sustainability Article Mandatory ESG Reporting and XBRL Taxonomies Combination: ESG Ratings and Income Statement, a Sustainable Value-Added Disclosure Alessio Faccia 1,2,* , Francesco Manni 3 and Fabian Capitanio 4 1 School of Business and Law, Coventry University, Coventry CV1 5FB, UK 2 Centre for Blockchain Technologies (CBT), University College London (UCL), London WC1E 6BT, UK 3 Dipartimento di Economia Aziendale, Università Roma TRE, 00145 Rome, Italy; [email protected] 4 Dipartimento di Medicina Veterinaria, Università di Napoli Federico II, 80137 Napoli, Italy; [email protected] * Correspondence: [email protected] Abstract: Corporate financial statements address multiple stakeholders’ needs. International Finan- cial 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 compre- hensive 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} Citation: Faccia, A.; Manni, F.; and {320000} codifications, respectively. Given the recent EU enhanced regulations that proposed Capitanio, F. Mandatory ESG Reporting and XBRL Taxonomies extend mandatory ESG reporting to SMEs, this study aims to design and recommend an additional Combination: ESG Ratings and Income Statement to embed structured Environmental, Social, and Governance (ESG) disclosure. A Income Statement, a Sustainable restatement of the IS is organised following an adjusted Value-Added perspective to fit the purpose of Value-Added Disclosure. sustainability disclosure. The above-mentioned Income Statement should be suitable and adaptable Sustainability 2021, 13, 8876. https:// for entities of any size and operating in any industry. This goal can be achieved through customised doi.org/10.3390/su13168876 input weighting. Therefore, this applied research can fill a current financial ESG disclosure gap, ensuring financial statements’ comparability and encouraging additional mandatory disclosures Academic Editors: Collins Ntim, through standardisation. Two more items in the XBRL (IFRS-based) structure are suggested, leading Dimu Ehalaiye, Ernest Gyapong, to the introduction of one fully structured statement “{330000}—Statement of comprehensive income, John Kalimilo Malagila and profit or loss, by Added Value, ESG based” and a semi-structured “{814000}—Notes—ESG Ratings and Jennifer Martínez-Ferrero Reporting” to better discuss and disclose the assumptions and results of the ESG Statement. Received: 13 June 2021 Accepted: 5 August 2021 Keywords: XBRL; ESG reporting; value-added; sustainable financial disclosure; IFRS; sustainability; Published: 9 August 2021 income statement; statement of comprehensive income; EU Taxonomy Climate Delegated Act; Non- Financial Reporting Directive (NFRD) Publisher’s Note: MDPI stays neutral with regard to jurisdictional claims in published maps and institutional affil- iations. 1. Introduction ESG disclosure is becoming increasingly regulated and essential to the stakeholders, more aware and sensitive to Environmental, Social, and Governance perspectives. Corpora- tions play a significant role in the communities in which they operate [1–3]. Therefore, their Copyright: © 2021 by the authors. accountability [4,5] should be considered, measured, and systematically disclosed to en- Licensee MDPI, Basel, Switzerland. sure transparency, comparability, and stakeholders’ awareness [6,7]. Attempts to measure This article is an open access article and inform sustainability outcomes and financial performances have led to autonomous distributed under the terms and Sustainability Reports, discretionarily presented by the companies [8,9]. conditions of the Creative Commons Structured financial statement disclosure, unlike ESG reporting, is enforced and highly Attribution (CC BY) license (https:// regulated by laws, accounting standards, and other regulations [10–12]. EU law enforces creativecommons.org/licenses/by/ large companies (“public-interest entities exceeding on their balance sheet dates the criterion 4.0/). Sustainability 2021, 13, 8876. https://doi.org/10.3390/su13168876 https://www.mdpi.com/journal/sustainability Sustainability 2021, 13, x FOR PEER REVIEW 2 of 18 Sustainability 2021, 13, 8876 2 of 17 enforces large companies (“public-interest entities exceeding on their balance sheet dates the ofcriterion the average of the number average of 500number employees of 500 during employees the financialduring the year financial”, Directive year 2014/95/EU.”, Directive This2014/95/EU. requirement This integratesrequirement the integrates previous the Directive previous 2013/34/EU) Directive 2013/34/EU) “to disclose “ informationto disclose oninformation the waythey on