The CSRD will officially come into force on January 1, 2024, initially affecting companies currently subject to the NFRD. By 2028, more than 50,000 companies across the European Union will be affected by this regulation, and will have to report annually on their commitment and impact on the environmental, social and governance indicators concerned.
In addition to the requirements for corporate transparency on environmental, social and governance issues, the CSRD has also introduced new reporting standards: the ESRS.
ESRS operation and objectives
As part of the implementation of the CSRD, the European Financial Reporting Advisory Group (EFRAG) has been 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 ESRSs, divided into 4 main groups:
- generic criteria (2 ESRS)
- environmental criteria (5 ESRS)
- social criteria (4 ESRS)
- governance criteria (1 ESRS)
These are reporting standards whose primary aim is to harmonize all the files collected from companies as part of the CSRD. This harmonization is necessary so that these reports can be easily read by all company stakeholders, so that they can be compared and also so that they can be 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 thus completes the CSRD directive voted in November 2022.
New sector-based ESRSs are currently under construction. Their purpose will be to enhance existing ESRSs by adding criteria specific to certain business sectors whose activities are likely to have a strong impact on ESG indicators, particularly in the environmental field.
How does ESRS work?
The ESRS detail the information that must be published by companies, its format and, in some cases, the data collection methodology. They also inform companies on how to complete their reporting.
These reports include both quantitative and qualitative data.
Companies are required to carry out a materiality analysis, which consists in assessing whether they are directly concerned by the issues addressed in each of the ESRSs. This analysis must take into account not only their impact on the various subjects dealt with in each of the 12 ESRSs, but also the impact these subjects may have on their business over time. This is commonly referred to as a double-materiality or double materiality analysis.
If a company considers that a topic is non-material, i.e. that it has no impact (positive or negative) on its activity, or that its activity has no impact on this topic, it does not have to provide reporting on it. However, in the context of ESRS E1, it must justify this decision.
Specific features of the ESRS E1 standard
ESRS E1 is probably the standard on which the greatest efforts will be focused. The CSRD is one of the elements of the European Green Deal, which aims to make the European Union carbon neutral by 2050, and to keep global warming to 1.5 degrees, in line with the objectives of the Paris Agreement.
The climate aspect is therefore a priority. This is why the E1 ESRS is the most comprehensive of the 12 CSRD ESRSs, and includes specific features not found in other reporting standards.
The E1 ESRS on climate has a specific feature. If a company considers that one or more of the themes covered by the ESRS is not material, i.e. not significant, for its business, it can briefly explain why. Only ESRS E1 has a special regime.
In fact, if the company considers that it does not need to report on ESRS E1, it must provide a detailed, well-argued justification, as well as an analysis of future conditions likely to lead the company to consider this topic as "material".
"If the undertaking concludes that climate change is not material and therefore omits alldisclosure requirements in ESRS E1 Climate change, it shall disclose 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 theundertaking to conclude that climate change is material in the future."" - Annex 1 to the Delegated Regulation - 07/31/2023
In practice, companies will find it extremely difficult to bypass this ESRS. Any activity is bound to emit greenhouse gases, and thus have an impact, however small, on the climate. This is all the more true as the ESRS E1 forces companies to take into account all emissions generated throughout their upstream and downstream value chain.
On the other hand, a company that decides not to publish its climate report, whatever the justification, would be sending out a very bad signal to the market.
Investors and buyers are increasingly scrutinizing the transparency of companies and their ability to adapt to climate change. To leave any doubt as to a company's ability to anticipate these changes, or its willingness to conceal information, would expose it to a definite risk vis-à-vis its stakeholders.
A highly structured ESRS
The ESRS E1 is extremely detailed. Comprising 9 Disclosure Requirements, it is one of the most comprehensive of all ESRSs, and the most comprehensive in terms of environmental aspects. Its scope of application is particularly broad.
The company must :
- Indicate whether it has a transition plan aligned with the Paris Agreements
- Take stock of your 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 activities
- Detail all initiatives taken internally to reduce or mitigate its negative impact on the climate
- Set reduction targets in line with Paris Agreement objectives
- Draw up an action plan to achieve these objectives
Each Disclosure Requirement is associated with an Application Requirement. For ESRS E1, these are particularly specific. They detail very precisely how companies must respond to the various questions put to them.
So, when it comes to accounting for their GHG emissions, companies will have to follow the methodology set out by the GHG Protocol and collect data on the scope 1, 2 and 3 of their activity. As mentioned above, the calculation of emissions therefore concerns their entire value chain. This can be a highly complex exercise, requiring the contribution of a large number of players, from employees to suppliers and service providers.
It is also required to comply with the collection requirements prescribed in ISO 14064-1:2018.
Lastly, it must detail the methodology applied in calculating its emissions, the assumptions made and the emissions factors chosen in its calculations, and take into account emissions of CO2, CH4, N2O, HFCs, PFCs, SF6 and NF3, as well as other GHGs if emissions are considered significant.
