Businesses must be increasingly transparent and consistent in their communication about non-financial impacts. This is where the Corporate Sustainability Reporting Directive (CSRD) comes into play, introducing a harmonized regulatory framework for non-financial reporting across Europe.
Key pillars of the CSRD include the European Sustainability Reporting Standards (ESRS), European norms that define specific requirements for this reporting. These standards play a crucial role in harmonizing non-financial reporting practices within the EU.
Focus on the CSRD Directive
What is the CSRD?
The CSRD (Corporate Sustainability Reporting Directive) is a European directive that came into effect in January 2024. The CSRD requires companies to publish an annual non-financial report on their environmental, social, and governance (ESG) performance. This directive aims to standardize non-financial reporting across the European Union, increasing transparency and combating greenwashing. The CSRD updates and extends the scope of its predecessor, the Non-Financial Reporting Directive (NFRD), to cover a broader range of companies.
Which companies will need to comply with the CSRD?
The CSRD applies to large companies, whether listed or not, that meet at least two of the following three criteria:
More than 250 employees
Net revenue exceeding 50 million euros
Total assets exceeding 25 million euros
Listed SMEs on a regulated European market (excluding micro-enterprises with fewer than 10 employees) are also subject to the CSRD if they meet at least two of the following three conditions:
More than 10 employees
Net revenue exceeding 900,000 euros
Total assets exceeding 450,000 euros
Non-European businesses are also affected if they have a subsidiary or branch within the EU and generate more than 150 million euros in annual revenue.
What information needs to be disclosed?
The CSRD relies on a set of reporting standards called the European Sustainability Reporting Standards (ESRS). Developed by the European Financial Reporting Advisory Group (EFRAG) under the mandate of the European Commission, these standards detail the information companies must disclose in their ESG reports, covering topics such as greenhouse gas (GHG) emissions, resource use, human rights, and governance. For most companies, a double materiality assessment will determine which ESRS criteria they need to report on. There are 12 ESRS in total: 2 general cross-cutting standards and 10 topical standards. Among these is the ESRS E1 standard specifically focused on "climate change".
What is the ESRS E1 standard?
directive. It reverses the burden of proof compared to other ESRS standards. This means that all companies must publish the information required by the ESRS E1 standard unless they can prove that climate change is not a significant (material) issue for their activities. Therefore, most businesses must disclose the information required by this standard.
ESRS E1 is considered one of the most comprehensive and demanding among the 12 ESRS standards. It includes 9 Disclosure Requirements (DR), amounting to approximately 220 data points that companies must report. This extensive set of requirements reflects the standard's thoroughness in addressing climate-related issues. It is a highly structured standard, both quantitative (emissions, energy consumption, etc.) and qualitative (strategies, policies, etc.).
The standard covers three sub-themes:
Climate change adaptation
Climate change mitigation
Energy
What are the objectives of the ESRS E1 standard?
As with all ESRS standards, the overarching goals of ESRS E1 are to improve transparency, accountability, and comparability in corporate sustainability reporting across the EU. However, ESRS E1 has specific objectives related to climate change.
The ESRS E1 standard aims to collect data to measure a company's overall impact on climate change and the measures taken to address it. It requires companies to provide increased transparency on:
Their GHG emissions
The effect of climate change on their activities
Their strategy and action plan to reduce GHG emissions
Their reduction targets aligned with a scenario limiting warming to 1.5°C (Paris Agreement)
Additionally, ESRS E1 seeks to standardize climate-related reporting, ensuring that companies disclose comparable and decision-useful information. This standardization helps investors, stakeholders, and regulators assess and compare companies' climate-related risks, opportunities, and strategies more effectively.
The 9 disclosure requirements of the ESRS E1 standard
Below is a summary of the 9 Disclosure Requirements (DR) of the ESRS E1 standard on climate change. For further details, the European Commission published the delegated regulation on ESRS and all disclosure requirements on July 31, 2023.
DR 1 - Transition plan for climate change mitigation
This requirement mandates companies to publish a clear and detailed transition plan outlining their actions to reduce GHG emissions and align with the Paris Agreement objectives, aiming to limit global warming to 1.5°C and achieve carbon neutrality by 2050. The plan should also address the company’s exposure to coal, oil, and gas-related activities, ensuring compatibility with the transition to a sustainable economy.
