Environmental, Social, and Governance (ESG) issues have gained much traction in recent times. The alarm over a ticking time bomb that is climate change, the need to monitor the impact of business activities on society, and an emphasis on corporate governance factors have caused investors to seek out information that is usually left out of corporate disclosures. It is this need for information that ESG reporting is meant to serve by employing standards to measure the impact of companies’ activities on their external environment as well as their resilience to risks from the external environment.
The question to ask at this juncture is if ESG reporting will serve its purpose well enough. Will companies make available information that adheres to the highest standards of quality and transparency? Will be information be accessible to everybody and facilitate comparison and analysis? We at IRIS CARBON® believe that they will – for the following reasons:
ESG Reporting Forms The Basis For An ESG Score
Factors that have for long been considered immaterial to business valuations have begun to matter under ESG reporting. Such factors are quantified and form the basis for an ESG score assigned to the reporting company by rating agencies such as MSCI ESG Ratings, Sustainalytics’ ESG Risk Ratings, and Bloomberg ESG Disclosures Score. The fact that investors bet on companies with the most favorable ESG scores provides companies an incentive to take ESG reporting seriously. To this end, ESG reporting is bound to serve its purpose.
ESG Reporting Will Consider Double Materiality
If materiality in accounting is about an item of income or expenditure being important enough to report to investors and affect their decision-making, double materiality goes a step further. Double materiality, in terms of ESG, involves considering how a company’s activities affect the environment and society as well as how the external environment affects the company itself. Double materiality is increasingly being adopted under ESG reporting frameworks and mandates and is poised to give investors more complete information for their decision-making.
Baseline ESG Reporting Standards Are Under Development
Several leading sustainability disclosure organizations are making efforts to create a globally-accepted set of baseline sustainability standards in order to bring uniformity to ESG reporting. In its current form, ESG reporting does not facilitate comparison or analysis of disclosures because companies are forced to use a patchwork of diverse ESG frameworks. Most noteworthy amongst efforts for a common set of standards is that by the IFRS Foundation’s International Sustainability Standards Board (ISSB). The IFRS Foundation intends to consolidate the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF) into the newly-created ISSB by June 2022. CDSB is an initiative of the Carbon Disclosure Project (CDP) and the VRF merges the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB).
Digital ESG Reporting Will Bring in More Transparency
A growing number of regulators and business registries around the world are mandating the use of digital data standards such as XBRL (eXtensible Business Reporting Language) for financial reporting. With ESG reporting mandates in the works in several jurisdictions, it is natural that regulators will call for sustainability information in a format that allows greater transparency, accessibility, comparability, and analysis. Several XBRL taxonomies for digital sustainability reporting exist at this point, while some others are being developed. The Sustainability Accounting Standards Board (SASB) an XBRL taxonomy in September 2021. Currently, the European Financial Reporting Advisory Group (EFRAG) and the Global Reporting Initiative (GRI) are collaborating to construct sustainability reporting standards for companies in the EU.
Software Solutions That Facilitate High-quality ESG Reporting
Software solutions that will help companies create high-quality digital disclosures will help the cause of ESG reporting. Many of these solutions are currently being used to file digital financial reports to regulators such as the US Securities and Exchange Commission, the UK’s Financial Conduct Authority (FCA) and Her Majesty’s Revenue and Customs (HMRC), and various national regulators in the European Union under the European Single Electronic Format (ESEF). The same software can start supporting various sustainability taxonomies and be used for ESG reporting. A leading software that is known to create high-quality digital (read XBRL) disclosures is IRIS CARBON®. The solution currently supports the SASB Taxonomy.