Integration into your corporate strategy
In addition to simply taking stock of GHG emission levels and the impact of its activity on the climate, the company must also integrate this data into its corporate strategy.
It must be able to demonstrate that it is aware of the climate challenges it faces or will face in the future, and how it intends to tackle them.
The 9th Disclosure Requirement of the ESRS E1, for example, is entirely dedicated to measuring the anticipated financial effects (risks and/or opportunities) of climate change and the implementation of a transition plan. This analysis requires the full integration of climate issues into corporate strategy. The company must show that it has anticipated the effects of climate change on its business and has taken the appropriate measures to deal with them.
Reducing their impact must also be part of this strategy. Companies will therefore need to set GHG emission reduction targets in line with the Paris Agreements, which aim to keep global warming to 1.5 degrees, and with the European objective of carbon neutrality by 2050.
These objectives must include target values for the years 2030 and, if possible, 2050. After 2030, target values must be set after each 5-year period.
9 Disclosure Requirements
As previously mentioned, the ESRS E1 is made up of 9 Disclosure Requirements, themselves complemented by very precise Application Requirements. Their aim is to provide a framework for analyses and action plans, and to harmonize reporting formats between all players.
These 9 Disclosure requirements will enable us to take stock of companies' impact on the climate and measure their degree of commitment to related issues. For stakeholders, it will also be an opportunity to assess the levels of risk faced by companies, and the opportunities that may arise in adapting to climate change and its potential consequences.
E1 - 1: Transition plan for climate change mitigation
This publication requirement should make it possible to visualize the company's past, present and future efforts to mitigate its impact on the climate, as well as the compatibility of these efforts with the objective of limiting global warming to 1.5 C° (Paris Agreements) and achieving carbon neutrality by 2050.
The company should outline its transition plan towards a sustainable economy, the decarbonization levers it has identified and the key actions envisaged (changes to the product and service portfolio, new technologies, actions on the value chain, etc.), the degree of progress of this transition plan, as well as the CapEx and OpEx mobilized within this framework. It should also describe how this plan is integrated into the company's business and financial strategy.
Finally, it will also have to indicate the current level of dependence of its business on fossil fuels (coal, oil and gas) by conducting "a quantitative assessment of potential locked-in GHG emissions."
If the company does not yet have a transition plan, it must indicate when this plan will be adopted and implemented.
E1 - 2: Policies related to climate change mitigation and adaptation
As part of this disclosure requirement, the company must demonstrate that it has put in place a policy to identify, assess and manage the risks and opportunities associated with mitigating and adapting to climate change.
This policy must also take into account energy efficiency and the deployment of renewable energies.
E1 - 3: Actions and resources in relation to climate change policies
In this section, the company should detail each of the actions implemented during the year to mitigate and/or adapt to climate change, as well as the results already achieved and those expected.
In particular, this presentation should include all climate change mitigation actions through decarbonization and actions to reduce GHG emissions.
It will need to indicate the resources mobilized in terms of OpeX and CapEx for each of these actions.
E1 - 4 : Targets related to climate change mitigation and adaptation
In this disclosure requirement, the company will have to set out the targets and objectives it has set itself for climate change mitigation and adaptation in support of the policy detailed in Disclosure Application E1 - 2.
Each action must be confronted with an objective: reducing greenhouse gas emissions, deploying renewable energies, mitigating physical risks, adapting to climate change...
To reduce GHG emissions, the company must follow a science-based approach and set targets for 2030 and 2050. The targets will be set on the basis of a reference year and will include the company's scopes 1, 2 and 3.
It also needs to anticipate future growth and its possible impact on greenhouse gas emissions, and therefore on the achievement of its targets.
Lastly, it must be able to justify how these objectives are in line with the Paris Agreements, which aim to limit global warming to 1.5°C.
E1 - 5: Energy consumption and mix
In this section, the company will describe its current energy consumption and mix.
It will have to break down its total consumption between the various sources of renewable energy on the one hand, and fossil fuels on the other.
Companies operating in "high-climate-impact sectors" will have to specify each of the fossil fuel sources that make up their energy mix, as well as their share of the company's total consumption, according to a precise nomenclature detailed in the delegated act.
E1 - 6: Gross Scopes 1, 2, 3 and Total GHG emissions
For each scope, the company must detail its gross greenhouse gas emissions in metric tons of CO2 equivalent.
The aim is not only to take stock of current emissions levels, but also to identify the main sources of emissions, whether from the company's direct activity, its energy consumption or its value chain. Finally, this data will enable us to measure the risk to which the company is exposed as part of its climate transition policy.
The company must be able to break down these Scopes 1 and 2 emissions between its consolidated accounting group on the one hand, and its associates, joint ventures and unconsolidated subsidiaries on the other.
