Today (30/8) EFRAG released the ESRS XBRL Taxonomy, which enables the marking up (‘tagging’) of ESRS sustainability reports in machine-readable format. It contains more than 2000 datapoints whereof more than 400 Booleans (true/false, yes/no answers).

The taxonomy represents the digital transposition of the human-readable ESRS Set 1 published in July 2023.

It will be the basis for the European Securities and Market Authority (ESMA) to develop Regulatory Technical Standards for tagging the ESRS sustainability statement.

⭕ Prerequisite: reports should have a structure where it is reasonably easy to identify the datapoint in the section addressed in the report.

The granularity in the standards themselves was chosen so that the most granular paragraphs, subparagraphs and sub-subparagraphs in each DR always provide information that is decision-useful.

This granularity was therefore suitable to be used in the XBRL taxonomy to enable reports to convey information at a decision-useful level.

It is worth noting that the DR architecture has been embedded in the ESRS from the start (April 2022). EFRAG has been thinking in digital terms since the beginning.

⭕ Priority: Decision-usefulness

Information contained within sustainability reports prepared in accordance with the ESRS is likely to be useful to suppliers, clients, investors and other stakeholders of the undertaking that need to collect and aggregate information for their own sustainability reports or for other reporting requirements.

Determining the impact of the value chain, or of investments, on a specific granular datapoint (DP) is much more efficient if that same DP is digitally identified in reports coming from that value chain or investments.

👉 Patrick de Cambourg, the EFRAG SRB Chair, stated:

‘The final XBRL taxonomy marks a major milestone to enable machine-readable sustainability statements once adopted by ESMA and the EC.

The advanced approaches being implemented, especially for the tagging of narrative disclosures, will increase the usability of ESRS statements as users (analysts, investors, etc.) confirmed to EFRAG.

We encourage companies to use the ESRS taxonomy for their first ESRS statements on a voluntary basis; it is a useful tool to structure disclosures and will increase their decision-usefulness.

Let us not miss the opportunity to start with digital ESG disclosures from day one – because this is what users want.’

⭕Implementation of the narrative tagging hierarchy 

The ESRS have been designed to systematically structure the ESRS sustainability statement into a list of detailed requirements corresponding to a given DR.

The core of a DR is in the main body of the standard and in a paragraph easily identifiable using the expressions ‘shall disclose’ and ‘shall include’ placed after the paragraph on the objective.

Usually, individual datapoints are identifiable by separate items reported in a list of letters: (a), (b), (c), etc. These can be further disaggregated in a sub-list of items identified by small roman numbers: (i), (ii), (iii), etc.

⭕The Disclosure Point (DP) structure is the following:

• the Level 1 XBRL element (known as parent) can be used to capture the full content of a Disclosure Requirement;
• the Level 2 XBRL element has dedicated elements (known as children) for each datapoint listed in the subparagraph of a DR (i.e., (a), (b), (c)); and,
• where applicable, additional XBRL elements have been implemented at the Level 3 in order to reflect the romaine numbered datapoints required by a specific DR (i.e., a(i), a(ii), a(iii)).

Additionally, Level 1 tags have an important meaning by providing a ‘content index’.

⭕Semi-narrative elements for usability and comparability of information

To improve the usability and comparability of information, EFRAG has created Semi-narrative elements, specifically Booleans and enumerations.

The Boolean corresponds to a ‘true’ or ‘false’ (yes/no) disclosure.

The enumeration is a predefined list (like a ‘drop-down menu’) created in the taxonomy that will facilitate the option to be selected from this list of items by choosing the most appropriate element (single choice) or more elements (multiple choices).

⭕The XBRL taxonomy for disclosure of IROs in ESRS 2, SBM-3

The XBRL taxonomy allows for the digital disaggregation of a single or grouped IROs (Impacts, Risks, Opportunities) and for the linking of Policies, Actions, and Targets to each of them.