the operate way they and operate manage and social manage and social environmental and environmental challenges challenges”[13], while” [13], allwhile the otherall the entities other entities are likely are to likely be soon to be expected soon expected to meet to extended meet extended mandatory mandatory ESG reporting, ESG re- accordingporting, according to the recent to the EU recent proposal EU proposal [1,2]. [1,2]. TheThe accountingaccounting process (see Figure 11)) startsstarts fromfrom (1)(1) bookkeepingbookkeeping of companies’ transactions,transactions, followedfollowed byby (2)(2) trial balance, (3 (3)) financial financial statement statement disclosure, disclosure, and and (4) (4) finan- finan- cialcial statementstatement analysisanalysis [[14].14]. While sole traders and unincorp unincorporatedorated entities entities are are usually usually onlyonly expectedexpected toto complycomply withwith the firstfirst two stepssteps of the accounting process, process, incorporated incorporated companiescompanies mustmust provideprovide additional disclosure through through structured, structured, standardised standardised financial financial statementsstatements thatthat manymany stakeholdersstakeholders analyse through flows flows and and ratios ratios [15]. [15]. In In this this research, research, thethe authorsauthors willwill referrefer toto incorporatedincorporated entities only, only, as sole traders’ and and unincorporated unincorporated entities’entities’ disclosuredisclosure remainremain limited.limited. InternationalInternational FinancialFinancial Reporting Standards Standards (IFRSs) (IFRSs) issued issued by by the the International International Ac- Ac- countingcounting StandardStandard BoardBoard (IASB)(IASB) apply to listed corporations of of European European countries countries and and manymany othersothers worldwide, resulting resulting in in the the most most popular popular accounting accounting standards, standards, followed followed by bythe the US US GAAPs GAAPs (Generally (Generally Accepted Accepted Accounting Accounting Principles), Principles), along along with with many many other other ac- accountingcounting standards standards issued issued by by national/local national/local accounting accounting professional professional bodies bodies [16]. [16 ]. FigureFigure 1.1. TheThe accountingaccounting process. TheThe eXtensibleeXtensible BusinessBusiness Reporting Reporting Language Language (XBRL) (XBRL) is is the the “ open“open international international standard stand- forard digital for digital business business reporting reporting”[17” [17].]. Incorporated Incorporated entities entities in in mostmost countriescountries should submit submit theirtheir annualannual reportreport toto publicpublic registersregisters (i.e., Companies Houses Houses in in the the UK, UK, SEC’s SEC’s Edgar Edgar databasedatabase inin thethe US)US) codifiedcodified accordingaccording to this standardised language language and and file file extension extension (XBRL)(XBRL) [[18].18]. TheseThese standards aim aim to to ensure ensure accuracy accuracy (through (through formal formal mistakes mistakes avoidance avoidance and andac- accountingcounting equation equation balance), balance), data data processing processing automation, automation, consistency, consistency, and and comparability. comparability. AlthoughAlthough thethe XBRLXBRL taxonomytaxonomy waswas initially appl appliedied to the the annual annual report report schemes schemes to to better better classifyclassify structuredstructured data,data, itsits applicationapplication was progressively extended to to the the notes notes to to include include unstructuredunstructured (text)(text) datadata [[19–21].19–21]. CorporateCorporate financialfinancial disclosure is essential to to ensure ensure transparency transparency and and accountability, accountability, andand itsits filingfiling accordingaccording toto thethe XBRLXBRL taxonomiestaxonomies is worldwide required. required. However, However, these these standardsstandards stillstill dodo notnot includeinclude anyany specificspecific reference to the ESG ESG disclosure. disclosure. Therefore, Therefore, this this studystudy tracestraces thethe pathpath toto aa furtherfurther extensionextension of the XBRL application to to a a standardised standardised SustainabilitySustainability Report.Report. AlthoughAlthough somesome attempts attempts have have been been carried carried out out to to integrate integrate financial finan- andcial and non-financial non-financial reporting reporting [22 ][22] or or to to unify unify the the