Essay: Reconsideration of the materiality principle in the 4th generation GRI guidelines
Contribution of Johan Piet, PhD, CPA
Date: 30 June 2011
With the upgrade to G3, GRI introduced the materiality principle as one of the core reporting
principles of its Sustainability Reporting Guidelines (2006)i. This principle is known from reporting
theory and practise, but is now used in a different way. Why was it necessary to redefine this concept,
and how is dealt with the gap it caused by deleting it as a quality aspect of reporting? The answer
“why” is given in the Technical Protocol Applying the Reporting Content Principles (2011)ii. Here is
stated: “The materiality focus of sustainability reports is broader than the traditional measures of
financial materiality”. This raises the question if reports on sustainability should distinguish from
financial reports on its theoretical fundaments? Or do we recognise a common framework on
reporting? This essay aims to clear the misunderstanding about this concept and makes proposals for
the G4 guidelines. While preparing a new philosophy for integrated reporting, we should respect a
common framework. If there is a need for redefinitions, it should at least be generally acceptable for
all types of information.
In the eighties and nineties some innovative work has been performed with environmental reporting.
One innovative stream was culminated in the UNEP publication of 1996iii which combined prior
publications of several other institutions into the (50) environmental topics to report on. I have
experienced that the emission reports of the 80th should be replaced by environmental policy reports
which were understandable by the general public and for this reason I have developed a new
conceptual framework which was applied to environmental reporting practice and delivered it to
science and education programmes. This framework was translated form Dutch into English and
discussed in international forums, ending in the FEE publication of 1999 with a generally accepted
vision of accountants. Accountancy is not limited to financial reporting. It is a general theory on the
design of information for information users, internal and external, in taking decisions and in rendering
account. And, by the way, accountants can also deliver assurance. Based on this scientific domain and
technical instruments from practise, the accountancy profession has contributed to the development of
sustainability reporting very profound.
In 1999 FEE published its discussion paperiv on environmental reporting and 2 of the 4 chapters have
been adopted by the first GRI (environmental) guidelines of 2000. In this paper the concept of
materiality has been ranked under the “underlying assumptions” of environmental reporting, which is
next to the qualitative characteristics of reports, but at a lower level than information needs. These
aspects were not specifically for financial reports but based on the general information theory or
reporting theory and it was judged as good applicable. These aspects are not only used in financial
reporting, but also in other types of reports. The basics of the conceptual framework are the same, but
in its application, differences may occur: different topics, different goals, different reader groups.
The meaning of materiality as a core principle of GRI is related to the “size” or “relative importance”
of the occurrence of an issue. In this meaning “materiality” has a different goal than the materiality
principle of reporting. In GRI, related concepts are used, such as the “relevance” for the reader
(stakeholder) in respect of its interests, and such as significance for the reporting organisation. The
latter is the selection of issues that are mostly present in the internal processes, products or chains of
this organisation. The combination of relevance and significance is the basis to report or not, and the
degree of detailing information. And the question which of relevance and significance is dominating
can be answered by: both are reasons to report on this topic. There is no reason for introducing a new
term for the size or importance of topics.
J.L.P. Piet, Reconsideration of the materiality principle
Using the concepts of relevance and significance, no differences will occur in the theoretical
framework of reporting. Both financial reporting and sustainability reporting use the same concepts
with the same meaning. So, I propose to delete materiality as a core principle and to replace it by a
combination of relevance for the reader and significance for the organisation.
Then the question can be raised in what sense a materiality principle can be used as it was designed in
the information and reporting theories. This principle in its original denotation is supporting the
quality of reported information. By deleting this quality criteria there is a risk of information overload
and a lack of control at potential faults and misstatements. In accountancy literature, definitions and
description can be found. “Accountants follow the materiality principle, which states that the
requirements of any accounting principle may be ignored when there is no effect on the users of
information.”v In the conceptual framework of the International Financial Reporting Standards (IFRS)
is explained: “Information is material if its omission or misstatement could influence the decisions
that users make on the basis of an entity’s financial information.” FEE (1999, page 17) believes, “that
the application of the materiality concept in environmental reporting situations is more complex than
in financial reporting, and heavily dependent on the nature and circumstances of an item or event (as
well as its scale)”. However, a group of experts organised in EMANvi have meanwhile developed
methodologies for quantifying environmental impacts which allows to quantify potential
misstatements in a similar way as in financial accounting. But realise, that even in financial accounting
information can be weak or biased for the use of estimations, valuations or calculation rules.
Sustainability information related to ethics is still in its native stage.
Accountants should be read as information experts. These professionals apply this expertise to
financial and non-financial information as well. If a message is send out, some bias may occur by
limitations in measuring, valuation or presentation. This potential mistake of fault should be judged as
part of the quality control by the reporter. For instance: a diffuse emission cannot be measured, but
some calculation models may estimate and reflect the impact. If this emission is significant or
relevant, the reporter should evaluate the possible consequences for reporting a ‘true and fair view’ of
this information. If this report is meant for emissions trading a risk of 1% mistakes may be acceptable.
Presenting an improvement from 18 tons to 12 tons, a misstatement with a materiality of 10% is good
enough. In other cases a report may contain a statement like: we cannot measure the emission, but we
have made investments in the production technology directed to a reduction of this emission in time.
Each item of a report should be judged for effects of bias or misstatements. Quantifying this risk is not
always possible, but using qualitative information may solve this problem.
I would propose to replace the materiality principle in defining the report content with relevance and
significance, and to bring it to the reporting principles for defining quality.
Global Reporting Initiative. Sustainability Reporting Guidelines, 2006-2011, version 3, page 8
Global Reporting Initiative, Technical Protocol Content Principles, 2011, page 3
UNEP, Company Environmental Reporting, Technical report No 24, Paris 1995
Fédération des Experts Comptables Européens, FEE Discussion Paper Towards a generally accepted
framework for environmental reporting, 1999
See general education books on accountancy, e.g. Elisabeth A.Minbiole
Environmental Management Accounting Network
J.L.P. Piet, Reconsideration of the materiality principle