A multiple-choice enumeration of sustainability matters (topics, subtopics and sub-subtopics) has been implemented, which allows for linking of the IRO to one or more sustainability matter.

⭕Providing context with relationships between topics, IROs, Policies, Actions and Targets

EFRAG has implemented relationships between topics, IROs, Policies, Actions and Targets in the taxonomy by linking IROs and topics, and by linking IROs and Policies, Actions & Targets (example: ‘Policy to choose suppliers that implement net zero target’ linked to target ‘All suppliers shall have a net zero target by 2035’).

A flexibility has been built in when a policy is not directly linked to a single IRO.

In order to provide a machine-readable link between IROs, policies, actions and targets, it is of particular relevance to use consistent identifiers or names across the report and across reporting periods.

⭕Incorporations by reference

The conditions for such incorporation, set in ESRS 1 paragraph 120, do not allow the incorporation of disclosures from any source or document outside of the Inline XBRL Document set (for example, from information provided on the webpage of the company or in a separate PDF).

Inline XBRL continuations provide flexibility in order to incorporate single disclosures by reference from different sections of the report, however those should not be used excessively and should be applied carefully in order not to lose the context of information provided.

Given the considerations above, if ESRS statements are completely digitally tagged, no specific disclosure for ESRS 2 BP-2 paragraph 16 has to be made. Therefore, no XBRL element has been implemented for this paragraph.

Source: https://www.efrag.org/en/news-and-calendar/news/efrag-publishes-the-esrs-set-1-xbrl-taxonomy

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Stay tuned for more CSRD, ESRS and CSDDD insights.

✅ Adopt a streamlined, digital and taxonomy-centric ESRS report preparation with Cleerit ESG.

On August 8, the European Commission published a document with Frequently Asked Questions on the implementation of the EU corporate sustainability reporting rules.

We have compiled a number of key ESRS questions on the following topics:

• The language of the sustainability report
• Exemptions from reporting in specific circumstances
• Inclusion of information from subsidiaries/branches & third-country undertakings
• Value chain estimates, “reasonable effort” and expected requests for sustainability information from SMEs
• Mark-up and management report format
• Sustainability report audit and assurance option

You will find these valuable takeaways here to help you navigate ESRS implementation.

The language of the sustainability report

⭕In which language should the sustainability report be published?  (Questions 35 and 49)

The linguistic regime for the sustainability report is laid down by each Member State in accordance with Article 21 of the Company Law Directive.

⭕Does the consolidated management report or the consolidated sustainability reporting of the parent undertaking have to be available in a language accepted by the Member State by whose national law the subsidiary undertaking is governed in order for the subsidiary to be exempted from publishing its own sustainability statement? (Question 21)

The Member State by whose national law the subsidiary undertaking is governed may require that the consolidated management report (or, where applicable, the consolidated sustainability reporting of the parent undertaking) is published in a language that such Member State accepts, and that any necessary translation into such language is provided.

In this case, these requirements must be met in order for the subsidiary undertaking to be exempted from publishing its own sustainability statement.

Exemptions from reporting in specific circumstances

⭕Does the consolidated management report/consolidated sustainability reporting of the parent undertaking have to be already published when its subsidiary publishes its own management report in order for the subsidiary to be exempted from publishing its own sustainability statement?  (Question 20)

No. … Where that consolidated management report or consolidated sustainability reporting is not yet available at the time of publication of the subsidiary undertaking’s management report, the subsidiary undertaking claiming the exemption can make reference in its management report to a general weblink at which the relevant documents will be available in the future.

⭕How can an undertaking comply with the obligation to prepare and publish an individual or a consolidated sustainability statement when it is not required to prepare and publish an individual or a consolidated management report?  (Question 25)

An undertaking that must report sustainability information and that is not required to prepare and publish an individual or a consolidated management report may publish the individual or consolidated sustainability statement in a separate document. … That separate document … must comply with the format and the mark-up requirements set out in Article 29d of the Accounting Directive.

