Digitalising climate and sustainability data
Bing Leng, board member, International Sustainability Standards Board, explains how the ISSB created its digital sustainability taxonomy to help investors analyse sustainability disclosures efficiently.
Major investors, whose funds help keep global markets working, increasingly use digital financial reporting to make efficient investment decisions. But currently, there is diversity in whether and how accounting and sustainability-related financial disclosures become computer readable.
Consequently, investors often cannot digitally compare accounting and sustainability data from various jurisdictions with confidence – and often they cannot do so in their own jurisdictions. The use of a common digital taxonomy for making sustainability-related financial disclosures computer readable could significantly reduce this diversity.
To that end, the International Sustainability Standards Board published the IFRS Sustainability Disclosure Taxonomy, which is an important piece of the puzzle in enabling investors and other capital providers to digitally compare and analyse sustainability-related financial disclosures. The ISSB Taxonomy is designed to be used with the digital taxonomies used for tagging companies’ accounting information to support holistic digital financial reporting (Figure 1).
Figure 1. Tagging scope 1 greenhouse gas emissions information using ISSB Taxonomy
Companies might use various descriptions when referring to their 'scope 1 greenhouse gas emissions'. Without further context from each company's financial reports, it is unclear whether each company is referring to the same concept.
If each company tags its disclosures with the 'AbsoluteGrossScope 1GHGEmissions' element from the IFRS Sustainability Disclosure Taxonomy, a computer is able to determine that each company is referring to the same concept.
Source: ISSB
‘As jurisdictions around the world are considering the adoption or other use of ISSB standards, the publication of the ISSB Taxonomy only a few months after the effective date of our inaugural standards is critical to support capital market transparency and efficiency,’ said Emmanuel Faber, ISSB chair.
The ISSB Taxonomy also enables ‘companies and investors to digitally process sustainability-related financial disclosures provided through use of the ISSB Standards,’ he said. This is keeping pace with the International Accounting Standards Board – the sister body of ISSB – that develops the IFRS Accounting Taxonomy alongside the IFRS Accounting Standards to help fulfil the information needs of investors in a digital format.
What is digital financial reporting and who uses it?
A digital financial report is a financial report in a computer-readable, structured data format. Although financial reports in a PDF format are visually and contextually understandable to humans, this format makes it difficult for users of financial reports to efficiently extract, compare and analyse companies’ information. Information in a computer-readable, structured data format allows investors to compare and analyse information efficiently – and on a large scale, particularly considering the important connections between information provided in a company’s financial statements and sustainability-related financial disclosures.
Digital financial reporting can improve capital market transparency and efficiency. Improved transparency promotes capital formation and allows companies to raise capital at a lower cost. This opens up greater opportunities for investment, which in turn leads to economic growth and development.
Digital financial reporting, which enables computer-readable and structured data to be provided to investors, is now a requirement in most of the major economies around the world. Capital markets without digital financial reporting requirements face the risk of lower foreign investment and a higher cost of capital. Over 90% of listed companies by global market capitalisation are required to undertake digital financial reporting to some extent.
For investors and markets to realise the full benefits, digital financial reports should be:
- a complete and accurate representation of reported information
- structured in a digitally comparable format
- publicly available at the same time as reported information
- centrally accessible in an easy-to-use format.
How can the challenges be resolved?
IFRS digital taxonomies – IFRS Accounting Taxonomy and ISSB Taxonomy – help companies provide investors with a full picture of how they respond to sustainability risks and opportunities and how those responses affect their financial performance and position.
Designed to be consistent with the IFRS Accounting Taxonomy so that companies can provide a holistic digital financial reporting package to investors, the ISSB Taxonomy can also be used with other digital taxonomies.
Find out more about IFRS digital taxonomies
- Access the ISSB Taxonomy and supporting information
- Access an introductory webcast about ISSB Taxonomy
- Access an introductory article about digital financial reporting and IFRS digital taxonomies