The ESRS are the new European standards of the CSRD.
Among the 12 ESRS, ESRS E1 covers the theme “Climate Change”.
This ESRS E1 covers 3 sub-themes:
- adaptation to climate change.
- the mitigation of global warming by reducing greenhouse gas emissions.
- the question of energy.
What is the purpose of this standard? What information companies have to disclose? Are there any planned reductions in the implementation schedule? We take stock of the 9 Disclosure Requirements of ESRS E1!
To go further on ESRS in general, you can consult our article “ESRS: understanding European reporting criteria!”
1. What is the purpose of the ESRS E1?
The overall objective of this ESRS E1 standard is twofold:
- To be able to collect data with which we can measure the global impact of the company in question on climate change.
- That we understand, through extra-financial reporting, how the company intends to go about reducing its GHG emissions.
This standard aims to specify the information required in the extra-financial reporting of companies so that users can in particular understand:
→ How does the company contribute to climate change in terms of impacts (positive and negative, significant, real and potential)?
→ What are the measures taken by the company to reduce it and mitigate its impact on the business? In concrete terms, the company must explain how it intends to reduce its greenhouse gas emissions and how it intends to adapt.
→ What are the company's capacities to adapt its strategy and business model to align with a sustainable economy and contribute to limiting global warming to 1.5°C.
In concrete terms, to meet this ESRS E1, the companies concerned must provide comprehensive information on the impact of climate change on their activities and explain how they anticipate and adapt to global warming.
They must also explain their action plan to reach an objective in terms of greenhouse gas emissions compatible with a maximum + 1.5°C scenario provided for by the Paris Agreement.
In the text adopted by the European Commission on July 31, 2023, the ESRS E1 dedicated to the climate change includes 9 Disclosure Requirements.
Let's take stock of these famous Disclosure Requirements (DR)!
2. Information to be disclosed
2.1 What are Disclosure Requirements?
Like all ESRS, the one on climate change is based on information requirements, qualitative or quantitative. In other words, data to be collected in order to then analyze and potentially publish them. This is what the European Commission calls Disclosure Requirements (DR).
Disclosure Requirements therefore refer to the obligation incumbent on companies or various organizations to disclose certain specific information. Under the CSRD, this information to be disclosed is linked to important aspects of the company, such as its financial, social, environmental and governance performance.
By reporting on the various DR, beyond meeting legal obligations related to the CSRD, organizations contribute to strengthening trust and transparency in their operations, improving their reputation and demonstrating their responsibility towards social and environmental issues.
2.2 Reporting that is almost inevitable, unless there is proof that the company has no impact on the climate
For the majority of ESRS, it is the double materiality assessment that determines which ESRS criteria companies will have to apply. Depending on the result of the double materiality analysis, it estimates the criteria on which it is appropriate to apply, which leaves the company with great freedom.
This is not the case for the climate component (ESRS E1). For this criterion, the burden of proof is reversed. In concrete terms, this means that it is up to the company to prove that the subject does not concern it if it chooses not to report on this theme.
In practice, it will be very difficult, if not impossible, for companies not to report on the climate component since most, if not all, human activities lead to the emission of greenhouse gases.
3. Focus on the 9 Disclosure Requirements of ESRS E1
The ESRS E1, dedicated to the theme of climate change, includes 9 specific disclosure requirements (DR) that assess the commitment and impact of companies in the face of climate change.
Below is the detailed list of the 9 DRs of ESRS E1:
3.1 DR 1: Develop a transition plan for climate change mitigation
The aim of this reporting obligation is to ensure that the transition plan developed by the company, if the company has made one, is compatible with the objectives of the Paris Agreement on climate change. In other words, how the transition plan is compatible with a climate warming scenario limited to 1.5°C.
The goal is to understand the company's past, present, and future mitigation efforts in order to assess whether the transition plan is robust and whether the company is really going to decarbonize.
To demonstrate that it is implementing sufficient means to achieve its objectives, the company will have to publish a certain amount of information.
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Here are some of the main elements expected in this DR to explain the transition plan:
- A decarbonization trajectory
This is the central element of the transition plan: the decarbonization trajectory. What is the reference year and what is the target year for achieving the objectives? What are the objectives set? How to achieve them? Are they compatible with a 1.5°C scenario?
Here's an example of how a decarbonization trajectory could be presented:
- Publication of decarbonization levers
The company must publish the decarbonization levers and key actions it has already or will implement in order to achieve its objectives. This plan may include: the adoption of renewable energy sources, improving energy efficiency, reducing fuel consumption, etc. Some of these levers can be found in the example of the decarbonization trajectory above, with the expected reduction in greenhouse gas emissions for each of these levers. At Sami, for example, we have developed our Climate Plan, which you can draw inspiration from and which may give you ideas!
- Calculation and publication of "locked-in" or "blocked" emissions
These are emissions generated by the company's long-life assets and products over their entire lifespan. This may include, for example, the installation of an industrial gas or oil boiler for a factory. The emissions generated by the use of this installation must then be calculated over its entire lifespan. The calculation of these emissions is very important because it will make it possible to judge the consistency of the company's objectives, its decarbonization levers with the emissions locked in for many years or decades. This is also a central element for understanding the transition risks that will weigh on these greenhouse gas emissions. Companies will therefore have to explain in their reporting whether these locked-in emissions jeopardize the achievement of GHG emission reduction objectives and whether they entail transition risks.
- Financial resources allocated to the transition plan
The company must disclose the nature (financial expenditure, human resources, etc.) and the amounts of capital expenditures (CapEx) and operating expenses (OpEx) that are or will be allocated to the transition plan. It is also up to the company to explain how the transition plan is aligned with the overall financial planning of the company. You will find all the expected datapoints in this DR n°1 of the ESRS E1 (and all the other datapoints) in this document: Sami: CSRD - ESRS Data Points.
3.2 DR 2: Prove that policies relating to climate change mitigation and adaptation are put in place by the company
This section aims to present the policies that the company has or plans to implement regarding the mitigation and adaptation to climate change.
The goal is to understand to what extent the company has identified the risks and opportunities related to climate change and what it is doing to reduce or manage them.
Regarding the mitigation of climate change, this refers to policies to reduce greenhouse gas (GHG) emissions in particular.
For adaptation to climate change, the company must be able to prove that it is adopting concrete strategies to deal with rising sea levels, extreme weather events, droughts, or supply chain disruptions, depending on the risks identified in advance.
This brings us to an essential point of this new CSRD reporting. The company must identify and assess the risks and opportunities related to climate change.
3.3 DR 3: Publish actions and resources related to policies implemented in connection with climate change
The company must disclose the actions and resources it allocates or plans to allocate to implement the various policies mentioned in DR No. 2. This is the operational implementation of DR No. 2.
The objective is to ensure that the company is implementing the necessary actions and resources to achieve the objectives set in its policies.
By "actions," the text refers to the main decarbonization levers (those presented in the transition plan - DR No. 1) and key adaptation actions.
Here are some examples from our Climate Plan.
It is also necessary to disclose the resources that are mobilized, namely the amounts of CapEx (capital expenditures) and OpEx (operating expenses), to implement the actions.
3.4 DR 4: Objectives related to climate change mitigation and adaptation
The company publishes the objectives it has set for itself in terms of mitigation and adaptation to climate change.
It must present clear and measurable objectives for reducing greenhouse gas (GHG) emissions.
Three levels of objectives are provided for in this reporting obligation:
- general objectives relating to climate and energy
- objectives for reducing GHG emissions
- net zero or carbon neutrality objectives
If the company has set itself GHG emission reduction targets, the following details are expected:
- the emission reduction target must be expressed in absolute value and, if relevant, in intensity
- the target must cover Scope 1, 2 and 3 emissions
- the company must set a reference year and a target value at least for the year 2030. After 2030, target values are set every 5 years
- the reduction factor used to calculate the target based on emissions in the reference year must come from a model compatible with a temperature increase limited to 1.5°C. To calculate its target, the company must therefore use one of these two models:
- the One Earth Climate Model (OECM)
- the Science Based Targets initiative (SBTi): either by using the SDA (Sectoral Decarbonisation Approach) which provide sectoral decarbonization trajectories or by using the absolute contraction approach (Absolute Contraction Approach) if there is no sectoral trajectory for the sector to which the company belongs.
- the company must also publish the decarbonization levers that will enable it to achieve the set target.
The EFRAG proposes two ways of presenting this information, one with a decarbonization trajectory (the same as in the transition plan), the other in the form of a spreadsheet.
3.5 DR 5: Energy consumption and energy mix
The company must provide information on its energy consumption and energy mix.
The objective once again is to ensure that the company's energy policy is in line with its emission reduction objectives.
Three things to remember about DR No. 5:
- companies must disclose their total energy consumption, taking into account all energies within the scope of the reporting. Importantly, this total energy consumption must be broken down into three sources: fossil energy, renewable energy, and nuclear energy.
- for companies operating in sectors with a high climate impact (the sectors concerned are those with a NACE code from A to H and L), they must break down the fossil energy sources: coal, oil, natural gas, other fossil sources, and consumption of electricity, heat, steam, and cooling of fossil origin.
- for these same companies in sectors with a high climate impact, they must also publish energy intensity per net sales.
Once again, the EFRAG proposes a table to present this data:
For companies that are not part of sectors with a high climate impact, lines 1 to 5 are not relevant.
3.6 DR 6: Gross GHG emissions from scopes 1, 2, 3 and total GHGs
Obligation to calculate and publish greenhouse gas (GHG) emissions.
This includes direct emissions (Scope 1), indirect emissions related to energy (Scope 2), and indirect emissions related to the company's activities (Scope 3).
Here are the important points to remember to comply with DR No. 6 on emissions:
- GHG emissions must be calculated following the methodology of the GHG Protocol
- companies must disclose total GHG emissions and emissions for each scope
- the scope to be considered for calculating GHG emissions is obviously that of the scope including financially controlled entities (parent company and subsidiaries, for example). However, the scope is broader than that, since emissions from operationally controlled entities must also be included. Therefore, operational control is the key element of the scope to be considered.
- in Scope 1, the company must indicate the total emissions and the percentage of emissions from this scope subject to regulated quota exchange systems.
- in Scope 2, emissions must be published according to the location-based methodology and also the market-based methodology.
- in Scope 3, significant emissions must be detailed by categories (the categories of the GHG Protocol)
- emissions in intensity per revenue are also expected
- finally, the assumptions used for the calculation of emissions, particularly the emission factors, must also be published
Here is an example of a presentation proposed by the EFRAG for GHG emissions reporting:
3.7 DR 7: GHG removals and GHG mitigation projects financed through carbon credits
If the company deploys carbon capture and storage solutions or finances projects via carbon credits, then it must provide certain details concerning these solutions.
Several points to remember:
- the first is that the company must operate a distinction in its reporting between projects carried out within its own company and its value chain and those carried out outside its value chain
- for absorption and storage projects carried out within the company or its value chain, the following details are expected:
- the GHG emissions concerned
- the type of project: biogenic, land use change (reforestation, agroforestry, urban plantations, etc.), hybrid, technological (CO2 capture in the air, etc.)
- where appropriate, a brief explanation if the operation is a nature-based solution
- how the risk of non-performance is managed
Here is a proposed presentation for reporting these solutions:
- For emission reduction projects outside the value chain financed by carbon credits, the following details are expected:
- the share of reduction or elimination projects
- the share of projects for each quality standard
- the share of projects in the EU
- the share that can be qualified as adjustment under Article 6 of the Paris Agreement
And a visual proposed to report these operations:
3.8 DR 8: Internal carbon pricing
The company indicates whether it applies internal carbon pricing systems, and, if so, how they support its decision-making and incentivize the implementation of climate-related policies and objectives.