⭕How can an undertaking comply with the obligation to prepare and publish a consolidated sustainability statement when it is exempted from preparing consolidated financial statements?  (Question 26)

An undertaking that must prepare and publish a consolidated sustainability statement without having to prepare and publish the corresponding consolidated financial statements will need to include in the consolidated sustainability statement the financial information necessary to understand the undertaking’s impacts on sustainability matters and to understand how sustainability matters affect the undertaking’s development, performance and position.

⭕Can large undertakings admitted to trading on an EU regulated market avail of the exemptions …?  (Question 24)

No.

Inclusion of information from subsidiaries/branches & third-country undertakings  

⭕Does the consolidated sustainability statement of the third-country parent undertaking … have to include all its subsidiaries or only the EU subsidiaries? (Question 87)

The rules for the consolidation of the sustainability statement are the same ones as for the consolidation of the financial statements. …

The consolidated sustainability statement must include all its subsidiary undertakings, regardless of where the registered offices of such subsidiary undertakings are situated.

⭕What happens if the EU subsidiary/branch does not manage to collect all the necessary information for the preparation of the sustainability report? (Question 45)

In the event that not all the required information is provided, the subsidiary undertaking or branch shall draw up, publish and make accessible the sustainability report, containing all information in its possession, obtained or acquired, and issue a statement indicating that the third-country undertaking did not make the necessary information available (Art. 40a(2) fourth subparagraph of the Accounting Directive).

Value chain estimates, “reasonable effort” and expected requests for sustainability information from SMEs

⭕ESRS require undertakings to use estimates if they cannot obtain all necessary value chain information after having made reasonable efforts to do so (ESRS 1 par. 69). What constitutes “reasonable effort”? (Question 29)

The undertaking should determine reasonable effort … taking into consideration its specific facts and circumstances as well as the conditions of the external environment in which it operates.

What constitutes reasonable effort is therefore likely to vary from undertaking to undertaking.

It is expected that undertakings will more frequently have recourse to the use of estimates in the first years of application of the reporting requirements and that the use of estimates will become less common as the ability of undertakings and the actors in their value chains to share sustainability information improves over time.

In all cases the undertaking should consider whether the use of estimates is likely to affect the quality of the reported information.

Examples of criteria that could offer useful guidance to determine reasonable effort (separately or in combination):

• The size and resources of the reporting undertaking in relation to the scale and complexity of its value chain.
• The technical readiness of the reporting undertaking to collect value chain information, depending on prior experience (the technical readiness is expected to improve over time.)
• The level of influence and buying power (in relation to the actors in the value chain).
• The ‘proximity’ of the actor in the value chain (tier 1 supplier or a direct customer vs other actors in the value chain).

⭕What should an SME expect to receive in terms of requests for sustainability information as a consequence of the CSRD and ESRS? (Question 30)

Paragraphs 132-3 of ESRS 1 set out transitional provisions that limit the value chain information that undertakings within the scope of the CSRD have to report and/or collect from actors in their value chain during the first 3 years.

The extent to which SMEs are asked to provide sustainability information … will, during the first 3 years of implementation, be strongly influenced by whether undertakings … make use of these transitional provisions regarding value chain reporting.

… SMEs should expect undertakings that fall under the scope of CSRD to apply “reasonable effort” to collect from actors in their value chains the information they need in order to comply with ESRS.

In accordance with the answer to the previous question, the size and resources, the technical readiness and the proximity of the actor in the value chain are among the criteria that can be used to establish what constitutes “reasonable effort”.

Therefore, smaller SMEs that have never voluntarily reported sustainability information, that are not connected with severe negative impacts and are not 1st tier suppliers or customers … should, at least during the first years of application of the reporting requirements, be less exposed to expectations to have and share sustainability information.

Larger SMEs that have previously reported sustainability information (for example because they apply EMAS or other environmental or sustainability certification or reporting schemes) and SMEs that are 1st tier suppliers or customers … may be exposed to higher expectations to have and share sustainability information.

