Tuesday, May 31, 2016

Big Data and Materiality: Lost in translation?

Part I of two following the GRI Global Conference 2016
Data was the centre of excitement at the GRI Global Conference held in Amsterdam this past May of 2016. Having been part of the GRI process since its foundational days, it has been fascinating to see the movement evolve from the early mission "for sustainability reporting to become as routine as annual financial reporting" to the new mission "to liberate sustainability data from reports". Only in this way can the data be analyzed and integrated in a meaningful way, argues GRI chief executive Michael Meehan.

And while many assume that more data will bring us closer to solutions, wise words at the Conference came from statistics professor Enrico Giovaninni from the University of Rome. He cautioned that data also creates new divides. For one, the data debate tends to be dominated by IT specialists, statisticians and consultants throwing about the latest jargon. It tends to be a technical or expert debate that may very well leave many GRI stakeholders feeling alienated. This brings the challenge of turning complexity into simplicity, an art for which one needs Steve Jobs-type technology visionaries.

As we weigh the opportunities offered by more data, do not forget the old phenomenon of "information carpet bombing". It is one that sustainability thought leaders like John Elkington himself identified in the early 2000s. What is really Big Material in the face of Big Data? During a plenary debate at the Conference someone mentioned that the predictions made by the Club of Rome in the early 1970s are still surprisingly accurate. The global trends and exponential growth in world population, food production and resources depletion as focused on by the Limits to Growth (1972) computer simulation study may indeed leave us with global system collapse by 2050. If they were so accurate and common sensual over fourty years ago, based on data available back then, what more do we really need today? At what point does common sense kick in? What should make us conclude that so much more data in the 2010s will suddenly help us to see the light of day and dramatically transform in a ways we have not been able to do in the last five decades?

During the launch event of the 10th anniversary edition of our report Carrots & Sticks with KPMG, UNEP and GRI, I pointed out that the Sustainable Development Goals (SDGs) can be thought of as a "shortlist" of the key material topics for our globe at this point in time.  Despite the interest in these themes, what was coming short at the GRI Conference was making the connection between the SDGs, Big Data and the new GRI standards. Often lacking in plenary discussions on data was:

  1. Associating the data with the performance of individual organizations (i.e. reporting companies), being entity specific and making the macro-micro link as opposed to a generic discussion on all sorts of data (including Big Data); and
  2. A lack of appreciation of the mass of contextual data that has been collected by governmental institutions and international public research initiatives since decades. (These include the data collected by institutions such as NASA, the World Bank and UN Global Observing Systems.)

The first above is addressed more or less directly by initial recommendations from the new GRI Technology Consortium on the future of sustainability data, made public at the Conference. One of its five recommendations is the need for a public and open global repository of public sustainability data. One could argue that this is provided by platforms like Corporate Register, which hosts over 75000 corporate reports accumulated since the 2000s. But the Consortium's interest is in making it easier to access, extract and compare data outside of "reports", in a world beyond paper and PDF documents. The easier access and comparability of data also makes the case for more specific GRI standards (on subcomponents of the GRI Guidelines).

The focus on digital information presents all sorts of challenges for old disciplines such as the legal profession as I've argued before (see "Good bye sustainability reports, hello sustainability reporting", May 2014). The Consortium recommendation is also different in that it asks for a public good. This is different  from the equivalent information service provided on commercial terms by the likes of Bloomberg and Thomson Reuters to investors. An example of what the Consortium may have in mind is the new Wikirate, a platform profiled in a workshop on "Radical Transparency" hosted before the Conference by the Reporting 3.0 initiative. Wikirate relies on crowdsourcing to compile data and information on various aspects (as per GRI G4 and others) of a company's operations. This includes data reported by the company itself, as well as data available publicly from other sources.

The Wikirate approach reminds of recent  reports by Thomson Reuters and BSD Consulting on the GHG emissions of the Global 500, in which publicly available information was used to estimate the GHG footprints of almost 150 of the Global 500 who still do not disclose their GHG emissions. As exciting as Wikirate is, the Berlin-based initiative will be challenged in (a) mobilizing public support (beyond mainly post-graduate students from say Europe) and (b) looking beyond the usual suspects, for example a top 100 companies who report extensively, versus thousands of lesser known, large companies world-wide who in many cases do not even disclose significant sustainability data in the first place.

The movement for large-scale disclosure and collection of information, engaging diverse stakeholders, brings us to the decision-usefulness of information or more specifically data, who the target decision-maker is and materiality. Discussions in recent years on "integration" and the need to replace information "clutter" with concise, strategically relevant information have highlighted the need to align the understanding by different professions of what "materiality" really means.

