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CSRD: An overview of the ESRS E1 standard for climate change

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".


esrs-standards-csrd


What is the ESRS E1 standard?


The ESRS E1 standard is the European standard dedicated to climate change under the CSRD 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. It covers three sub-themes:

  • Climate change adaptation

  • Climate change mitigation

  • Energy


What is the objective of the ESRS E1 standard?


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)


The ESRS E1 standard is considered one of the most comprehensive and demanding among the 12 ESRS. It includes 9 Disclosure Requirements (DR), amounting to approximately 220 data points that companies must report. It is a highly structured standard, both quantitative (emissions, energy consumption, etc.) and qualitative (strategies, policies, etc.).



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.


scope-1-2-3-emissions

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 making sure the company will be on track. How?

  • Collect the necessary data to complete the reporting, whether qualitative or quantitative and involving stakeholders as early as possible

  • Conduct a comprehensive carbon footprint assessment for scopes 1, 2, and 3

  • Define clear, precise reduction targets linked to scientific data and methodologies

  • Develop a detailed and ambitious climate transition plan.


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