EFRAG is currently developing two sustainability reporting standards for SMEs: a mandatory one for listed SMEs (LSME ESRS) and a voluntary one for non-listed SMEs (VSME).

LSME ESRS will establish the maximum level of sustainability information that ESRS can require an undertaking that falls within the scope of the CSRD to obtain from SMEs in its value chain.

VSME will be designed to become a reference point for all actors in the market, to ensure that the reporting effort of CSRD and non-CSRD undertakings is proportionate.

Mark-up and management report format pending the adoption by the EC of a digital ESRS taxonomy

⭕What are the format requirements that undertakings need to comply with pending the adoption by the European Commission of a digital taxonomy for the mark-up of the sustainability statement?  (Question 38)

Article 29d of the Accounting Directive requires undertakings … to prepare their management report in the electronic reporting format specified in Article 3 of the ESEF Delegated Regulation (i.e. in XHTML) and to mark-up the sustainability statement within the management report in accordance with the specific digital taxonomy [a set of rules] that will be adopted by way of an amendment to the ESEF Delegated Regulation … in order for the sustainability statement to become machine-readable.

Until the adoption of this digital taxonomy, undertakings are not required to mark-up their sustainability statements.

Considering that the sustainability statement will become machine-readable only once it is both included in an XHTML document and marked-up with a digital taxonomy, pending the adoption of the digital taxonomy undertakings are also not required to prepare the management report in XHTML.

Sustainability report audit and assurance opinion

⭕What should the assurance provider express an opinion on … ? (Question 70)

This assurance opinion is based on a limited assurance engagement … with regards to:

1. the compliance of the sustainability reporting with the ESRS …,
2. the process carried out by the undertaking to identify the information reported pursuant to those ESRS i.e., the double materiality assessment process,
3. the compliance with the requirement to mark-up sustainability reporting … (i.e., the digital tagging),
4. the reporting requirements provided for in Article 8 of the [Green] Taxonomy Regulation.

The assurance providers are expected to perform procedures that enable them to conclude that no matter has come to their attention to cause them to believe that the information included in the sustainability statement is not fairly presented, in all material respects, in accordance with ESRS … .

The first part of the conclusion referring to the fair presentation, … entails an opinion on:

• whether the undertaking’s sustainability statement, including the process to identify the information reported (i.e., the double materiality assessment process), are compliant with ESRS; and
• whether the outcome of this process has resulted in the disclosure of all material sustainability-related impacts, risks and opportunities of the undertaking in accordance with ESRS.

⭕In the case of two different statutory auditors carrying out the audit of the financial statements and the assurance of the sustainability statement, which one of the two should express the opinion on whether the management report is consistent with the financial statements?  (Question 72)

… The statutory auditor or audit firm in charge of auditing the financial statements remains in charge of expressing an opinion on the consistency between management report and financial statements for the same financial year.

⭕In which document does the assurance opinion need to be included?  (Question 73)

In the assurance report.

If the assurance opinion is given by the same auditor that does the audit of financial statements, Member States may allow auditors to include the assurance opinion as a separate section of the audit report.

⭕Shall undertakings that report sustainability information in accordance with ESRS on a voluntary basis (such as SMEs without securities admitted to trading on an EU regulated market) be required to subject this information to assurance?  (Question 77)

An undertaking carrying out sustainability reporting on a voluntary basis is … not required to subject its sustainability information to an assurance engagement.

The full EC FAQs document can be downloaded here: >>>

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Below you will find questions and answers, in short, for the following topics:

• ESRS 2 and MDR policies, actions & targets datapoints
• Monetary amounts for revenue and anticipated financial effects related to climate change
• GHG emissions and carbon credits
• GHG removal and storage

Q&As in short on ESRS 2 and MDR policies, actions & targets datapoints

❓ Question 821

When a sustainability matter triggers exposure to both risks and opportunities, should the assessment of materiality be made on each individually or on the combined financial risk and opportunity?

