According to the EU’s new Corporate Sustainability Reporting Directive (CSRD), the introduction of Inline XBRL in mandatory sustainability reporting is becoming increasingly vital. Investors, regulators, and stakeholders are placing greater emphasis on Environmental, Social, and Governance (ESG) issues, resulting in new demands for companies to provide ESG data with greater transparency.
WHAT IS THE ESG PROPOSAL ALL ABOUT?
The European Commission has approved a proposal to reform and replace the present Non-Financial Reporting Directive (NFRD) with a Corporate Sustainability Reporting Directive (CSRD). It will entail using Inline XBRL (or iXBRL) to report detailed and consistent structured data. This will usher in a new era of environmental, social, and governance (ESG) disclosure, providing far more useful and comparable information for investors and other stakeholders.
WHY IXBRL?
XBRL is without a doubt the industry standard for digital financial reporting. Inline XBRL is the obvious choice for digital and transparent integrated reporting. The new CSRD reporting criteria must include ESG reporting as a core duty for them to join their financial counterparts in the EU’s ESEF framework.
PILLARS OF ESG
ESG stands for Environmental Social and Governance. These are the three important characteristics to consider when assessing an investment’s long-term viability and ethical impact –
Environment – includes energy use, waste management, and climate change.
Social – includes labor relations, human rights, diversity and inclusion, and product liability.
Governance – includes compliance, business ethics, controls, and procedures.
Management firms and investors can assess a range of criteria or specific concerns within each pillar to determine how a company performs.
HOW IS ESG REPORTING AFFECTING VARIOUS AREAS?
Most investors prefer to remain committed to companies that consider ESG parameters and support resolutions on ESG issues, including climate change. ESG concerns are material to a company’s fundamental strategy and long-term value generation. Understanding how ESG helps drive a business’s purpose will help CFOs and other leaders better position their firms for a sustainable tomorrow.
Investors don’t just need reliable and comparable information; they need it in a machine-readable and easily consumable form.
WHAT ARE THE DIFFERENT ESG FRAMEWORKS?
ESG frameworks in use today to implement efficient reporting are as follows:
- The Global Reporting Initiative (GRI)
GRI was the first and most widely used framework. Its accountability standards metrics include environment, human rights, governance, and social well-being.
This framework implements a holistic approach by working with stakeholders to determine how a company affects the world.
- United Nations Sustainable Development Goals (SDGs)
The SDGs, which were adopted by member states in 2015 as part of the larger 2030 Agenda for Sustainable Development, is a set of 17 goals aimed at creating a better future for people and the planet.
Although it is known worldwide, it lacks the sense of industry-specific indicators.
- Morgan Stanley Capital International
Morgan Stanley specifically identifies ESG risk in the investment decisions taken by the firm. These ESG risks are determined through a scoring system covering data points and ratings ranging from CCC (laggard) to AAA (leader).
- The Sustainability Accounting Standards Board (SASB)
The Sustainability Accounting Standards Board (SASB) brings together businesses and investors to discuss sustainability’s financial implications. SASB standards are industry-specific and are intended to help investors make informed decisions while also being cost-effective for businesses. They are created through an evidence-based and market-driven process.
SASB XBRL taxonomy is open for a 60-day trial period. (Find it here). This taxonomy encompasses SASB’s 77 industry Standards.
CHALLENGES WHEN ADOPTING ESG FRAMEWORKS
Some of the many hindering obstacles to meaningful reporting directly stem from the ESG framework themselves.
Different methodology and scoring systems –
Various methodologies are used in ESG frameworks, resulting in different scoring systems and data interpretations. Scores can differ dramatically amongst frameworks, reducing the utility of the data. It’s difficult to choose the one that best fits the company out of all of them.
Lack of Coordination
There is a lack of harmonized standards within different ESG frameworks, complicating the task even more in terms of which reporting standards to choose.
In the recent chain of developments, the IFRS Foundation trustees released documents regarding sustainability reporting. The first, a Feedback Statement, summarises the major issues expressed by respondents to the Sustainability Reporting Consultation Paper. The second is an Exposure Draft, which details suggested targeted adjustments to the IFRS Foundation Constitution to allow for the establishment of an International Sustainability Standards Board (ISSB) to develop IFRS sustainability standards. The proposed revisions will be open for public discussion until July 29, 2021.
Additionally, the International Federation of Accountants (IFAC) has published a paper titled ‘Enhancing Corporate Reporting: Sustainability Building Blocks,’ which elaborates on the building blocks method and lends its support to it.
CONCLUSION –
Investors and acquirers pay more attention to ESG rankings as evidence mounts that sustainable corporate practices are linked to success. ESG is here to stay. It may change names—it was previously known as corporate social responsibility—and it’s linked to an increase of interest in corporate purpose.
