Sustainability Reporting – An Introduction
Companies today are accountable for a lot more than before. It’s not just about providing goods and services that meet customer needs optimally or about bringing value to shareholders. Today, regulators, investors, lenders, non-governmental organizations, and other stakeholders expect companies to be transparent about their interactions with the external environment. The metrics currently in focus are Environmental, Social, and Governance (ESG), which take into account business practices that nurture or harm the environment and society and also consider how a corporation governs itself. The metrics also capture the risks businesses face from the environment they operate in. ESG has spawned an entire ecosystem built around how companies perform on the sustainability front – such as ESG analysis, investing, ratings, and data services. The key driver for this ecosystem is sustainability reporting, and it is up to companies to evolve and fine-tune processes to collect and disseminate information on their ESG credentials.
The Case for Digital Sustainability Reports
Sustainability reports offer limited value to stakeholders when they are published in static formats. Take for instance a PDF document. The information can be read and understood by a human reader. But any further interaction with the information, such as analysis, would require that the data be manually transferred to a spreadsheet or MS Word document. A digital document, on the other hand, makes the information available in a machine-readable format. Interacting with information in a digital document is easier as the data can be pulled into a spreadsheet at a click. In this way, the digital format enhances the accessibility, analysis, and comparability of the information it presents. Digital reporting is driven by a format known as the eXtensible Business Reporting Language (XBRL).
XBRL – The Format for Digital ESG Reporting
XBRL is an open data standard for digitally communicating business information. The standard is managed by XBRL International – a not-for-profit organization committed to improving business disclosures.
XBRL is known as a machine-readable format or language. This is because it is a collection of machine-readable tags or elements that represent individual accounting concepts. A collection of XBRL tags or elements is known as a taxonomy. Accounting standards such as the IFRS standards or the US GAAP standards have digital versions known as the IFRS Taxonomy and the US GAAP Taxonomy. These are used for machine-readable reporting of financial information in the United States and the European Union.
How Does XBRL Reporting Work?
Here’s how machine-readable (XBRL) reporting works. Once a company prepares its financial or sustainability reports, special software is used to insert XBRL tags against the data or numbers in the reports. These tags must be drawn from the taxonomy or digital accounting standards that apply in the geography where the company operates. Once the XBRL tagging process is done, the tags may be reviewed and verified in a process called validation. The final document, which is both human-readable and machine-readable can then be filed with the national regulator.
XBRL reporting has revolutionized financial reporting in the US, EU, UK, and several other places. For many years, companies in these geographies have been filing XBRL reports with the regulators. Investors, financial analysts, banks, and other institutions prefer working with digital reports because of the ease they bring to analysis and decision-making. The element of machine readability has been credited with improving the transparency of business reporting, preventing fraud, and speeding up the decision-making process. We now move on to the benefits of using XBRL for sustainability reporting.
XBRL Benefits for Sustainability Reporting
- A Format your Stakeholders Prefer: Investors, analysts, and rating agencies prefer having business information in XBRL because it makes their work easier. XBRL allows them to slice and dice information like a static format does not. XBRL makes information across companies and industries comparable, which facilitates a more optimal analysis.
- A Commitment to Transparency: Companies that adopt XBRL reporting signal a commitment to transparency. XBRL brings structure to business information and machine-readability leaves no room for misrepresentation. Moreover, information in digital format is a permanent record. The financial reporting world is awash with examples of how XBRL brought discrepancies to light.
- Using XBRL for Future-readiness: Regulators in the US and the EU have shown their intent to mandate ESG disclosures in the XBRL format. Organizations would do well to proactively adopt XBRL for ESG reporting to stay ahead of any future mandates. Investors and other stakeholders are known to reward companies that make the effort to stay ahead of the curve.
- More Streamlined Reporting Process: XBRL is a language computers understand. So, it is easier to automate processes and use the powers of artificial intelligence and machine learning to their fullest. The XBRL reporting process is highly intelligent since it is facilitated by state-of-the-art software. With manual and menial data processing out of the way, sustainability reporting professionals can use their time for more intellectually stimulating work.
Getting started with XBRL reporting of ESG information
- Understanding the ESG Mandate: The first step to getting started with digital sustainability reporting is understanding the regulatory requirements of the jurisdiction. For instance, companies in the US must await the SEC’s final decision on its climate-related disclosure proposal. Companies in the EU must get ready to use the European Sustainability Reporting Standards (ESRS).
- Understanding the ESG Framework: A framework is a set of sustainability standards. Organizations such as the Sustainability Accounting Standards Board (SASB), the Task Force on Climate-related Financial Disclosures (TCFD), and the Global Reporting Initiative (GRI) have developed standards for companies to use. Some of these, such as the SASB Standards, have an XBRL taxonomy that companies can use for digital ESG disclosures.
- Get an ESG XBRL Software Provider: Companies must tie up with an XBRL reporting software provider for their sustainability reports. While XBRL reporting is not too complex, it is not something first-timers can easily handle. The XBRL tagging process requires familiarity with the sustainability standard being used as well as the software’s features. It makes more sense to take the help of a software provider who has an XBRL International certification, customer references, and years of experience handling digital reporting.
- Form an ESG XBRL Reporting Process: Efficient sustainability reporting calls for a foolproof reporting process. The process must factor in the development of an internal sustainability data gathering mechanism; an assessment of regulatory requirements and ESG frameworks; the grouping of sustainability, financial disclosure, and investor relations personnel for drafting the disclosures; a sign-off from the top management; stakeholder engagement before and after the ESG report is published.
Unlock the Power of Digital Sustainability Reporting
The financial reporting ecosystem has experienced the benefits of XBRL for close to two decades now. Over 100 regulators in more than 60 countries require XBRL reports from the entities they regulate. With sustainability reporting becoming just as important as financial reporting, more regulators are sure to join the ranks.
In fact, there is no choice but to adopt XBRL. Information that is not captured in digital format is not comparable, transparent, or even reliable. It is not the kind of information analysts and investors will want to use. Moreover, XBRL speeds up the reporting, information processing, and decision-making process. Companies that do not adopt XBRL reporting risk slowing down the analysis of their reports and the decision-making process.
The future, however, lies in integrated reporting – where the lines between financial and non-financial (read ESG) disclosures are blurred. It makes perfect business sense to bring XBRL into the mix at a time when demand for sustainability reports is increasing and a system that takes an integrated view of the factors contributing to business value is not too far away.