For example, energy consumption is a financial risk because the cost of energy can fluctuate significantly, but there is also an opportunity in terms of reduced energy costs if the company invests in renewable energy and energy-efficient appliances.

➡ Answer

When the nature of an opportunity or a risk relating to a sustainability matter is different, it shall be assessed separately.

The positive deviations are not necessarily identified as separate opportunities but assessed together with the risk.

In the example above, it is the action of investing in renewable energy that creates the opportunity to reduce energy expenses.

❓ Question 762

How shall Minimum Disclosure Requirements (MDR) on policies, actions and targets be reported if they related to more than one topical standard?

➡ Answer

The MDRs on policies, actions, metrics and targets shall be applied together with the corresponding DRs in topical and sector-specific ESRS (ESRS 1 par. 13).

Reference from one part of the sustainability statement to another is allowed, avoiding duplications (ESRS 1 par. 115).

❓ Question 733

Can the ESRS 2 datapoints be overlapping with those in topical standards?

➡ Answer

No, the ESRS 2 Disclosure Requirements do not overlap with those in topical ESRS, with the exception of the MDRs in ESRS 2 Chapter 4.2 as they are a checklist to be used for completeness.

When a datapoint in MDR is already covered by a topical standard, undertakings are not supposed to report twice the same information requirement.

Some Disclosure Requirements in the topical ESRS further specify the ESRS 2 disclosures in relation to the respective topical matter (see ESRS 2 par. 2).

❓ Question 429

Which are the DPs or DRs to consider from ESRS 2 for entity-specific disclosure?

➡ Answer

ESRS 2 GOV-1 to GOV-5, SBM-1 to SBM-3, IRO-1 and the Minimum Disclosure Requirements on policies and actions on metrics and targets, respectively (ESRS 2 par. 60 and 70).

❓ Question 781

Is the general meeting to be considered as an ‘administrative, management and supervisory body’? The general meeting is usually a company’s highest decision-making body.

➡ Answer

No, the general meeting should not be considered an ‘administrative, management and supervisory body’.

It is a separate governance body with specific powers attributed to shareholders or owners.

The general meeting is not addressed by ESRS.

Q&As in short on disclosing monetary amounts for revenue and anticipated financial effects related to climate change

❓Question 395

What does net revenue mean? How is it calculated?

➡ Answer

The terms ‘revenue’, ‘total revenue’ and ‘net revenue’ are to be understood as the amounts presented in the income statement of the undertaking’s financial statements in accordance with the applicable legislation and/or accounting standards.

❓Question 422

Is the disclosure of monetary amount and proportion of assets at risk over the short-/medium-/long-term meant to be broken down by the time horizon (short-/medium-/long-term) or by a single aggregate number for assets at risk in any of those time horizons?

➡ Answer

ESRS E1 paragraphs 66 and 67 do not require a breakdown of monetary amount figures by the three time horizons.

It rather requires the disclosure of a monetary amount that is the result of cumulative financial effects assessed for each of the time horizons (short-, medium- and long-term).

❓Question 555

Please provide more clarity around the requirement to report the anticipated financial effects from chronic and acute physical risks in relation to climate change.

➡ Answer

The monetary amount of the assets that are exposed to impact from chronic and/or acute climate change events provides a measure of exposure to climate risks.

The undertaking is required to disclose (Regulation EU 2022/2453):

(a) the gross carrying amount of exposures sensitive to impact from chronic climate-change events;

(b) the gross carrying amount of exposures sensitive to impact from acute climate change events; and

(c) the gross carrying amount subject to impact from both chronic and acute climate change events.

Q&As in short on disclosure of GHG emissions and carbon credits

❓Question 268

Do Gross GHG scopes 1-3 need to be disclosed each year?