In its latest annual Reporting Awards, Corporate Register (see CRRA 2016) employed "Relevance and Materiality" as one of its criteria. It describes it as focusing on:
  • "the report which cuts to the chase and tells us about the material issues (those that are specific to the company performance and sector, the risks and opportunities), clearly and succinctly". 

Most will agree that this sounds attractive indeed. Such clarity (or the lack thereof) also has important implications for business model innovation. Being clear on materiality is key for making the business case, having a convincing value proposition and defining a business model that has sustainability built into it. So argued Knut Haanaes, Geneva-based partner of The Boston Consulting Group (BCG) in a recent webinar on their latest annual survey report with MIT Sloan Management Review. The 2016 edition of their Global Executive Study on corporate sustainability highlights that senior executives underestimate the level of interest that senior investment managers are showing in ESG data.

The GRI Technology Consortium members include MIT Sloan. Its survey with BCG hints at a certain skepticism about sustainability ratings today (were they able to predict BP and VW type scandals?) and the possibility that more companies are developing their own benchmarkings in-house. In defence of sustainability ratings, service providers such as Sustainalytics would argue that more advanced rating today has become more dynamic in reflecting changes in the materiality of topics. The new GRI standards approach also recognizes the evolving nature of an ESG agenda and will allow for the formulation of individual topics and indicators to undergo revision on a "when required" basis. Furthermore, agencies such as Sustainalytics would argue that more integrated rating today is also applying more rigorous weighting based on materiality considerations informed by quantitative data analysis. The emerging ESG Ratings Hub of the Global Initiative for Sustainability Ratings (GISR) will provide more transparency about the nature and quality of methodologies applied by rating agencies (including those accredited for applying the GISR principles).

Somewhat data-bombed and lost in translation at the GRI Conference, I attended materiality-focused discussions and two Master Classes on Materiality presented by respectively Deloitte and Sustainalytics.  Two themes that struck me was (a) perspectives on the materiality determination process, including how the time dimension is dealt with, as well as (b) making the link between sustainability data and financial data. Let me start with the process.

Materiality process and its value

The master class by Deloitte among others highlighted the apparent disconnect between, on the one hand, (i) a resource intensive process of determining materiality that companies conduct every 1-3 years, involving often diverse stakeholders, and, on the other hand, (ii) the content provided in sustainability reports or content tabled at senior / top management discussions. If a company invests all the effort in determining material topics through an inclusive process, it is puzzling and a missed opportunity if strategic and Board level discussions do not effectively make use of the resultant information. The latest WBCSD Reporting Matters (2015) study found from its examination of 169 WBCSD members' non-financial reports that while 82% of them disclose the use of a materiality determination process, only 30% focus their reporting on those issues they consider to be material to their business.

Talking to South Africa's Mervyn King afterwards, he underlined to me the importance of exposing Board members and ensuring they hear what diverse stakeholders have said. This was echoed in the second Master Class, hosted by Sustainalytics, where Jean-Pascal Gond of Cass Business School (City University of London) argued that the materiality analysis has institutional value  in that the matrix tool presents broader societal concerns, helps to renegotiate boundaries and coordinate the actions of people.

Who to involve in the materiality determination process and at what level remains open to experimentation. In the 2000s I worked with AccountAbility in developing The Stakeholder Engagement Manual (2006). Its guidance on how to prioritize stakeholder groups remains highly valuable. Describing its process, ABN AMRO bank highlighted its categorization of stakeholders in four priority groups: clients, investors, employees and society at large. Producing an integrated report based on the IIRC <IR> Framework, it describes its value creation process in terms of the six Capitals. Under Financial Capital, it highlights with respect to inputs its reliance on investor equity and client deposits. Also under Financial Capital, it highlights with respect to outputs the bank's contribution to the national economy by providing debt capital (lending) to households, small businesses and corporates as well as its improving Return on Equity (RoE) to ensure a good dividend paying capacity vis-a-vis its shareholders (investors).

As one of the three biggest banks in The Netherlands, it is no wonder that three of the top material topics reported by ABN AMRO is the privacy, security and stability of digital services to its clients. Another is compliance with legislation and regulations. The new Carrots & Sticks report indicates that financial institutions have received special attention in many new disclosure requirements introduced by diverse instruments (regulations and other) over the last five years. If what is required by law to be included in an annual report (for example a statutory document) were to be material by definition, one cannot help wondering if in some cases what is material may not be strategic. More on this in Part II of my GRI Global Conference 2016 blog.



    From left to right at the launch of Carrots & Sticks 2016 at the GRI Conference:
    Teresa Fogelberg (GRI), Cornis van der Lugt (Stellenbosch University Business School),
    Elisa Tonda (UNEP) and Wim Bartels (KPMG Global Sustainability Services)





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