E1 - 7: GHG removals and GHG mitigation projects financed through carbon credits
Here, the company will describe the GHG absorption and mitigation projects it has set up internally and/or those to which it has contributed outside its value chain.
For in-house GHG absorption and storage projects, the assumptions, calculations and quantities of carbon involved should be detailed. These quantities will be broken down according to the company's own activities and the various elements making up its upstream and downstream value chain.
In the case of carbon credits, the company must specify the quantities stored in metric tons of CO2 equivalent. It will also have to demonstrate the credibility of the carbon credit projects in which it is involved, and its compliance with recognized standards in the field.
If the company communicates publicly about the carbon neutrality of its activity, it must be able to demonstrate that the purchase of carbon credits is not simply an alternative to its objectives of reducing gross GHG emissions.
The aim here is to combat greenwashing and, in particular, abuses linked to the use of the term Net Zero by companies that are not committed to a real policy of reducing their climate impact.
E1 - 8: Internal carbon pricing
In this Disclosure Agreement, the company will indicate whether it applies an internal carbon pricing mechanism and how this contributes to its climate transition policy.
It will have to detail its operation, uses and scope of application.
E1 - 9: Anticipated financial effects from material physical and transition risks and potential climate-related opportunities
In this section, the company will present its short-, medium- and long-term financial risks:
- to which it is exposed as part of its transition plan
- to which it is exposed in the context of climate change
This information should include the monetary value and proportion of assets and net proceeds exposed to physical risk and potential financial impact.
Finally, the company will also have to describe the opportunities it can seize in the context of climate change and/or its transition plan. These may include savings achieved through climate change mitigation or adaptation actions, as well as potential gains linked to market development or changes in products or services.
How to prepare your ESRS E1 reports
The ESRS E1 is therefore probably the ESRS that will require the most commitment from companies subject to the CSRD. In order to collect all the data requested, you will need to mobilize a large number of internal employees, as well as all the stakeholders in your value chain.
You'll also need to be able to model financial plans that take into account the actions you intend to take and the potential impact climate change could have on your business.
To prepare your ESRS E1 and therefore CSRD reports in the best possible way, certain reflexes are essential.
Putting the complexity of the exercise into perspective
While this is the most comprehensive ESRS, it is not necessarily the most complex.
Methodologies for calculating carbon emissions are now well established and already widely used. It will be much more complicated, for example, to estimate the impact of one's activity on biodiversity, a field in which calculation methods are still in their infancy.
You can draw on the methodologies developed by the GHG Protocol or the Association Bilan Carbone, two internationally recognized organizations. Similarly, if you've already carried out an initial carbon assessment or responded to CDP questionnaires, you'll have the initial information you need to respond to this ESRS.
With the democratization of GHG emissions measurement over the last few years, whether as a result of companies' own initiatives, regulatory constraints or pressure from stakeholders, many players already have access to up-to-date data, making it easier to collect data from your value chain. The difficulty lies in harmonizing data collection methods, quality and format.
Setting ambitious but achievable targets
As you can see, the framework set by the CSRD, and even more so by the ESRS E1, does not allow us to set objectives on the fly.
These targets must be measurable, justified and aligned with those of the Paris Agreement and the EU's goal of carbon neutrality by 2050.
There is therefore little room for manoeuvre, at least when it comes to the overall objectives that the company must set itself after carrying out its impact analyses and accounting for its greenhouse gas emissions.
In the light of these global objectives, we advise you to consider the exhaustive list of levers you have identified to reduce your carbon footprint and your impact on the climate.
Set ambitious targets for each of the options you wish to activate. The sum of your efforts on each of the levers will enable you to achieve your overall objectives. Moreover, by spreading your actions over several levers, you reduce the risk of blockages and increase your chances of achieving substantial results.
Make sure, however, that there is overall consistency in the activation of these different levers. This means checking upstream that efforts on one side do not have a negative impact on the other.
Find the right software
Given the scale of the task, it's best to be well supported in collecting data and publishing CSRD reports. We strongly advise you to look first and foremost at the players who can simplify the environmental dimension of CSRD for you, and in particular the ESRS E1.
As you can see, this part of the CSRD is the one that will require the most involvement on your part, and the probability of escaping this reporting is virtually nil. You'll need to collect a great deal of data, analyze countless variables and be able to measure the impact of your actions in the short, medium and long term, in terms of both GHG emissions and financial impact.
So it's not just a question of finding a tool that will centralize all the quantitative and qualitative information required for CSRD reporting. More than just an improved Excel file, the tool must be able to support you in collecting data from the many stakeholders involved, as well as helping you to model your action plans and estimate their costs.
To find out more, discover how Traace can help you publish your CSRD reports.
- "European sustainability standards - first set of standards", European Commission, 07/31/2023
- "Draft european sustainability reporting standards - ESRS E1 Climate Change"EFRAG, 01/11/2022