Financial materiality and human rights, pineapples and profits
The Materiality Files: Blog 1, Co-authored by Ben Carpenter & Jeremy Nicholls
In June, the Guardian and The Bureau of Investigative Journalism (TBIJ) published an investigation into allegations that four people had been killed and many more had suffered violent assaults over a four year period from the security personnel of a Del Monte pineapple farm in Kenya.
These alleged human rights abuses were perpetrated in the name of protecting pineapples and the profits they represent. This blog uses this story to illustrate how human rights abuses like those alleged in this investigation occur regularly and will continue until there is a fundamental change to the way our economy works and the way businesses make decisions.
In this first blog in the Materiality Files, we outline how the global economy currently works and introduce the idea of ‘financial materiality’ before examining the case of Del Monte to illustrate the shortcomings of this approach. Lastly, we describe an alternative approach that could lead to more sustainable decisions.
Financial materiality and the economy
In the current global economy investment managers and business leaders focus first and foremost on financial returns. Even when thinking about sustainability issues (Environmental, Social and Governance, or ESG), these are treated as risks to financial value. The newly formed International Sustainability Standards Board (ISSB) states that sustainability information is useful to investors because:
“an entity’s ability to generate cash flows over the short, medium and long term is inextricably linked to the interactions between the entity and its stakeholders, society, the economy and the natural environment throughout the entity’s value chain.”[1]
This is what has come to be called ‘financial materiality’. It is not about achieving sustainable development or improving the wellbeing of people and planet, it is about financial risk management.
Supporters of financial materiality argue that business decisions will be made to avoid negative impacts on people because all negative impacts, at some point (short, medium long term), limit the business’ ability to generate cash flows. Perhaps the pursuit of profits will force businesses to be more responsible – to treat people with dignity and not exploit our natural resources? In theory then, a business would not abuse members of the local community because this leads to bad press, a damaged reputation, a drop in share price, reduced sales and maybe fines or compensation packages.
2. How this idea of financial materiality works … in real life … when pineapples, profits and people’s lives are all at stake
Why were the alleged human rights abuses committed by the security firm employed by Del Monte? Why didn’t the risk of reduced financial performance prevent the reported violence from happening? Comparing the consequences of these events for the Del Monte business owners and shareholders with the consequences experienced by victims and their friends and family may provide the answer.
What are the consequences for Del Monte shareholders? These headlines about violence and deaths are obviously not ‘good for business’. Perhaps there was an immediate drop in share-price? If the scandal continues there may be a drop in sales. Once any investigations have been concluded there may be a fine that the company might have to pay.
It is quite clear that the consequences for Del Monte shareholders and business leaders were not severe enough to prevent what law firm Leigh Day called “serious human rights abuses.”. In fact, news articles reveal that Del Monte have been embroiled in similar scandals for the past four years but the share price for that period does not show any significant downward trend (see below). It appears that a business can absorb the consequences. Any negative effect on company reputation or ‘license to operate’ is short term and passing. Pineapple will be back on our menus soon enough.
Del Monte’s share price has remained stable despite the allegations
What are the consequences for the people who experience impact? The families of the victims will forever be grieving the loss of life of a loved one. They will also suffer as a result of the loss of income. Other victims who survived may be suffering from physical injuries and emotional harm, a loss of dignity and respect, and a drop in income.
“Joel wants Del Monte to act. Speaking about the guards he believed attacked his son, he said: ‘They don’t value life. What they value most is pineapples.’”
https://www.theguardian.com/world/2023/jun/21/kenya-plantation-deaths-families-fight-for-answers-del-monte
These consequences are not accounted for by Del Monte. There is no ledger that includes the negative value experienced by these people. What would the world look like if these impacts were accounted for? Imagine what business decisions would be made if all these impacts were included in company reports but valued from the perspective of the alleged victims?
Not only are the financial consequences low but the lost value to investors is completely different to the lost value to those affected. Whether or not this information was reported does not appear to have changed investors decisions. The argument is now that including it in the company’s own reporting as opposed to in a news report is more likely to affect decisions. But if the (risk adjusted) financial consequences are low, it may still not be included in those reports. However, if the loss of value from the perspective of the victims was taken into account, and into the account of profits made, the business would be making very different decisions and a lot faster.
An alternative approach: from financial materiality to ‘wellbeing materiality’
Social Value International believe in a world where, in calculating profits, businesses account for the impacts they have on people’s wellbeing. Since 2007 SVI have been growing a body of practice for ‘accounting for value’ where impacts on wellbeing can be accounted for and integrated alongside financial value. Today, SVI's community of practitioners, spanning 60+ countries, are proving that measuring impacts on wellbeing is entirely possible. Through a principles-based approach, these practitioners can produce a social value account or a ‘wellbeing account’ that can inform decisions where the purpose is expectation of improvements in wellbeing. We could even call this ‘wellbeing materiality’.
If Del Monte were producing wellbeing accounts they would be collecting and analysing data on how their activities impact the wellbeing of a range of stakeholders including local villagers. These accounts would include valuations of the impacts – from the perspectives of the people who experience the impacts. This information matters and if integrated with the financial accounts would lead to very different decisions being made.
However, we believe that there is a more fundamental problem with how materiality has been used in sustainability accounting and reporting, that relates to how materiality is treated in financial accounting and so in a company’s financial statements. We argue that the way materiality is used in sustainability reporting, and even in how financial materiality has come to be understood by many, is inconsistent with what happens in financial accounting.
This will be the subject of our second blog.
In addition, our Top Tips webinar with Jeremy Nicholls on 5th September 2023 took a deep dive into this subject and examined how accounts of wellbeing would result in different decisions being made. You can watch a recording of this webinar here.
About the Materiality Files
SVI are producing a series of blogs and a webinar on the subject of materiality. Why? The existential threats of climate change and social inequality are real for us all. In an attempt to reverse these negative trends and create a more sustainable world there needs to be a transformation in the way capitalism works and that means a change in the way decisions are made. Central to this transformation is changing the purpose behind investment decisions and then the information that matters to inform decisions with that purpose will also change. The concept of materiality is central to this.