It’s Time Investors had US Firms’ Non-financial Disclosures in XBRL

March 1, 2021by Team IRIS CARBON

Back in the late nineties, a motley group of professionals got together to develop an XML-based data standard that would revolutionize the way financial information is conveyed.

Extensible Financial Reporting Mark-up Language or XFRML, as their project was initially called, would go on to become the go-to standard for regulators of every hue to seek transparent and comparable data from the entities they regulated.

But for that to happen, the project had to undergo a change of name and vision. For not only was XFRML difficult to pronounce, but it also narrowed the scope of the standard to financial information alone.

Finally, with the July 2000 deadline for the first technical specification of the standard fast approaching, the group realized they needed to expand their project’s focus. The standard they were developing could “cover more than just financial statements”. It could “encompass all of business reporting” — both financial and non-financial.

This new vision gave birth to Extensible Business Reporting Language or XBRL as it is known today.

The main benefit of the XBRL standard is the machine-readability it lends to a document. The making of an XBRL document involves placing machine-readable tags against the data or disclosures in a document from the backend. The list of all the machine-readable tags is called taxonomy.

Two decades from its ‘birth’, the XBRL standard is still to realize its full potential. It has been confined mostly to financial disclosures, with calls every now and then to extend it to non-financial reporting.

Among the most recent voices on this issue is that of the US SEC’s Acting Chair Allison Herren Lee. In her keynote speech at the XBRL US Investor Forum 2020 in November, ‘The Promise of Structured Data: True Modernization of Disclosure Effectiveness’, Lee, who was then a commissioner, marked out four areas outside of financial statements where XBRL could improve disclosures. The four areas are proxy data, climate change and ESG data, Management’s Discussion and Analysis (MD&A), and earnings releases.

Here’s a glance at what XBRL disclosures in each of these areas would mean:

Proxy voting data

Proxy voting data, which the SEC requires mutual funds and other management investment companies to disclose through Form N-PX, helps investors know if voting on their behalf has been carried out in their best interests and as per their instructions.

Lee said in her speech that the voluminous data in N-PX filings would likely need “relatively few, straightforward data (read XBRL) tags. “…we could potentially take a large body of important information and dramatically increase its usability through a relatively simple taxonomy.”

Climate change and ESG data

Environmental, Social, and Governance (ESG) or sustainability disclosures have been largely voluntary in the US. The US SEC, unlike regulators elsewhere — the UK, Europe, and Singapore, to name a few — has not talked about bringing in regulations for companies to furnish information on ESG factors. That’s apart from a couple of statements by then-Commissioner Lee, and Commissioner Caroline A. Crenshaw, which mention the climate risk disclosures issue.

Commissioner Lee said in a public statement in January 2020 that the last time the SEC tried to address the climate risk disclosures issue was back in 2010 when the regulator mentioned four areas of Regulation S-K that could do with those disclosures — description of business, legal proceedings, risk factors, and the Management’s Discussion and Analysis section.

Lee’s statement followed a proposal by the SEC to ‘modernize and enhance financial disclosures’ covering each of the four areas mentioned above, which left climate risk disclosure requirements out of the agenda. Regulation S-K sets out the requirements for disclosures by public companies in the US.

The SEC adopted amendments to Regulation S-K twice in 2020 — in August and November. After the second amendment, Commissioner Caroline Crenshaw joined Commissioner Lee in issuing a statement mentioning the SEC’s failure to address the ESG disclosure issue.

Things seem poised for change, however, as the US SEC’s incoming chairman Gary Gensler is known to be a tough regulator and might take an ‘aggressive stance’ on ESG disclosure requirements.

Lee, herself, in her capacity as the SEC’s acting chair, has called for ESG disclosures to be made mandatory.

Discussion and Analysis

Management’s Discussion and Analysis (MD&A) is that section of a company’s annual report or quarterly filings where the management offers a commentary on the company’s performance.

There have been calls in the past for expanding XBRL tagging requirements to the MD&A section. It has been suggested that companies be required to organize the information in the section before each part is block tagged. Tagging even the numeric data in this section would open ‘a trove of valuable data for investors’, an expert has said.

As mentioned before, the MD&A section was a subject of much debate within the US SEC in 2020 as the regulator’s move to improve disclosures in the MD&A section did not factor in ESG issues, which Lee felt are best addressed in this section.

Earnings releases

The information contained in earnings releases is ‘market-moving’ and appears to be “another well-suited candidate for tagging”, according to Lee. And what’s more, earnings releases are relatively easy to structure.

XBRL beyond financial reporting

The XBRL standard was never meant to be confined to the financial disclosures of business entities. Moreover, it takes more than just financial information to get a full picture of any business activity.

It is time for the SEC-mandated non-financial disclosures in the XBRL format, starting with the four areas that Commissioner Lee has mentioned.

And it is time the world at large realized the full potential of structured data.

This article was first published from Anuradha RK’s LinkedIn profile.

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