ESG reporting has picked up in a big way of late with various global regulators mandating transparent information on how companies contribute to climate change or how their activities affect the environment and society, apart from their handling of corporate governance matters. Companies have multiple factors to consider before kicking off their ESG reporting process, such as the requirements specific to their jurisdiction, the sustainability framework to use, and so on. And then there are digital ESG reporting requirements.
Digital ESG Reporting refers to the presentation of sustainability information in a machine-readable format that enhances the accessibility and comparability of such information. Paper or PDF reports may be visually attractive, but their utility is limited because they are static formats that do not allow data information to be transmitted between machines or computers. In other words, paper or PDF reports are merely human-readable. Machine-readable reports, meanwhile, can be transmitted between computers and the data they contain can be pulled into spreadsheets for further analysis. When we say machine-readable reports, we mean documents with information represented by digital labels of the eXtensible Business Reporting Language (XBRL).
XBRL comprises a set of machine-readable elements that correspond to financial or sustainability reporting standards. A collection of XBRL elements is known as a taxonomy. Financial reporting standards such as the IFRS and sustainability standards like SASB have their XBRL or digital equivalents: the IFRS Taxonomy and SASB Taxonomy, respectively.
Digital financial or ESG reports are prepared using software that facilitates the mapping of a company’s disclosures with their corresponding XBRL taxonomy elements. Financial reporting in the XBRL or the more advanced Inline XBRL format has revolutionized business reporting. It is now the turn of ESG disclosures to go the digital way for the benefit of regulatory bodies, rating agencies, data aggregators, investors, and other stakeholders.
In this blog, we explore the five factors companies must keep in mind when attempting to prepare digital ESG reports.
1. Requirements Specific to Jurisdiction
ESG reporting requirements vary across jurisdictions. For instance, the US Securities and Exchange Commission (SEC) proposes that companies disclose their direct (Scope 1) as well as indirect (Scope 2) greenhouse gas emissions. Companies other than those classified as small reporting companies may also be required to disclose Scope 3 emissions, which result from a company’s activities but are generated from sources not owned or controlled by the company. (The SEC may adopt climate-related disclosure rules by the end of 2022).
In the European Union, standards being developed for reporting in accordance with the Corporate Sustainability Reporting Directive (CSRD) are based on ‘double materiality’. Disclosures under double materiality cover not just the risks a company faces from climate change but also how its activities contribute to climate change. The first reports under CSRD are expected from 2025.
ESG reporting teams would do well to understand the requirements specific to their jurisdictions to ensure their reports are acceptable to regulators and other stakeholders.
2. ESG Frameworks Specific to Jurisdiction
Regulators across jurisdictions have been coming up with their own rules with respect to the ESG reporting frameworks companies must use. For instance, the United Kingdom requires over 1,300 of its largest listed entities to report in accordance with the Taskforce on Climate-Related Financial Disclosures (TCFD) recommendations.
In the US, the SEC proposal mentions TCFD recommendations as well as the Greenhouse Gas Protocol (GHG Protocol). The TCFD recommendations are preferred by companies across various jurisdictions such as the UK, the EU, New Zealand, and Canada, and incorporated into other sustainability reporting frameworks such as those by the Carbon Disclosure Project (CDP), Global Reporting Initiative (GRI), and the Sustainability Accounting Standards Board (SASB).
In the EU, meanwhile, sustainability reporting standards for CSRD reporting are being developed by the European Financial Reporting Advisory Group (EFRAG) and the GRI. A number of companies also prefer the SASB Standards for voluntary ESG reporting. Sustainability standards that have a digital equivalent (or taxonomy) include SASB and GRI, as well as the UK’s Streamlined Energy and Carbon Reporting (SECR).
3. Digital ESG Reporting Process to Follow
We recommend the following 7-step process for companies to follow for ESG reporting.
STEP 1: Expectation management – Recognizing your stakeholders and their expectations from your ESG reports. This includes the information they need, the factors they consider as material, the disclosure format they prefer, and the frequency with which they evaluate ESG performance.
STEP 2: Applicable standards – Identifying the ESG factors that pertain to your industry in any given sustainability framework such as TCFD, SASB, or GRI.
STEP 3: Assessment and Comparison – Assessing your current system of gathering and analyzing non-financial information and the extent of your adherence to the sustainability framework metrics. This analysis could also include your financial disclosure process.
STEP 4: Evolving Existing Systems – Determining any scope of improvement in your performance based on the sustainability framework and ensuring you align yourself with the expectations of your stakeholders. This step could include reviewing the disclosure practices of your peer companies.
STEP 5: The drafting process- The drafting process involves your governance or sustainability team coordinating with internal financial disclosure personnel. Your team must examine the documentation that comes with the sustainability framework. Draft standards can ideally be passed on to law firms and ESG-focused organizations for review.
STEP 6: Senior management involvement – Evaluate your ESG disclosures internally along with the senior management, with full transparency about the disclosures and procedures that are not up to speed. Changes that assist compliance must be adopted proactively and measures to publicize the disclosures must be discussed.
STEP 7: Publicize your disclosures – Make your digital ESG report available on your website along with supporting documents and issue a press release. Ensure the messaging or narrative about your sustainability efforts is right. Examine best practices on how to go about announcing the release of a sustainability report.
4. What Stakeholders Expect from ESG Reports
One of the most important steps in the digital ESG reporting process is recognizing your most important stakeholders and understanding their expectations. There could be specific ESG frameworks or a frequency of assessment they prefer. A materiality assessment can help you identify the ESG factors specific to your operations and then each issue can be approached based on its impact on your organization and its importance to stakeholders. You also need to know how your stakeholders intend to use the ESG data and narrative presented to them. Be open to engaging with non-governmental organizations that work on sustainability issues, data aggregators, ESG rating agencies, and analysts who study your disclosures based on publicly available information. Their feedback can help you improve your disclosure and data-gathering process.
5. Choosing the Right Digital Reporting Solution
For companies aiming to prepare high-quality digital ESG reports, it all boils down to the kind of software tool they employ. And choosing one software out of many in the market that claims to offer good results is no easy task. We suggest a few specific checks that should help you with your choice.
XBRL International Certification: Any software that helps companies prepare XBRL reports needs to have an XBRL International certification. This certification assures you that the software in question conforms to the latest XBRL specifications and offers interoperability between XBRL software products. By using certified products, you can ensure that your ESG reports are technically sound and acceptable to regulators and stakeholders.
XBRL Credentials: XBRL reporting is complex and you must ensure that your software vendor has deep expertise in the domain. A few questions to ask of the vendor: How many years of XBRL expertise does the vendor have? Does the vendor have XBRL experts who can handhold your ESG reporting teams through the digital reporting process?
Customer Stories: A simple check that allows you to assess the quality of a software vendor is to ask for customer references or testimonials. You can also check for customer reviews on third-party websites such as G2 and Gartner.
Third-party Rankings: Various independent organizations periodically publish XBRL data quality rankings. They evaluate the performance of XBRL software based on the quality of their XBRL output and the absence of errors. Check for a software vendor’s performance in such quality assessment.