The basis of deciding what to include or exclude from any report is predicated on the concept of materiality. The Integrated Reporting <IR> Public Sector Pioneer Network, in its recent webinar 'Materiality in Integrated Reporting for the Public Sector', explored the materiality principle in the context of <IR> and provided some practical examples of its application.
One challenge that readily comes to mind when considering materiality in public sector reporting is the plethora of standards/requirements for reporting, and how materiality is interpreted in each context. Work has already begun, with the Corporate Reporting Dialogue – comprising of eight of the major organisations responsible for standard setting and guidance on reporting – producing a Statement of Common Principles of Materiality.
Although it focuses on the private sector, many of these standards are applicable to the public sector, for example, International Organisation of Standardization (ISO) Standards, Climate Disclosure Standards, Sustainable Accounting Standards and International Financial Reporting Standards. The statement compares materiality definitions and approaches across the respective standards/guidelines and clarifies the reporting concepts.
The International Integrated Reporting Council (IIRC) and the International Federation of Accountants (IFAC) published Materiality in <IR> Guidance for the preparation of integrated reports which sets out how organisations should prepare content, establish parameters for their materiality determination process and embed them in their management processes. It states that “in integrated reporting, a matter is material if it could substantively affect the organisation’s ability to create value in the short, medium and long term.”
Within the International <IR> Framework (the Framework), materiality is considered from three angles – process, results and accountability – which are covered in the following sections of the Framework:
Preparers of integrated reports are encouraged to consider carefully the process their organisation uses to determine which matters should be included in their integrated report. Additionally, the process should consider how those matters will be evaluated or quantified. The Framework sets out the stages of a materiality determination process to guide <IR> implementers.
To assist in that determination, public sector organisations are encouraged to consider firstly the audience of the integrated report because this is integral in establishing both what goes into the report and what does not.
Laura Leka, Programme Lead at the IIRC, shared that within the public sector, identifying the audience is “particularly important to consider due to the complexity of such organisations. The public sector is accountable to a wide and diverse range of stakeholder groups (including taxpayers, users of services, parliaments, legislators and markets), who often have conflicting needs.” Public sector organisations are expected to credibly demonstrate through their reporting how their stakeholders’ varying needs and expectations are managed, and ultimately how value is created through service provision.
Sarah Grey, IIRC Markets Director, pointed out that the ‘result’ of the materiality determination process refers to those matters that should be disclosed and what needs to be said about them. The guide recommends reporting on matters that have a material effect on strategy, the organisation’s business model and the six capitals.
The guide also suggests that consideration should be given to how each issue interacts with other factors to support or erode longer-term value. It is important to explain how these issues are being managed and the mechanisms in place to address them. Disclosure is further recommended on management’s approach to materiality determination, as well as the extent of their capacity to control those matters.
Sarah explained that some organisations cover their material issues over the normal course of their report (which is fine), while others find it useful to summarise their material issues in a list or matrix before proceeding to a deeper discussion.
The report should disclose the role that persons charged with governance play in the process. Some examples cited include endorsement of and signoff on the materiality determination process; consideration of the material issues raised and the action taken; and monitoring of material matters identified during the process through formal mechanisms, such as agenda items at meetings of those charged with governance.
Karen Koch, Chief Advisor of Integrated Reporting at Eskom Holdings SOC Ltd in South Africa, shared how her organisation developed and aligned their <IR> materiality determination process to their reporting environment.
As a wholly state-owned entity, Eskom is the primary electricity supplier in South Africa. It generates, transmits, distributes and sells approximately 90% of the electricity used in South Africa, also supplying to neighbouring countries. Their materiality determination process is based on the guidance set out in the <IR> Framework and reflects the following features: