Over the next few years, more and more companies in Europe will be subject to the Corporate Sustainability Reporting Directive. Those that are required to comply will need to follow the European Sustainability Reporting Standards (ESRS), a comprehensive set of disclosure guidelines designed to help detail, and ultimately reduce, the impact of climate change.
For anyone facing the ESRS E1 standard and its requirement for granular Scope 3 greenhouse gas emissions reporting, it can be a daunting prospect. But with the standard set to have a far-reaching impact, compliance will be time well spent.
Transparent climate change disclosure can help your business align with global commitments that require deep emissions cuts. Early movers that can demonstrate strong performance against their targets will likely benefit from greater investment, as well as demonstrating greater agility and long-term business viability, making it a key element of what AMCS calls ‘performance sustainability.’
Below, we delve into the specifics of what ESRS E1 entails and explore how the standard relates to well-known voluntary reporting standards such as TCFD, GRI, or ISO 50001.
what is ESRS E1?
The ESRS E1 standard for climate change is one of five ESRS environmental standards that sit within the body of ESRS standards. Of the 12 standards, companies are only required to report on the standards that are material to their operations, however, since nearly every product or service is associated with GHG emissions, the E1 climate change standard is material to the majority of businesses.
Its requirement to report Scope 3 greenhouse gas (GHG) emissions includes 15 categories of upstream and downstream emissions sources, including global supply chain emissions. For most companies, over 80 percent of their emissions come from Scope 3 sources.
Onerous as this might seem, companies who waive the disclosures required by ESRS E1 must justify the decision with a detailed explanation and a forward looking analysis, explaining whether GHG emissions will become material in the future.
what is involved in ESRS E1 disclosure?
There are nine topics within ESRS E1, each requiring disclosure in four areas including: general information, the management of impacts, risks and opportunities, and metrics and targets. Below, we look at each of the 9 ESRS E1 disclosures in detail.
E1.1 – climate transition plan
You’ll need to present a plan to adapt your business model to meet the Paris Agreement target of limiting global warming to 1.5°C by 2050. This goal aligns with scientifically accepted targets for a safe level of warming.
E1.2 – climate change mitigation and adaptation policies
In this section, you should disclose your organization’s policies for climate change mitigation and adaptation. This includes the roles of administrators, management and governance bodies in pursuing your climate change targets.
E1.3 – measurement methodologies
Here, you’ll need to provide a detailed description of the methodologies used to measure your organization’s greenhouse gas emissions.
E1.4 – action plans and resources for climate change mitigation and adaptation
Present your goals, targets, investments, and plans to support climate change mitigation and adapt to climate change impacts.
E1.5 – energy consumption and energy mix
When presenting your energy consumption and energy mix, you should disclose your company’s renewable and non-renewable energy sources. Companies should also provide the energy intensity per revenue to align with sustainable finance data requirements.
E1.6 – GHG absolute emissions for Scope 1, 2, and 3
In this section, you should report your organization’s GHG emissions by type and scope.
- Emissions Type: The standard specifies reporting on the following GHGs: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PCFs), sulphur hexafluoride (SF6) and nitrogen trifluoride (NF3).
- Emissions Scopes: Scope 1, 2 and 3 emissions reporting in ESRS aligns with the GHG Protocol recommendations. S1 emissions are from operational activities, S2 emissions are from purchased energy, and S3 emissions are value chain emissions.
- Total Emissions: In addition to these, you should also report your total emissions, a requirement which is unique to ESRS E1.
For each Scope, there are a few additional guidelines specified in ESRS:
- S1: Include the share of S1 emissions covered by regulated emissions trading schemes by %.
- S2: Provide location and market-based data.
- S3: Emissions mapping is required. Update this disclosure every 3 years. Also disclose the percentage of primary data used. Companies with up to 750 employees can forgo reporting Scope 3 emissions in the first reporting year (2024).
Reporting Boundaries: The reporting boundaries are 100% of emissions from financially controlled entities, and 0% or 100% of emissions for non-financially controlled entities and joint ventures. To decide which percentage to use, apply the operational control criteria basis from the GHG Protocol.
