Carbon footprint legislation in the EU


Will carbon footprint disclosure become mandatory for companies? The short answer is “yes, most likely”. The longer and fully nuanced version of the answer can be found in this article.

The European Union has set the ambition to become climate neutral by 2050, as outlined in the Green Deal. To achieve this goal, net emissions need to be reduced with 55% by 2030, compared to 1990 levels. These ambitions and targets are written into law through the European Climate Law and concrete measures to achieve these targets are outlined in the Fit for 55 Package. Simultaneously, the EU adopted the Taxonomy Regulation and the Sustainable Finance Package, respectively to have a common definition of what “environmentally sustainable” is and to steer the flow of money towards sustainable activities.

Within these major legislative initiatives, some very concrete legislation on carbon footprinting exists or is in the making. This article gives an overview of this legislation at European level, in chronological order. Buckle up for some alphabet soup.

Carbon footprint disclosure will become mandatory for companies.

European Emission Trading System (EU ETS)

What | The EU ETS is a cornerstone of European climate policy. It is a cap-and-trade system for carbon emissions from large industrial players and intra-European aviation. The European Union imposes an upper limit on annual carbon emissions (i.e., a cap) after which industrial players buy and trade permits to emit carbon. As such, a price is put on carbon emissions and polluting companies have an incentive to reduce their emissions. All industrial players covered by this system need to report their carbon emissions to the European Union, together with the corresponding procured emission permits. The current ETS cap is around 1.500 MtCO2e per year at a price of €60 per tCO2e.

Who | The EU ETS covers direct greenhouse gas emissions (i.e., scope 1 emissions) from industrial installations with a thermal rated output of at least 20 MW. This includes around 11.000 individual installations in Europe such as power plants, oil refineries and steel mills. Since 2012, also intra-European aviation is included in the EU ETS.1 Currently, the European Commission is discussing the extension of EU ETS to transport and buildings. This would reinforce the position of EU ETS as the leading European climate policy.

When | The EU ETS was put in place in 2005 as the world’s first and largest international emission trading system. Legally, the EU ETS runs until 2030 after which legislators need to extend the system. However, it’s generally accepted that the EU ETS will remain a pivotal policy instrument to become climate neutral in 2050.

Non-Financial Reporting Directive (NFRD)

What | The NFRD was the first EU law requiring companies to disclose information on a set of non-financial sustainability-related metrics, such as environmental matters, social matters, treatment of employees, human rights and diversity. As part of the NFRD, the European commission published guidelines to help companies disclose climate-related information, such as their carbon footprint. However, these guidelines are not mandatory and companies may decide to use national guidelines according to their own business environment.

Who | The NFRD applies to large public-interest companies with more than 500 employees. Public interest companies are publicly listed companies, banks and insurers. As such, NFRD covers approximately 11.700 European companies.

When | The NFRD was adopted in 2014 at European level and came into effect in all EU member states in 2018.

Sustainable Finance Disclosure Regulation (SFDR)

What | The SFDR is part of the sustainable finance package and aims to create transparency and consistency in sustainability reporting of financial products. This regulation makes it mandatory for financial institutions to disclose the sustainability performance of their products (e.g., stock funds) and their own sustainability risks (e.g., loan portfolios). A key part of SFDR reporting requirements will be a comprehensive carbon footprint of investments made by financial institution. A consequence of all this is that financial institutions start to structurally cooperate with sustainability consultants (e.g., partnerships between KBC and Encon and BNP Paribas and Climact).

Who | The SFDR applies to financial institutions active in Europe such as banks, insurers, asset managers and investment firms.

When | The SFDR was adopted in November 2019 and came into force in March 2021. However, the exact technical details will only follow in January 2022 in the Regulatory Technical Standard (e.g., details on scope 3 emission reporting). Therefore, financial institutions are currently in a kind of run-in period. The first SFDR reporting will take place in 2023 for the year 2022.

Corporate sustainability reporting directive (CSRD)

What | The CSRD is an extension of the Non-Financial Reporting Directive (NFRP, see above) on various aspects. It raises the stakes of the latter on a few fronts. First, more companies will need to report non-financials (see next paragraph) and it strengthens the reporting requirements with the introduction of the double materiality concept. This requires companies to report on all climate-related information necessary for understanding the external impacts of the companyIn practice this means disclosing on carbon emissions and targets, and it also forces companies to provide limited assurance of this non-financial reporting. Lastly, the new directive instructs companies to submit their non-financials in an electronic format similar to the format used for financial reporting. As such, it is clear that carbon footprint disclosure will be a key part of CSRD reporting requirements. Moreover, excel-based carbon footprinting will come to an end due to assurance and electronic reporting requirements.

Who | The CSRD applies to all large companies in Europe as well as all companies listed on regulated markets (except listed micro-enterprises). Large companies are companies that meet at least 2 of the following conditions: 250+ employees, €40M+ turnover or €20M+ total assets. As such, CSRD will cover close to 50.000 European companies (compared to 11.700 companies covered by the Non-Financial Reporting Directive).

When | The CSRD was adopted in April 2021. The technical reporting details will be adopted by the end of 2022 in the Sustainability Reporting Standards. A first set of draft standards is expected by mid-2022. The first CSRD reporting will take place in 2024 for the year 2023.

[1] Intercontinental flights departing from or arriving into the EU were excluded from EU ETS, after fierce political protest from various non-European countries, amongst which the US and China. Emissions from these flights are regulated as of this year through the UN-agency ICAO (i.e., the International Civil Aviation Organization) and its program CORSIA (i.e., the Carbon Offsetting and Reduction Scheme for International Aviation).