July 23, 2024

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Adopting Digital Transformation in Sustainability Reporting with ESRS Set 1 XBRL Taxonomy

The following article is attributed to Ms. Barbie Antony, Associate Director at Updapt- an ESG Tech Co.

The Corporate Sustainability Reporting Directive (CSRD) changes how companies report their social and environmental impacts. The CSRD requires more companies, including large firms and listed SMEs, to report on their sustainability practices. Even some non-EU companies earning over EUR 150 million in the EU must comply. This directive helps investors, civil society, consumers, and others understand companies’ sustainability performance, supporting the European Green Deal.

Central to the CSRD are the European Sustainability Reporting Standards (ESRS), developed to standardize the sustainability information that companies must report. The ESRS ensure that disclosures are consistent and comparable across different organizations, thereby facilitating better analysis and decision-making by stakeholders.

To further improve and enhance the reporting process, the ESRS requirements are translated into a digital format using the eXtensible Business Reporting Language (XBRL). XBRL is a globally recognized standard for exchanging business information. By using XBRL, companies can tag their sustainability data, making it machine-readable and easily accessible for analysis.

The Draft ESRS Set 1 XBRL Taxonomy, developed by the European Financial Reporting Advisory Group (EFRAG), is a significant innovation in this regard. It provides a structured way to digitally tag and store information about ESRS disclosures, facilitating the identification, navigation, and extraction of sustainability data. This taxonomy not only enhances the clarity and depth of reported information but also integrates dimensions that allow for detailed data disaggregation.

Implementing the ESRS Set 1 XBRL Taxonomy offers numerous benefits. It improves data accessibility, enabling stakeholders to quickly locate and analyze relevant information. The standardization of disclosures ensures comparability across companies, enhancing the overall quality of sustainability reporting. Additionally, the digital format reduces the likelihood of errors and omissions, increasing the reliability of the reported data.

The digital transformation facilitated by the ESRS Set 1 XBRL Taxonomy marks a significant leap in sustainability reporting. By making narrative data—textual information that describes a company’s sustainability journey—digitally accessible and taggable, the taxonomy supports more comprehensive and insightful reporting. This is particularly crucial as narrative data currently constitutes about 50% to 60% of the data reported under the CSRD.

For companies looking to adopt this digital approach, several steps are essential. Firstly, selecting appropriate software that supports XBRL tagging is crucial. This software should enable seamless data integration, ensuring that all relevant sustainability information is accurately captured and tagged. Process automation tools can further enhance efficiency, reducing the time and effort required for manual data compilation and analysis.

Automating the reporting process not only improves efficiency but also reduces costs over the medium to long term. By harmonizing the information that needs to be reported, companies can focus on implementing effective sustainability practices rather than being bogged down by the complexities of data management. Moreover, the precision offered by digital tagging significantly reduces errors, enhancing the trustworthiness of ESG information.

One of the key features of the XBRL taxonomy is its hierarchical tagging system, which organizes data into three nested levels. Level 1 tags address the whole disclosure requirement, providing a high-level overview. Level 2 tags focus on specific aspects of the disclosure, while Level 3 tags offer detailed granularity, breaking down information into its smallest components. This structured approach ensures that each piece of information is logically placed, enhancing both human readability and automatic data processing.

The interoperability of the ESRS digital tagging system with other sustainability standards is another important consideration. EFRAG aims to achieve digital interoperability with frameworks like the IFRS Sustainability-related Disclosure Standards and the Global Reporting Initiative (GRI). This will simplify comparability and enable automatic tagging across different standards, reducing the burden on companies to produce multiple reports for various stakeholders.

In practice, companies can approach XBRL tagging through two primary methodologies: content-first and taxonomy-centric. The content-first approach involves completing the sustainability statement before mapping the information onto its digital counterpart. Conversely, the taxonomy-centric approach involves identifying relevant XBRL elements prior to the creation of the report. Both approaches have their merits, and the choice between them depends on the company’s specific circumstances, processes, and tools used.

The finalization of the ESRS XBRL Taxonomy is particularly important for early adopters of AI technology in sustainability reporting. Digital tagging of disclosures enables AI systems to more easily and accurately identify and classify ESG data. In turn, AI tools can help organize raw sustainability data into compliant reports, further streamlining the reporting process.

The integration of the CSRD, ESRS, and XBRL Taxonomy is a big step toward clearer, easier, and more dependable sustainability reporting. By adopting these new methods, companies can meet regulatory requirements and show their dedication to sustainable practices, helping to build a more sustainable future.