We have already presented the ESRS standards, general requirements and standards for the content of non-financial reporting in general terms in previous articles. The criteria introduced by the ESRB cover and detail the areas covered by the concept of ESG and specify the reporting requirements for non-financial reporting, which will apply to a large number of companies, both in the EU and the Czech Republic, from this year, i.e. from 2024, according to the CSRD[1].
We have prepared a series of three articles in which we will focus on individual ESRS standards groups, according to the topics covered by each ESG letter. In this first article we will focus on the first area, namely E for environmental impacts.
“E” for environmental impacts
Environmental criteria, also referred to as environmental factors, address the environmental impacts of the resource consumption and activities of the company subject to ESG reporting. Whether it is about reducing the impacts of climate change or minimising the pollution that occurs as a result of the company’s activities as a whole, i.e. throughout the supply chain.
The objectives that companies should pursue are in particular the reduction of greenhouse gas emissions (reducing the carbon footprint), the efficient use of energy and maximising the use of clean energy sources, the efficient management of waste and the disposal of packaging materials.
Beware of double materiality
It is important to mention that from the below mentioned categories of information, companies will be able to more or less choose which topics are relevant due to the nature of their business and activities and which will be reported in the non-financial reporting, according to the rule of the so-called double materiality (according to the materiality analysis, where significant impacts, risks and opportunities for a specific company are identified).
Therefore, it will not be mandatory for all companys to monitor and include in the non-financial report all the areas listed below. However, if a company does not wish to report on any area, it will need to provide sufficient justification for such omission, i.e. detail how it has conducted the materiality analysis (see our following ESG articles for more details).
ESRS-E subgroups
The environmental standards are divided into several subgroups, which are presented below.
ESRS E1
These standards, which are instructions on what kind of information a company should include and how in its non-financial reporting, focus on climate change topics, specifically climate change mitigation, climate change adaptation and energy.
They are further developed into several sub-areas, which companies will have to cover in their ESG report and disclose relevant information according to them.
- Transition plan for climate change mitigation: This requirement aims to inform how the company seeks to mitigate the impacts of climate change to ensure that its strategy and business model(s) are compatible with the transition to a sustainable economy and with the goal of limiting global warming to 1.5°C in accordance with the Paris Agreement and the goal of achieving climate neutrality by 2050 and, where appropriate, the company’s exposure to coal, oil and gas activities.
- Policies on climate change mitigation and environmental protection: a company shall disclose the policies it has adopted to manage its significant activities, particularly with respect to the impacts, risks and opportunities associated with climate change mitigation and adaptation.
- Climate change actions and resources: under this point, the company is required to disclose key actions taken and planned to achieve climate-related policy goals and targets.
- Climate change mitigation objectives: a company must set its climate change mitigation and adaptation objectives and address its significant climate-related impacts, risks and opportunities. In particular, this includes information on whether and how the company has set targets for reducing greenhouse gas emissions and/or any other targets for managing significant climate-related impacts, risks and opportunities, such as the deployment of renewable energy.
- Energy consumption and mix: a company must disclose information on its energy consumption and sources in absolute terms, steps to improve energy efficiency, exposure to coal, oil and gas activities and the share of renewable energy in its operations or in its overall energy mix.
- Gross and total GHG emissions, GHG removals and funded GHG mitigation projects, internal carbon pricing: the ESG report must also include data on the company’s emissions, if and where applicable how it participates in GHG removals, and information on the financing of GHG mitigation projects. The company shall disclose whether it has internal carbon pricing systems in place and, if so, how these systems support its decision-making and incentivise the implementation of climate-related policies and targets.
- Potential financial impacts of significant physical and transitional risks and potential climate-related opportunities: an entity shall disclose (a) the potential financial impacts from significant physical risks; (b) the potential financial impacts arising from significant transitional risks; and (c) the potential to realise significant climate-related opportunities.
ESRS E2
The second set of criteria sets out disclosure requirements for the following areas: air pollution, water, soil, substances of concern, including substances of very high concern.
The company must include in the ESG report what its pollution policies are, a description of pollution-related activities and sources, what its pollution objectives are, and what pollutants are generated or used during the company’s operations. In addition, the company shall disclose information on the production, use, distribution, trade and import or export of substances of concern and substances of very high concern. This section of the report includes the financial implications of risks and opportunities arising from pollution-related impacts.
ESRS E3
The disclosure requirements for information relating to water and marine waters, water and water resources are set out in the third set of standards.
Within this area, the company must report on the policies applied to manage its significant impacts, risks and opportunities related to water and marine resources. In addition, it must disclose its water and marine resource-related measures and the resources allocated to their implementation and the water and marine resource-related targets it has adopted. Information on the company’s water consumption and the potential financial impact of risks and opportunities arising from water and marine resource-related impacts is also mandatory.
ESRS E4
Finally, the standards also address disclosure requirements regarding the company’s relationship with terrestrial, freshwater and marine habitats, ecosystems and populations of animals and plants, related species of animals and plants, including diversity within and between species and ecosystems, and their interrelationship with indigenous and affected communities.
The sub-points of ESRS E4 are (i) biodiversity and ecosystem transition plan, (ii) biodiversity and ecosystem-related policies, (iii) biodiversity and ecosystem-related measures and resources, (iv) biodiversity and ecosystem-related targets, (v) biodiversity and ecosystem-related impact metrics, and (vi) potential financial impacts of biodiversity, ecosystem-related risks and opportunities.
ESRS E5
The last set of reporting criteria focuses on information related to resource use and circularity, in particular (i) resource inflows, including the circular nature of significant resource inflows, taking into account the circular nature of (non-)renewable resources, (ii) resource outflows, including information on products and materials, and (iii) waste. In many ways, they also refer to existing EU legislative frameworks and policies, such as the EU Green Deal, Regulation (EU) 2019/2088 (SFDR), Regulation (EU) 2020/852 (EU Taxonomy), the EU circular economy action plan or the waste management plan.
More information can be found on the EFRAG (European Financial Reporting Advisory Group) website here.
Conclusion
Today, environmental protection is one of the most accentuated topics, which is increasingly reflected in the legal regulation of the behaviour of individuals and, in particular, of companies. The scope of information on the environmental impacts of a company’s activities, which according to the ESRS criteria companies will have to monitor and consistently report, is considerable. However, not every company will be required to monitor all environmental standards – a rigorous and well-founded materiality analysis, which you can read more about in our following ESG articles, can select only areas relevant to the company’s activities.
If you have any questions about non-financial reporting, please do not hesitate to contact us, our PEYTON legal team is at your disposal.
[1] Specifically, Directive (EU) 2022/2464 of the European Parliament and of the Council of 14 December 2022, amending Regulation (EU) No 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU, as regards corporate sustainability reporting, which was transposed into Czech law in the autumn of 2023 as part of the so-called consolidation package.
Rachel Kouklíková, Legal Assistant – kouklikova@plegal.cz
Tereza Hrudková, Legal Assistant – hrudkova@plegal.cz
Mgr. Jakub Málek, managing partner – malek@plegal.cz
21. 2. 2024