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The CSRD will officially come into force on January 1, 2024, and will initially apply to companies currently subject to the NFRD. By 2028, more than 50,000 companies across the European Union will be covered by this regulation and will be required to report annually on their commitment and impact regarding the environmental, social, and governance indicators covered by these rules.
In addition to corporate transparency obligations regarding environmental, social, and governance issues, the CSRD has also introduced new reporting standards: the ESRS.
How ESRS work and their objectives
As part of the implementation of the CSRD, the EFRAG (European Financial Reporting Advisory Group), a European advisory group in charge of financial reporting, was mandated to work on reporting standards to harmonize the collection of information from companies subject to this regulation.
What is an ESRS?
There are currently 12 ESRS, divided into 4 main groups:
- general criteria (2 ESRS)
- environmental criteria (5 ESRS)
- social criteria (4 ESRS)
- governance criteria (1 ESRS)
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These are reporting standards whose primary objective is to harmonize all files collected from companies under the CSRD. This harmonization is necessary so that these reports can be easily read by all company stakeholders, compared, and also processed automatically by IT tools.
The delegated act detailing these first 12 ESRS standards was adopted by the European Commission on July 31, 2023. It therefore complements the CSRD directive passed in November 2022.
New sector-specific ESRS are currently being developed. Their goal will be to enhance existing ESRS by adding criteria specific to certain industries whose activities are likely to have a significant impact on ESG indicators, particularly the environmental aspect.
How do the ESRS work?
The ESRS detail the information that companies must disclose, its format, and in some cases, the methodology for data collection. They also provide guidance to companies on how to complete their reporting.
These reports consist of both quantitative and qualitative data.
Companies must conduct a materiality assessment to determine if they are directly affected by the topics covered in each ESRS. This analysis must take into account their impact on the various subjects addressed in each of the 12 ESRS, as well as the impact these subjects may have on their business over time. This is commonly referred to as a double materiality assessment. If a company deems a topic immaterial—meaning it has no impact (positive or negative) on its business, or its business has no impact on that topic—it is not required to provide reporting on it. However, in the case of ESRS E1, it must justify this decision.
Specifics of the ESRS E1 standard
ESRS E1 is likely the standard that will require the most significant effort. The CSRD is a key component of the European Green Deal , which aims to achieve carbon neutrality for the European Union by 2050 and to limit global warming to 1.5 degrees, in line with the goals of the Paris Agreement.
The climate aspect is therefore a priority. This is why ESRS E1 is the most comprehensive of the 12 CSRD ESRS and includes specific requirements not found in the other reporting standards.
Materiality assessment
The ESRS E1 climate standard has a unique feature. If a company considers one or more of the themes covered by the ESRS to be immaterial—meaning non-significant—regarding its business, it may briefly explain the reasons why. Only ESRS E1 has this special provision.
Indeed, if the company considers that it does not need to report on ESRS E1, it must provide a detailed and reasoned justification, as well as an analysis of future conditions that could lead the company to consider this topic "material."
“If the undertaking concludes that climate change is not a material topic and therefore omits all the disclosure requirements in ESRS E1 Climate Change, it shall publish a detailed explanation of the conclusions of its materiality assessment with regard to climate change (...), including a forward-looking analysis of the conditions that could lead the undertaking to conclude that climate change is a material topic in the future.” - Annex 1 to the Delegated Regulation - 07/31/2023
In practice, companies will find it extremely difficult to bypass this ESRS. Every activity inevitably generates greenhouse gas emissions and therefore has an impact, however minimal, on the climate. This is all the more true given that ESRS E1 requires companies to account for all emissions generated throughout their upstream and downstream value chain.
Furthermore, a company that chooses not to publish its climate reporting, regardless of the justification provided, would send a very negative signal to the market.
Investors and buyers are increasingly scrutinizing corporate transparency and the ability of companies to adapt to climate change. Allowing doubt to arise regarding a company's ability to anticipate these changes, or its willingness to conceal information, would expose it to significant risk with its stakeholders.
A highly structured ESRS
ESRS E1 is extremely structured. Comprising 9 Disclosure Requirements, it is one of the most comprehensive of all the ESRS and the most extensive regarding environmental matters. Its scope is particularly broad.
The company must:
- Indicate whether it has a transition plan aligned with the Paris Agreement
- Conduct a precise assessment of its greenhouse gas emissions
- Analyze the impact of all its activities on the climate
- Estimate the impact that climate change has and will have on its operations
- Detail all internal initiatives taken to reduce or mitigate its negative impact on the climate
- Set reduction targets aligned with the goals of the Paris Agreement
- Develop an action plan to achieve these targets
Each of the Disclosure Requirements is associated with Application Requirements. In the context of ESRS E1, these are particularly specific. They detail, with great precision, how companies must respond to the various questions asked of them.
For instance, when calculating their GHG emissions, companies must follow the methodology established by the GHG Protocol and collect data for Scope 1, 2, and 3 of their operations. As previously mentioned, the calculation of emissions therefore covers their entire value chain. This exercise can prove highly complex and requires the contribution of a large number of stakeholders, including employees, suppliers, and service providers.
