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ESRS E1: Navigating Sustainability Reporting in the European Union

Emma Valli

Marketing Coordinator

Environmental Sustainability reporting

Introduction to European Sustainability Reporting Standard, ESRS E1 that focuses on climate change.

European Union has increased mandatory sustainability reporting to make sure companies in EU are operating in an ethical and ecological manner. One of the most prominent standards in this realm is ESRS E1, which focuses on climate-related risks. So, what exactly is it, and why is it crucial for companies operating within the EU?

The Role of ESRS in the European Union

The European Sustainability Reporting Standards (ESRS) are a set of standards developed by the European Financial Reporting Advisory Group (EFRAG) to ensure that businesses are transparent about their environmental, social, and governance (ESG) performance. ESRS E1, specifically, centers on environmental metrics, particularly those concerning climate change and its risks. Its goal is to create a uniform reporting structure that enables comparability and transparency across sectors and borders.

ESRS standards

ESRS E1 and Climate Change Reporting

Climate change is one of the most significant risks to businesses globally. ESRS E1 requires companies to disclose how climate risks affect their operations, finances, and overall business models. By focusing on climate change, ESRS E1 emphasises the urgency of reducing carbon emissions and managing climate-related risks in financial decision-making.

Key Principles

At its core, ESRS E1 is built around three key principles that aim to make sustainability reporting clear, actionable, and trustworthy:

  • Transparency: Organizations must provide a transparent view of their environmental impacts.
  • Comparability: The data shared under ESRS E1 should be comparable across industries and countries.
  • Accuracy: The information must be precise, reflecting real environmental risks and opportunities.

Scope and Coverage

ESRS E1 applies to companies reporting under the EU’s Corporate Sustainability Reporting Directive (CSRD). It encompasses GHG emissions divided into three Scopes: Scope 1 (direct emissions), Scope 2 (indirect emissions from energy usage), and Scope 3 emissions (other indirect emissions, including those from the value chain). This broad coverage ensures that the total carbon footprint is accounted for, including upstream and downstream emissions.

👉 Watch our webinar: Navigating Scopes 1,2 & 3.

Double Materiality Concept in ESRS E1

One of the defining features in the standard is its double materiality concept. This means that companies must disclose both the impact of environmental factors on their financial performance and the impact of their business activities on the environment. It’s not just about how climate risks affect the bottom line; it’s also about the broader environmental consequences of corporate operations.

Green finance calculation

Reporting Requirements Under ESRS E1

To comply, companies must provide detailed disclosures on climate risks, greenhouse gas (GHG) emissions, and their strategies for reducing their carbon footprint. This includes setting measurable targets, tracking progress, and providing stakeholders with updates on sustainability initiatives. Companies should also be aware of the deadlines for compliance, as the EU has set strict timelines for reporting.

How to Prepare for ESRS E1 Reporting

Preparation for reporting involves several key steps, including conducting an initial assessment of climate risks, gathering relevant data, and setting up internal systems for reporting. Many companies find that early planning and the involvement of senior management are critical to successful compliance.

Data Collection and Management

In the era of big data, technology plays a vital role in sustainability reporting. Companies can leverage digital tools, such as carbon accounting software, to gather and manage the required data for the reporting. Automation in data collection also reduces the risk of human error and ensures consistency.


Challenges in Implementing ESRS E1

Despite the benefits, implementing can be challenging, especially for companies that are new to sustainability reporting. Some of the common hurdles include the complexity of gathering accurate data across the supply chain and aligning internal processes with the requirements. Especially activity-based Scope 3 data gathering can sometimes require significant resources, both internally and from suppliers. However, this is crucial, particularly in industries such as food and beverage, where the majority of emissions come from Scope 3.

Benefits of ESRS E1 Compliance

Complying with the standard offers multiple benefits, such as

  • enhanced transparency,
  • increased investor confidence,
  • and better risk management.

Not to mention the greater potential to reduce emissions and carry out effective climate work. These actions also enhance brand reputation.

In the long term, companies that align their strategies with ESRS E1 are likely to experience improved financial performance as they become more resilient to environmental risks.

Comparing ESRS E1 with Other Reporting Standards

There are several global standards for sustainability reporting, such as the Global Reporting Initiative (GRI), Task Force on Climate-related Financial Disclosures (TCFD), and Carbon Disclosure Project (CDP). While these frameworks share similarities with ESRS E1, the latter is unique in its focus on the European market and its regulatory backing by the EU.

Future of ESRS E1 and Sustainability Reporting

As the EU continues to push for greater transparency in environmental reporting, we can expect all ESRS, including E1 to evolve further. Future updates may include more detailed sector-specific guidelines and stronger enforcement measures to ensure compliance. Companies should stay informed about these changes to remain ahead of the curve.

Conclusion

In conclusion, all this is a significant step forward in sustainability reporting within the European Union. It encourages companies to take responsibility for their environmental impacts while providing investors and stakeholders with clear, comparable information on climate risks. As climate change continues to affect businesses worldwide, compliance with standards like these will be essential for long-term success.

FAQ

ESRS E1 is a part of the European Sustainability Reporting Standards, focusing on environmental disclosures, especially related to climate risks and greenhouse gas emissions.

Companies obligated to report under the EU’s CSRD are required to comply with ESRS E1.

ESRS E1 helps companies identify, assess, and disclose climate-related risks that could affect their operations and financial performance, encouraging better risk management.

The EU has set strict deadlines for ESRS E1 reporting, with many companies required to begin compliance within the next few reporting periods.

Double materiality refers to the concept that companies must disclose both the financial risks of climate change and the environmental impacts of their activities.

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