SASB’s XBRL Taxonomy; Stepping forward by stepping sideways

SASB’s XBRL Taxonomy

Stepping forward by stepping sideways

The future of business reporting is incomplete without a significant increase in the quantity and quality of ESG reporting, ultimately mandated by regulators and included in the scope of the external audit. For ESG data to be of an auditable quality, a common standard is required, with a level of rigour equivalent to IFRS or US GAAP standards approved by the FASB (and for the US government, GASB). To meet the need for higher quality ESG (Environmental, Social, and Governance) reporting, the SASB has just released an XBRL taxonomy version of their standards.

Is the SASB XBRL Taxonomy an extravagance, a step sideways, or in a strange way, a step forward for ESG reporting? Is an(other) XBRL taxonomy required, and if so, why and what benefit will be achieved (and for whom)? After all, there is already a GRI XBRL Taxonomy for Sustainability reporting.

The foundations for effective ESG reporting are being laid, but there remains a lack of compulsion that will be required to force companies to deliver.

Instead of another XBRL Taxonomy, I would recommend the SASB (VRF) put their energies and limited resources into:

1. lobbying the SEC and regulators to require ESG reporting in quarterly and annual reports, and
2. request the SEC to provide further guidance on how ESP information should be provide under Reg S-K, including the 2020 “modernisation” of the Rule, and
3. lobbying regulators to demand that ESG information be audited, and
4. developing course materials to enable universities to train young accountants to audit ESG information, and
5. developing CPD materials for established professionals to audit (including Partner review training) of ESG information, and
6. work with the data aggregators to develop easy to use reporting tools to analyse ESG content.

Sustainability data will remain “nice to have” until it mandated and it is audited, and any number of XBRL Taxonomies will not make that happen.

The importance of SASB

ESG (and Sustainability) reporting is not new, although its importance has increased through the pandemic and the climate crisis. When the Club of Rome released their “Limits to Growth” in 1972, there was little understanding of sustainability as a national and business priority. Over the next decades, that changed, and by the turn of the century, the first ESG and sustainability reporting standards were introduced.

The problem with almost all sustainability reporting standards is the lack of auditability of the reports, and the lack of accounting-standards level clarity or exactness of definition. It was almost impossible to ensure like-for-like meanings of the reported sustainability or governance concepts. Most standards were built with the PR department in mind, not Finance and share market or Compliance Reporting.

The SASB (Sustainability Accounting Standards Board) was established in an already well-populated ecosystem of competing standards for ESG reporting. However, SASB is the first standards organisation of develop a set of sustainability and ESG reporting standards to the same level as traditional accounting standards. The IIRC (International Integrated Reporting Consortium) was founded in the UK to pursue the development and introduction of the “Integrated Report” to improve the quality of business reporting. The SASB and IIRC have merged to create the Value Reporting Foundation (VRF).

For a standard to be successful it requires three market drivers. First a need must be satisfied that exceeds the cost of implementation – a compelling commercial case for implementation. Second there must be natural users or ‘consumers’ of the product of the standard. Finally, there must be regulatory drivers that compel the recalcitrant to implement the standard.

Until now, Sustainability and/or ESG reporting has lacked the third of these, in that sustainability reporting has been optional. This resulted in a plethora of standards (the GRI, SASB, CDP, UNGC, etc)* each providing optional levels of compliance and limited, if any, assurance mechanisms. We shouldn’t forget the “Accounting for Sustainability” (A4S) initiative from the Prince of Wales, or the Task Force on Climate-related Financial Disclosures (TCFD) initiative.

All of these standards are voluntary. This means that Sustainability and/or ESG reporting have been, by the very option nature of such reporting, an opportunity for marketing and PR to put forward the best story, especially if it is not the whole story.

SASB’s standard provides one of the first ESG standard with the potential to meet regulator’s needs for an auditable and consistent content definition. Therefore, when the third driver is in place (regulatory mandate), the SASB standard is ready to be used to provide the level and quality of data mandated by regulators.

The XBRL Dream

In 1998 (long before the first iPhone), a group of accountants came up with an intriguing idea. What if they were able to create an XML based standard for the “tagging” of financial information, so that all consumers of that information would know exactly what each piece of data actually meant. Of course, it was not so easy, as any financial and later “business” “fact” requires an awful lot of contextual information to give it actual and consistent meaning. So the XBRL (eXtensible Business Reporting Language) Standard was born, extending the XML standard considerably.

