With the growing demand for corporate transparency and sustainability, the European Union has made significant strides in mandating Environmental, Social, and Governance (ESG) reporting. The European Sustainability Reporting Standards (ESRS) Set 1 Taxonomy plays a crucial role in ensuring standardized, clear, and actionable sustainability disclosures across various sectors. As companies prepare to adopt these standards, understanding the taxonomy is key to successful ESG compliance and reporting.
What is ESRS Set 1 Taxonomy?
At its core, the ESRS Set 1 Taxonomy is a structured framework for organizing and reporting ESG data in line with the Corporate Sustainability Reporting Directive (CSRD). This taxonomy serves as a data dictionary, defining ESG concepts and linking them to digital tags for easy access, integration, and reporting. Each tag contains specific attributes that streamline reporting processes, making producing comparable and comprehensive sustainability reports easier.
The taxonomy was officially released in draft form in 2023, with its final adoption and implementation released on 30th August 2024. It comprises over 12,630 concepts, covering a wide range of ESG metrics that companies must disclose.
Key Features of ESRS Set 1 Taxonomy
One of the standout aspects of the ESRS taxonomy is its comprehensive nature. It introduces several new concepts that make ESG reporting more dynamic and detailed:
- Narrative Disclosures with 3-Level Tagging
- Companies must report on both quantitative and qualitative ESG data. The taxonomy provides a unique 3-level tagging system for narrative disclosures. This allows companies to include unstructured data like sentences, paragraphs, images, and tables, making reports more holistic.
2. New Data Types and Tags
The taxonomy introduces several new tags and data types, such as:
- Intensity Ratios: These allow companies to report on key metrics like greenhouse gas (GHG) emissions or water consumption per unit of revenue.
- Targets: Companies can outline their sustainability goals, providing transparency around their future commitments.
- Boolean Fields: Simple “Yes/No” fields to streamline certain reporting aspects.
- Extensible Enumerations: Single or multi-select dropdowns offer flexibility for companies to customize their reports based on specific criteria.
3. Typed and Optional Dimensions
The taxonomy also includes typed dimensions, which allow for more specific disclosures tailored to individual company needs. Optional dimensions provide flexibility for firms to include additional information that is material to their specific business.
4. Validation Rules and Formula Checks
Ensuring accuracy and consistency in ESG reporting is essential. The ESRS taxonomy introduces a validation system with severity messages for errors, warnings, and “OK” statuses. This ensures that critical ESG data is correctly tagged, while also verifying compliance with EU reporting standards.
❖ Formula validation with severity messages
❖ xsi:nil attribute assigned to concept which are not material in nature
ESRS has implemented 3 validation rules
✓ Validates if datapoints related to other EU legislation are tagged in XBRL report – Error
✓ Validates mandatory disclosures that are outside the materiality assessment – Warning
✓ Checks whether metrics of ESRS topics is not tagged in XBRL report and is deemed to be not material – OK
How is ESRS Set 1 Different from Other Taxonomies?
One of the notable differences between ESRS Set 1 and other taxonomies is its focus on double materiality. This concept requires companies to assess not only how ESG factors affect their financial performance (financial materiality) but also how their activities impact the environment and society (impact materiality). This dual focus ensures that both inward and outward ESG impacts are reported.
Additionally, ESRS Set 1 integrates typed dimensions for more precise tagging, offers optional dimensions for tailored reporting, and provides support for various units of measurement. This flexibility allows companies to report on a wide range of metrics, from energy consumption to water usage, GHG emissions, and more.
Implementation Timeline and Early Adoption
The implementation timeline for ESRS Set 1 is fast approaching. Early adopters are encouraged to begin familiarizing themselves with the taxonomy to ensure a smooth transition. Here are the key milestones:
- April 2021: CSRD proposal adopted.
- July 2023: Draft ESRS standards submitted.
- April 2024: End of public consultation.
- Mid-2024: Final ESRS taxonomy expected to be published.
- 2025: First reports due for listed companies and other large entities.
Companies that prepare early will have a competitive advantage, as they can ensure compliance with the reporting deadlines and avoid last-minute bottlenecks.
How to Get Started with ESRS Set 1 Taxonomy?
Implementing the ESRS Set 1 taxonomy can be daunting, but the process can be broken down into manageable steps:
5. Understand the ESRS Requirements
Begin by thoroughly reviewing the ESRS standards and identifying the relevant data points for your company.
6. Double Materiality Assessment
Conduct a double materiality assessment to determine which ESG factors are material to your business operations and how they should be reported.
7. Prepare ESG Disclosures
Collect and aggregate data from across the organization, ensuring that it aligns with the ESRS taxonomy’s requirements.
8. Leverage Digital Tagging
Use XBRL (eXtensible Business Reporting Language) to tag your data, ensuring it’s discoverable and comparable across different platforms and jurisdictions.
9. Review and Publish
Ensure accuracy and completeness before submitting your reports. The ESRS validation rules will help flag any inconsistencies or missing data.
Conclusion
The ESRS Set 1 taxonomy is set to revolutionize the way companies report on sustainability. By adopting this standard early, organizations can not only meet regulatory requirements but also enhance their transparency and reputation among investors and stakeholders. With tools like XBRL digital tagging and new concepts such as intensity ratios and narrative disclosures, companies can create more comprehensive, accurate, and actionable ESG reports.
As sustainability becomes an increasingly important factor for business success, the ESRS Set 1 taxonomy offers a robust framework for companies to lead the way in transparent and responsible reporting. Early adoption is key—those who embrace the taxonomy now will be well-positioned for the future of ESG reporting.
Find Out How IRIS CARBON® can Streamline your ESG Reporting.
As the distinguished specialist at IRIS CARBON®, Neha leads the way in advancing XBRL reporting. With 13 years of domain expertise, she navigates reporting mandates across the US, UK, EU, Israel, and Nigeria. Neha streamlines XBRL integration for European businesses, raising reporting standards. Her expertise extends to the digital transformation of ESG data and authoring reports using the Disclosure Management platform. Neha’s blogs offer practical insights for mastering XBRL reporting and financial disclosure, recognized for turning complex concepts into strategic assets. She guides industry leaders, ensuring each initiative is a roadmap for successful ESG integration and impactful financial reporting.
