The rising profile of ESG has been evident. It is also abundantly clear - considering ESG data without its implications on financial performance for any type of analysis will lead to suboptimal decision-making. Why? Because we have seen evidence of this every day in the ESG ecosystem, from investors, regulators, standard-setters, accounting firms, and the companies themselves.
The stakeholders recognize that analyzing ESG data in a vacuum will only provide one side of the picture. Financial data is critically required to complete the picture.
Very recently, S&P Global announced a partnership with an ESG data provider. The motivation for this partnership magnifies the importance of a central repository and a single access point to allow market participants to analyze how ESG factors drive the financial performance of companies and allows transparent communication to other stakeholders, like auditors, boards, and investors.
Companies are starting to consider how their ESG disclosures might impact their financial disclosures. Not only are there potential SEC rules (E.g., the climate-related rules and the pay versus performance disclosures requirement) requiring companies to address this issue head-on, but they are also being questioned on this by SEC in Comment Letters.
The regulator asked companies to explain the incongruencies between their ESG disclosures published in corporate sustainability reports or company websites and their financial filings (10-Ks and 10-Qs) filed with the SEC. From these SEC Comment Letters, it is clear that companies need to address how their ESG disclosures impact their financial disclosures and that the two domains need to be cointegrated.
The recently formed ISSB (International Sustainability Standards Board) under the IFRS Foundation demonstrates that standards-setters acknowledge that the efforts to develop ESG and financial reporting standards should be a coordinated one. Even the accounting firms are accelerating their investments to build up ESG talent and knowledge base to service their clients. All of these examples underscore the importance of integrating the ESG and financial domains. However, one crucial piece linking the two datasets still needs to be addressed - digital standardization of the datasets to provide full transparency and credibility to the data.
Herein comes the Digital Reporting Standard
XBRL (Extensible Business Reporting Language), the global digital reporting standard, has been used in the U.S. since 2009 by companies to structure their financial disclosures digitally in a standardized manner. This global standard is also being used by jurisdictions around the world for financial disclosures. For example, European companies are required to tag their financial reports under the European Single Electronic Format (ESEF) mandate using XBRL. This tagging of financial disclosures using XBRL in the U.S. and worldwide is well-established. If the ESG and financial datasets are to be seen holistically and not co-exist in silos, then it seems natural that the ESG disclosures should also be tagged using XBRL. We are encouraged that the ISSB is thinking along those lines and is looking to develop an IFRS Sustainability Disclosure Taxonomy.
One major pain point investors and stakeholders face in consuming ESG data for decision-making is the lack of transparency and credibility in the data. The XBRL framework provides the solution to solve that problem. Inherent in the XBRL DNA is the metadata embedded in the source documents, which links every single data point back to the source location. By tagging all data (ESG and financial), end users will always be able to trace the data points back to the original locations, thereby providing full transparency. Users relying on the data can confidently make informed decisions. Importantly, once both ESG and financial data are tagged and standardized using XBRL, stakeholders can seamlessly co-mingle the two data sets for analyses, reporting, and generating new insights.
XBRL provides that unifying lens.