From the Trenches
CSRD Hub Newsletter # 10
November 2024
 

​Understanding E1

 

While E1 is technically subject to double materiality, companies who deem climate change to not be material are required to provide a detailed explanation and include a forward-looking analysis of the conditions that could lead the undertaking to conclude that climate change is material in the future (see ESRS 2 IRO-2).​

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Our Perspective:

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Most (if not all) companies will report on E1. We’ll keep an eye out for any who deem climate change not to be material, however, since we’re genuinely curious to understand the reasoning.

Just a heads up: The standard includes nearly 190 “shall” datapoints and 60+ mandatory application requirements, along with references to transition planning, other EU regulations, and the EU Taxonomy. Familiarizing oneself with all elements first will be helpful. 

The good news is, most companies will not be starting from scratch, as there is a good deal of overlap with existing standards and protocols. This includes TCFD and IFRS S2 for risks and opportunities, and some overlap with GRI on the impact side, at least for specific metrics. The GHG Protocol also plays a prominent (and required) role in calculating emissions.

We’ve provided a number of resources below to help identify interoperability opportunities.

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First things first: What is included under “climate change?”

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Within ESRS climate change includes three broad subtopics: climate mitigation, climate adaptation, and energy. These include:

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• Climate Mitigation: Climate mitigation efforts focus on reducing greenhouse gas (GHG) emissions, for example, in alignment with the Paris Agreement. Examples include transition plans and initiatives aimed at achieving net-zero targets by reducing emissions throughout the entire value chain, for example, from upstream suppliers to downstream use of products. Mitigation activities often address transition risks, such as regulatory changes and shifts in market demand toward low-carbon solutions.

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• Climate Adaptation: Adaptation measures involve adjustments to business operations and infrastructure to enhance resilience against the impacts of climate change. These efforts often target physical risks, such as extreme weather events, which can disrupt business continuity. Examples include upgrading or safeguarding facilities, like office buildings, data centers, and other critical assets, against climate-induced damages. By focusing on adaptation, companies can protect their physical infrastructure across both direct operations and value chain activities, reducing vulnerability to climate-related disruptions.

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• Energy: Energy production and consumption form a critical component of climate change strategy, with a strong emphasis on shifting toward renewable sources. Organizations are required to disclose their energy mix, including electricity, natural gas, and renewable energy sources like solar power. This focus on energy includes assessing both renewable and non-renewable sources to better understand the carbon footprint associated with energy consumption. 

 

And remember, as with all matters under ESRS, we are looking not only at the impacts of the company’s activities and relationships on climate change but also the risks and opportunities associated with these impacts or dependencies related to climate change on the business. 

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What is required?

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Many items that have been matters of debate within climate disclosure – from reporting on Scope 3 to transition plans – have largely been settled under E1. A few critical objectives and implications include

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• Transition plans. A core objective under E1 includes transparency around mitigation efforts in Line with 1.5°C Pathway as well as adaptation strategy to align to a lower carbon economy. This includes transparency around transition plans, which companies will need to disclose if they are material. If a company does not yet have a transition plan, it is required to disclose that this is the case, and when they plan to adopt one. 

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• Scopes 1, 2, and 3. Required disclosures include all relevant scopes, including Scope 3. In addition, the GHG Protocol is largely required as the basis for calculation. Note that the Application Requirements specify a mandatory reporting format for this information.

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• Use of internal carbon pricing. While TCFD references reporting on the use of carbon pricing, ESRS E1 requires detailed reporting on the role that internal carbon prices play in the company’s transition plan and in meeting targets.

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• Transition and physical risks: Companies are required to report on actions that prevent, mitigate, or remediate climate-related impacts and to address emerging risks and opportunities. This involves a detailed breakdown of material risks, both physical and transition risks. The Application Requirements outline a detailed list of risks that companies should consider.

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• Financial implications: Organizations are required to disclose the financial effects of climate change across short-, medium-, and long-term horizons. This should include scenario analysis to highlight potential financial impacts.

 

Companies tackling the topic

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Norsk Hydro

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Norsk Hydro has a well-structured sustainability statement with its annual report that includes a detailed section on E1 (beginning on page 74). The links to broader financial accounting are clear, and they have also done a nice job of detailing policies, actions, and targets via a clear structure that is repeated across all sections.

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Metsa Group

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Metsa has one of the best structured, easiest-to-understand sustainability statements among early adopting companies. The climate change section, beginning on 38, includes clear sections breaking down E1-specific IROs, with individual sections on policies, actions, metrics and targets. In addition, Metsa provides an extensive narrative on where in the value chain climate change IROs arise and how they are managed.

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Lenzing

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Lenzing’s annual report is a great example of an early adopter that is bridging ESRS along with other standards, including GRI. Each chapter, including climate change (beginning on page 73) includes a similar structure with a clear overview of what makes the topic material, policies, actions, metrics and targets, along with other targeted disclosures.

This is a great report to consult if you are looking for inspiration for how chapters could be structured that address all required disclosures while maintaining navigability.

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More resources

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How can companies get started

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As noted above, the E1 standard includes nearly 190 required datapoints and dozens of mandatory application requirements. Most companies are not starting from scratch, and can draw on a number of resources to understand overlap with other standards:

Impacts and transition planning

• GRI - ESRS (covers all topics)

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• Transition Plan Taskforce - ESRS (climate transition plans under E1)

Climate-related financial risks and opportunities

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• TCFD - ESRS

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• IFRS Sustainability - ESRS (Focus is S2 climate change standard)

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• CDP - ESRS (2024 under review, 2023 mapping here)

 

GHG calculations

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• GHG Protocol interoperability (includes ESRS and other regulatory standards)

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Looking for more resources and support?

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Learn more with Smart CSRD

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Check out our climate school and learning opportunities

 

Double Materiality Assessment Tool

 

Since the launch nearly 6 months ago, several selected large end users and consulting companies have subscribed to our Double Materiality Tool. The tool is now open for all consulting companies, so contact us to schedule your demo.

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