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Dear Readers,

In the previous article that was dealing with the CSRD Directive from the general perspective, we explained duties brought by the Directive’s implementation. We also discussed the historical context of the non-financial reporting’s establishment and, last but not lease, informed you about the ESRS standards. You can find all those pieces of information here.

In this article, we will examine the above-mentioned ESRS standards more closely, and will specifically focus on the environmental standard (letter “E” in the “ESG” reporting).

Environmental Standards (“E”)

As mentioned above, “E” stands for environment, and this aspect involves considerations of ecological impacts of corporations’ operation (and vice versa). The purpose is to define priorities of a long-term sustainable strategy for particular sectors where respective firms are engaged.

The sector-specific ESRS standards will be issued one by one by the EFRAG association and will complement five mandatorily reported general standards. The ESRS environmental categories are as follows:

• ESRS E1: Climate Change;
• ESRS E2: Pollution;
• ESRS E3: Water and Marine Resources;
• ESRS E4: Biodiversity and Ecosystems; and
• ESRS E5: Resource Use and Circular Economy.

Another tool to assist in transiting to long-term financially sustainable and competitive economy is the EU taxonomy that sets forth six environmental objectives:

• Climate change mitigation;
• Climate change adaptation;
• Sustainable use and protection of water and marine resources;
• Transition to a circular economy;
• Pollution prevention and control;
• Protection and restoration of biodiversity and ecosystems.

Article 8 of Regulation (EU) 2021/2178 states that companies currently required to comply with the non-financial reporting duty should report their taxonomy eligibility for the first two objectives (mitigation and adoption) for 2022 and 2023. Those entities will additionally be obliged to report their taxonomy compliance in all six objectives as early as for 2024 and 2025.

Under the EU taxonomy, a company that is obliged to report under the NFRD and CSRD application schedule (see our previous article) also has to publish its proportion of environmentally sustainable economic activities. Activities have to meet the following conditions in order to be considered environmentally sustainable:

1. Substantially contributing to at least one of the six objectives;
2. Causing no significant harm to any of the other five objectives under the DNSH principle;
3. Complying with minimum social safeguards; and
4. Complying with applicable technical screening criteria.

The ESRS Directive introduces an obligation to report green gas emissions in three categories, the calculation of which is specified in detail in ESRS E1-E5 and is based on the Greenhouse Gas (GHG) Protocol:

1. Scope 1: Direct emissions and data from the reporting company, such as company buildings and vehicles;
2. Scope 2: Indirect power emissions from activities connected only with the “upstream” suppliers, e.g. purchased power; and
3. Scope 3: Other indirect emissions from the supplier chain representing for example purchases, transportation of goods or travel; other indirect emissions come from activities connected with “downstream” suppliers, such as sold products, transportation of goods and investments.

The EU standards confine the Scope 3 reporting to significant categories. In addition to this, they require certain details and a comprehensive calculation of a company’s emissions once in three years (only in case that there are no changes that have an influence on the emission inventory).

We will explore the letter “S” from the ESG reporting in our next article.

Jiří Vidiečan                                       Lenka Kolmanová
vidiecan@edmutilitas.cz                      kolmanova@edmutilitas.cz