Materiality is central to disclosure and investment 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.
To prepare this 2013 Corporate Accountability Report, AEP conducted a materiality assessment to ensure that we were reporting on sustainability issues of importance to our stakeholders and our business and to identify potential improvements in our presentation of information. This represents a change in the approach to and engagement of our stakeholders. It provided us an opportunity to ensure that issues deemed to be material by our stakeholders align with our business strategy and risks. 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.
We sought opinions from more than 250 internal and external stakeholders. This outreach extended to the six-member Committee on Directors and Corporate Governance and the Chairman of the AEP Board of Directors, 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 feedback we received from the survey helped us to prioritize AEP's environmental, social and governance (ESG) performance and to rank those issues based on their importance to stakeholders and to AEP. This report reflects the outcome of this process.
Although we reached out to many external stakeholders, we did not receive as robust a response as we had hoped for. We would have especially liked a greater response rate from customers, NGOs and governmental stakeholders and will work harder to engage them in the next survey. AEP worked with MetaVu and CRD Analytics on the assessment, which involved an objective, strategic review of AEP's existing materiality model (issues, stakeholders, methodology, visual charts and stakeholder communications, etc.). It was important to us to include an investment analyst's perspective in this process, which CRD Analytics represented.
We also sought to understand key changes in reporting expectations as presented by the Global Reporting Initiative (GRI), the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB). We aligned those changes in the standards with our material risks as identified by management, the Risk Executive Committee and the Board of Directors, to assure that we were measuring and reporting in a meaningful and useful fashion.
In 2012, we reported on more than 80 issues; we condensed that list to 36 issues and, of those, 15 continued to be issues of high priority for internal and external stakeholders. Those are the issues we are focusing on most intently.
The survey received a 56.3 percent response rate, which exceeded expectations. Participants ranged from AEP Board of Directors members, investors and employees to customers, suppliers (fuel and non-fuel), non-government organizations, contractors, labor unions and trade organizations.
Not surprisingly, there are changes in priorities among stakeholder groups. Some issues, such as environmental performance (including climate change) remain a high priority for AEP and its stakeholders. These issues have long dominated many of our conversations with stakeholders and led us to set goals to improve and enhance our environmental performance and reduce CO2 emissions. Environmental performance and regulation uncertainty continue to be significant issues to the company and to society and thus remains a material issue to AEP, as reflected by the amount of time, effort and financial resources we devote to our environmental performance and compliance. We have continued to be transparent about our environmental efforts while narrowing the focus of our reporting.
At the same time, other issues have risen to the top. This new assessment shows that energy reliability and security, the business value and cost of electricity and innovation and technology are also top areas of interest. We attribute this to the rapidly changing business and operating environment, which is driving a major transformation of our company and our industry. It may also reflect heightened awareness of reliability issues in the wake of several severe weather events in 2012 that caused massive power outages.
This assessment was compared with the material risks of the company to validate the relevance and importance of each issue to AEP and its stakeholders. This exercise helped us to level-set our performance with the expectations of our many diverse stakeholders as we move forward and give greater focus to our performance reporting.
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.