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The Four Cells

The "Material Societal Issues" cell contains the issues that the company has determined are most relevant for the stakeholders it considers most significant given the corporation's objectives. All of these issues should be the responsibility of line management and should be included in the company's integrated report. They also require high levels of stakeholder engagement and resource commitment. Often issues in which there is a tradeoff between meeting the objectives of providers of financial capital and stakeholders, the issues in this cell are those with the greatest need for major innovation. Specifically, a type of "open innovation" through stakeholder engagement can allow a company to simultaneously improve financial and nonfinancial performance. These major innovations are typically high risk, requiring substantial capital commitments, and long time frames before they pay off.48 In its integrated report, the company should explain its efforts and expectations for stakeholder engagement, resource commitment, and innovation.

Because they are highly important to sustainable value creation— especially for the audience of shareholders—issues in the "Material Issues" cell should also be included in the company's integrated report. While the company deems them less significant for stakeholders, a medium degree of engagement is appropriate because of the opportunities they provide for moderate innovation regarding sustainability issues.49 In general, resource commitments will be less than in the above cell, but they can still be significant.

In contrast, the issues in the "Societal Significant Issues" cell are not material for sustainable value creation. Still, a company cannot completely ignore civil society even if it does not deem these issues, at least for now, critical to its strategy. As such, these issues require a modest resource commitment and offer only minor opportunities for innovation for sustainability. Because the company has acknowledged the importance of these issues, however, it should practice high levels of stakeholder engagement and transparent sustainability reporting about them outside of its integrated report. These issues can be managed through a "sustainability program" being led by the "sustainability group," perhaps under the direction of a Chief Sustainability Officer. They are not the responsibility of line management.

The final cell, labeled "Potential/Developing Issues," includes topics that can and should be largely ignored—at least for now. There is no need to report on them and it would be a mistake to do so, as this will only create clutter and distract the audience from the issues the company deems are significant. Consequently, little effort should be made in stakeholder engagement and minimal resources should be committed to these issues. Innovation is largely irrelevant in this cell. Even if opportunities exist, the resources are best committed elsewhere.

The transformative power of the SVM is a product of the exercise of governance judgment, evidenced by clearly displaying this binary treatment of materiality and significance, drawing clear lines to inform reporting, stakeholder engagement, resource commitment decisions, and opportunities for innovation. By being clear on what it sees as material and significant and what is not, the company establishes credibility and legitimacy. It avoids charges of "greenwashing" that can legitimately be made when a company says "we care about everything and everybody."

Yes, such demarcations can lead to conflict. Stakeholders unhappy with the placement of their issue(s) in a company's SVM may choose to try to influence them to change it. That is their right. It is also the company's obligation to engage—although not necessarily agree—with them. The SVM is the basis for a more meaningful conversation between a company and all of its stakeholders within the now-clarified framework of how the corporation sees its role in society. While the general quality of integrated reports being produced today is fair, however, there is substantial room for improvement in how companies communicate their views on materiality—an issue addressed in the next chapter on the quality of integrated reporting.

A Hypothetical SVM for a Pharmaceutical Company

Although clearly no company has produced an SVM, we can make this idea more concrete with an "as if" example for a hypothetical pharmaceutical company example (Figure 6.3). We say "as if" since this example violates the fundamental tenet of the SVM, which is that it is an entity-specific social construction. However, using data from other sources, we can illustrate what such a matrix might look like for a pharmaceutical company, with a corresponding "as if" analysis recognizing that it is not from an actual company's perspective. The 43 issues in this SVM are taken directly from the Sustainability Accounting Standards Board (SASB)50 (Table 6.1). We used their Materiality Map™ to determine the value on the X-axis, setting the "Firm's Issue Materiality Threshold" line at SASB's cutoff point for materiality. The values on the Y-axis are the averages of a survey of eight partners at the Boston Consulting Group who are experts on the pharmaceutical industry, as a simulation of the stakeholder engagement process.51 In keeping with the spirit of exercising discipline in drawing the "Society's Issue Significance Boundary," we set it at 6.0, on a 1-10 scale.

