Sustainability-related disclosure is here to stay. Disclosure is not a silver bullet. However, it is almost unmatched in its ability to alter behaviour at a global scale.” These were John Turner’s words (CEO of XBRL International) at the start of the Data Amplified Virtual 2022 conference this past December. Hosted by XBRL International, this conference is a global gathering of experts in structured data, digital reporting, technical standards and related topics. Visma Connect attended as member of XBRL Europe.
This year’s conference centred on the digitisation of sustainability reporting and emphasised the advantage of having a global baseline across sustainability reporting frameworks. But why is the role of digitisation so important in achieving this?
Turner’s words summarise a common understanding that has been rapidly spreading across corporations, customers, investors, and regulators globally regarding the need for high-quality, audited, digital and accessible ESG data. Such data will play a significant role in shaping feedback loops that ensure organisations are continuously improving their ESG performance over time. Effective feedback loops can provide extremely strong incentives; however, their reliability depends heavily on the comparability of the underlying disclosure, both against past performance as well as relative to peers in the same industry. Comparability, in turn, requires clearly defined, standardised definitions and methodology to be used across organisations and geographies.
Until recently, disclosure on sustainability metrics (the environmental and social components of ESG) was largely voluntary, with many frameworks to choose from. The use of different measurement approaches and the ability to selectively apply disclosure meant that even where companies adopted the same disclosure framework, analysing relative performance was often futile. For example, where one clothing manufacturer chose to report on waste per unit manufactured, others might decide to report based on the weight or volume of goods produced instead. None of these metrics is necessarily wrong, but the lack of consistency limits the usefulness of the disclosure. The introduction of detailed mandatory disclosure requirements can go a long way towards solving these challenges.
There are many benefits to regulators agreeing on common digital reporting requirements. In essence, the use of a single digital reporting language with standardised rules and definitions across global reporting taxonomies lessens the reporting burden for companies operating across multiple jurisdictions. At the same time, the goals to increase comparability across markets are met.
Let us take, for example, a large, listed company that is required to report according to both US and EU sustainability disclosure rules. If, as is expected, both jurisdictions ultimately require the use of XBRL to digitally markup (i.e., tag) sustainability disclosure, only one digital reporting methodology needs to be learned and applied. Further, as XBRL is currently used for tagging financial reports in both geographies, the company’s finance team will already be familiar with it and can share their learnings with those in charge of sustainability reporting.
Now assume there is also a common registry of definitions and tagging rules that applies to elements of the sustainability reporting taxonomies for both regions. This implies that for these parts of the disclosure, the same XBRL tags could be used across both taxonomies, despite their originating from different disclosure frameworks. On the other hand, even small differences in rules could result in separate tags being required for each taxonomy, leading to unnecessary duplication of effort.
As XBRL is already used for financial disclosures in many jurisdictions, it makes sense to extend its use to sustainability disclosure. A common digital tagging tool between the two types of disclosure significantly reduces the time and effort required to analyse companies from both perspectives at once. Further, as was highlighted by Christina Tan (a Board member of XBRL international) in her presentation, inherent in every XBRL data point is the ability to trace it back to its source. This allows for direct linkage between a reported value, the underlying policies and disclosures that explain how it was calculated and any other data point or company specific targets it is connected to.
There is, of course, such a thing as over-tagging. Regulators need to balance the information needs of investors with the burden of reporting for companies. Reducing unnecessary duplication in tagging by agreeing on common principles across taxonomies is just one of the factors that need to be considered. The level of detailed tagging (tagging of specific data points) versus block tagging (tagging of entire sections of content) that is ultimately required will also have a meaningful impact.
The Data Amplified Virtual Conference was a great platform to learn more about the latest developments in sustainability reporting and how best practice in the use of XBRL could ultimately enhance the usefulness and comparability of disclosure. Although a lot of uncertainty remains regarding how and when sustainability reporting regulation will ultimately impact companies in different geographies, a few things are clear:
In his talk, Bing Leng (an ISSB Board Member), stated that “in some ways, the taxonomy is more important than the standards themselves; because every preparer has to use the taxonomy and all the issues of comparability and standardisation are reviewed on the level of the taxonomy and SBR instance.”
Differences in industry norms, regulations and reporting practices make it unlikely that there will ever be a single global taxonomy for sustainability reporting. However, where there is an opportunity for alignment, this should be prioritised.
As experts in XBRL validation and taxonomy development, Visma Connect is committed to helping clients understand and navigate the digital disclosure environment. The insights that were shared at the conference are very much in line with our own expertise and experiences with clients.
We see even more opportunities for standardised data exchange in XBRL beyond low frequency mandatory reporting. For example, implementing standardised metrics for goal setting with supply partners, embedding into contracts and application in weekly/monthly reporting. This allows for high quality and comparable data to be used for improving ESG performance. At the same time, this also allows for these data points to be aggregated into mandatory reporting disclosure, so that the facts are underpinned by the evidence that stakeholders require.
Would you like to know more? Check out how VISMA Connect can help you eliminate the complexity of sustainability reporting by streamlining and automating data processing. Alternatively, learn how the ESG Clearing House enables easy and reliable exchange of ESG metrics across organisational boundaries at the data level using global and industry standards.