What You Need to Know About the ESRS xBRL Taxonomy

EFRAG recently released the European Sustainability Reporting Standards (ESRS) xBRL Taxonomy containing the requirements on reporting format and presentation under the Corporate Sustainability Reporting Directive (CSRD). The Taxonomy may be unfamiliar territory to companies that have never used xBRL for financial reporting, let alone sustainability reporting. In this article, we explore the key concepts of the new Taxonomy and common questions surrounding its requirements.

What is xBRL and why is it necessary?

xBRL is a digital reporting format in XML, JSON, and CSV. Perhaps these formats will be familiar to those who work with Excel. xBRL stands for extensible business reporting format, and its purpose is to allow the classification of business information through a tagging system. It is important to have a standardised reporting format that is universally readable (including machine-readable), easily searchable, and in our current age, digitally accessible. Digital accessibility is particularly relevant for xBRL and probably the reason it is the format of choice for EFRAG, as its structure is premised on coding metadata.

Having a digital taxonomy for reporting enables information to be correctly tagged, making disclosures identifiable for reporting companies and for report users. This is the main purpose of the draft xBRL Taxonomy. The other purpose of no less importance, provided by the CSRD, is to centralise information and enable accessibility and comparability in an open format. A reporting taxonomy such as the ESRS xBRL Taxonomy provides structure to vast amounts of complex information, making it possible to compare disclosures between companies by looking at the same tags.

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What’s new about the ESRS xBRL Taxonomy?

The xBRL is not equivalent to the ESRS xBRL Taxonomy or any other xBRL taxonomies used in business. xBRL is an existing reporting format, the ESRS’ latest taxonomy is a classification system for sustainability information, which to our knowledge is the first of its kind for that purpose. Companies already familiar with xBRL will still have to understand the ESRS xBRL Taxonomy to tag sustainability information accurately.

An xBRL worksheet looks like this:

There is very clearly a hierarchy of information, indicating a taxonomy in use. Each line is a taxonomy element i.e. a tag. The tree hierarchy shows the relationship between separate tags. In a sense, the Taxonomy in implementation is a map of your report. At the highest level, it presents the Disclosure Requirements (DR) that are included in a report, then a breakdown of the metrics or dimensions under each parent DR, which are all to be tagged according to the definitions set out in the Taxonomy.

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Is it mandatory to use xBRL software?

In short, yes. Firstly, the CSRD mandates the presentation of disclosures in xBRL format. xBRL is a free open standard software. You can technically convert an Excel file to xBRL end format, but we recommend using the xBRL software for sustainability disclosures to ensure the highest degree of accuracy. 

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What are the challenges of the new taxonomy?

The key challenge is designing a structure that makes sense to the narrative. The Taxonomy uses levels of nesting to approach structuring the data, which can help companies design a coherent flow for disclosures. 

As a lot of sustainability reporting is qualitative, companies may be anxious about the accurate tagging of qualitative data. Thankfully, the ESRS xBRL Taxonomy accommodates qualitative disclosures in the form of text block concepts. Text block tags can be used to tag a sentence, paragraph, or pages of narrative disclosure. The Taxonomy further groups other types of data for tagging purposes into three broad categories:

• Numerical, quantitative data points (metrics)
• Non-numerical but comparable types (semi-narrative)
• Narrative types (text blocks)
  

In a xBRL report, there can be up to three levels of nesting for each DR based on the above categories. 

It should be noted that the CSRD requires assurance for xBRL formatting, so companies should pay more attention to the new taxonomy. The full draft will soon be released for public consultation for a two-month period, stay tuned here for more updates.