Digital ESG Reporting

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ESG
Global Trends in Disclosure and Rule Making
Part 1: Global Perspectives
John Turner
CEO, XBRL International

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Suddenly, sustainability is everywhere
“Quality data and comparable frameworks of disclosure are
crucial for addressing climate-related financial risks and
mobilising sustainable finance”
G20 FINANCE MINISTERS AND CENTRAL BANK GOVERNORS COMMUNIQUE, JULY 2020
What’s happening?
Why does this matter?
What does it mean?

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Understanding Global
ESG Developments
1. Introductions
2. What do investors want?
3. What do policy makers wants?
4. Complex global situation
5. Making sense of these changes

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Some Introductions
1. XBRL International
2. The ESG or Sustainability Landscape

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First – What is “XBRL International”
Not for Profit
Standards
Development
Freely Licensed for
Everyone
Public Interest Purpose
Open
Accountable
Global
20 Years Old
And why does digital matter?

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What Does XBRL International Do?
Specifications and Best Practice
XBRL International’s Scope:
Specifications & Best
Practices
National Regulator/
Standards Setter
(Taxonomies)
Reporting
Organisations
(Reports)
An Analogy
• XII develops the specifications that
underpin digital reporting of all kinds. Think
of the Specs as an alphabet and
grammar.
• Dictionaries, or taxonomies, need to be
developed to create the Words that can
be used in reports. The Dictionary needs to
use the letters of the alphabet and the
rules of grammar, both defined in the
Specifications.
• Reports can then be created using the
Words in the Dictionaries, the letters in the
alphabet and the rules of grammar.

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We are content neutral and domain neutral
Switzerland!

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The 2020s are a global digital age
https://www.xbrl.org/the-standard/why/xbrl-project-directory/

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Digital Transformation is all around us and is a key differentiator
Why now?
• Essentially every business process is being re-
imagined at the moment, thanks to:
• Cheap computing and cloud platforms
• Ubiquitous internet access
• Big Data and Next Generation Analytics
• Machine Learning
• Financial analysis, review, process controls,
reporting and assurance are all being reinvented
too.
• XBRL is coming of age now that all of these things
are true.

@xbrlint
Voluntary, Mostly Privately Funded, Exploratory… and all just a little bit different
ESG Frameworks have developed independently
over 20+ years
≠
• Climate Disclosure Standards Board (CDSB)
• Global Reporting Initiative (GRI)
• Science Based Targets initiative (SBTi)
• Sustainability Accounting Standards Board (SASB)
• Task Force on Climate-related Financial Disclosures (TCFD)
• UN Principles for Responsible Investment (PRI)
• World Economic Forum (WEF) Stakeholder Capitalism Metrics
Different metrics, approaches and scope: different frameworks: An “Alphabet Soup”
At the end of 2018 there was an initial attempt to rationalise the standards.

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Often a marketing or investor relations tool, rather than disclosure about sustainable performance
Voluntary Disclosures Widely Misused
• Financial reporting has been with us for
hundreds of years.
• Disclosure about other aspects of
business activity is new, complex and
not subject to the same processes,
controls or review as financial data used
to run the business and disclose to
markets and other stakeholders.
• Voluntary arrangements make this more
difficult.
Source: Eco-Business

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The question of different ESG reporting frameworks… and ratings… start to gain attention
Increasing focus on this issue in 2019
• Financial media and investment groups
started to discuss the key problem
associated with the lack of clarity in ESG
disclosures.
• Even in 2019, however, the suggestion that
regulators might ”pick a winner” was only
discussed within the standards-setters
themselves.
Source: Financial Times – 6 October 2019

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From 2017 onwards, a swing to ESG-investing quickly strengthened… mostly based on ESG ratings
Sustainability Ratings Complicate Matters
• In addition to different voluntary
corporate disclosure arrangements,
different ratings agencies prepare their
own, proprietary ESG ratings based on
surveys and other undisclosed
mechanisms.
• Ratings drive investment.
• But ESG disclosures do not necessarily
get reflected in ratings.
• Why? The Alphabet Soup.
Source: Financial Times 4 March 2020 - Heavy flows into
ESG funds raise questions over ratings

