The demand for standardized climate and sustainability data is never more apparent than now, and the good news is that regulators and global standard setters are listening.
The recently established International Sustainability Standards Board (ISSB) issued Exposure Draft IFRS S2 that proposes disclosures that will allow investors to assess climate-related risks and opportunities on the company’s financial position and performance. In April 2022, the Securities and Exchange Commission (SEC) proposed a rule for companies to provide climate-related disclosures in registration statements and Exchange Act annual reports like a 10-K. The European Union adopted the Corporate Sustainability Reporting Directive (CSRD), which will require companies to report sustainability data on an annual basis.
Notably, in all three of these examples, the significance of digitally structuring these sustainability disclosures looms ahead. Additionally, it is also quite apparent that the linkage between company financial and sustainability reporting is not treated in silos, but rather, as financial and sustainability are treated as an integrated reporting activity.
Why should Investors Care about Financial Data AND Sustainability Data?
It is no secret that investors are allocating more resources to sustainability investing strategies. Whilst investors now have an insatiable appetite for ESG/sustainability data, let’s not forget the importance of financial data that investors have long taken for granted. After all, the capital markets have functioned for many decades with the significance of this financial data underpinning it.
The voluminous academic literature empirically documents the importance of reported financial information in contributing to decision-making by capital markets participants. However, the stage is being set for investors to capitalize on the co-mingling of financial data AND sustainability data. Professor Mary Barth, one of the most renowned academics with deep industry and standard-setting experience, seems to think so. In fact, Professor Barth suggests that financial information should be the foundation to help investors make better decisions on, for example, climate change, further underscoring the importance of analyzing companies through the lens of both financial and sustainability disclosures and data in cohesion. In response to investor demand, the regulators and standard-setters are developing standards that holistically integrate financial and sustainability reporting. Old-school investors who focus solely on financial data as core to their investment analyses may be missing out on potential new threats, risks, and opportunities facing the firm.
Digitally Structuring Financial and Sustainability Data
The digital structuring of company financial data is well-established around the world. For example, companies in the U.S. have been required to tag their financial statements and footnotes using XBRL since 2009. According to XBRL International, nearly 140 regulators and capital markets worldwide currently implement or require XBRL for company reporting. Given that financial data is already being ‘tagged’ using XBRL, the natural extension would also require companies to tag their sustainability and climate disclosures. We see this trend continuing at the ISSB, where there is an objective to develop an IFRS Sustainability Disclosure Taxonomy. Furthermore, tagging sustainability disclosures using a global digital reporting standard like XBRL solves a critical pain point that ESG/sustainability data consumers currently face - the lack of transparency and credibility of existing ESG/sustainability data. Inherent in an XBRL-first solution is the embedding of meta-data for each data point, including the traceback of each data point to the source location within the document.
With the digital structuring of financial AND sustainability disclosures, investors will have access to both granular financial and sustainability data in a standardized manner and in real-time. Now, this is something to get excited about. Another thing to get excited about is how we, at idaciti, have digitally structured ESG/sustainability data using our unique XBRL-first approach so that investors can already start co-mingling the ESG/sustainability and financial datasets.