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?

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*  “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. 

Why create a CSR report?

Why create a CSR report?

Why should a company create a CSR (Corporate Social Responsibility), sometimes known as a Sustainability report, or even a “Triple Bottom Line” report? What are the drivers? Is CSR a fad, a real reporting opportunity, or a requirement? The answer to that question depends on who you are, your markets and clients, your competitors, and those you report to external to the company.

It is easy to suggest that it is a fad, and we've all seen fads come and go. But it is also easy to see that if it is a fad, it is a fad that is being driven as much by consumers as by companies themselves. Companies across industries are touting their corporate responsibility on their websites. Why? Why would they spend the money and time to create reports, unless they actually believe there is a return for such reporting?

The very fast response is that they believe there is going to be a return, a real ROI, either through reduced costs or increased revenue, or both.

Drivers

So what are the key drivers? The can be summed up as including:
•    Investors
•    Market expectations
•    Competitors
•    Regulators
•    Employees
•    Communities

And each of these drivers has at its core either increasing revenues, or reducing costs. After all, if a program does not accomplish one or the other, then why should a company incur the associated costs?

In CSR circles, these drives are called "stakeholders", and frequently direct outreach to stakeholders is an important element of creating a successful CSR report. Strangely, for most companies that "stakeholder engagement" has already take place, in one way or another, and the information needed to create the CSR report already exists.

So lets look quickly at each of these drivers.

Investors

Why should a company produce any report? Fundamentally reporting should serve the purpose of improving internal decision-making, influencing external parties, or responding to regulator mandates. As CSR reports are external facing in nature, the question then is "who do we want to influence". At the front of the pact should be the investors or potential investors. And this means that the CSR report should provide the information needed for that group - information to demonstrate to investors (and analysts whose results are of interest to investors) that the company understands and is proactive in meeting is "responsibility" imperatives.

Investors want both short- and long-term rewards, and management's program must balance the two. The CSR report should, coupled with or even integrated with the annual and financial report, provide the data that delivers comfort to investors that the company understands and is focused on achieving short-term rewards in a manner that ensures achievement of long-term rewards and goals. Almost sounds like the classic definition of Sustainability - enough for today without stealing from tomorrow (my paraphrase).
 
Market Expectations

Markets, both B2B and B2C (and every other x2x) are becoming much more aware of the relationship between a supplier's corporate responsibility and the quality of product, acceptance of the product, and reduction of long term costs.

Equally, companies have come to understand that, as Warren Buffet said best "it takes 20 years to build a reputation and 5 minutes to ruin one". Corporate responsibility is not about always doing good, but about being able to prove to yourself and communicate to your customers that always try, honestly, to do good (within a business context of needing to make a profit).

Many companies are now including a requriement for suppliers to specifically address their CSR credential in proposals. One bank in Vancouver includes responses in it ranking of potential service providers. Other companies around the world are now looking for this information in bids.

You should be asking for a copy of any potential suppliers CSR reports before entering into any major contract. Companies that provide such reports are significantly more likely to understand the issues and to work to ensure that they are “responsible” businesses. Companies that cannot demonstrate their CSR credentials may cost you, and cost you big. Too often a failure to report is not because the company is not aware of the issues, but because addressing potential issues (child labor, carbon-intensive production or energy, pollution) can add costs that will eat into the suppliers’ profits. Competing against “responsible” businesses without carrying associated costs can be profitable business. But today, any tourist or activist with a cellphone could destroy your reputation, linking you to irresponsible companies in your supply chain.

Competitors

Companies should take a very good look at their competitors’ websites and the messages that they are sending.

Working with clients, I make a habit of looking at their competitors’ websites. It comes as a little surprise that many tout their sustainability or responsibility credentials. Sometimes in vapid and empty phrases, or with pictures of windmills, daisies, and little girls smiling in the sunshine (these I almost immediately discount). Others back up their statements with reports, online or in PDF format, sometimes with a GRI Content Index to help find various bits of information.

