ESRS E1 – Climate Change
The ESRS E1 standard is one of five environment-specific standards of the European Sustainability Reporting Standards. These were developed by EFRAG (European Financial Reporting Advisory Group) and are to be applied in accordance with the CSRD (Corporate Sustainability Reporting Directive). This article is based on the delegated regulation of the ESRS which was published in the Official Journal of the EU on 22nd December 2023. Here you can find a general overview of the ESRS standards.
The ESRS E1 standard defines the disclosures a company has to make regarding its impact on climate change. This includes positive as well as negative and actual as well as potential impacts. Furthermore, the company must outline its past, present and future efforts to mitigate climate change in accordance with the Paris Agreement (or an updated international agreement on climate change) and to limit global warming to 1.5°C. The company should indicate what strategies it has planned to adapt its business models to the transition to a sustainable economy and how this will contribute to limiting global warming to 1.5°C. The risks and opportunities arising from the company’s impact and dependence on climate change should also be mentioned, as well as the financial effects on the company. Legal requirements from the EU that are taken into account in this standard are for instance the Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy Regulation.
Interactions with other ESRS
Reporting requirements for pollution (ESRS E2 ) address air emissions which are related to climate change. These include ozone-depleting substances (ODS), nitrogen oxides (NOX) and sulphur oxides (SOX).
The Standards S1 (Own workforce), S2 (Workforce in the value chain), S3 (Affected communities) and S4 (Consumers and end-users) address the impacts that the transition to a carbon-neutral economy may have on humans.
Standard E1 should be read in conjunction with ESRS 1 General Requirements and ESRS 2 General Disclosures.
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Disclosure Requirements according to ESRS E1
Standard E1 includes nine environmental disclosure requirements (E1-1 to E1-9) and three requirements from ESRS 2 (GOV-3, SBM-3, and IRO-1). These are listed in the following table to give an overview and are briefly described in the following subsections.
| 1 | Disclosure Requirement ESRS 2 GOV-3 | Integration of sustainability-related performance in incentive schemes |
| 2 | Disclosure Requirement E1-1 | Transition plan for climate change mitigation |
| 3 | Disclosure Requirement related to ESRS 2 SBM-3 | Material impacts, risks and opportunities and their interaction with strategy and business model(s) |
| 4 | Disclosure Requirement ESRS 2- IRO-1 | Description of the processes to identify and assess material climate-related impacts, risks and opportunities |
| 5 | Disclosure Requirement E1-2 | Policies related to climate change mitigation and adaptation |
| 6 | Disclosure Requirement E1-3 | Actions and resources in relation to climate change policies |
| 7 | Disclosure Requirement E1-4 | Targets related to climate change mitigation and adaptation |
| 8 | Disclosure Requirement E1-5 | Energy consumption and mix |
| 9 | Disclosure Requirement E1-6 | Gross Scopes 1, 2, 3 and Total GHG emissions |
| 10 | Disclosure Requirement E1-7 | GHG removals and GHG mitigation projects financed through carbon credits |
| 11 | Disclosure Requirement E1-8 | Internal carbon pricing |
| 12 | Disclosure Requirement E1-9 | Anticipated financial effects from material physical and transition risks and potential climate-related opportunities |
Ad 1) Integration of sustainability-related performance in incentive schemes
Under the requirement ESRS 2 GOV-3, the undertaking shall disclose whether the performance of the members of the administrative, management and supervisory bodies has been evaluated against the GHG emission reduction targets that need to be reported under E1-4.
Ad 2) Transition plan for climate change mitigation
The company must report on its transition plan to mitigate climate change in accordance with this disclosure requirement. This must include a description of the efforts the company has already made and what it plans to do in the future. It must also report on progress in this regard. If the company does not have a transition plan, it must explain whether and when it will prepare one.
Ad 3) Material impacts, risks and opportunities and their interaction with strategy and business model(s)
It has to be reported how resilient the undertaking’s strategy and business model(s) are with respect to climate change. The framework and method of the resilience analysis should be documented, as well the scenario analysis as described in the disclosure requirement ESRS 2 IRO-1 listed below. In addition, the results of both analyses must be disclosed.
