The Data Coalition’s Environmental, Social, and Governance (ESG) Data Working Group released its final report this week sharing recommendations to help bring ESG data to a place it could be effectively used in a regulatory environment. The group calls for ESG data to be standardized, machine-readable, and auditable. If the U.S. Federal government was to implement the working group’s recommendations, it would be positioned to take the lead on developing standards and expectations before international standards are in place.
ESG data in an entity’s financial reports are used by stakeholders to assess risk and long-term value on metrics impacting governance, people, profits, and the planet, increasingly influencing international investment decisions. Currently, ESG reporting is largely voluntary and reporting requirements are determined by investment firms and the market, creating an environment of confusing and uncomparable ESG disclosure. According to the working group, this means that “understanding the information provided across firms, sectors, regions, or countries is not only challenging, but largely unreliable and uncertain.”
As calls for ESG reporting grow in the U.S. and internationally, the Data Coalition recognized an opportunity to support useful ESG reporting. The Data Coalition ESG Working Group convened in 2021 and included representatives from member companies DFIN, Workiva, Summit LLC, the Global LEI Foundation, SAP, XBRL US, and Data Foundation staff. With the goal of producing guidance to inform data-related legislation, financial regulations, and private sector practices, the group came together throughout the year to develop an understanding of the current landscape of ESG reporting and determine the most critical improvements needed. In June 2021, the group provided public feedback on a climate disclosure inquiry from the Securities and Exchange Commission and released their final report in December of 2021.
- First, the U.S. should contribute to consensus international, domain standards to the extent feasible. Existing independent standard-setting organizations that take into account national, regional, sector, and market perspectives provide a platform for producing standards that are usable and consistent with global activities.
- Second, all ESG data disclosures should be machine-readable and digital so that it facilitates interoperability. Machine-readable data allows more efficient and cost-effective growth across the industry.
- Lastly, ESG data should lend itself to be auditable to support greater accountability and transparency. A glossary of terms and data sources, and establishing processes similar to disclosure controls with financial reporting, can increase the confidence of investors and the public that ESG data is trustworthy and of high quality.
Market pressure for ESG disclosure is increasing and the U.S. should take advantage of the momentum of interest in ESG. The Data Coalition supports the working group’s recommendations that U.S. regulators, by cultivating a data ecosystem composed of standardized, machine-readable, and auditable data, can facilitate a more trustworthy and influential ESG reporting ecosystem.