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Materiality – at the coal face

Materiality – at the coal face.

 

JEREMY NICHOLLS, 06 SEPTEMBER 2012

The question of what should be included in any account that someone gives to someone else to explain the results of their actions will be difficult. And yet this question, the question of what should be included in the analysis or the account is probably the most important question in assessing impact or value, whether social or financial.

It’s easy to side step this question if you focus your analysis on your objectives but then this won’t tell you much about how much value you have created or destroyed.

The OECD defines impact as (in the OECD DAC glossary)

‘positive and negative, primary and secondary long-term effects produced by a development intervention, directly or indirectly, intended or unintended’

Close enough, although in SROI the outcomes may be shorter term as well as longer term. But once you have gone wider than objectives then you need to decide which outcomes to include; which are related to your actions, which are important or valuable enough to be included. This is materiality.

There are lots of materiality definitions but they generally suggest than an outcome (or issue or transaction) is material if its exclusion would change the decisions made by a user of the information. In SROI the description of the principle – only include what is material is

‘Determine what information and evidence must be included in the accounts to give a true and fair picture, such that stakeholders can draw reasonable conclusions about impact.’

This adds a new question. Who is the information designed for? Missing out things that are material to someone for whom the information was not intended is ok.

In an SROI report in which the information is designed to be used by any stakeholder materially affected by the activity for which value is being accounted, is a pretty broad group. In a set of financial accounts the user is an investor (current or potential).

Most of the time these two sets of materiality decisions are left separate. The accountants decide what is material to a set of financial accounts and the sustainability practitioners, SROI analysts, CBA economists and evaluators decide what is material to the non financial account.

But there is an overlap and a potential relationship between these two sets of issues as currently defined.

At some point an assessment of issues that affect stakeholders will become material to an investor if it affects the long term viability of the organisation. If it has an effect on the ability of the organisation to distribute reserves then it should be included in the financial accounts.

The general idea is that the organisation should produce a set of financial accounts which provides a true and fair view of the financial position and the reserves of the organisation. This would include assessment of liabilities that are reasonable expected to arise.

In theory the assessment of sustainability issues could identify issues for stakeholders that could give rise to a liability for the organisation. At which point the risk of the liability occurring and the size of the liability and whether this should be reflected in the financial accounts would be considered.

This made me wonder:

Would a responsible investor want to see an organisation make more of a provision in financial accounts for these issues than a ‘non’ responsible investor? Not perhaps to realise a liability but so as to influence management to pursue activities that would not give rise to the issues.

How is the assessment of the level of risk at which an item becomes included in the accounts influenced by the views of investors?

Are there any examples of where those responsible for the sustainability reporting (within the organisation and as advisors or auditors of sustainability reports) have identified issues which have become recognised in the financial accounts?

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