E1.7 – CO2 reduction projects
Where applicable, you should report your organization’s CO2 reduction projects measured in tonnes of CO2 equivalents, including:
- GHG removals and GHG mitigation projects financed through carbon credits.
- GHG removals and storage in your own operations and the value chain.
- GHG mitigation projects financed through carbon credits.
For companies with a net-zero target, residual emissions should not make up more than 5-10% of your total emissions. These companies should declare their approach to this guideline, i.e. "Avoid-Reduce-Compensate.”
E1.8 – internal CO2 pricing
For companies with an internal price on CO2, they should include a description of their methodology to establish the price and declare how the price affects their business strategy.
E1.9 – financial impact of climate-related risks and opportunities
To comply with this requirement, you should prepare physical and transition risk assessments for both your financial statements and those that extend beyond the scope of your financial statements. These assessments should follow TCFD recommendations for comparing at least two contrasting warming scenarios in the short-, medium- and long-term.
Your analysis should include the following:
- Amount and current net assets at risk from physical and transition climate change impacts.
- Real estate assets by energy efficiency class.
- Potential liabilities from emission trading schemes and contractual commitments to purchase carbon credits in the future.
- Share of revenues from activities with physical and transition risk exposure.
- Share of the predicted financial risks covered by transition plans.
general disclosures linked to ESRS E1
In addition to the nine ESRS E1 disclosures described above, there are also various general disclosures, several of which relate to climate change:
- OP 2-Gov-3: Companies should report how they integrate sustainability performance into their incentive systems.
- OP 2-SBM-3: Companies should state the current significant impacts, risks and opportunities and how the business strategy addresses these.
- OP 2-IRO-1: Companies must describe the processes for identifying and assessing significant climate-related impacts, risks and opportunities.
how does ESRS E1 compare to voluntary climate reporting?
ESRS E1 is currently the most rigorous set of climate change reporting standards in the world, but its development didn't happen in isolation. Many of the E1 requirements had already been recommended within voluntary ESG frameworks and standards adopted by companies around the world.
For example, many of the requirements directly align with the Task Force on Climate Related Financial Disclosures (TCFD), a voluntary framework launched by the Financial Stability Board in 2015 to support businesses in better analyzing the economic risks linked to climate change. Included in TCFD are recommended emissions measurements by scope that align with the older GHG Protocol, developed in 1998 as a method for carbon accounting.
That’s no surprise as ESRS E1 was designed for strong "interoperability" with the most widely adopted voluntary reporting standards and frameworks. This is achieved thanks, in part, to its "double materiality" approach, which emphasizes both climate impacts and financial effects. This helps it align with both the Global Reporting Initiative, which focuses on an organization's outward impact on society, and the International Financial Reporting Standards, which address the inward financial effects from non-financial issues. A comparison between ESRS and IFRS can be found in the EFRAG appendix.
By emphasizing a management systems approach to implementing change across your organization, ESRS E1 also aligns with both ISO 50001 and ISO 14068. These standards emphasize year over year performance improvements and change management strategies that embed strong measurement methods, and the clear assignment of roles and responsibilities.
turning the ESRS challenge into opportunity
While ESRS E1 presents a significant challenge to many organizations, it also presents significant opportunities. Apart from the obvious societal benefits of reducing your climate impacts, your company’s ability to adapt to environmental pressures demonstrates a future-focused agility that can improve performance, allows your businesses to scale, powers growth, and helps protect our planet’s future.
So, whether your organization is obliged to report to the CSRD in 2024, or in the years ahead, following the reporting guidelines set out by ESRS E1 is a smart move. In fact, you may already be collating much of the information for an alternative standard. To avoid unnecessary duplication and ensure you have every aspect covered, a software tool like the AMCS Sustainability Platform can help to streamline your reporting efforts, ensuring you manage staff and resources effectively.
If your organization is likely to be impacted by the CSRD and its ESRS E1 climate disclosure requirements, the time to start compiling information is now. To get started, speak with an AMCS advisor today.