With XBRL, it was possible to state with certainty that one company’s reported “Cash and Cash Equivalent” actually defined the same accounting concept as another company’s reported “Cash and Cash Equivalent”. In addition, the “eXtensible” part of the standard meant that if you require a more granular concept than already exists in the taxonomy, you could add a new element.

Business reporting would be simplified, consumption of like-for-like information would transform analysis, and companies, through the (modest it was hoped) use of extensions elements, could “tell their story their way”.

Now it was simply a matter of developing a taxonomy of business terms, and convincing software makers to develop the tools required to support what had become a very complex standard.

The XBRL Reality

Unfortunately, the complexity of XBRL meant that for the first decade, all three of the major drivers for adoption were missing. There was no economic case for developers to create software or for companies to spend their money to produce financials and business reports in XBRL, because there were no consumers of XBRL (and little or no software to consume and use the XBRL). Finally, no regulator had mandated the provision of XBRL versions for key reports. Certainly, there were niche software houses that bought into the dream of XBRL, and a few companies that chose to produce XBRL. Some of the financial reporting aggregators even said that they could or would support XBRL.

In 2009 the SEC’s mandate for the provision of parts of the 10K (annual reports) and 10Q (quarterly reports) in XBRL came into effect. But they have yet, more than a decade later, to mandate that the XBRL content be audited, nor have the expanded the coverage of content adequately to the full reports.

Across Europe, regulators have mandated XBRL for everything from company reports to insurance solvency reporting. Companies House in the UK receives XBRL version of company financials from all companies. But as these files are, in effect, produced from templates, the dream of high-quality business data has not been met.

XBRL remains a cumbersome and limited standard, and one that is used only (other than very few exceptions to prove the rule) by companies that are required to produce reports in the XBRL format. There remains virtually no voluntary uptake of a complex and expensive standard that delivers unaudited data for which there is no consumer driven demand.

The best-mangled metaphor I’ve ever seen was used to describe XBRL. It is “like using a dinosaur to crack a walnut”.

Implications of the SASB XBRL Taxonomy

Now SASB has, with the assistance of one of the Big-4 who has supported XBRL from the very beginning, developed an XBRL Taxonomy for their reporting standard. This is good news. It will now be possible to “tag” the ESG data in XBRL for automated consumption by XBRL capable regulators and reporting systems. 

Furthermore, when a company tags an ESG “fact” in XBRL, consumers of that data will know that the underlying meaning and concept associated with that “fact” is exactly the same and the underlying meaning and concept of that “fact” reported by any other company using the same taxonomy and taxonomy element.

SASB’s XBRL Taxonomy will neither derail nor spur ESG reporting

Realistic and meaningful ESG reporting will not happen until regulators mandate not only the reporting but that the information is audited, and a dedicated XBRL Taxonomy will have little impact on the uptake of ESG reporting.

Only then will reporting companies provide information that investors can trust (Google “Greenwashing”).

The provision of ESG information tagged in XBRL (and audited) might be an improvement. However, the XBRL standard is so old and cumbersome that only a limited number of people will ever have the skills required to exploit data provided in native XBRL.

If SASB really wants ESG adopted…

SASB (or the Value Reporting Foundation as it is now called after merging with the IIRC) is probably the best standard for real, auditable, ESG information. If they really want companies to be providing ESG reporting, and using SASB as “the standard”, I would recommend that instead of playing with the Big-4 and XBRL, that their energies go into the list of activities listed at the beginning of this arlticle.

I would also challenge for any reader to add to that list. What else should the SASB/VRF be doing to encourage the uptake and use of ESG reporting?

--------------------------------------------

*  “GRI, SASB, CDP, UNGC”. These are four of the multitude of ESG “standards”: Global Reporting Initiative, Sustainability Accounting Standards Board, the Carbon Disclosure Project, and the UN Global Compact.

The Author: Daniel Roberts served as Chair of the XBRL US Steering Committee in 2005 and 2006, a time when XBRL US was working closely with the SEC to advance the use of XBRL for corporate disclosures.