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What is a taxonomy and how can it be applied in sustainability reporting?

Preparing a sustainability report is time-consuming and laborious. Collecting the relevant data is often difficult, as you need to source it from different departments who may or may not communicate with each other. Comparing the data through time is also hard, as there are often no clear standards or benchmarks. Taxonomies have been used in financial reporting for decades to address these challenges, but what exactly is a taxonomy? What does using a taxonomy entail and how can it facilitate sustainability disclosure?

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Taxonomies, defined 

A taxonomy is a dictionary that defines concepts and the relationships between them. In other words, it provides definitions for data elements and how they relate to each other. Think of carbon emissions. The term can mean something different for each company. A taxonomy helps you set a definition and a standard, drawing on the relevant legal definitions or regulations. Taxonomies are often created using the Extensible Business Reporting Language (XBRL). This is an XML-based language that provides a framework for the exchange of business information. In reporting, a taxonomy acts like a blueprint for disclosure; all data definitions and identification tags are standardised. This provides a shared understanding between parties. 

The advantage of using a taxonomy

There are several advantages to using a taxonomy:

  • You have clear definitions and therefore less room for doubts and interpretation. 
  • Because the data definitions stay the same, it’s easier to compare data between companies and across time periods. 
  • The taxonomy defines business rules, so when you create a report you fill out the data exactly as required (with mandatory fields and summations). This makes reporting less error-prone and more accurate. 
  • You can re-use concepts between taxonomies, as they are built using a global standard. This promotes standardisation across industries and companies.
  • XBRL has been around since the early 2000s and is well-supported internationally.

In financial reporting, taxonomies paved the way for Standard Business Reporting, which is an approach that was initially adopted in the Netherlands to facilitate financial disclosure using standards. The same principles can be applied to make sustainability reporting easier. But you might be wondering, how you can make a machine-readable language like XBRL accessible to humans. That’s where portals come in. 

Visualising taxonomies in portals

Sometimes, taxonomies are meant to be used in a system-to-system environment, but often you need business users to perform data entry themselves. In such cases, you can use a portal. A portal is essentially a form that users can fill out. The form has business rules built-in, so that only the correct fields are shown. If data is entered incorrectly, the user gets notified in real-time. These forms often come with conditional rendering as well, meaning that relevant questions are shown based on answer logic. 

Visma Sustynex, Visma Connect’s platform for sustainability reporting, comes with a prepare and submit portal, and allows you to import reports into the portal (using an XBRL file) in order to visualise them. Visma Sustynex has a built-in taxonomy that uses GRI (Global Reporting Initiative) standards for sustainability reporting. We are also working on incorporating reporting frameworks that use the UN’s Sustainable Development Goals. 

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9 Tips to Get Started with Sustainability Reporting

With the upcoming Corporate Sustainability Reporting Directive (CSRD), 48.000 companies in the EU will have to report on sustainability in a uniform way. CSRD will be effective as of 2024. Now is the time to start thinking about creating standard and structured sustainability reports. Follow this nine point checklist to make progress quickly.  Read more

What makes a sustainability taxonomy different?

While financial reporting taxonomies typically use widely adopted accounting standards, like those of the IFRS Foundation, sustainability reporting taxonomies are in the early stages of adoption. There are no globally adopted standards for sustainability reporting yet. However, organisations like GRI are making headway in creating universal standards. GRI standards are used in over 100 countries. A 2020 report by KPMG shows that around 73% of the G250 and 67% of N100 companies use GRI. 

GRI standards are used to report on a variety of themes, including human rights, anti-corruption, indirect economic impact, waste, supplier environmental assessments, and more. The standards were recently updated on October 5, 2021. This update was the most comprehensive one since 2016. Most of the changes impacted GRI’s Universal Standards. The revised Universal Standards are more user-friendly and strengthen the foundation of GRI reporting. The revised Universal Standards have been implemented in the Visma Sustynex taxonomy and are entering into effect on January 1, 2023.

Adopt standard sustainability reporting with Visma Sustynex

Are you curious about how you can make sustainability reporting easier? Read more about Visma Sustynex

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