What you need to know about materiality in integrated reporting

The <IR> Framework has seven guiding principles. The fourth guiding principle articulates the importance of determining materiality.

What is materiality?

Materiality is a term that is widely used, but perhaps not completely understood. The focus of this article is on materiality in integrated reporting, although definitions vary in interpretation between integrated and sustainability reports, as well as when applied in the accounting context. 

Material matters highlight important information that relates to your company’s strategy, governance, performance and future prospects, and have the potential to impact the decisions of stakeholders. In integrated reporting, the purpose of materiality is to explain to providers of financial capital how your organisation creates value over time. Integrated reporting requires that you think beyond traditional financial reporting and identify risks, opportunities and potential outcomes.

Why is it important?

When you highlight how your company’s material matters link with your strategy, governance, performance and future prospects, it goes beyond the reporting requirement and demonstrates integrated thinking.  By embedding the materiality determination process into management processes, you can enhance the efficiency and effectiveness of your decision-making processes and ultimately how you report on the outcomes of decisions.

What does the framework say?

“An integrated report should answer the question: How does the organisation determine what matters to include in the integrated report and how are such matters quantified or evaluated?”

How do I determine materiality?

Although there is no prescribing rule regarding the frequency of determining your company’s material matters, the framework recommends revisiting your previously identified material matters with each reporting cycle. Ideally, materiality should be embedded as a continuous process that is performed as part of everyday decision-making by senior management and those charged with governance in your organisation.

In identifying material matters, you should consider financial and non-financial information that have, or may have, the potential to impact your organisation’s ability to create value, both positively and negatively. Topics or issues to consider include matters arising from boardroom discussions, issues that may lead to loss of opportunity if not addressed, issues raised by stakeholder groups, and issues that link to your company’s strategy, governance, performance or prospects. The framework further provides guidance on the process to determine material matters, namely identifying relevant issues, evaluating their importance, and prioritisation.

Identify these relevant matters by considering value drivers, stakeholder issues, external and internal factors, and current performance. Evaluate their importance based on magnitude of effect and likelihood of occurrence. Prioritise the material matters based on magnitude. Disclose the materiality process, the results thereof (material matters), and accountability (the role of those charged with governance in preparing content).

Understanding magnitude of effect in integrated reporting

Not all the matters identified will be considered material. By evaluating the magnitude of effect of a specific issue, considering its known or potential impact on your organisation’s ability to create value, you can filter issues for relevance and importance.  

It’s important to apply scientific rigour in determining the magnitude of effect by using both qualitative and quantitative measures. 

If you require further guidance on determining your company’s material matters, contact Alchemy Creative Studios: info@alchemycs.co.za

This is the fourth article in a series of seven relating to the <IR> Framework guiding principles. Return to our blog to read more on these principles.