Mandatory ESG Reporting and XBRL Taxonomies Combination: ESG Ratings and Income Statement, a Sustainable Value-Added Disclosure

Abstract

Corporate financial statements address multiple stakeholders’ needs. International Financial Reporting Standards (IFRSs), among others, allow two different classifications, “by function of expense” and “by nature of expense”, for the statement of profit and loss and other comprehensive income for the period (from now on, also identified in short as “Income Statement”, or “IS”). XBRL standards ensure compliance and consistency in financial statements’ drafting and filing. XBRL taxonomies reflect the Income Statement IFRS disclosure requirement in the {310000} and {320000} codifications, respectively. Given the recent EU enhanced regulations that proposed extend mandatory ESG reporting to SMEs, this study aims to design and recommend an additional Income Statement to embed structured Environmental, Social, and Governance (ESG) disclosure. A restatement of the IS is organised following an adjusted Value-Added perspective to fit the purpose of sustainability disclosure. The above-mentioned Income Statement should be suitable and adaptable for entities of any size and operating in any industry. This goal can be achieved through customised input weighting. Therefore, this applied research can fill a current financial ESG disclosure gap, ensuring financial statements’ comparability and encouraging additional mandatory disclosures through standardisation. Two more items in the XBRL (IFRS-based) structure are suggested, leading to the introduction of one fully structured statement “{330000}—Statement of comprehensive income, profit or loss, by Added Value, ESG based” and a semi-structured “{814000}—Notes—ESG Ratings and Reporting” to better discuss and disclose the assumptions and results of the ESG Statement.

Editorial Entrepreneurial Finance for Green Innovative SMEs

“…As a major contributor to the economy [29], SMEs have a responsibility of social supervision that can include how they disclose their environmental information on increasing the efficiency of energy usage and reducing their resource consumption that can produce nonrecyclable wastes. This underpins the EU's concerns for establishing SME ESG reporting under European Directive 2021/01014 [14], [17]. Green finance is, therefore, closely tied to green innovation technology.…”

“…This approach needs a positive and productive discussion [17]. The solution may lie with specific and targeted transparent and easy to report environmental (non-financial) measures [14], [19] so that the burden of regulations on SMEs can be lifted and the credit supply can be facilitated.…”

Norwegian stakeholder's attitudes towards EU taxonomy

“…Several certification systems and ESG programmes have been developed to measure the integration of SD goals into business. To show transparency to investors and other stakeholders that are sensitive to ESG principles, a recent European Union (EU) proposal mandates large enterprises to improve their company disclosure by comprehensive ESG reporting (Faccia et al , 2021; Li et al , 2021; Schütze and Stede, 2021). The EU taxonomy is taking this framework a step further, as it aims to document the ESG principles effect of the investments to the climate, or the so-called “green financing”.…”