In the case of an internal carbon price, the following information is expected:
- the type of internal carbon pricing chosen by the company: shadow price applied for investment decisions, internal carbon tax, etc.
- the scope of the system in question (entities, geographic area, etc.)
- the carbon price applied as well as the methodology and choices made to arrive at this price
- the approximate volume of GHG emissions covered by this pricing for scopes 1 and 2, and when possible, for scope 3
And here is the presentation format proposed by the EFRAG:
3.9 DR 9: Anticipated financial effects of physical and transition risks and potential climate-related opportunities
The company must disclose the anticipated financial effects related to significant physical and transition risks and communicate on its ability to seize significant climate-related opportunities.
To do this, it must associate its financial reporting with the main physical and transition risks to which it is exposed.
First of all, it should be noted that there is no common and established methodology for calculating these financial effects today. However, here is an assessment process taken up by the Accounting Standards Authority to make an estimate of these effects:
As there is no common methodology and companies do not have feedback on this data, the publication of financial effects may be omitted by companies in the first year of their reporting, and they may comply by publishing only qualitative (and not quantitative) information for the first three years of reporting.
For each DR, data points are to be collected. For the ESRS E1 Climate Change, there are a total of 220. It can be narrative, semi-narrative, monetary data, percentages, etc... You will find all these data points in this table.
4. ESRS E1 reporting schedule
4.1 Planned relief and gradual implementation of reporting
For some DR, the delegated act provides for greater flexibility in the deadlines for implementing reporting:
- DR 6 of ESRS E1 (the obligation for companies to calculate and disclose their GHG emissions scope 1, 2, 3)
Companies with less than 750 employees can do the first year of their extra-financial reporting omit all data on scope 3 emissions and total greenhouse gas emissions.
- DR 9 of ESRS E1 (the obligation for companies to disclose anticipated financial effects)
For the first year of reporting, companies may omit all information relating to the anticipated financial effects for environmental themes. In the first 3 years, they can only report on qualitative information by omitting quantitative information if it is not possible to collect it.
-> Example of qualitative information: explain how these climate risks have (or could reasonably be likely to have) a significant influence on the financial situation of the organization, its financial results and its future prospects.
-> Example of quantitative information: communicate on monetary amounts and the percentage of assets exposed to significant physical risk in the short, medium and long term, before adopting measures to adapt to climate change.
4.2 How to best anticipate reporting on the ESRS E1?
Companies can already anticipate and prepare for CSRD by carrying out several actions.
- Realize the carbon footprint of your company. This will make it possible to collect the information necessary for DR 6 requiring the disclosure of its GHG emissions.
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- Implement a strategy to reduce greenhouse gas emissions and adapt to climate change within your company. This decarbonization objective can be achieved through the dedicated support of a specialized consultant.
- Collect the information necessary to carry out the reporting. This requires involving stakeholders to collect qualitative but also quantitative data and information.
ESRS E1 covers the “Climate Change” theme, but there are 11 other ESRS that cover other topics: pollution, biodiversity etc. Faced with these dense and numerous standards, compliance is a real challenge for companies that will have to adapt and anticipate as much as possible!
You can find valuable information about CSRD in these other contents:
- Everything about the CSRD: extra-financial reporting obligations
- Double materiality assessment: the basis of the CSRD
- ESRS standards: understanding everything about the new European reporting criteria
- The 25 questions that all businesses ask themselves about CSRD
- The ESRS checklist
- The table of expected data points for each ESRS
- First version of the ESRS adapted to European SMEs not affected by the CSRD, EFRAG, November 2023
- Implementation guidance for materiality assessment, EFRAG, November 2023
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