Ad 4) Description of the processes to identify and assess material climate-related impacts, risks and opportunities
Documentation on the process for identifying and assessing significant climate-related impacts, risks and opportunities must include the following:
- Description of climate change impacts (esp. GHG emissions of the company),
- Identification and assessment of climate-related physical risks throughout the value chain.
- Climate-related risks and opportunities in the transition process.
For all 3 aspects, it must be explained to what extent climate-related scenario analyses were used.
Ad 5) Policies related to climate change mitigation and adaptation
According to this disclosure requirement, the reporting company must disclose the strategies for dealing with its significant impacts, risks and opportunities in connection with climate change mitigation and adaptation. This should include the company’s policies on climate change mitigation, adaptation, energy efficiency, use of renewable energy and other areas.
Ad 6) Actions and resources in relation to climate change policies
The company shall disclose its action plans to mitigate and adapt to climate change and the resources allocated to their implementation. This is intended to provide an understanding of the key actions the entity has taken or plans to take to achieve climate policy goals and objectives. The description of measures and resources must comply with the requirements set out in ESRS 2 MDR-A (Actions and resources in relation to material sustainability matters). This must include a description of what the savings are and will be in terms of GHG emissions. In addition, the significant amounts of money in CapEx and OpEx required to implement the measures must be related to various metrics, including the KPIs of the Taxonomy Regulation.
Ad 7) Targets related to climate change mitigation and adaptation
According to this disclosure requirement, the company must report its targets regarding climate change mitigation and adaptation. In doing so, the main climate-related impacts, risks and opportunities must be addressed. For the documentation according to E1-4, the requirements from ESRS 2 MDR-T (Tracking effectiveness of policies and actions through targets) must be applied. In addition, it must be documented in which units and in which Scope (1, 2, 3) the targets are to be measured. Precise information must be provided on the greenhouse gas emission reduction targets (baseline and comparative values over the years, scientific basis, etc.).
Ad 8) Energy consumption and mix
According to E1-5, the company must provide information regarding its energy consumption and energy mix. The total energy consumption of the undertaking shall be broken down into non-renewable sources and renewable sources (e.g. fuel consumption from coal and coal products or consumption of purchased or acquired electricity, heating, steam and cooling from renewable sources). If the company produces energy, this production of energy must also be listed separately as renewable and non-renewable.
Ad 9) Gross Scopes 1, 2, 3 and Total GHG emissions
According to E1-6, the undertaking must document its total gross greenhouse gas emissions broken down into Scope 1, 2 and 3. Emissions from both the company’s own operations and the value chain must be taken into account. Scope 1 emissions are defined by the fact that they are released from sources owned or controlled by the undertaking. Scope 2 includes indirect emissions from purchased energy. Electricity for example is consumed within the company, but the emissions occur outside the company where the electricity was generated. Scope 3 emissions usually account for the largest share of emissions and arise in the company’s upstream and downstream value chain. For example, they come from production and processing of upstream fuels. They are not owned or controlled by the company.
Ad 10) GHG removals and GHG mitigation projects financed through carbon credits
It must be disclosed how GHGs are removed and stored from the company’s activities and the upstream and downstream value chain. If carbon credits have been purchased, the extent of GHG emission reductions or removals from climate change mitigation projects outside the company’s value chain financed by these credits must be disclosed. In addition, a statement must be made regarding the credibility and integrity of the carbon credits. Should a net zero strategy be published, the framework and methodologies must be reported, as well as how GHG emissions that cannot be reduced within the company’s own operations and value chain will be dealt with.
Ad 11) Internal carbon pricing
The reporting company shall declare whether it applies internal carbon pricing schemes. If this is the case, it must describe how these support its decision-making and create incentives for the implementation of climate-related strategies and targets. The type of internal carbon pricing scheme and its specific scope (activities, geographic areas, companies, etc.) must be disclosed. The information must also be provided on why the chosen system was deemed relevant and the extent to which scientific methodologies were used to calculate carbon prices. The company must also disclose the approximate GHG emission volumes under Scope 1, 2 and 3 covered by these schemes as well as the total GHG emissions.
Ad 12) Anticipated financial effects from material physical and transition risks and potential climate-related opportunities
The E1-9 disclosure requirement asks entities to report potential financial impacts from material transition risks and physical risks, as well as the potential to pursue material climate-related opportunities. This is intended to help ensure that there is an understanding of how the company can benefit financially from climate-related opportunities.