➡ Answer

Yes, an undertaking shall disclose and update their Gross Scopes 1, 2, 3 and Total GHG emissions on an annual basis.

The update of Scope 3 GHG emissions in each significant category shall occur every year on the basis of current activity data.

The update of the full Scope 3 GHG inventory is required at least every three years or on the occurrence of a significant event or a significant change in circumstances (ESRS E1 par. AR 46 (f)).

❓Question 863

When calculating metrics, including value chain metrics, do we have to consider downstream positions for all four quarters (as of 31.03, 30.06, 30.09, 31.12)?

➡ Answer

ESRS do not require to calculate annual averages based on quarterly figures.

❓Question 910

Can the transitional provision in ESRS 1 paragraphs 132 to 135 (difficulty in gathering value chain information for the first 3 years) be applied to the reporting of Scope 3 emissions in ESRS E1 par. 44 (c)?

➡ Answer

No. The disclosure of Scope 3 emissions is a datapoint derived from EU legislation. Despite these transitional provisions, datapoints derived from EU legislation, such as Scope 3 emissions, shall be reported.

However, if the average number of employees during the financial year does not exceed 750, the undertaking may omit the datapoints on Scope 3 emissions and total GHG emissions for the first year.

❓Question 536

Which are the recognised quality standards for carbon credit?

➡ Answer

There is currently no list of quality standards for carbon credit recognised by the EU or recommended by EFRAG.

This list of criteria needs to be met:

(a) must be verifiable by independent third parties; and

(b) make requirements and project reports publicly available and at a minimum ensure:

1. additionality,
2. permanence,
3. avoidance of double counting and provide rules for calculation,
4. monitoring, and
5. verification of the project’s GHG emissions and removals.

As long as those criteria are met, an undertaking can consider the carbon credit as a recognised quality standard for carbon credit.

Q&As in short on GHG removal and storage

❓Question 577

What is the definition of ‘projects’ in ESRS E1 paragraph 56 (a) (GHG removals and storage resulting from projects).

➡ Answer

Projects are all activities/interventions conducted by the undertaking which may lead to GHG removals and storage.

Examples of GHG removal projects include:

reforestation/afforestation, soil carbon enhancement, ecological restoration, blue carbon removals, integration of bioenergy with carbon capture and storage (BECCS) technologies and Direct Air Capture of CO2 with storage (DACCS).

Projects will usually test new concepts, technologies or products within the operating context of the company and have both a novelty component as well as a transitory nature – the related activity is operated as a project for a certain limited period.

❓Question 636

What are the definitions of ‘biogenic removal and storage’, ‘removal and storage from land use’, ‘technological removal and storage’ and ‘hybrid removal and storage’?

➡ Answer

Biogenic removal and storage refers to GHG removal and storage as defined in ESRS, which is classified as biogenic.

This is produced by living organisms or biological processes but not by fossilized or from fossil sources. One example is forest restoration.

Removal and storage from land use refers to GHG removal and storage as defined in ESRS resulting from land-use, which is defined, too, in ESRS.

Additionally, ESRS E1 AR 57 (b) provides examples of such activities (afforestation, reforestation, forest restoration, urban tree planting, agroforestry, building soil carbon).

Technological removal and storage refers to GHG removal and storage as defined in ESRS, which results from use of technology.

Such activities may resemble examples provided in ESRS E1 AR 57 (b) (direct air capture).

Hybrid removal and storage refers to GHG removal and storage as defined in ESRS, which results from combining the use of technology with biogenic removals.

ESRS E1 AR 57 (b) provides an example of this activity (bioenergy with CO2 capture and storage).

Undertakings interested in carbon removals and carbon farming are also advised to check the provisional agreement reached on 20 February 2024 by the European Parliament and the Council of the EU for a Carbon Removals and Carbon Farming (CRCF) Regulation.

The full Q&A compilation for January-July 2024 can be downloaded here: >>

Stay tuned for more CSRD and ESRS insights on our LinkedIn page >>