From Materiality Assessments to Digital Tagging: Streamlining ESG Reporting Across Industries

Introduction

As the focus on ESG has grown over the years, the need for ESG reporting has grown along with it. With the increasingly tangible effects of climate change, the discourse on ESG not just among the general populace, but among regulators and investors has become commonplace. 

For many investors, determining the ESG proclivities of organizations is synonymous with determining their long-term sustainability. This has resulted in the C-suite of companies taking into account ESG in the company’s overall risk management and strategy, as evidenced by the 2024 KPMG U.S. CEO Outlook Pulse Survey, which states that the majority of CEOs expect significant returns from sustainability investments in 3-5 years. 

Now with several jurisdictions pushing ESG regulations, it is no longer just a “good to have” for organizations, it is a mandate. The EU’s CSRD(Corporate Sustainability Reporting Directive), for instance, would cover around 50,000 companies. The ISSB(International Sustainability Standards Board) standards are also being used by jurisdictions either directly, or by developing their own standards based on it. 

However, most of the regulators have not released industry-specific standards. While it is in the roadmap for many of them, companies which need to report as per the released standards might find it difficult to address their unique industry-specific needs through these standards. 

Unique ESG Needs of Diverse Industries

Performing a materiality assessment is crucial to understanding the industry as well as the company-specific needs of an organization. Standards such as the ESRS (European Sustainability Reporting Standards) mandate a double materiality assessment to assess the ESG topics relevant to the company. 

This enables the company to report specifically on those topics that are relevant to them. For instance, if a company’s operations are not water intensive, they may choose not to report on the topical standards addressing Water & Marine Resources. 

Similarly, the ISSB also requires a sustainability risk and opportunities assessment to determine key ESG risks. The ISSB also requires companies to consider the industry-specific metrics released by the SASB (Sustainability Accounting Standards Board) standards.  

Apart from this, companies are encouraged to identify and disclose any company-specific topics relevant to them. However, this diverse set of topics for different industries, and even companies within the same industry, leads to difficulty for investors, in terms of comparison between companies. 

For instance, if an investor needs to choose between company A which discloses their water consumption as “Water consumption”, but company B discloses it as “Water used”, then while searching with the keyword “Water consumption”, only company A’s metric will show up.  

In this case, the investor will again have to try searching with different keywords to find the metric relevant to them. This might lead to frustration among investors, while also disadvantaging companies which do not report as per the keywords used by the specific investor. 

The Need for Digital Reporting

One of the primary reasons behind the emergence of digital reporting was to standardize reporting across companies. In the wake of scams such as Enron, which resulted in the loss of billions in terms of shareholder wealth, the need for a more convenient and accurate method of comparing the disclosures of companies arose. 

This need was filled by standards such as XBRL(Extensible Business Reporting Language) with the aim of developing a standardized methodology for communicating financial and non-financial disclosures. XBRL is a machine-readable format. The corresponding human-readable format is called iXBRL(inline XBRL). 

Regulators such as the US SEC were among the first to adopt XBRL and release a taxonomy based on it. Now, the major non-financial standards bodies are developing XBRL/iXBRL-based taxonomies to go along with the standards which are developed, such as the ESRS and ISSB standards. 

This allows companies to report using the terms most relevant to them. This can then be tagged to the corresponding taxonomy terminology to enable investors to search for the same metric across different companies using one keyword. 

Taking the example used earlier, assuming that the taxonomy has the tag “Water consumption”, company A can tag its “Water consumption” metric to this tag, while company B tags its “Water used” metric to the same tag. Now, if an investor searches for the tag “Water consumption” for both companies, it would show the same metric. 

This is how digital ESG reporting proves advantageous not just for companies, but also investors and regulators. There are several other benefits of digital reporting, such as ensuring accuracy and performing validation checks, which also makes it easier for auditors. 

This is why digital ESG reporting is growing in use and popularity among both preparers as well as users of financial and non-financial disclosures. 

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. 

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. 

Conclusion

From materiality assessments to digital tagging, the journey toward streamlining ESG reporting across industries is marked by innovation and adaptability. By embracing digital solutions, businesses can transcend the limitations of disparate reporting practices and foster transparency and comparability in ESG disclosures. 

Digital reporting, epitomized by formats like XBRL and iXBRL, not only facilitates standardization but also enhances accuracy and efficiency, benefiting preparers, users, and regulators alike. As the momentum behind ESG reporting continues to swell, embracing digital solutions emerges not just as a necessity but as a strategic imperative for organizations navigating the complexities of sustainability reporting. 

For those seeking to unlock the full potential of digital ESG reporting, IRIS stands ready to provide guidance and support. Reach out to info@iriscarbon.com to learn more about how digital reporting can empower your organization to meet its ESG objectives effectively.