ESG Key takeaways from XBRL Europe and Eurofilings

This blog will cover the key points from the ESRS consultation, including proposed changes to reduce extensions and simplify tagging processes. We'll also discuss the interoperability between ISSB and ESRS standards, highlighting collaborative efforts to ease compliance for companies affected by both. By the end, you'll understand the current status and future outlook of ESRS digital reporting.

ESRS Digital Reporting Timeline 

The draft ESRS XBRL Taxonomy was released in February of this year. Alongside it, EFRAG also released a consultation for issuers, software providers, XBRL experts, etc. to answer questions and give feedback. EFRAG are now in their review stage, where they are making changes to the draft XBRL taxonomy in response to this consultation. The aim is to have the final XBRL taxonomy ready in Q3 of 2024. 

Although it seems like we are very close to having a digital taxonomy for report preparation, the taxonomy will still need to be handed to ESMA who will be required to combine the final XBRL taxonomy with their current ESEF taxonomy. They will also need to make changes to the Regulatory Technical Standards and ESEF guidance. The European Commission will then need to approve of these taxonomies and formalize them within EU law, as well as translate the element labels into the EU’s official languages.  

For this reason it seems very unlikely that the digital requirement of ESRS will go ahead for 2024 annual reports (being reported in early 2025). The European Commissioner implied this at an EFRAG conference back in December, too. Hopefully we will be given an official delay sooner rather than later. 

Regardless of this potential delay, we encourage companies to start preparing for their digital reporting of ESRS as soon as possible. When ESEF was delayed in 2021, many chose to voluntarily prepare their ESEF, which was very beneficial. Companies were able to test their process and were better prepared for the following years. If you are interested, ARKK can help you with your digital preparation. 

ESRS consultation

As I previously mentioned, EFRAG are in the review stage of their consultation. Richard Boessen, who is responsible for the development of EFRAG’s digital sustainability XBRL taxonomies, was able to give us an insight into their change proposals in consequence to the consultation feedback. 

The general overview was that the proposed draft XBRL taxonomy was well received, with 85% of participants agreeing that the XBRL taxonomy accurately represented the ESRS disclosure requirements. There was a particular appreciation towards EFRAG’s attempt to reduce the need for extensions. Extensions are company specific tags, created within the taxonomy, where a tag with the same meaning as the reported disclosure does not already exist. Unfortunately, extensions can quite often be error prone and can vary massively across reports reducing comparability, and so EFRAG’s introduction to the likes of ‘Other’ disclosures and ‘Typed dimensions’ will hopefully reduce extensions significantly. 

Some other changes being considered after the public feedback include, adding a calculation linkbase to allow calculations to be added in several numerical tables, rephrasing of negatively phrased label names to avoid double negative confusion, and streamlining of narrative disclosures in terms of overlapping elements.  

A phase in approach to the text block tagging was also discussed within the working groups which could be very important for issuers. The ESRS XBRL taxonomy has more than 1000 text block elements that an issuer can use for the digital tagging of their disclosures. By phasing in the tagging of narrative tags, it will massively ease the burden of the already time consuming process for issuers. Many of the narrative disclosures in ESRS have been hierarchised into 3 levels. Level 1 being the widest narrative tag will include the entire related disclosure, with level 2 tagging more granular parts of this level 1 tag, and level 3 tagging even more granular parts of the disclosure. If for example, issuers were only required to tag the level 1 narrative tags in their first year reporting, this would reduce the amount of tagging, and therefore time spent. ESEF followed a similar process, where only the primary financial statements were required for tagging in the first year, and the notes tags were added in the following year. Whether or not the phase in approach will go ahead, it will definitely be something to keep an ear out for. 

ISSB and ESRS Interoperability 

Another important sustainability standard discussed in both conferences is the ISSB standards. These are independent standards to the ESRS created by the IFRS foundation, whose aim was to develop standards for a global baseline of sustainability disclosures. The problem many issuers may face is the possibility of having to follow both standards at the same time. 

Many jurisdictions across the world have already adopted the ISSB standards, with many others very likely to adopt, including the UK. If the UK decides to adopt the ISSB standards, many listed companies may fall under both the ESRS and ISSB standard requirements. This means they will need to prepare their annual reports under both standards, and digitally report using both XBRL taxonomies. The addition of sustainability reporting under one standard will already be a huge process for companies, never mind meeting the requirements for both. 

ISSB and EFRAG have worked together during the development of their standards to attempt to achieve a high degree of alignment between both standards. They have produced a guidance to help with the interoperability. This guidance shows alignment of disclosure requirements and information, and provides practical support that explains how companies can efficiently comply with both sets of standards. Unfortunately, even if this solves the non-digital reporting burden, the separate XBRL taxonomies will still be a problem. Hopefully when we get the final ESRS XBRL taxonomy, we will get more guidance on interoperability between the two XBRL taxonomies and how companies will be expected to tag their report with 2 separate XBRL taxonomies with their own sets of tags. 

To stay ahead of these changes and ensure a smooth transition to digital reporting, early preparation is key. ARKK can help you navigate this complex process, offering expert guidance and support tailored to your needs. Reach out to us today to learn how we can assist you in preparing for the new ESRS digital reporting requirements, ensuring you are well-equipped for the future.