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(Complexity, inconsistency makes all of this hard to measure!)
Huge Investment Focus
Bloomberg projects
that ESG Assets could
rise to as much as
$53 Trillion by 2025.
Whatever the results,
easy to agree that
“ESG” is growing
incredibly quickly.
Source: Bloomberg.com

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Investors look to intangibles, business models, market position, more than traditional financials.
Big Picture: Non-financial measures are important
• Book value and reported earnings
once governed valuations.
Increasingly, this is only part of what
investors look to.
• Questions about business model,
intangible assets, relative market
position and vulnerability to external
shocks are what many investors
focus on.
Source: Baruch Lev, Feng Gu The End of Accounting and the Path Forward for Investors and Managers 2016

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Pandemic is a Dry Run…
One Key External Shock: Climate Change
• Citizens, governments and even (some) of the
media are focussed on global climate change.
• Investors have a particular focus on the financial
risks and opportunities that climate change
presents to different parts of the economy.
• Many (if not yet most) policy makers are looking
to almost every aspect of economic production,
to identify levers that can be used to alter CO2
emissions.
• Disclosure is one of them.
Source: Reuters 7 June 2021

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New information can drive new kinds of decisions. Getting in front of this trend is key.
To summarise so far…
• Voluntary ESG disclosures are neither
comparable nor accurate.
• Until now, no unifying force to resolve
this question.
• Rapid shift in attention by investors
towards ESG factors.
• Rapid shift in attention by policy
makers towards ESG disclosures.

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What do Investors Want?

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Most famously the “Larry Fink Letters to CEOs”
Strong push from large asset managers
“I believe that the pandemic has presented such an existential crisis
– such a stark reminder of our fragility – that it has driven us to
confront the global threat of climate change more forcefully and to
consider how, like the pandemic, it will alter our lives. It has reminded
us how the biggest crises, whether medical or environmental,
demand a global and ambitious response.”
“We know that climate risk is investment risk. But we also believe the
climate transition presents a historic investment opportunity.”
“We strongly support moving to a single global standard, which will
enable investors to make more informed decisions about how to
achieve durable long-term returns.”

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Every investor is different… however …
But more broadly…
• Convergence in ESG reporting frameworks
• Meaningful disclosures on climate change
• Consistency, clarity and assurance

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What do Policy Makers
Want?

@xbrlint
Investors are looking to risks and opportunities. Governments seek change.
Fundamentally, Policy Makers Want New Levers
• Climate related change (becoming globally
consistent)
• Some social changes (hugely variable)
• Eventually some governance changes (likely to
include intangibles in the future)
• We’ll explore the most prominent set of
changes… and then extrapolate.

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Europe is leading, and seeks to lead change in this field
It depends! (Of course!)
• EU has introduced a raft of new proposals that will largely be passed into law this year.
• In particular, as part of ambitious and transformational “Green Deal”.
• Seeks zero net emissions of greenhouse gases by 2050.
• Of particular relevance to this discussion:
CSRD SFDR
EU “Taxonomy”
Or
Classification
of Industries

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Corporate Sustainability Reporting Directive
The EU will require consistent, high quality disclosures
• “CSRD” replaces non-binding “NFRD”
• Covers largest 50K companies operating in the EU
• Requires “Double Materiality” disclosures
• A consistent reporting framework
• Audit/Assurance over the disclosures
• Digital First approach to disclosure
• Wider “Corporate Reporting” includes financial
reporting as well – ESG disclosures to appear in
Management Commentary.
CSRD

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Seek to limit greenwashing and provide investor information at a fund level
EU SFDR Disclosures by Fund Managers
Funds are either:
• Not focussed on sustainability
(Article 6)
• Promote sustainability factors
(Article 8)
• Have sustainability as their core
objective (Article 9)
Investment managers need
corporate disclosures to (in turn)
disclose fund characteristics.
Source: JP Morgan
SFDR

