Knowing what issues are most important to the company and its stakeholders is a key factor when disclosing performance. We consider material issues to be those that have affected, or that are reasonably likely to affect, the company's reputation, liquidity, capital resources or results of operations. Material issues can also include those that stakeholders consider important to their interests and to AEP's sustainability.
In 2012, AEP conducted a formal materiality assessment to evaluate the sustainability issues of importance to our stakeholders and our business. We also sought to identify opportunities for improving our presentation of information. We used the Global Reporting Initiative, the International Integrated Reporting Council and the Sustainability Accounting Standards Board as guidance to give us perspective on expectations for performance reporting. And we got an analyst’s view to help us see how investors view our reporting and what they need to be able to make more informed decisions about AEP.
This exercise allowed us to see the connections between issues our stakeholders say are important to them and our business strategy, risks and opportunities. Understanding these linkages allows us to be more focused in our engagement and to allocate resources where there is the greatest opportunity for sustainable growth while mitigating potential risks.
AEP Materiality Matrix
Description of Matrix
The matrix highlights those issues identified as AEP's new priority issues, based on the survey results. These priority issues are represented in blue. The numbers on the X and Y axis represent the degree of materiality as assessed by the survey. We defined how materiality should be interpreted for all stakeholders who participated, recognizing that each individual stakeholder group would have a different perspective. They were asked to respond to each issue, ranking them as not applicable/not material, low materiality, medium materiality, or high materiality. The X axis represents the scoring for internal stakeholders; the Y axis represents the average scoring for external stakeholders.
Increases in the temperature of the earth’s atmosphere, caused either by natural cycles or human activity, and their potential impact on AEP’s operations, including its fuel mix; its environmental compliance; the cost of electricity; and the company’s financial performance.
In November 2012, we sought opinions from more than 250 internal and external stakeholders. This outreach extended to the six-member Committee on Directors and Corporate Governance of the AEP Board of Directors, as well as the board chairman, all of whom completed the survey. This committee has oversight of AEP's sustainability reporting and initiatives and was deemed the most appropriate board engagement for this first assessment. In the future, we will engage the entire board.
The materiality matrix that resulted from the survey reflects AEP’s environmental, economic and social impacts and aligns with our business strategy and material risks. Although this assessment provided guidance, it reflects a specific point in time. In preparing our 2014 Corporate Accountability Report, we sought to test the continued relevance of these priority issues as well as identify any new or emerging issues.
To do this, we organized a half-day workshop with subject matter experts from more than 15 business units and departments across AEP. Facilitated by SustainAbility, a consultant that works with us on stakeholder engagement, the discussion was robust and thoughtful. These experts questioned how issues were described and offered ideas for greater clarity; they identified disconnects between the initial assessment and today’s changing environment; and they identified new and emerging issues that are now on our radar screen.
For example, the way we look at cybersecurity has expanded to include potential threats from the supply chain as suppliers gain access to our systems. The group also identified the growing impact of distributed generation, such as rooftop solar, to AEP’s business model and strategy. In the wake of Super Storm Sandy and other extreme weather events, grid hardening has also become a higher priority.
We also identified three additional priority issues during our review. Customer relationships/satisfaction, engaging our employees, and market competitiveness were issues deemed material in 2012, but not identified as priority issues. These new priority issues reflect the strategies put in place in 2013 to help execute our strategy for growth. Improving our customer experience, engaging our employees and advancing our competitive businesses will continue to be our focus in 2014 and beyond.
In addition to an internal review, we met with environmental groups and investors to discuss these issues in November 2013. We asked them what they wanted to talk with us about and then wove several of our material issues into the discussion. Some of the questions and issues they raised mirrored those of our internal stakeholders. For example, our external stakeholders also raised the issue of distributed generation and its impact on AEP’s business and the industry.
Climate change remains a priority issue for our stakeholders, as it is for AEP. Stakeholder interest in AEP’s internal culture and its influence on business strategy and success was unexpected. They saw it as a reflection of how the company is integrating its strategic focus with employee engagement to manage those issues that are shaping AEP’s future. The discussions and subsequent interactions we had with all of our stakeholders validate the priority sustainability issues for AEP.
A third component of our materiality review in 2013 was an external review of AEP’s Corporate Accountability website. Specifically, we asked SustainAbility to review the content organization and structure and make recommendations for improving accessibility and presentation of information for different stakeholder audiences. This was a very helpful exercise and the organization of this year’s report and website reflect this evaluation. Among their specific recommendations was to use simpler and clearer language and descriptions. For example, in this year’s report, “Fleet Transformation” is now called “Coal Unit Retirements.” SustainAbility also recommended tailoring online communications to engage different stakeholder groups.
AEP also received an analysis of its environmental, social and governance reporting – prepared by the Analyst DeskSM – a partnership between MetaVu and Wall Street investment analytics firm CRD Analytics. The analysis looked at reporting transparency, availability, completeness and syntax. We found this to be a valuable input to our process because it provided an investor’s view by reviewing our reporting through the lens of the NASDAQ OMX CRD Global Sustainability Index. This index tracks companies that are taking a leadership role in sustainability performance reporting.
The sum of our review process has given us a sharper focus on priority issues, improved online navigation and prompted us to use more straightforward language in describing parts of our business. It has also brought us closer to providing more tailored communications for different stakeholder groups. We have taken all of this input into consideration in preparing the 2014 report. Each time we go through this process, we deepen our understanding of the importance of integrated financial and nonfinancial performance reporting.
Materiality in the Electric Industry
The number of electric utilities committed to sustainable electricity is growing every year. Through the Electric Power Research Institute’s Sustainability Interest Group (ESIG), more than 40 investor-owned and public utilities, municipal cooperatives and merchant power generators come together regularly to share best practices and learn. In 2012, ESIG undertook an industry-wide materiality assessment (which AEP participated in) that was published in early 2013. This year, the group will publish a companion report about activities identified by stakeholders that utilities are doing or can consider to address the industry’s priority issues.
Learn more about the electric utility industry’s materiality assessment.