A Hypothetical Sustainable Value Matrix for a Pharmaceutical Company

FIGURE 6.3 A Hypothetical Sustainable Value Matrix for a Pharmaceutical Company

Of the list of 43 issues (Figure 6.3), only 6 appear in the "Material Societal Issues" cell and they are either in the "Social Capital" or "Business Model and Innovation" SASB issue categories. This makes intuitive sense for a pharmaceutical company. Climate change risk (issue number "1") is the only entry in the "Material Issues" cell. This may suggest that the company perceives this issue as more significant than it believes stakeholders do. Or, it could be that this hypothetical firm is heavily weighting new Securities and Exchange Commission and European Union regulatory guidance on climate change when determining materiality. The "Societal Significant" cell is heavily populated by "Leadership and Governance" topics regarding the company's products, along with a significant number of "Social Capital" and "Business Model and Innovation" issues. Except for climate change risks, all issues in the "Environment" category appear in the "Potential/Developing Issues" cell, consistent with the perceived relatively low impact a pharmaceutical company has on the environment. Finally, while no Human Capital category issues were considered material by the firm, the firm perceives that its stakeholders think that "employee health and safety" as well as "retention and recruitment" are significant ("Societal Significant" cell), and that the remaining five other human capital issues are not significant to stakeholders.

TABLE 6.1 SASB Pharmaceutical Issues

SASB Pharmaceutical Issues


1. Eccles, Robert G. and George Serafeim. "The Performance Frontier: Innovating for a sustainable strategy." Harvard Business Review 91, no. 5 (May 2013): 50-60.

2. Fronesys, "Materiality Determination: Analysing who, what and how," October 2011, p. 3. This report summarizes the results of detailed analyses of the materiality matrices of 31 companies. A full version of the report is available for purchase from Fronesys.

3. The report recommended a five-part materiality test: (1) Direct, short-term financial impacts, (2) Policy-based performance, (3) Business peer-based norms, (4) Stakeholder behavior and concerns, and (5) Societal norms (regulator and nonregulatory). AccountAbility. Research, Organizational Accountability, accountability.Org/images/content/0/8/085/Redefining %252520Materiality%252520-%252520Full%252520Report.pdf p. 4, accessed May 2014.

4. BP, "Making the Right Choices," Sustainability Report 2004, bp .com/liveassets/bp_internet/globalbp/STAGING/global_assets/downloads/S/ Sustainability_Report_2004.pdf, accessed May 2014.

5. Ford, "Our Route to Sustainability," Sustainability Report 2004/5., accessed May 2014. BT, "Social and Environmental Report," 2006. btpk .com/betterfuture/betterbusiness/betterfuturereport/pdf/2006/2 006Environ-mentalreport.pdf, accessed May 2014.

6. AccountAbility. "The Materiality Report," images/content/0/8/088/The%20Materiality%20Report.pdf, accessed May 2014, p. 20. The report analyzed the approaches and experiences of Anglo American, Ford Motor Company, The Gap Inc., Hydro Tasmania, Nike, Novozymes, BP Pic, BT Group Pic, and Telefonica. "The Materiality Report," p. 7. For an example of a risk analysis matrix, see PricewaterhouseCoopers, "A practical guide to risk assessment," December 2008, p. 28, Figure 5. Risk analysis can be defined as "a systematic process for identifying and evaluating events (i.e., possible risks and opportunities) that could affect the achievement of objectives, positively or negatively. Such events can be identified in the external environment (e.g., economic trends, regulatory landscape, and competition) and within an organization's internal environment (e.g., people, process, and infrastructure). When these events intersect with an organization's objectives—or can be predicted to do so—they become risks." p. 5.

7. Global Reporting Initiative. Reporting, G3.1 and G3 Guidelines, Guidelines Online,, accessed May 2014. GRI calls the material issue selection process the "prioritization step": "The methodology applied in the

Prioritization step varies according to the individual organization. Specific circumstances such as business model, sector, geographic, cultural and legal operating context, ownership structure, and size and nature of impacts affect how an organization prioritizes the topics and Aspects it covers in its sustainability report. What is important, given this variation, is the need for an organization to develop a rational process, the ability to document it, and the ability to replicate the process in subsequent reporting cycles."