Then there are the majority - the companies that do not have CSR or Sustainability reports of position statements. I also like to point these out to my clients, asking if demonstrating the company’s credentials might actually provide a competitive advantage. Equally, if the company is already competing of a "level playing field", how level will the field be when their competitors do start showing their credentials?

Regulators

Ahhh, regulators, the gorilla in the room. Why are they a driver for creating a CSR or Sustainability report? The first reason is to show them that you are already a "responsible" business and therefore, as they say on the police shows - "Move along, nothing to see here". The second reason is to prove that there is no need for all that nasty regulation that they are considering, because you are already "responsible", as demonstrated in you report.

Of course, the first reason the more effective, because for the second to matter, your peers will need to be demonstrating that they are responsible businesses also.

So, the CSR or Sustainability report should be taking informaiton that your company already produces, and complies it into a quality report that all can see, not just the regulators who are already receiving those detailed reports.

A great example is the commercial property and construction industries. Many companies in these industries produce very nice CSR reports. A careful read of the reports, especially their health and safety sections (frequently described as "Caring for our People and our Communities" or words to that effect) can be boring, and sound like boilerplate. At there core is a simple message - "We comply with all health and safety laws". But that is not nearly as interesting as reporting a reduced accident rate, increased training, onsite safety briefings for all visitors (“because we care”), etc.

Employees

Employees like to have pride in their company. It is part of them. And a company’s image reflects on the employees. Ask any employee of a "Top 100 Places to Work" (in the US) or virtually any employee of a company like the Co-Op in the UK, and you will see their pride.

And pride in your employer translates directly into reduced unplanned turnover, reduced hiring costs and payroll, and increased productivity. We know that people work for money - but we also know that people chose where they work for many reasons beyond money.

Some companies are intentionally structuring the "responsibility" message with a view to attracting and retaining employees (even in this economy). Some look at their employees as long term assets that require investment. Others understand that the recovery, as it unfolds, will change the employment picture, and companies with a poor reputation will get their pick of the second-level candidates.

Communities

Finally, and possibly most importantly, all companies have a "license to operate" that is in no small part predicated on how the local and wider community views that company. Good employers, innovative products and services, and a respect for the environment and society all factor into that "license to operate". Abuse that license and society will turn against the company.

Therefore reports are being written specifically to highlight the value and respect that companies have for their communities. For the multinationals, they report to demonstrate their respect for and support for the varied cultures and communities in which the work and deliver products and services.

The support of companies for their communities is not something that happens because it is in a glossy CSR report. The CSR report highlights the support that the company provides to its communities.

Where does the content come from?

So, I've highlighted the drivers for CSR reporting. But where does all the information contained in such a report come from? The range of information, the number of people that maintain and hold that information within a company can be quite difficult to map. And mapping the sources of that information is important.

The good news is that there are ways to improve access to and collating all that information, filtering out the important from the merely interesting.

This is a subject for a different article, but clearly tools exist or are coming onto the market that will make the collection, collation and selection of already existing information and content much easier. This will facilitate the rapid creation and updating of CSR / Sustainability reports, regardless of the reporting standard used.

What reporting standards should be followed?

Today there are a few reporting standards, and the standard selected should be based on the primary audiences. If you are looking to create a pool of data for analysts, I would recommend you take a good hard look at the KPIs for ESP produced by the DVFA (German Investment Analysts Association) and endorsed by EFFAS. If your primary audience is marketing, consumers, and employees, then the GRI's G3 standard provides a range of reporting levels (they call them "Application Level") that allows you to produce a tailored report, and to grow the range of reported information over time.


The UN Global Compact probably has the "easiest" and "fastest" standard to comply with, and is a good "starter" report. But if a company is going to be serious about meeting the information needs of the widest range of audiences, the UNCG will not be adequate.


The work of the newly formed (August 2010) IIRC (International Integrated Reporting Committee) will be worth following, as the primary objective there is to create reporting standards that integrate sustainability reporting into tranal business reporting (annual reports, etc) and providing a sound accounting base for the reported information.