Why XBRL is the future of ESG reporting

As businesses work to disclose this information, they’re leveraging technological tools and frameworks to move from manual processes toward automation. Digital reporting, such as eXtensible Business Reporting Language (XBRL), allows companies to deliver high-quality information in a machine-readable form, which makes it easier to apply data analytics to gain deeper insights for better decisions. While regulators and businesses already use digital tools in financial disclosures, there are opportunities to apply them in other areas as well. 

To help leverage this technology around environmental, social and governance (ESG) data, we recently provided pro bono support to the Value Reporting Foundation to develop a XBRL taxonomy for ESG reporting — a meaningful step forward in improving the comparability and usefulness of ESG data on a global scale.

About XBRL — and how it can help

Businesses are gathering and disclosing ESG information — more than 90% of S&P companies have sustainability reporting on their websites. Such disclosures are becoming essential to doing business: Eighty percent of respondents to the PwC 2021 Consumer Intelligence Series survey told us they prefer to buy from companies focused on environmental issues, while 76% point to social issues and 80% to governance. Employees are more likely to work for an organization focused on environmental (84%), social (83%) or governance (86%) issues. And half or more want to see more action instead of rhetoric on ESG, with 57% focused on environmental, 48% on social and 54% on governance.

In building the accessibility and reliability of information, leaders can take cues from financial disclosures to start reporting on ESG.

One of the issues with current ESG reporting stems from the lack of comparability and transparency. Since the US doesn’t require ESG disclosures or require the application of a specific standard, companies determine what, how, when and where they share ESG information with stakeholders. This inconsistency makes it difficult for investors, regulators and others to understand and compare company disclosures. While differences in standards still complicate comparability of ESG data, leveraging XBRL to digitize ESG reporting with all the benefits of machine-readable data can be a significant advancement toward improving the usefulness of ESG information. 

The new ESG taxonomy

As part of our ongoing efforts to support standard setters and regulators — and our clients — around ESG, we worked with the Value Reporting Foundation, formerly the Sustainability Accounting Standards Board (SASB), to develop the first XBRL taxonomy for ESG reporting. Publicly released this fall, the taxonomy — a digital dictionary of terms that companies can use to tag information — includes 77 ESG standards across industries with more than 2,500 submetrics converted to XBRL.

This allows companies to structure their ESG information in an agreed upon library using existing standards and applying the tags in their ESG reports. In the US, the SEC already requires XBRL tagging for financial disclosures using the US GAAP Financial Reporting Taxonomy. The goal is for businesses to use the new ESG taxonomy in a similar way. 

The finance function’s role in ESG reporting

The connections between financial and ESG reporting provide ample opportunities for the finance function. High-quality, decision-useful information is critical in both financial and nonfinancial disclosures to help provide stakeholders with better information to make decisions and to help build trust in the capital markets. After all, investors, regulators and other stakeholders should be entitled to the same confidence in ESG information as they currently expect from financial disclosures.

And there’s a role for the accounting profession as well. While XBRL tagging is required for financial disclosures, it’s only helpful if done correctly. But, as of September last year, about half of the financial statements released by Fortune 500 companies included at least one error based on XBRL US’ Data Quality Committee rules. These errors do not even include those that cannot be identified through purely automated means. XBRL tagging isn’t currently within the scope of financial statement audits, but there is potential to bring it within the scope to provide assurance over the data before it’s submitted to the SEC. Correct tagging is critical for the usefulness and comparability of both financial and nonfinancial XBRL information, and there’s an opportunity for the finance function and external auditors to improve data quality.

The future of ESG disclosures

As regulators in the US, Europe and elsewhere establish ESG disclosure guidelines and potentially mandate XBRL tagging, the taxonomy is likely to evolve in the coming years. However, this first iteration will serve as the foundation for an ESG taxonomy at a global scale. And the timing couldn’t be more important as nonfinancial information becomes even more relevant for investors evaluating a company’s core strategy and long-term value creation. As businesses move forward, taking steps to develop high-quality, comparable ESG data is critical.