Carbon Accounting

A summary: Corporate Sustainability Reporting Directive (CSRD) and European Sustainability Reporting Standards (ESRS)

August 7, 2023
10 minutes

The Corporate Sustainability Reporting Directive (CSRD) is EU legislation that mandates certain companies located in the European Union (EU) to comply with and report on the European Sustainability Reporting Standards (ESRS), provided that they meet the requirements. Companies that meet the definition of ‘large undertakings’ (i.e. PIEs, 500+ employees, net turnover €40+ million or balance sheet €20+ million) under the scope of CSRD will be required to report in accordance with ESRSs for financial years beginning on or after 1 January 2024, with other large companies to follow for subsequent periods commencing on or after 1 January 2025.

‍ESRS is a set of standards prepared by the European Financial Reporting Advisory Group (EFRAG) that companies can follow to demonstrate their commitment to environmental and social responsibility. These standards cover a wide range of issues, including climate change, human rights, labour practices, and product safety. The objective of the standard is to provide a standardised framework for companies to analyse and report on their performance across a range of ESG related topics deemed relevant to them. After organisations have an understanding of their baseline performance across these key areas the standard provides guidance on the disclosure of goals and targets as well as progress towards these are reported over time.

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The Update:

As at July 31 2023, the EU Commission has adopted ESRS standards for use by all companies subject to the CSRD. You can find the ESRS within Annex 1 here, Annex 2 contains a list of acronyms and glossary of terms, which may also be of use to refer to.

The EU Commission has emphasised the importance of aligning the ESRS with global standards like the International Financial Reporting Standards (IFRS) sustainability disclosure standards and the Global Reporting Initiative (GRI). This is supported with International Sustainability Standards Board (ISSB)’s press release that confirmed that there is a high degree of alignment between its climate disclosures and the ESRS climate disclosures.

The EU Commission, EFRAG, and ISSB are developing interoperability guidance material that will help organisations navigate between the standards and understand the difference in disclosures required by the two sets of standards. This will be discussed during the EFRAG SRB public board session on 23 August 2023 (You can sign up here to watch live or receive the recording).

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Who does it apply to:

The CSRD applies to large public-interest entities in the EU, including those from outside the EU that have listed securities on an EU regulated market. This includes listed companies, banks, and insurance companies with more than 250 employees and annual revenues of over €20 million. The scope of large companies will expand progressively over the following years, ultimately also capturing non-EU parent companies with substantial activity and a presence in the EU.

Companies that meet the definition of ‘large undertakings’ under the scope of CSRD will be required to report in accordance with ESRSs for financial years beginning on or after 1 January 2024, with other large companies to follow for subsequent periods commencing on or after 1 January 2025.

The two tables below summaries who and when they are expected to report:

Table 1: Reporting entity descriptions captured under CSRD
Table 2: First time application timeline under CSRD, as per Article 5 of the Delegated Act

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What are the sections relevant to carbon accounting:

The ESRS comprises of 12 standards, containing 2 general (ESRS 1 & 2), 5 environmental (ESRS E1–E5), 4 social (ESRS S1–S4) and 1 governance (ESRS G1) topics.

Under ESRS E1-6, companies are required to disclose their Scope 1, 2, and 3 emissions, total GHG emissions, as well as emission intensities. The standards place the onus on companies to determine the extent to which specific Scope 3 categories are relevant to their GHG Inventory, and provide justification for any exclusions. Similarly organisations are required to report emissions intensity in terms of net turn over, but other intensity metrics may also be relevant depending on the company’s industry or operations.

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What are the disclosure requirements outside of carbon accounting that sumday advisors may be able to support:

The ESRS describes disclosure requirements to report alongside their GHG emissions. A few examples to note are:

  • ESRS E1, like TCFD, requires companies to disclose their governance, strategy, and risk management related to climate impacts, risks, and opportunities. This disclosure is built upon carbon accounting as its foundation.
  • Under ESRS E1-1, undertakings shall disclose its transition plan for climate change mitigation to enable an understanding of the undertaking’s strategy and plans around business model to transition to a sustainable economy. The TCFD 2021 guidance, pg 45, suggests disclosing the current GHG emissions performance, financial impacts, planned changes to businesses and strategy etc as some key information to disclose. Sumday can support the disclosure of GHG emissions as well as associated metrics allowing organisations and their advisors to compile a GHG inventory inline with the standards.
  • ESRS 1 - General requirements, subsection 7.2 suggests to describe and explain sources of estimation and outcome uncertainties. The TCFD 2021 guidance, pg15, suggests organisations should consider disclosing their methodologies and assumptions used, such as GHG emission factors, scope, and boundaries, for example. Sumday reporting outputs provide transparency around emissions source and calculation methods which can then inform further disclosures as part of climate reporting.

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In addition to this information, companies are also required to report on GHG emissions reduction targets, the use of carbon offsets, and the methodologies used to calculate emissions. Companies must also report on their energy consumption, including the proportion of renewable energy used.

On page 70 of the ‘near final’ ESRS E1, it’s indicated there may be interactions across other ESRSs such as:

  • ESRS S1 Own workforce, ESRS 2 Workers in the value chain, ESRS S3 Affected communities and ESRS S4 Consumers and users → for it’s impacts on people that may arise from the transition to a climate-neutral economy are covered.
  • ESRS E3 Water and marine resources and ESRS E4 Biodiversity and ecosystems. → for physical climate risks that may arise from water and ocean-related hazards, and biodiversity loss and ecosystem degradation caused by climate change.

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Key takeaways for sumday advisors:

Sumday can assist advisors in preparing for CSRD through our learning courses and software which enables granular carbon accounting and reporting. Our courses are designed to provide advisors with the technical knowledge necessary to report on Scope 1, 2, and 3 GHG emissions which will be a crucial component in complying with requirements under ESRS E1. Sumday  is designed to facilitate carbon accounting in line with the GHG Protocol. It also provides users with the necessary guidance to report on their climate impact and to transparently disclose estimates used as part of the GHG inventory, as well as the associated uncertainty.

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Getting ready - what’s next:

You may consider supporting clients to get ready by:

  • Reading through this guidance and the relevant sections
  • Proposing a baseline emissions assessment to comply with emission reporting requirements
  • Identifying the source of data that would enable the client to assess risks across other categories covered by the standards
  • Making a plan to gather data that does not exist in anticipation of reporting requirements
  • Creating a target timeline for data collection, revisions, assessment and reporting from now until mandatory disclosures are forecast to impact your client (2025).

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Disclosure examples:

No reports currently exist as the standards have yet to be finalised. The ESRS is built upon existing voluntary frameworks such as the GRI and TCFD, these can serve as references to draw upon.

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  • Example disclosures for describing transition plans:
  • Company details: Nestle, EU, (Consumer market/ FBG)
  • Source: TCFD 2021 guidance, pg45

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