What Is The CSRD?
The CSRD (Corporate Sustainability Reporting Directive) is a European Union law that requires companies to report on their environmental and social impact.
The CSRD will replace the Non-Financial Reporting Directive (NFRD), and will cover a broader range of companies. The number of companies impacted will increase from 11,700 to around 49,000, including 4,000 in Italy alone.
The main goal of the CSRD is to enhance sustainability reporting, putting ESG results on par with traditional financial statements and acknowledging their inherent connection.
How Can Data Be Effectively Compared Across Companies?
To ensure greater comparability, companies will need to adopt a single reporting standard, the ESRS (European Sustainability Reporting Standard), developed by the EFRAG (European Financial Reporting Advisory Group).
The ESRS are a set of standards designed to provide investors, customers, and other stakeholders with consistent, comparable, and reliable sustainability information.
These are broken down into:
- 2 cross-cutting standards: providing general guidelines for sustainability reporting.
- 10 topic-specific standards: delving into specific environmental, social, and governance (ESG) areas.
The 10 topic-specific standards cover areas like climate change, biodiversity, human rights, social impacts, and governance.
And the Carbon Credits?
The European Union recognizes investments in carbon credits as a valuable tool for mitigating climate change. Consequently, the purchase of carbon credits is addressed within ESRS E1 in a dedicated section called: “Disclosure Requirement E1-7 – GHG removals and GHG mitigation projects financed through carbon credits”.
Companies must disclose detailed information about their carbon credit purchases, including the quantity, type (removal vs. avoidance), and quality of the credits. They should specify whether the credits originate from the EU and if they include Corresponding Adjustments. Additionally, companies need to report on the credits used and those planned for cancellation based on existing contractual agreements.
Furthermore, if companies use carbon credits to claim carbon neutrality, they must demonstrate how the purchase of these credits positively impacts their overall carbon reduction strategy and does not hinder their plans for direct emissions reduction. According to Trove Research, now part of MSCI, companies that utilize carbon credits decarbonize twice as fast as those that do not. It is not difficult to imagine why; companies that engage in offsetting often have an internal carbon pricing mechanism that helps them take responsibility and pursue their reduction targets more tenaciously.
Conclusion
The ESRS E1 standard marks a significant advancement in promoting transparency and accountability in corporate climate action. This standard makes it easier for stakeholders to understand the specific actions a company is taking in the global fight against climate change. Investing in carbon credits can further demonstrate a company’s dedication to environmental sustainability by supporting mitigation projects beyond its value chain. This not only drives meaningful change but also positions the company as a leader in the transition to a low-carbon economy.
