Landmark Climate Disclosure Requirements Announced
Last week, the International Sustainability Standards Board (ISSB) announced its first consultation on two proposed standards. The first standard sets the general requirements for the disclosure of sustainability-related information. The second is more specific and sets the climate disclosure requirements that enable decision-makers to assess the effects of climate-related risks and opportunities on the reporting entity’s enterprise value. The ISSB is inviting public comments on the proposals. Also, the Securities and Exchange Commission recently issued a proposed rule to require companies to disclose climate-related financial risks and metrics in their annual reports so that investors can make informed decisions about the impact of climate-related risks on their investments.
Demand for Complete and Accurate Data
There is no denying that ESG/Sustainability-related data has been of heightened interest to stakeholders and capital market participants recently. For instance, ESG global assets under management have exceeded $35 trillion in 2020 and are estimated to surpass $50 trillion by 2025. Whilst capital continues to pour into the ESG investing marketplace, potential downsides are looming that cannot and should not be ignored - notably, the risk of ‘greenwashing’. Greenwashing is a practice whereby a company claims to engage in environmentally friendly activities without actually fulfilling the claim. This type of embellishment is not new - however, given the exacerbated interest in environmentally-conscious brands, companies are indeed now facing the pressure to step up their games.
So, how does this tie back to the efforts at the ISSB? Let's look at the core of the requirements for sustainability-related disclosures. It's anchored on the need for companies to provide a complete, neutral and accurate depiction of the sustainability-related risks and opportunities that will enable users of the general purpose financial report to assess enterprise value and decide whether to provide resources to the company (IFRS S1, para 1-3). In other words, under IFRS S1, sustainability-related disclosures are directly linked to enterprise value, which is defined by the standard as the amount, timing, and future cash flows of the company and the value of those cash flows in light of the company's risk profile. What does this mean for those companies who are "dressing up" their ESG disclosures? You must now have the financial reporting numbers to "back up your story". This theme is also echoed in the SEC's climate proposal, which emphasizes that climate-related disclosures are necessary to promote efficiency, competition, and capital formation.
Future-Proof Technology Addresses the HERE AND NOW
At idaciti, we have always firmly believed that it is important to "connect the dots" between financial and non-financial information to truly understand a company. It’s not just about the numbers reported in the financial statements and footnotes but also about the context in which the numbers are reported and how the non-financial information correlates with the financials.
Although the financial data have been digitally structured (‘tagged’) using XBRL under the SEC mandate, we believe it is also important to digitally structure the other sections in a 10-K, 10-Q, and other company disclosures currently not required to be tagged. This is why we innovated to ‘XBRL-ize’ these other currently unstructured disclosures so that we could deliver real-time, standardized, and machine-readable data to users for them to see a full picture of the company and assess how the non-financial data impacted enterprise value.
At this juncture, we are encouraged to see the intersection of ESG and financial reporting disclosures being established, and we are also excited to see the recognition that ESG disclosures need to be digitized and structured (for example, the SEC’s recent climate disclosure proposal requires the disclosures to be tagged using XBRL, and the SASB/VRF XBRL taxonomy). The tagging of financial disclosures using XBRL both in the U.S. and around the world sets a strong precedent for the new era of tagging ESG disclosures. While we eagerly anticipate this tipping point, in the meantime, we will continue to ‘XBRL-ize’ ESG disclosures to help bridge that time gap.
As Benjamin Franklin once said, “Never leave that till tomorrow which you can do today.” And, since managing the climate crisis is a race against time, we’re doing our part to act now.