The AA1000 series of standards sets the stage for a principles-based process of stakeholder engagement…
The AA1000 AccountAbility Principles Standard (APS 2008) provides criteria for meeting the principle of materiality. These require a materiality determination process that:
- is applied across the organisation (e.g. group and local level);
- is integrated in the organisation, and
- is ongoing and not ‘one off’.
AA1000 expects that the materiality determination process:
- identifies and fairly represents issues from a wide range of sources…;
- evaluates the relevance of the identified sustainability issues based on suitable and explicit criteria…;
- determines the significance of the identified sustainability issues using criteria and thresholds that are credible, clear and understandable as well as replicable, defensible and assurable;
- takes into account the changing sustainability context and maturity of issues and concerns; and
- includes a means of addressing conflicts or dilemmas between different expectations regarding materiality.
The principle of materiality is complemented by the other two core principles of AA1000, namely stakeholder inclusivity and responsiveness.The Redefining Materiality paper by AccountAbility (2003) made clear the expectation that “Governing Materiality” is to fall under direct responsibility of the company Board, and be subject to independent, external assurance. This requires, among others, (i) an explicit process through which materiality tests are applied, which ensures that the required information is identified, assessed and made available to the Board, and (ii) a Board that collectively has the necessary competencies to be able to make sound decisions on the basis of the information provided.
The five-step materiality test proposed by AccountAbility (2003) were as follows:
- Test 1: Direct short term financial impacts
- Test 2: Policy-related performance
- Test 3: Business peer-based norms
- Test 4: Stakeholder behavior and concerns
- Test 5: Societal norms (regulatory and non-regulatory)
The above was described as a spectrum in which each organization will evolve from classical, narrow approaches to interpreting materiality through to more inclusive and complex approaches (see graphic).
The subsequent Materiality Report by AcccoountAbility (2006) defined a Materiality Framework with a “core process” that involves the following:
Stage 1: Identify issues from a wide range of stakeholders and sources:
- Business strategies, reports, risk register
- Company policies and commitments
- Best practice norms exhibited by peers and highlighted in relevant standards;
- Stakeholder feedback and engagement
- Public debate in the media, campaigns, Parliament, etc.
Stage 2: Use a consistent set of filters to determine level of significance for each issue.
Stage 3: Embed process in internal decision-making and external review. Ideally the process should be subject to:
- review by internal and external advisory panels,
- sign-off at Board level, and
- independent assurance as part of overall reporting process.
The Redefining Materiality II paper by AccountAbility (2013) made clear that this goes beyond reporting. The materiality determination methodology needs to be embedded within the company’s ongoing processes of strategy development, performance management, reporting and stakeholder engagement.