In the ever-evolving landscape of corporate sustainability, the European Corporate Sustainability Reporting Directive (CSRD) represents a significant shift towards more transparent, reliable, and comprehensive reporting of companies’ sustainability efforts, particularly concerning their climate impact. This blog post delves into the intricacies of the European Sustainability Reporting Standards (ESRS), focusing on the climate-related aspects, including carbon accounting and climate target setting, to provide sustainability consultants with an insightful analysis of what lies ahead.
The European Sustainability Reporting Standards
The ESRS stands as a beacon for standardizing the sustainability information disclosure by companies, aimed at equipping investors, regulators, and other stakeholders with the means to assess and compare the sustainability performance across the corporate spectrum. Formulated by the European Financial Reporting Advisory Group (EFRAG) and sanctioned by the European Commission in July 2023, these standards have undergone rigorous scrutiny, finally receiving the nod from the EU Parliament in October 2023. The ESRS framework, integral to the CSRD, ensures that all stakeholders are furnished with transparent and comprehensive insights into companies’ sustainability impacts.
Structured into two general cross-cutting standards and twelve topical standards, the ESRS embodies a strong alignment with environmental concerns, closely mirroring the categories of the EU taxonomy. This meticulous categorization underscores the directive’s sector-agnostic approach, set to broaden with sector-specific standards by mid-2026. A key highlight of the ESRS is the adoption of double materiality assessment (DMA), emphasizing both the adaptation impact of the environment on organizations and their mitigatory responses. With 1,178 data points, of which 220 are dedicated to climate change (E1), the breadth and depth of the required disclosures speak volumes about the directive’s emphasis on climate accountability.
Zooming In on ESRS-E1: Climate change
The E1 standards pivot around the dual narratives of adaptation and mitigation, casting a spotlight on the organization’s proactive measures and their climate impact. This segment calls for a retrospective and prospective analysis of GHG metrics, monetary metrics, and an assessment of risks, underlining the directive’s insistence on substantive, actionable insights over mere regulatory compliance.
Carbon accounting principles (ESRS E1-6)
The E1-6 segment on Gross GHG Emissions integrates widely recognized corporate carbon accounting frameworks. Reporting companies must consider the principles, requirements and guidance provided by the GHG Protocol Corporate Standard (version 2004, and all its attachments). Reporting companies may also consider Commission Recommendation (EU) 2021/2279 ( 51) or the requirements stipulated by EN ISO 14064-1:2018.
Besides, the ESRS E1-6 on Gross GHG emissions complements the GHG Protocol with some additional specifications:
- Disclose comparative information in respect of the previous period for all quantitative metrics and monetary amounts disclosed in the current period;
- Disclose information to enable readers to understand the most significant uncertainties affecting the quantitative metrics and monetary amounts reported in its sustainability statement;
- Use the most recent Global Warming Potential (GWP);
- Update Scope 3 GHG emissions in each significant category every year on the basis of current activity data; update the full Scope 3 GHG inventory at least every 3 years or on the occurrence of a significant event or a significant change in circumstances (a significant event or significant change in circumstances can, for example, relate to changes in the undertaking’s activities or structure, changes in the activities or structure of its upstream and downstream value chain(s), a change in calculation methodology or in the discovery of errors);
- If it is material for the undertaking’s Scope 3 emissions, it shall disclose the GHG emissions from purchased cloud computing and data centre services as a subset of the overarching Scope 3 category “upstream purchased goods and services”.
Target setting principles (ESRS E1-4)
The E1-4 Mitigation Targets standards draw inspiration from the science-based target initiative (SBTi), albeit with the flexibility to incorporate other frameworks, provided they substantiate alignment with the global 1.5°C warming threshold. This segment mandates clear target setting for 2030 and, where possible, for 2050, alongside subsequent five-yearly updates. It emphasizes the disclosure of decarbonization levers and their quantitative contributions towards achieving these targets, ensuring that the targets encompass Scope 1, 2, and 3 GHG emissions, with a strict focus on gross targets over net offsets.
Conclusion: A Call to Action for Sustainability Consultants
The ESRS under the CSRD heralds a new era in corporate sustainability reporting, with a pronounced focus on climate-related disclosures. For sustainability consultants, understanding the nuances of these standards, particularly the emphasis on carbon accounting and climate target setting, is paramount. This knowledge equips professionals to guide their clients through the maze of compliance and beyond, towards genuinely impactful sustainability practices.
As the directive unfolds, staying abreast of its developments and implications will be crucial for consultants aiming to provide cutting-edge advice in this dynamic domain.
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