8. Ibid.

9. Mark McElroy, the founder and executive director of the Center for Sustainable Organizations, critiqued this formulation of the matrix, arguing that it "amounts to a perversion of the idea of materiality in sustainability reporting, because it essentially cuts out consideration of what are arguably the most material issues: the broad social, economic and environmental impacts of an organization, regardless of how they relate to a particular business plan or strategy." "Are Materiality Matrices Really Material?" www, accessed December 2013. In the Technical Protocol for GRI3.1, released in the 2011, the X-axis was changed to "significance to the organization.", accessed May 2014.

10. Framework LLC, "State of Integrated Reporting," 2013, p. 5 and Fronesys, "Materiality Futures," 2011, p. 7.

11. Framework LLC, "The Materiality Bridge," 2011.

12. The visual representation could be a matrix, chart, or diagram. Framework LLC, "The Materiality Bridge," 2011. p. 2.

13. Report Sustentabilidade, "Materiality in Brazil: How companies identify relevant topics," 2013., accessed May 2014.

14. Fronesys describes itself as a Digital Economy advisory service. Their focus is on research, consulting, and training in four core areas, Innovation and entrepreneurship, Sustainability, Big Data and Smart Cities and Digital skills. Fronesys. About,, accessed May 2014.

15. Fronesys, "Materiality Futures," 2011, p. 8. The companies were selected for inclusion using, Framework: CR (now known as Framework LLC) materiality analysis and Internet search engines. Each company selected had a published materiality matrix with at least three degrees of granularity per axis and with individual issues identified and positioned in the matrix. The 31 companies identified each had a published materiality matrix with at least three levels of granularity per axis and with individual issues identified and positioned within the matrix.

16. NGOs were the most common constituency for the stakeholder axis, whereas Management/experts were the most common constituency for the company axis. Fronesys, "Materiality Futures," 2011. pp. 10-11.

17. "This is calculated by averaging the distance of all points on an issue chart from the average materiality point. Using this approach, if all companies have agreed on the position an issue takes along the company axis, and their stakeholders have similarly agreed on the position the issue takes along the stakeholder axis, then the Issue Coherence Level (ICL) would be zero. On the other hand a totally random distribution would result in an ICL of about 4." Fronesys, "Materiality Futures," 2011. p. 14. The study finds that "economic stability/recession" has the greatest coherence level, while "biodiversity" has the least.

18. "If the company and its stakeholders agreed on the materiality ranking for every issue considered then there would be perfect convergence and all the issue points would sit on an x=y straight line. To measure materiality convergence, Fronesys proposes the statistical parameter known as the average residual (R ), as defined in figure 8, where R is, in effect, a measure of divergence form the x=y line." Fronesys, "Materiality Futures," 2011. p. 16.

19. For instance, China Mobile has a materiality matrix which was excluded because it does not properly label issue location. It provides a matrix populated with unlabeled dots, with a list of material issues given below the matrix. However, none of these issues are scored and it is not possible to correlate them with the dots on the matrix. China Mobile Limited. 2012 Sustainability Report,, p. 6, accessed May 2014.

20. The company's reporting and website were evaluated for explanations of the stakeholder identification process and stakeholder engagement process.

21. Volkswagen. Sustainability Report 2012, sustainability-report2012, accessed May 2014.

22. Dow. 2012 Annual Sustainability Report, pdf/35865-2012%20Sustainability%20Report.pdf, pp. 41, 43, accessed May 2014. See also for more background on the SEAC: Eccles, Robert G., George Serafeim, and Shelley Xin Li. "Dow Chemical: Innovating for Sustainability." Harvard Business School Case 112-064, January 2012. (Revised June 2013.)

23. Carlsberg Group. CSR, Materiality Analysis, carlsberggroup .com/csr/ReportingonProgress/overview/Materiality analysis/Pages/Mater iality Matrix.aspx, accessed May 2014.

24. Staples. Staples Soul, Reporting Approach, Materiality Analysis, www .html#id_ra2, accessed May 2014.

25. Daiwa. Daiwa House Group Annual Report 2012, english/groupbrand/ar/pdf/daiwahouseAR2012E_2.pdf, p. 145, accessed May 2014.

26. Kepco. Kepco 2012 Sustainability Report, business-kopec/sr_2012_e.pdf, p. 20, accessed May 2014.

27. Enel. Sustainability, Responsibility, Materiality Matrix, en-GB/sustainability/ our_responsibility/ materiality_matrix/, accessed May 2014.

