operations in the ordinary course of business.
-HIV/AIDS could be considered a value chain impact for a company like GlaxoSmithKline
-Carbon emissions could be considered a value chain impact for a company like UPS

3. Competitive context issue/impacts: Those that significantly affect the underlying drivers of competitiveness in the places the company operates.
-HIV/AIDS could be considered a competitive context issue by a company like Anglo American as it affects the direct health of their workforce in mine sites
-Carbon emissions could be considered a competitive context issue by a company like Toyota due to the long term impacts of their products.

Do companies get bogged down in long lists of issues, or are they getting better at understanding the different types of issues they need to manage and report on? Your thoughts?

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