Companies within the scope of the Directive (EU) 2022/2464 of the European Parliament and of the Council of 14 December 2022 amending Regulation (EU) No 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU, as regards corporate sustainability reporting ("CSRD") will have to report sustainability information using the European Sustainability Reporting Standards ("ESRS"). On July 31, 2023, the EuropeanCommission adopted a delegated act on the first set of sector-agnostic standards, i.e., two cross-cutting standards (General Requirements and General Disclosures) and 10 topical standards (including, in particular, Climate Change, Biodiversity and Ecosystems, Workers in the Value Chain, and Consumers and End-users). The Climate Change Standard, referenced as "ESRS E1," stands out from the rest of the topical standards. While the application of other topical disclosure requirements is subject to double materiality assessment, and companies may choose to omit information without providing explanation, climate change is the only ESG topic where even if a reporting company determines that the matter is not material, it must include a detailed explanation describing how and why it reached that conclusion and omitted information on climate change.
Implementation of ESRS is mandatory, and companies that fail to comply may be subject to penalties by law. However, companies should also be mindful of the risks associated with the implementation of ESRS, in particular with respect to disclosures required by ESRS E1 regarding climate change issues. For example, ESRS E1-1 requires undertakings to disclose a transition plan for climate change mitigation which includes greenhouse gas ("GHG") emission reduction targets, as well as "an explanation of how the undertakings' targets are compatible with the limiting of global warming to 1.5°C in line with the Paris Agreement." The required explanation should be documented and supported by a well-recognized methodology to avoid potential greenwashing claims.
Another challenge for businesses is the extensive breakdown of data and technical experience required to produce required emissions information, which must be calculated in accordance with the GHG Protocol Corporate Standard, Corporate Value Chain (Scope 3) Standard, and Scope 2 Guidance. ESRS E1 sets out dozens of specific data points related to direct and indirect emissions, emissions reduction targets, and mitigation activities. GHG removals, carbon credits, or avoided emissions must be excluded from total emissions calculations and each reported separately, supplemented by a description of the methodologies and assumptions used for the calculations. Reporting companies will have to disclose emissions under each significant Scope 3 category and justify excluded categories. Therefore, companies will have to rely on their partners, suppliers, and customers to timely provide emissions data, and should engage with their upstream and downstream value chain well ahead of reporting deadlines.
Companies should assess how the extensive requirements of ESRS E1 will impact their ESG reporting and data gathering, evaluate their readiness, and ensure they have the necessary processes, internal controls, and experience to report on climate change.
Read the full Climate Report.
