Market segmentation is critical for improved matching of customer needs. In reporting, failure to meet the “reasonable expectations” of stakeholder groups is common due to the failure to differentiate and prioritise different stakeholder groups…


Any disclosure venue or report needs to have clarity on its target audience. Here lies a key difference between the IIRC Framework and the GRI G4 Guidelines. The former targets the finance community or “the providers of financial capital”. The latter seeks to appeal to diverse stakeholder groups. Guidance on the prioritisation of stakeholder groups, even groups within the finance community, is lacking. It can be found elsewhere, in the world of stakeholder engagement management. An example is the Stakeholder Engagement Manual (2006) by AccountAbility, UNEP and SRA. The Manual among others provides a Stakeholders Influence and Dependency Matrix for report preparers to use.


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Target audienceFinancial reporting convention
Materiality guidance traditionally distinguishes between the preparers, the auditors (internal/external) and the users of financial statements and reports. Key is being clear about who the expected “users” are. Some guidance refer specifically to the “reasonable” or “average prudent investor”, whereas other guidance on financial reporting (and today integrated reporting) refers to “the providers of financial capital”. These providers are present or potential investors, creditors (lenders) and insurers.

These actors as well as others (such as lawyers and judges) can interpret materiality differently. Factors that also influence judgment is whether the public or private sector is involved, and the influence of culture and socio-economic circumstances in different countries. Investors themselves are not a homogeneous group. Perceptions of what is material among institutional, non-institutional or nonprofessional investors may differ widely from that of auditors and preparers.

In financial accounting, the decision on materiality is made (independently) by the preparer and the auditor of the report. Inevitably this includes grey areas where the “professional judgment” of for example the auditor is required. The judgement is based on (a) her/his perception of the circumstances and (b) what she/he believes the information needs of the user are. A factor is also the risk attitude (level of aversion or tolerance) of the auditor. The aim of standard guidance would be to reduce the level of subjectivity involved in decision-making. Standard guidance on materiality tests or assessments can also help preparers and directors to better understand materiality and the “how” of their duty of care and diligence, without the constant fear of litigation.

The user utility model considers not only historical information but also forward-looking projections, mindful of what the probable effect would be on the financial stakeholder as intended user. The decision to be made by the user involves “resource allocation” or “economic decision-making”. Typically it implies a decision-maker or stakeholder with a commercial relation to the company. In the case of the investor this involves a decision on voting or trading (buy/sell). In the case of a lender this involves a decision on whether or not to provide a loan or to cancel a loan.

The non-financial stakeholder as “user”
The broader definition of materiality promoted by CSR or sustainability experts since the 1990s requires company managers and auditors to consider the “reasonable expectations of all stakeholders”. This goes beyond the traditional focus on shareholders or the providers of financial capital.

The more inclusive, multistakeholder model highlights various “affected and interested players” such as employees, suppliers, customers, governmental authorities, local communities and NGOs. This inevitably raises the question if materiality is first and foremost about the level of direct or indirect impact on a specific stakeholder group, the level of external impact on society (across a broad rage of stakeholders) or the level of impact internally on the health of the reporting business itself. The related question is if the relevant metrics is reliably available, of a financial nature and if so, related to the financial performance of the reporting business.

CSR or sustainability standards tend in some respects also to focus less on user utility and more on the inherent merits of the topic involved. As is evident from the GRI definition of materiality, this can relate to any significant impact of the organization (e.g. on the health of society). In addition to the inherent significance of economic, environmental and social impacts, the GRI allows for the possibility that an issue (“Aspect”) be considered material where it is given high significance by (external) stakeholders even though management internally views its impact on the reporting business as not significant.

In the case of the IIRC definition of materiality, the health of the reporting business as such is more pertinent. This is mindful of the fact that materiality is a reporting entity-specific concept. Preparers of integrated reports are therefore encouraged to consider whether a matter substantively impacts, or has the potential to substantively impact, the organization’s strategy, its business model, or one or more of the capitals it uses or affects. A central challenge in integration and “shared value” approaches is to raise above “us versus them” – i.e. (internal) management versus (external) stakeholders – perspectives. In G4 the GRI has also changed the terminology of its Materiality Matrix axis to not simply referring to “views of stakeholders” versus “views of the business”.

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