28. Thomson Reuters. The Knowledge Effect, Materiality Matrix, blog, accessed May 2014.

29. Other uses included "Global Sustainability Significance." Mountain Equipment Co-op. MEC's 2013 Materiality Matrix, accountability/MEC_2 013_materiality_matrix_v2_m5 6 577569831501444 .pdf, accessed May 2014 and "Pressure from stakeholders." Braskem. Annual Report 2012, rao2012 12_PDF_completo_ in.pdf, accessed May 2014.

30. UBS. About us, Corporate responsibility, Our approach, Materiality assessment, commit ment_strategy/materiality-matrix.html, accessed May 2014.

31. The three most common labels on the X-axis were "relevance to" (26%), "impact on"(23%), and "importance to" (20%). The three most common labels on the Y-axis were "importance to" (34%), "relevance to" (16%), and "significance to" (9%).

32. Statoil. Annual Report 2012, Sustainability Report, AnnualReport2 012 /en/Do wnload%2 0Center%2 OFiles/01 %2 OKey %2 Odown loads/20%20Sustainability%20Report%202012/Sustainability.pdf, p. 51, accessed May 2014.

33. Danisco. 2010/2011 Sustainability Report, tx_tcdaniscofiles/danisco_sustanability_report_2010-ll_04.pdf, p. 20, accessed May 2014.

34. Nestle. Creating Shared Value, What is CSV, Materiality, nestle .com/csv/what-is-csv/materiality, accessed May 2014. Ball Corp. Sustainability, Our Approach, Priorities,, accessed May 2014.

35. Ford, Sustainability 2013/2013, ability-report-2 012-13 /blueprint-materiality-analysis.

36. Numerical (14.3%), Labels (60.4%), No labels (25.3%).

37. UBS. E: 0-19. Relevant to a limited number of stakeholders and no current impact on UBS performance. D: 20-39. Relevant to a group of stakeholders and minor current impact on UBS performance. C: 40-59. Relevant to groups of stakeholders and limited current impact on UBS performance. B: 60-79. Relevant to most (including all key) stakeholder groups and relative current impact on UBS performance. A: 80-100. Relevant to all stakeholders and direct current impact on UBS performance.

38. DSM. Royal DSM Integrated Annual Report 2012. annualreport2012, accessed May 2014. The upper right quadrant is "Prioritize," the upper left is "Actively monitor and communicate," the bottom left is "low priority," and the bottom right is "actively manage."

39. Although Daimler acknowledges the complexity of aggregating stakeholders' views in producing the Y-axis in its 2012/2013 materiality matrix, it only provides a one-sentence explanation for how this as done: "In addition, weighted averages were calculated for what in some cases were divergent interests among individual stakeholder groups. These averages (weighted) were incorporated into the matrix in an aggregate form." Daimler. Sustainability Report 2012, About this report, Materiality matrix, annual/2013/nb/English/ 7520/materiality-matrix.html, accessed December 2013. Deloitte recommends using decision science to calculate the stakeholder weighting: "Given today's immature state of knowledge on ESG valuation impacts, decision science methods are a powerful tool that can help managers develop a single scale and structure some of the complexity involved in ESG topics, including the subjective biases of multiple stakeholders. Using these methods can augment the credibility of ESG materiality determination and can allow business leaders to better defend their decisions about ESG management, investment and disclosure on matters of value to their myriad stakeholders." Decision science can be used to weight and aggregate the scores of individual stakeholder groups, as well as incorporate the importance of a time dimension in these issues. Using such methods can increase the transparency of the scoring process, and provide an objective measure, which acknowledges the differences in stakeholder groups. Deloitte. "Disclosure of long term business value; What matters?" www materialitypov_032812.pdf, accessed May 2014.

40. BASF. Sustainability, Identification and Management of Sustainability Issues, Materiality analysis, management-and-instruments/global-materiality-matrix, accessed May 2014. For other examples, see the following. Vodafone. Sustainability, Our vision and approach, Material issues, our_vision_and_approach/managing_sustainability/material_issues.html, accessed May 2014. Fraport. Connecting Sustainability - Report 2012, Sustainability Management, Sustainability Strategy, sustainability-report.fra-port.eom/sustainability-management/sustainability-strategy/#wesen, accessed May 2014.

