The first topical standard of the European Sustainability Reporting Standards (ESRS) is Climate Change. It is expected that most, if not all reporting companies will disclose information related to Climate Change based on this standard. According to Chapter 3.2 of ESRS 1 on Material matters and materiality of information, if a reporting company decides that climate change is not material and therefore do not disclose information required under the Climate Change topical standard, the company must provide a detailed explanation of the conclusions of its materiality assessment regarding climate change. Thus, most companies are expected to find Climate Change as a material topic in their assessment.
ESRS E1 Climate Change is composed of nine disclosure requirements, grouped into Governance, Strategy, Impacts risks and opportunities, and Metrics and targets. It aligns with and takes into account other regulatory requirements of various related EU regulations (e.g., EU Climate Law, Sustainable Finance Disclosure Regulation (SFDR), EU Taxonomy, etc.).
E1 Climate change - Governance
Specific to Climate Change, the reporting company is required to disclose whether and how climate-related considerations are factored into the remuneration of the supervisory bodies, particularly assessed against the GHG emissions reduction targets and other climate considerations (including what these other climate considerations entails).
E1 Climate change - Strategy
The strategy disclosure regarding climate change resides primarily in the reporting of the transition plan for climate change mitigation (disclosure requirement E1-1). This transition plan should enable the users of sustainability statements to understand the reporting company’s past, present and future activities to ensure its strategy and business model aligns with the transition to a sustainable economy. The goals are to limit global warming to 1.5 degrees C in line with the Paris agreement, to achieve climate neutrality by 2050, and where applicable, how it will adjust its exposure to coal, oil and gas-related activities.
This transition plan should include:
- GHG emissions reduction target and how it aligns with the Paris agreement benchmarked in relation to a pathway to 1.5 degrees C based on either a sectoral decarbonisation pathway (if it is available) or an economy-wide scenario (keeping in mind its non-specific limitations),
- Decarbonisation levers compatible with achieving the GHG emissions reduction target and in accordance with climate change mitigation actions,
- Investment and funding supporting the transition plan and the climate change mitigation actions, including performance indicators of taxonomy-aligned CapEx plans,
- A qualitative assessment of the potential locked-in GHG emissions, which are estimates of future GHG emissions that are likely to be caused by key assets or products sold within their operating lifetime. Emissions from key assets are assessed as the sum of the estimated Scope 1 and 2 GHG emissions over the operating lifetime of the active and firmly planned key assets. This assessment should include how they may jeopardise the path to reach the GHG emissions reduction targets and drive transition risk,
- An explanation of CapEx or OpEx planned for aligning economic activities with the EU Taxonomy delegated regulations. If relevant, a disclosure of significant investments related to oil, coal and gas should be disclosed, and
- Other aspects such as the how the transition plan is embedded in and aligned with the reporting company’s overall business strategy and financial planning, whether the transition plan has been approved by the supervisory bodies, and the progress in implementing the transition plan.
In addition to the transition plan, disclosure requirement SBM-3 of E1 Climate change requires reporting companies to disclose the scope, methods and outcome of a resilience analysis, which describes the resilience of the reporting company’s strategy and business model to climate change risks, in relation to material physical and transition risks related to climate change. These material physical and transition risks should be outlines as required in IRO-1 (next section).
E1 Climate change - Impacts, risks and opportunities
The process to identify and assess climate change-related impacts, risks and opportunities should include the GHG emissions impact, climate-related physical risks in own operations and along the upstream and downstream value chain, and climate-related transition risks and opportunities in own operations and long the upstream and downstream value chain. Transition risks and opportunities may cover policy and legal risks, technology risks, market risks, and reputation risks, may extend to more than 10 years, and may be aligned with climate-related public policy goals. In assessing physical and transition risks, the methods and outcomes of scenario analysis using a range of climate scenarios should be disclosed. The following guidance documents may be considered while conducting scenario analysis.
In disclosure requirements E1-2 and E1-3, policies, actions and resources allocated to climate change mitigation and adaptation are disclosed. The policies should include those to address the identification, assessment, management and/or remediation of its material impacts, risks and opportunities, and should include climate change mitigation and adaptation, energy efficiency, renewable energy deployment, and other areas that may be relevant to a reporting company’s business in relation to climate change.
The reporting of actions and resources should be guided by the decarbonisation levers, including nature-based solutions. When reporting CapEx or OpEx related to climate change actions, such amounts must reconcile with the relevant line items or notes in the financial statements, and include the performance indicators and CapEx plans required as part of the EU Taxonomy regulations.
E1 Climate change - Metrics and targets
The metrics and targets required under this topical standards include:
- E1-4 Climate change mitigation and adaptation targets. These targets include GHG emissions target (Scope 1, 2, 3 or total) and/or any other targets to manage climate related risks or opportunities, such as renewable energy deployment, energy efficiency, or physical/transition risk mitigation. The GHG emissions target should be in absolute values (i.e., tonnes of CO2e or percentage of a base year), and where relevant in intensity value (e.g., tonnes of CO2e per production unit). The frameworks and method used to arrive at the climate change targets (e.g., whether they follow a science-based method) should be disclosed along with the underlying climate and policy scenarios and whether the targets are externally assured. Decarbonisation levers and their contribution to achieving the GHG emissions emissions reduction targets should be described.
- E1-5 Energy consumption and mix which provides an understanding of the reporting company’s total energy consumption, improvements in energy efficiency, exposure to coal, oil and gas-related activities, and the share of renewable energy in its overall energy mix. The reporting company should disclose total energy intensity based on net revenue for high climate impact sectors.
- E1-6 Gross Scope 1, 2, 3 and total emissions including GHG intensity based on net revenue. This previous article reviews the interoperability in GHG emissions reporting requirements between GRI, ISSB and ESRS E1-6.
- E1-7 GHG removals and mitigation projects financed through carbon credits. The reporting companies are required to disclose GHG removals and storage that results from projects it may have developed or contributed to in its own operations or its upstream and downstream value chain, and the amount of GHG emission reductions or removals it has financed or intends to finance through carbon credits from projects outside its value chain.
- E1-8 Internal carbon pricing scheme and how this internal carbon pricing supports decision making and incentivises the implementation of climate-related policies and targets. This information includes the disclosure of the type of carbon pricing scheme (e.g., as shadow prices for CapEx or R&D resource allocation decision making, internal carbon fees, or internal carbon funds), the scope of application of the internal carbon price and how the price is determined.
- E1-9 Anticipated financial effects from climate change physical and transition risks and potential opportunities. The anticipated financial effects are separate and additive to the current financial effects reported under ESRS 2 SBM-3. This disclosure is subject to the phase-in allowances for the first year of reporting, and qualitative disclosure is allowed for the first three years of reporting. The disclosure of effects from physical risks is related to climate change adaptation actions and includes the monetary amount and proportion of assets at risk over the short, medium and long-term before considering adaptation actions, the proportion of assets address by such actions, the net revenue at risk over short, medium, and long-term, and the locations of the assets under physical risks. The disclosure of effects from transition risks is related to climate change mitigation actions and it requires the monetary amount of assets at risk before and after mitigation actions, a breakdown of the carrying value of the real-estate assets by energy efficiency classes, and liabilities that may have to be recognised in financial statements. Any monetary amounts should be reconciled to the relevant line items or notes in the financial statement.
Other articles in this series
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