It is also required to comply with the data collection requirements prescribed in the standard ISO 14064-1:2018.
Finally, it must detail the methodology used to calculate its emissions, the assumptions made, and the emission factors selected for its calculations, while accounting for CO2, CH4, N2O, HFC, PFC, SF6, and NF3 emissions, as well as other GHGs if they are considered significant.
Integration into your business strategy
Beyond a simple assessment of GHG emission levels and the impact of its activities on the climate, the company must also integrate this data into its business strategy.
It must be able to demonstrate that it is aware of the climate challenges it faces or will face, and how it intends to address them.
The 9th Disclosure Requirement of ESRS E1, for example, is entirely dedicated to measuring anticipated financial effects (risks and/or opportunities) in the context of climate change and the implementation of a transition plan. This analysis requires the full and complete integration of climate issues into the business strategy. The company must show that it has anticipated the effects of climate change on its business and has taken appropriate measures to address them.
Reducing their impact must also be part of this strategy. Companies will therefore need to set GHG emission reduction targets aligned with the Paris Agreement, which aims to limit global warming to 1.5 degrees, and with the European goal of carbon neutrality by 2050.
These objectives must include target values for 2030 and, if possible, 2050. After 2030, target values must be set for every 5-year period.
9 Disclosure Requirements
As mentioned previously, ESRS E1 consists of 9 Disclosure Requirements, which are further supplemented by very specific Application Requirements. Their purpose is to provide a framework for analyses and action plans and to harmonize reporting formats across all stakeholders.
These 9 Disclosure Requirements will provide an overview of companies' impact on the climate and measure their level of commitment to related issues. For stakeholders, this will also be an opportunity to assess the levels of risk companies face and the opportunities that may arise in the context of adapting to climate change and its potential consequences.
E1 - 1: Transition plan for climate change mitigation
This disclosure requirement is intended to provide visibility into the company's past, present, and future efforts to mitigate its climate impact, as well as the compatibility of these efforts with the goal of limiting global warming to 1.5°C (Paris Agreement) and achieving carbon neutrality by 2050.
The company must outline its transition plan toward a sustainable economy, the decarbonization levers it has identified, and the key actions planned (changes to the product and service portfolio, new technologies, actions across the value chain, etc.), the progress of this transition plan, and the CapEx and OpEx allocated to it. Furthermore, it must describe how this plan is integrated into the company's business and financial strategy.
Finally, it must also indicate the current level of its business's dependence on fossil fuels (coal, oil, and gas) by conducting “a quantitative assessment of potential locked-in GHG emissions.”
In the event that the company does not currently have a transition plan, it must indicate when such a plan will be adopted and implemented.
E1 - 2: Policies related to climate change mitigation and adaptation
To meet this disclosure requirement, the company must demonstrate that it has implemented a policy to identify, assess, and manage risks and opportunities related to climate change mitigation and adaptation.
This policy must also account for energy efficiency and the deployment of renewable energy.
E1 - 3: Actions and resources related to climate change policies
In this section, the company must detail each action taken during the year to mitigate and/or adapt to climate change, as well as the results already achieved and those expected.
This report must include all climate change mitigation actions through decarbonization and GHG emission reduction initiatives.
It must specify the resources mobilized in terms of OpEx and CapEx for each of these actions.
E1 - 4: Targets related to climate change mitigation and adaptation
To meet this disclosure requirement, the company must outline the targets and objectives it has set regarding climate change mitigation and adaptation to support the policy detailed in Disclosure Requirement E1 - 2.
Each action must be linked to a specific objective: reducing greenhouse gas emissions, deploying renewable energy, mitigating physical risks, adapting to climate change, etc.
For GHG emission reductions, the company must follow a science-based methodology and set targets for 2030 and 2050. Targets will be set based on a base year and must include the company's Scope 1, 2, and 3 emissions.
It must also anticipate its future growth and the potential impact this may have on its greenhouse gas emissions and, consequently, the achievement of its targets.
Finally, it must be able to justify how these targets align with the Paris Agreement goals to limit global warming to 1.5°C.
E1 - 5: Energy consumption and energy mix
In this section, the company will report on its current energy consumption and energy mix.
It must break down its total consumption between different renewable energy sources and fossil fuels.
Companies operating in “high climate impact sectors” must specify each fossil fuel source that makes up their energy mix, as well as its share of the company’s total consumption, according to a precise nomenclature detailed in the delegated act.
E1 - 6: Gross GHG emissions for scopes 1, 2, 3 and total emissions
For each scope, the company must detail its gross greenhouse gas emissions in metric tonnes of CO2 equivalent.
The goal is to assess current emission levels while also identifying the primary sources of emissions, whether they stem from the company’s direct operations, its energy consumption, or its value chain. Ultimately, this data will help measure the risks the company faces as part of its climate transition policy.
