The IFRS Foundation has forthcoming Sustainability-related and Climate-related Disclosure Standards that will change the way thousands of companies report on their ESG performance. In tandem with these disclosure standards, the IFRS has drafted a Sustainability Disclosure Taxonomy supporting the digital consumption of the disclosed data. At Rho Impact, we frequently collect and transform large quantities of sustainability data, thereby motivating us to review and provide feedback on the staff draft of the IFRS Sustainability Disclosure Taxonomy. In this post, we will highlight the importance of this Taxonomy and the key recommendations we made. Our full response to the IFRS can be found here.
IFRS Sustainability Disclosure Taxonomy Overview
The IFRS Foundation established the International Sustainability Standards Board (ISSB) to develop climate-related financial disclosure standards. These standards seek to enable globally consistent disclosures about organizational risks related to climate change and other sustainability issues. Two exposure drafts, one on sustainability and one on climate, were published earlier this year. CDP has already announced that, beginning in 2024, the thousands of companies that report environmental data through CDP will be doing so using the forthcoming IFRS climate-related disclosure standards.
We are enthusiastic about these efforts because of the urgency for the ESG and impact communities to converge on a set of metrics. The space needs metrics and data handling protocols that are transparent and built to evolve with the necessary alacrity. Further, to provide actionable insights on the metrics reported in these disclosures, it is essential that the information be built to integrate with conventional data exchange methods (e.g., APIs) and in universally accessible language formats (e.g., XBRL). This impending surge of sustainability-related big data has the potential to provide new insights into high-impact areas for innovation.
Companies and their stakeholders increasingly need access to digitized sustainability-related information to understand an entity’s environmental, social, and governance performance. Recent advances in computational tools have allowed for rapid ingestion and automated calculation of impact-related data, but a lack of consistency, both in terms of the metrics and the data formatting, slows progress on risk reduction. A challenge that we encounter daily is how disparate information is, even within a single organization, thereby making it extremely difficult to measure and assess ESG risks. We envision a future where sustainability-related data are as trackable and globally consistent as financial data, but there needs to be systems in place to support these efforts. Therefore, we applaud the IFRS for their efforts in developing the disclosure standards and associated Taxonomy. In particular, we are thrilled about the explicit efforts to code sustainability data in a way that facilitates facile analytics, cross-industry data sharing and comparison (i.e., structured electronic tagging).
The Taxonomy covers a range of topics including the organization of sustainability-related financial information, tagging requirements, representation of narrative versus quantitative information, inter-report connectivity, and metrics modeling. The full Taxonomy draft can be found here. Below is a summary of our key recommendations that we believe will help improve the Taxonomy as it is applied now and in the future.
Our Taxonomy Recommendations
Designing the Taxonomy to accommodate new metrics and enhance existing metricsWe are especially focused on the Taxonomy being designed to accommodate new metrics or change existing ones. Due to the rapid evolution of sustainability measurement and analysis tools, we recommend a specific protocol be included for metric additions or modifications, as well as flexibility in how the relevant data are disclosed. Such a Taxonomy protocol should include a process for developing, proposing, and adding custom metric elements. Moreover, we recommend the inclusion of forward-looking metrics, such as "Emissions Reduction Potential."
In regards to the flexibility mentioned above, we would like to see broader metrics categories that allow for organizations to report data that are verifiable and aligned with their relevant metrics, rather than a set of prescriptive metrics categories that may become outdated quickly. Further, providing companies with the opportunity to transparently show the underlying data for a given metric is equally as important as the metric category itself.
Through our experience working with stakeholders who follow different standards, and because standards (and disclosure needs) will change, we have found that overly prescriptive metrics and requirements can hinder sustainable development. This is because such metrics may not reveal the most relevant impacts of certain activities. For example, the SASB metrics for Apparel, Accessories & Footwear industry are largely focused on supplier compliance with specific environmental data assessments and raw material certifications from a third-party. While this may highlight a supply chain that is aligned with environmental standards, it does not encourage sustainable innovation. A more specific disclosure that clarifies areas for improvement may include information around the percentage of raw textile materials that are reused or repurposed from existing materials, or identify carcinogenic chemicals used in textile dyeing and associated worker exposure risks.
- Useful digital reporting necessitates high-resolution tagging We strongly support the plan for detailed tagging of specific data points and would suggest that every effort be made to enable high-resolution tagging, organizing, encrypting, and secure data sharing as part of a truly robust digital ecosystem for sustainability data. High-resolution tagging is extraordinarily useful for analysts who need to categorize and interpret data in a variety of ways and across platforms.
Focusing on data and process transparencyThe Taxonomy should encourage reporting entities to focus primarily on reporting only the materially relevant, verifiable, and contextualized information – concrete information and fewer hand- or algorithmically-derived summary metrics. This should include transparent documentation around the process used to collect specific evidence and convert it into the reported values. In our experience, organizations can readily report the “facts on the ground” about their activities, such as the number of fleet vehicles they own and the fuel consumption of those vehicles. The current challenge for many organizations is to translate this information into standardized metrics, for example, non-stationary Scope 1 emissions.
We think that there is a real benefit in shifting the responsibility of deep analysis from the organization itself to the subject matter experts, including both standards setters as well as sustainability analytics providers. By having an organization provide raw data, and leaving analysts/subject matter experts to transform the data into relevant metrics, there is a lower barrier of entry for organizations and preparers to comply with disclosure standards. As a result, the reported metrics are likely to be more accurate. Further, if subject matter experts are the ones designing the methodologies and performing the metrics analyses, they are less likely to be biased in the application of analytical methods. Similar to how companies use external accountants and auditors, subject matter experts are positioned to take a broader and more systematic view of parsing high granularity data.
Increasing taxonomy ease of useThe issues raised by the IFRS staff in their Taxonomy draft for feedback highlight the many aspects of sustainability-related financial disclosure reporting. To accommodate users of this Taxonomy, it would be helpful to include a complete sustainability disclosure example document with annotations describing the various Taxonomy components (e.g., categorized elements, narrative elements, hierarchical ordering of data, etc.). Currently, synthesizing all of the guidance in the Taxonomy is somewhat challenging due to its lack of a comprehensive, downloadable example. Few things teach as well as examples!
As the community approaches a more standardized set of metrics and best practices, stakeholders will be equipped to better assess and use a company’s ESG and impact information in a meaningful way. We believe that this will provide critical tailwinds to the corporate sustainability movement in a way that focuses on verifiable actions, especially on climate resilience. We appreciate the IFRS facilitating the advancement of these drafts in a way that directly benefits all stakeholders. The advancement of sustainability-related big data will enable new aggregate analyses and it is our hope that the underlying data and metrics will be sufficiently robust to provide meaningful directions for sustainable development.