DR 2 - Policies related to climate change mitigation and adaptation
Companies must disclose their policies, procedures, and actions to mitigate their climate impact and adapt to the effects of climate change, including identifying related risks and opportunities. Companies must indicate if the adopted policies cover one or more of the following areas:
Climate change mitigation
Climate change adaptation
Energy efficiency
Deployment of renewable energies
Others
DR 3 - Actions and resources in relation to climate change policies
For this requirement, companies must detail the concrete actions implemented or planned to mitigate climate change and the resources allocated (financial, human, technical, etc.). Companies must transparently present their capital expenditures (CAPEX) and operational expenditures (OPEX) to implement their actions.
DR 4 - Targets related to climate change mitigation and adaptation
Companies must specify and detail clear reduction targets to enable stakeholders to understand the goals the company has set to support its climate change mitigation and adaptation policies.
They must define clear reduction targets for scopes 1, 2, and 3 (separately or combined), in absolute terms, and set a target year and a baseline value for at least 2030. Beyond that, these objectives should be set every 5 years.
They must also indicate the methodology used to define their reduction trajectories and objectives, such as the Science Based Targets Initiative (SBTi).
DR 5 - Energy consumption and mix
Companies must provide information on their energy consumption and energy mix. They must publish their total energy consumption over the period, broken down by energy source (fossil, nuclear, and renewable).
A company categorized in a high climate impact sector must further detail the breakdown, specifying the fossil energy source (gas, crude oil, coal, etc.).
The primary goal is to ensure that the company's energy policy aligns with its reduction targets.
DR 6 - Gross Scopes 1, 2, 3 and Total GHG emissions
This requirement obliges companies to calculate and publish their GHG emissions for scopes 1, 2, and 3 according to the GHG Protocol methodology, in metric tons of CO2 equivalent (CO2e). Companies must thus conduct a comprehensive carbon footprint assessment to provide information on their emissions as well as those from their supply chain. Controlled entities include both the parent company and its subsidiaries. This requirement covers:
Scope 1 emissions and the percentage of emissions from the regulated Emission Trading System (ETS)
Scope 2 emissions using two methods: location-based and market-based
Scope 3 emissions for each of the 15 categories defined by the GHG Protocol when considered significant (i.e., a priority for the company). This means that both upstream and downstream emissions should be considered.
Companies must also publish information on their total estimated GHG emissions per net product.
DR 7 - GHG removals and GHG mitigation projects financed through carbon credits
In this section, companies must disclose information on:
The amount of greenhouse gas removals from the atmosphere they have achieved through projects they have undertaken or contributed to.
The amount of greenhouse gas emission reductions or eliminations they have achieved or plan to achieve by funding climate change mitigation projects outside their value chain, either directly or through the purchase and retirement of carbon credits.
DR 8 - Internal carbon pricing
Companies must disclose whether they apply internal carbon pricing mechanisms. If so, they must specify:
The type of internal carbon pricing mechanism (e.g., internal carbon funds, carbon levies)
The scope (geographic area, entities, etc.)
The carbon price applied according to the type of mechanism
The volume of emissions covered by the mechanisms for scopes 1, 2, and 3 for the current year
DR 9 - Anticipated financial effects from material physical and transition risks and potential climate-related opportunities
This final requirement emphasizes the anticipated financial impacts for companies facing physical and transition risks to which they are exposed. Companies must also present potential opportunities related to climate change to determine if they can gain a financial advantage.
As this information does not have a specific methodology yet, companies may omit it in the first year of their reporting.
How to prepare for ESRS E1 reporting?
Even if a company is only subject to the CSRD in 2026 or 2027, it can (and should) start preparing for the CSRD reporting today and implement a roadmap to make sure the company will be on track. Here are key steps to take:
Familiarize with ESRS E1 Disclosure Requirements: Understand the 9 Disclosure Requirements of ESRS E1 and their specific reporting needs.
Conduct a double materiality assessment: Evaluate and identify material impacts, risks, and opportunities related to climate change, considering both financial and sustainability perspectives.
Collect and analyze data: Gather the necessary qualitative and quantitative data for reporting, including a comprehensive carbon footprint assessment for scopes 1, 2, and 3 emissions, while involving relevant stakeholders early in the process.
Define Science-Based reduction targets: Establish clear and precise GHG reduction targets that are aligned with scientific data and methodologies, particularly those linked to the Paris Agreement's goal of limiting warming to 1.5°C.
Develop a climate transition plan: Create a detailed and ambitious plan outlining key decarbonization actions, investments, and timelines to achieve the defined reduction targets.
Integrate climate considerations into governance: Ensure that climate risks and opportunities are incorporated into corporate governance, strategy, and decision-making processes.
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