AccountAbility Proposes Robust Materiality for Social and Environmental Disclosure

Source: AccountAbility, 1 July 2003

AccountAbility, the leading professional body promoting accountability standards for sustainable
development, today releases its report, Redefining Materiality: Practice and Public Policy for Effective Corporate Reporting.
Redefining Materiality proposes a new approach to defining materiality in corporate reporting. It is particularly relevant to the UK Governments proposed amendments to Company Law. These amendments will require companies to disclose within an Operating and Financial Review (OFR) social and environmental performance relevant to members interests arising from stakeholder concerns and actions.
AccountAbilitys proposals are also aimed at impacting on a range of other regulations, including those governing risk-related corporate reporting, and stock exchange listing requirements.
AccountAbilitys proposals have been developed in association with the UK Social Investment Forum, and informed by extensive consultation with the investment community and experts in corporate governance and assurance. The report coincides with the publication of the Department of Trade & Industrys consultation paper on the interpretation of materiality in the proposed
Company Laws Operating and Financial Review (OFR).

AccountAbilitys proposed approach to defining materiality offers legal protection to directors responsible for non-financial reporting by providing the essential framework for compliance, which the legislation currently lacks. All parties can therefore achieve a degree of certainty and confidence that the legislation can achieve its stated aims. Increased regulatory interest in corporate disclosures has too often suffered from uncertainty and inconsistent levels and quality of disclosure, which has benefited neither directors nor stakeholders.
AccountAbilitys proposals go to the heart of the DTIs proposed reforms to OFR in setting out a robust, five-part test of materiality for identifying and deciding which stakeholder concerns should be taken into account in assessing members interests. The report goes further in advocating that the application of the test be subject to external assurance by providers using appropriate standards,
notably the recently launched AA1000 Sustainability Assurance Standard that is being increasingly used for assuring corporate sustainability reports.

Chris Hirst, CIS Executive Director Investment Management, comments: Corporate reporting is being redefined on the ground, by companies responding to pressure on business from society and, increasingly, investor demands, regulation and litigation. AccountAbilitys proposals offer an
approach that will guide and protect company directors, and enhance the value of corporate reporting to the business, its members and other stakeholders. We hope that the government will adopt these proposals to ensure that the proposed reforms to UK Company Law are coherent, practical and effective.
Labour standards, human rights and environmental issues rarely figure in investor-focused reporting, comments Simon Zadek, Chief Executive of AccountAbility and co-author of the report, yet in retrospect we see repeatedly how these issues impact on businesses reputation, performance
and profitability. He concludes, Materiality in company law must mean companies credibly reporting on what people care about because these stakeholders can and will affect future business performance through their actions as customers, employees, investors and voters. Our recommendations set out how this can be done, and so support Governments underlying proposals for reforming UK Company Law.

Alun Bowen, a Senior Partner at KPMG, comments: "Redefining Materiality provides a significant contribution to the current debate on materiality. It can be one of the foundations, as in my view it reflects current best practice, that future Company Law and related guidance can be built upon.
Our information needs as investors are changing and the definition and interpretation of materiality has to evolve to accommodate this.

AccountAbility’s proposals offer a practical and useful way forward which will allow company directors to report effectively to investors on their material, environmental and social impacts, said Emma Howard Boyd, Head of Socially Responsible Investment at Jupiter Asset Management.

Download the executive summary (pdf)