The company must be able to break down these scope 1 and 2 emissions between its consolidated accounting group on one hand, and its associates, joint ventures, and non-consolidated subsidiaries on the other.
E1 - 7: GHG removals and GHG mitigation projects financed through carbon credits
Here, the company will describe the GHG removal and mitigation projects it has implemented internally and/or those it has contributed to outside of its value chain.
Regarding internal GHG removal and storage projects, the assumptions, calculations, and quantities of carbon involved must be detailed. These quantities will be broken down according to the company’s own activities and the various elements constituting its upstream and downstream value chain.
Regarding carbon credits, the company must specify the quantities stored in metric tonnes of CO2 equivalent. It must report on the credibility of the carbon credit projects in which it is involved and their compliance with recognized standards in the field.
If the company makes public claims regarding the carbon neutrality of its operations, it must be able to demonstrate that the purchase of carbon credits is not used as a mere alternative to its gross GHG emission reduction targets.
The objective here is to combat greenwashing, particularly abuses related to the use of the term "Net Zero" by companies that are not committing to a genuine policy to reduce their climate impact.
E1 - 8: Internal carbon pricing
In this disclosure, the company will indicate whether it applies an internal carbon pricing mechanism and how it contributes to its climate transition policy.
It must detail how this mechanism functions, its uses, and its scope of application.
E1 - 9: Anticipated financial effects of climate-related physical and transition risks and potential opportunities
In this section, the company must present the short-, medium-, and long-term financial risks:
- to which it is exposed as part of its transition plan
- to which it is exposed due to climate change
This information must include the monetary value and the proportion of assets and net turnover exposed to physical risk, as well as potential financial impacts.
Finally, it must also report on the opportunities it can seize in the context of climate change and/or its transition plan. This may concern savings achieved through its climate change mitigation or adaptation actions, as well as potential gains linked to market development or changes in its products or services.
How to prepare your ESRS E1 reporting
ESRS E1 is likely the ESRS that will require the most commitment from companies subject to the CSRD. Collecting all the requested data will involve mobilizing a large number of internal employees, as well as engaging with all stakeholders throughout your value chain.
You will also need to be able to model financial plans that take into account the actions you intend to take and the potential impacts that climate change could have on your business.
To best prepare your ESRS E1 and therefore CSRD reporting, certain habits will be essential.
Put the complexity of the exercise into perspective
While it is the most comprehensive ESRS, it is not necessarily the most complex.
Carbon emission calculation methodologies are now well-defined and already widely used. For example, it will be much more complicated to estimate the impact of one's activity on biodiversity, a field where calculation methods are still in their infancy.
You can rely on the methodologies developed by the GHG Protocol or the Association Bilan Carbone, two internationally recognized organizations. Similarly, if you have already carried out an initial carbon footprint assessment or responded to CDP questionnaires, you will have the initial elements needed to address this ESRS.
As the measurement of GHG emissions has become more widespread in recent years—whether through companies' own initiative, regulatory requirements, or stakeholder pressure—many players already have up-to-date data, which facilitates the collection process across your value chain. The difficulty then lies in harmonizing the methods of collection, quality, and data format.
Set ambitious but achievable goals
As you will have gathered, the framework set by the CSRD, and even more so by ESRS E1, does not allow for setting goals based on guesswork.
These objectives must be measurable, justified, and aligned with those of the Paris Agreement and the EU's 2050 climate neutrality goal.
The room for maneuver is therefore limited, at least regarding the overall objectives the company must set for itself after conducting its impact analyses and accounting for its greenhouse gas emissions.
In light of these overall objectives, we advise you to examine the exhaustive list of levers you have identified to reduce your carbon footprint and your impact on the climate.
Set ambitious goals for each of the options you wish to activate. The sum of efforts across each lever will allow you to reach your overall objectives. Furthermore, by breaking down your actions across several levers, you reduce the risk of bottlenecks and increase your chances of achieving substantial results.
Nevertheless, ensure overall consistency in the activation of these different levers. This involves verifying beforehand that efforts made in one area do not have a negative impact on another.
Find the right software
Given the scale of the task, it is best to have the right support when collecting data and publishing CSRD reports. We strongly recommend prioritizing providers capable of simplifying the environmental aspects of the CSRD, particularly ESRS E1.
As you can see, this part of the CSRD will require the most involvement on your part, and the likelihood of avoiding this reporting is virtually zero. You will need to collect a vast amount of data, analyze countless variables, and be able to measure the impact of your actions in the short, medium, and long term, both in terms of GHG emissions and financial outcomes.
It is therefore not just a matter of finding a tool that will centralize all the quantitative and qualitative information required by CSRD reporting. More than just an enhanced Excel file, the tool must be able to support you in collecting data from numerous stakeholders, while also helping you model your action plans and estimate their costs.
To learn more, discover how Tennaxia can support you in publishing your CSRD reports.
Sources:
- “European Sustainability Reporting Standards - First Set of Standards”, European Commission, 07/31/2023
- “Draft European Sustainability Reporting Standards - ESRS E1 Climate Change”, EFRAG, 11/01/2022