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A macro tool…
“EU Taxonomy”
• Classification of industries based on their ESG characteristics
• Supplemented by:
• “Non-financial companies will have to disclose the share of their turnover, capital and operational expenditure
associated with environmentally sustainable economic activities as defined in the Taxonomy Regulation”
• “Financial institutions, mainly large banks, asset managers, investment firms and insurance/reinsurance
companies, will have to disclose the share of environmentally sustainable economic activities in the total
assets they finance or invest in.”
(This information will be derived from CSRD disclosures)
EU Taxonomy classifications of specific companies will help drive investor behaviours.
EU
“Taxonomy”
Or
Classification
of Industries

@xbrlint
A range of incentives…
So is this all market-based? No! It combines Carrots…
• The EU’s Green Deal provides a range of
incentives for Sustainable Finance, not least
certain credit enhancements and lending
guarantees for bonds and loans originated for
the purpose of climate transition.
• The EU also believes that high quality
disclosure will alter investor behaviour,
particularly away from “carbon heavy”
industries.
Source: BBC News

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With more accurate ESG disclosures, policy makers can influence behaviours directly…
And Sticks…
• A range of stricter emissions trading cap & trade
rules will be imposed around the world – the EU
just expanded theirs, China just announced its own.
• Carbon taxes logically will follow.
• To equalise international behaviours, governments
are likely to introduce initiatives like the EU’s
“Carbon Border Adjustment Mechanism”.
Source: New York Times

@xbrlint
An ESG equivalent to the IASB?
Let’s go back to “Consistent Standards”
• With support from the G20, FSB, BIS, OECD and IOSCO, the IFRS Trustees are working
towards the creation of the International Sustainability Standards Board.
• ISSB is not yet a done deal… but getting close.
• However – the key question is – will they be adopted?
• EU seeks involvement through EFRAG
• US role is yet to be seen – potentially constrained.
• Asia is likely to be highly influential.

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CSRD is explicitly focussed on impact on the enterprise and impact of the enterprise…
And “Double Materiality”
Source: A prototype climate-related financial disclosure standard

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In the US things are also changing…
Across the Pond…
• New US SEC Chair Gensler has been asked by the Biden
Administration to prioritise ESG disclosure.
• The SEC has issued several public requests, and directed
the staff to study, different approaches to ESG disclosure.
• It seems that the Administration would need legislation in
order to give the SEC power to delegate ESG standards
setting to an independent body.
• “Double” materiality is highly unlikely to be supported in
the USA.
• In the short term, then, it is quite likely that the SEC will
need to make their own rules.

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Single Global Standard? Highly unlikely!
Building Block Approach
• As we move from mostly voluntary ESG
disclosures, or relatively light mandates to a
general shift to broad mandates, we move
from voluntary standards setting to much
more formal, and closely watched
arrangements.
• Nations of the world just will not agree on a
consistent single standard.
• Therefore, the new watch words: the
“Building Block Approach”.

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Need for Consistent Audit Standards
Auditability
• Rapid shift by IAASB to develop
global standards for reviewing
ESG disclosures.
• KEY ISSUE?
• Development of new
capabilities, processes and
controls for the preparation and
review of ESG reporting
concepts.

@xbrlint
Coming in Europe, Japan. Certain to follow in the US and other markets around the world
Digital
• Mandate to be finalised in Q4 2021 in
Europe – CSRD
• US and Japan very focussed on this topic.
• IFRS Trustees clear that digital first
approach will be part of the ISSB.
• Policy Makers should be contributing to
ISSB standards and using digital
disclosures.

@xbrlint
Ok – so where are we?
To summarise
• ESG Disclosure is likely to become mandatory across most of the major markets.
• A combination of investor demand and a significant new set of needs from policy
makers brings this about. Particularly around climate. It is moving extremely fast.
• Very uncertain.
• The ISSB looks set to be created.
• A “Building Block” approach is very likely.
• There will be a spectrum of implementations, from “Full Fat” double materiality to
“Skinny” that will just be carbon disclosures – and everything in between.
• Aspects of the EU’s approach are deliberately extra-territorial.
• Remember: Carrots and Sticks!
• Strong support for Assurance and a Digital First approach from IOSCO, OECD and G20.