41. Cisco. 2013 Corporate Social Responsibility Report, assets/csr/pdf/CSR_Report_2013.pdf, accessed May 2014.

42. Campbell Soup Company. 2013 Corporate Social Responsibility Report, asp#. UvGgNRBdVQF. Inactive link as of May 2014. The four stakeholder categories were "Customer/Consumer"; "Stakeholder Relations and Community"; "Workplace"; and "Environment and Supply Chain."

43. Samsung Life Insurance. 2010-2011 Samsung Life Insurance Sustainability Report, http: // samsunglife .com/companyeng/pdf/2010_2 01 l_SR_eng_ full_page.pdf, accessed May 2014. The Corporate Library. GS E&C Integrated Report,, accessed May 2014.

44. Mountain Equipment Co-op.

45. Most companies use a fairly high-level classification of stakeholders into broad groups like employees, customers, suppliers, and NGOs. But there are nuances within each and decisions made about how to construct the sample for each stakeholder group. The situation is especially complicated with NGOs. The company may not always know which NGO is the most "legitimate" one for representing society's interest on a particular topic. Conversely, identifying an NGO as a stakeholder in constructing the matrix and in ongoing engagement processes can confer legitimacy on the NGO, raise questions about why the company selected a particular NGO and not another, or both. For a thorough discussion of some of the nuances in identifying, selecting, and engaging with stakeholders see Wheeler, David, Heike Fabig, and Richard Boele. "Paradoxes and Dilemmas for Stakeholder Responsive Firms in the Extractive Sector: Lessons from the Case of Shell and the Ogoni." Journal of Business Ethics 39 (September 2002): 297-318.

46. We observed this already in our comparison of Ford's matrix and Daimler's matrix. We saw that the same issues were given different scores along each company's materiality matrix, underlining the fact that the Y-axis is not an objective measure of importance to society but the company's judgment of an issue's significance to society.

47. This approach has already been adopted by a few companies which name the Y-axis either "society" or "societal interest." See the following. Cisco. Petrobas, Investor Relations, Sustainability Report, en/governance/sustainability-report/relatorio-de-sustentabilidade-detalhe-4 .htm), accessed May 2014. DSM.

48. Eccles and Serafeim explain that this is not for the faint of heart, "Addressing the most significant trade-offs between financial and ESG performance— challenges that are often unsolved in a sector—requires major, organization-wide innovation: entirely new products, processes, and business models that improve performance in 'bundles' of material issues. Developing a single product or process innovation to address a specific issue may be part of the solution but in and of itself won't shift the performance frontier for the company as a whole." Furthermore, they add, ". . . major innovations often require substantial investments whose benefits will not be seen for years to come. If a company expects shareholders to commit for the long term in order to receive those benefits, it needs to provide them with information that justifies their investments. Combining ESG and financial performance information in a single document [an integrated report], as Natura did, is an effective way to do this." Eccles and Serafeim. "The Performance Frontier," pp. 54 and 58.

49. Eccles and Serafeim note that minor to moderate innovation may not be enough. "While minor innovations, such as efficiency improvements, can nudge a downward-sloping performance frontier up a bit, only major innovations in products, processes, or business models can shift the slope from descending to ascending." The authors continue, "If your firm's performance in an area—say, energy use or labor practices—falls short of industry benchmarks, getting it up above par is a first priority. At the very least it will mitigate your risks, since stakeholders tend to focus on industry laggards in campaigns aimed at increasing corporate ESG performance. Many improvements, such as reducing manufacturing waste, involve minor or moderate innovations that can enhance efficiency and, therefore, financial performance. Those sorts of innovations are increasingly necessary (but not sufficient) to ensure competitiveness." Ibid., pp . 53-54.

50. Sustainability Accounting Standards Board. Approach, Materiality, SASB Materiality Map™, accessed May 2014.

51. Martin Reeves, email correspondence with Robert Eccles, April 17, 2014. We are deeply grateful to Martin Reeves, Senior Vice President of the Boston Consulting Group and head of their Strategy Institute, and seven of his partners for taking the time to fill out the survey, which provided data for the Y-axis.

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