Guidelines for the ESRS E1 Climate change standard

9 minutes12/1/2023

The European Parliament voted to reject a resolution to limit the European Sustainability Reporting Standards (ESRS) on October 18, 2023. This resolution followed the European Commission's publication of its delegated act for ESRS on July 31, 2023. Europe is set to implement its Corporate Sustainability Reporting Directive (CSRD) for roughly 50,000 companies to prepare annual reports based on the ESRS for their activities in 2024. These companies not only include those headquartered in Europe but also the Europe-based subsidiaries of international companies that pass a certain size.

The ESRS E1 standard for climate change, one of the five ESRS environmental standards, could have a global impact as well. Its requirement of Scope 3 greenhouse gas (GHG) emissions reporting 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.   

Delve into the specifics of what ESRS E1 requirements entail, learn how to comply with relevant requests from ESRS E1-1 to ESRS E1-9, understand what general disclosures are linked to ESRS E1, and explore how this standard set relates to well-known voluntary reporting standards such as TCFD, GRI, or ISO 50001. Click through the directory to access the different areas:

ESRS E1 requirements overview

ESRS E1 disclosures in detail

General disclosures linked to ESRS E1

How ESRS E1 compares to voluntary climate reporting

Outlook: Turning a challenge into opportunity

ESRS E1 requirements overview

Of the 12 standards ESRS contains, companies are only required to report on the standards that are material to their operations. However, nearly every product or service is associated with GHG emissions, making the E1 climate change standard material to the majority of businesses.

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.

All 12 of the standards ESRS contains require disclosures on four main topics: general information, the management of impacts, risks and opportunities, and metrics and targets. In nine disclosures, ESRS E1 touches on each of these topics. Some of its unique requirements include reporting on:

1. Climate transition plan
2. Activities undertaken for climate mitigation and adaptation
3. Absolute Scope 1, 2 and 3 emissions reporting
4. Carbon removal activities and carbon pricing, if applicable
5. Climate-related financial risks and opportunities with a forward-looking strategic analysis 

ESRS E1 disclosures in detail

E1-1 - Climate transition plan

Companies must present a plan to adapt their 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

Companies should disclose their policies for climate change mitigation and adaptation. This includes the roles of administrators, management and governance bodies in pursuing their climate change targets.

E1-3 - Measurement methodologies

Companies are required to provide a detailed description of the methodologies they use to measure their greenhouse gas emissions.

E1-4 - Action plans and resources for climate change mitigation and adaptation.

Companies should present their 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 their energy consumption and energy mix, companies should disclose their 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 and total

Companies should report their 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, companies should also report their total emissions, a requirement 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, companies should apply the operational control criteria basis from the GHG Protocol.  

E1-7 -  CO2 reduction projects (if applicable)

Companies should report their 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 their 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 a company’s total emissions. These companies should declare their approach to this guideline, i.e.; "Avoid-Reduce-Compensate.”

E1-8 - Internal CO2 pricing (if applicable)

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

Companies should prepare physical and transition risk assessments for both their financial statements and those that extend beyond the scope of their financial statements. These assessments should follow TCFD recommendations for comparing at least two contrasting warming scenarios in the short-, medium- and long-term.

The 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, several of the general disclosures also 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 ESRS E1 compares 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.

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.

ESRS E1 was designed for strong "interoperability" with the most widely adopted voluntary reporting standards and frameworks. This means the reported information can be easily analyzed and used by parties interested in either approach.

ESRS E1 achieves interoperability thanks in part to its "double materiality" approach, which emphasizes both impact and financial effects. This helps it align with both the Global Reporting Initiative, which emphasizes an organization's outward impact on society, and the International Financial Reporting Standards, which emphasize 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 an 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.

Outlook: Turning a challenge into opportunity

While ESRS E1 presents a significant challenge to many organizations, it also presents significant opportunities. Transparent climate change reporting can help organizations align with global commitments that require deep emissions cuts over the next few years.

Apart from the obvious societal benefits this brings, early movers demonstrating strong performance against their climate change targets will likely benefit from greater investment opportunities and long-term business viability throughout the climate transition.