Starting in 2024, the first companies will be required to submit sustainability reports, and these obligations will be successively expanded to numerous other organizations in the subsequent years. Two of the most important regulatory requirements with regard to sustainability reporting have to do with standardization and digitalization. This article will explain exactly what that means. Abbreviations like EFRAG, ESRS, and iXBRL play a key role in this context, so we’ll also cover what all these terms signify and why they are important for you.
Who defines sustainability standards?
The European Financial Reporting Advisory Group plays a decisive role in creating sustainability standards and mapping them digitally in the form of taxonomies. In a way, EFRAG represents Europe's voice in the field of financial reporting. For years, its primary task was to advise the European Commission on translating the International Financial Reporting Standards (IFRS) into EU law.
Since 2021–22, EFRAG has also been supporting the European Commission in issues related to sustainability reporting. Its most important task was the preparation of the final European Sustainability Reporting Standards (ESRS). These were published on 31.07.2023.
The ESRS are meant to ensure that the information disclosed in sustainability reports is understandable, relevant, representative, verifiable, and comparable.
What the ESRS cover
The ESRS contain more than 80 disclosure requirements. While these requirements are mandatory for all industries, the corresponding disclosures don’t actually need to be made by every company. This depends on the results of the materiality analyses that companies first need to carry out.
The ESRS reflect the established ESG classification:
- Environment: Climate change, pollution, water and marine resources, biodiversity and ecosystems, resource use and circular economy
- Social issues: Own workforce, workers in the value chain, affected communities, consumers and end-users
- Governance: Business conduct
How are sustainability reports going digital?
Along with the information they contain, the form of sustainability reports is vitally important. Printed reports will soon be things of the past. Instead, sustainability reports are to be created in a standardized electronic format known as iXBRL.
The difference between XBRL and iXBRL
XBRL stands for eXtensible Business Reporting Language. It’s an XML-based language that facilitates the standardization of data and is used for things like compiling annual financial statements. Every year, millions of XBRL documents are generated to replace older, paper-based reports with digital versions that are more effective and accurate.
iXBRL, or Inline eXtensible Business Reporting Language, represents the next evolution of XBRL. Here, XBRL documents are wrapped in HTML files so they can be viewed in a web browser. This means the iXBRL format can be read by both people and machines.
XBRL and iXBRL thus offer a practical means of reporting information digitally. They make it possible to analyze and distribute large amounts of data while ensuring standardization and uniformity in combination with corresponding taxonomies.
EFRAG's XBRL taxonomy
In addition to its work on the contents of sustainability reports, EFRAG is responsible for developing an XBRL taxonomy. This constitutes a digital reflection of the ESRS and provides a basis for the tagging of reports. Think of the XBRL taxonomy as a big chart of accounts. It can be opened in steps and provides a means of adding text-based and tabular tags to sustainability reports. The information these tags contain can then be read electronically by machines.
Meanwhile, the XBRL taxonomy shouldn’t be confused with the EU taxonomy for ecologically sustainable economic activities. EFRAG's current XBRL taxonomy is considered a proof-of-concept that implements a small, but important part of the environmental standard E1. It can be downloaded here (LINK: https://www.efrag.org/Lab4).
Digital sustainability reports are here
The obligation to submit digital sustainability reports using the iXBRL format in the future can be considered a done deal. While this will entail some additional effort, there are some positive aspects, as well. Many publicly traded companies already have adequate knowledge of iXBRL and process-related experience with the format.
The processes and technologies that have proven useful in this area are also suitable for the regulatory requirements of sustainability reporting.
Everything you need to create sustainability reports
Do you want to learn how to convert your annual reports into EU-compliant reports in iXBRL format? Get to know SmartNotes – a disclosure management solution that automates data flows and offers integrated (i)XBRL tagging – and you’ll be well on your way to implementing ESG reporting that meets all the relevant specifications.
Before submitting your next annual report, you’ll need to compile a sustainability report. To find out how simple this can be with Lucanet's integrated software for closing, planning, and reporting, check out our webinar.