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Complex Global Situation

@xbrlint
With an undercurrent of COP26
Fast Moving! • EU Seeks to lead.
• Will its data be comparable??
• CN rapidly introducing
mandatory disclosures
• US is changing rapidly
• Congressional constraints
• Limited disclosure rules for
now?
ISSB Scope is
Limited
EFRAG –
Double
Materiality

@xbrlint
2H 2021 is vital
Next Few Months Will Determine:
• Which standards setters might be folded into the ISSB, or
provide ways to work with the ISSB.
• Which approach the US will take to ESG disclosure.
• Whether the EU will adopt international standards (ie: ISSB)
or stay local.
• Where economies like China and Japan will shift in relation
to the ISSB.
• What role disclosure might take in any COP26 agreement.
101 Days to COP26

@xbrlint
Getting ready…
Key Opportunities
• For markets that seek to make themselves competitive on the global stage, use of coming
ISSB standards will be important. Demonstrating impacts on the sustainability of
international supply chains will be key.
• New (green) industries will shake up decades old assumptions. It is likely that reputation risks
associated with some “S” and “G” aspects will also be vital.
• For companies seeking investment that can show a clear linkage to reducing carbon
emissions, or taking advantage of new opportunities created by the transition to a low
carbon economy, there are a host of opportunities.
• For accountants in practice and in industry, there is a need to develop skills and
capabilities in these areas. Requires new knowledge, new processes and new controls.
Hugely relevant to the accounting and audit profession because it also requires rigour.

@xbrlint
ESG
The Digitisation of Reporting
Part 2: A Framework for Enhancement
John Turner
CEO, XBRL International

@xbrlint
1. TWSE and ESG Reporting Today
2. Understanding Inline XBRL
3. Navigating Global Change
4. Q&A

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TWSE & ESG Today
Impressive Foundations

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TWSE already set the right direction of travel
Large Corporate ESG Disclosures…
• Reports utilising the GRI
framework.
• Cross references to SASB
• TCFD disclosures
• External Assurance
• Do these reports meet the
needs of stakeholders?

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Ratings Achieved
At one level – absolutely.
Do the ratings
come about as a
result of the
reports?
E.G: TSMC --
230 page report
In English and
another in
Mandarin…

@xbrlint
CG3.0
Plans on foot to expand…
• Existing FSC plans will see the reporting threshold lowered to TWD 2Bn.
• CG3.0 will incorporate TCFD and SASB standards into sustainability reporting.
Will this help raise the visibility and enhance the performance of TWSE public companies?
Likely, yes!
But wouldn’t it be better to ensure that:
• These disclosures are as globally comparable as possible?
• Local companies will not suffer as a result of upcoming “ESG Trade Barriers”?

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Making Disclosure Digital
Understanding Inline XBRL

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Live Demonstration
filings.xbrl.org
Repository of EU
Public Company
Filings

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• Interesting to look
across populations
for overall trends.
• This chart shows
the inclination of
companies in the
EU to spend on
R&D…
Direct Analytics!

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Navigating Global Change

@xbrlint
We should expect an ISSB
announcement in the next 101
days. This should provide
significant shrinking of the
“alphabet soup”. By all means,
add your own building blocks.
But think in terms of
comparability.
Follow IFRS Developments
Make sure that TWSE
companies of all sizes and
in all industries can
demonstrate their
performance to local and
international stakeholders by
concentrating on access!
Focus on Accessibility
Consider a Digital First
Approach to coming wider
mandatory ESG
disclosures.
Be Digital!
A key part of global trade policy
going forward will include
“comparative carbon”, likely
driven by corporate disclosures.
Competitiveness will literally
depend on industry ESG
performance.
Design Incentives

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Our purpose is to improve the accountability and
transparency of business performance globally, by
providing the open data exchange standard
for business reporting.
Our standards are freely licensed. We operate in the
public interest as a not-for-profit standards
development organisation.
Join Us!
https://www.xbrl.org

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consensus opinions of the XBRL Standards Board or Best Practices Board. Nothing in this
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