The European Sustainability Reporting Standards (ESRS) will have a significant effect on the EU’s net zero targets. The first set of ESRS are currently being developed as a delegated act to the Corporate Sustainability Reporting Directive (CSRD). They aim to set out cross-cutting standards for the disclosure of environmental, social, and governance information in companies’ annual reports. The first of the environmental standards, E1 Climate Change, includes specific requirements around greenhouse gas emissions, net zero targets, net zero claims and carbon removals.
The current draft marks a significant improvement in the transparency of emissions and carbon credit data. Through its emissions and carbon credit reporting, the ESRS, and the E1 specifically, start to address one of the core issues with unsubstantiated net zero claims and the illegitimate use of low-quality offsetting: the lack of detailed and disaggregated publicly available information. Although the requirements for net zero claims and defining residual emissions aren’t quite as rigorous as they should be, with further improvements, the standards have the potential to become the basis for civil society to police whether net zero claims and carbon removals are legitimate and sustainable.
The ESRS on net zero: what do they bring to the table?
Companies under the scope of the CSRD will have to disclose their emissions in publicly available annual reports separately from carbon credits, without aggregating the two and thus giving the impression that their emissions are lower than they are. Beyond this improvement, the separation of carbon credits generated by emission reductions from those generated by carbon removals ensures greater transparency over the nature of carbon credits.
The draft ESRS introduce reporting requirements specifically for those companies choosing to make net zero claims. These requirements remain optional apart from the obligation to explain the credibility of the carbon credits used to make such a claim. Although this requirements are an important step forward, there is still significant room for improvement regarding their specificity and rigour.
For net zero targets, however, the draft ESRS require more transparency over the methodologies and frameworks applied. The standards recognise that only the emissions remaining after 90-95% emissions reductions are eligible for compensation to achieve net zero targets, while also acknowledging justified sectoral variations in decarbonisation pathways.
The draft ESRS improve the transparency of the source and destination of carbon emissions and removals. They require biogenic emissions to be reported separately from others, and for removals within a company’s value chain to be differentiated by removal and storage type (biogenic, land-use change, technological, hybrid). The draft also requires GHG removal credits to be disaggregated by biological and technological sinks. The standards form an information basis from which civil society can draw on to monitor, using publicly available information, whether removals durably balance earth’s long and short carbon cycle and the emissions they balance are commensurate in terms of timescales.
What’s to be improved?
The ESRS are limited by their nature and cannot prevent companies from making faulty net zero claims. That is the role of consumer law such as the proposed Empowering Consumers and Green Claims Directives. Despite the reporting requirements for net zero claims, a company may still make such claims: (1) without first reducing its emissions; (2) by using any type of carbon credit; and (3) without disclosing emissions reduction targets nor a net zero target. These issues must be addressed by enshrining in EU law a robust definition of net zero claims that is aligned with scientific consensus, making sure that carbon credits generated from emission reductions and avoidance cannot be used to substantiate such claims. Only credits generated from carbon removal should be allowed to be used to balance residual emissions with a view of substantiating net zero claims.
Although the draft ESRS recognise sectoral variations in decarbonisation pathways, there are still no such pathways in public policy at this stage. The European Commission misses the opportunity to ensure that emissions are legitimately residual and can be balanced with carbon removals without impeding efforts to reduce emissions. The Commission should establish a transparent process for classifying emissions on a regular basis by empowering an agency to review and categorise emissions based on impact assessments and multi-stakeholder consultations. As technology evolves, costs reduce and circumstances change, emissions will need to be re-classified.
While the draft ESRS requires biogenic and fossil emissions to be reported separately, as well as carbon removal credits to be disaggregated by storage type, there is no ban on balancing fossil emissions with removals into biogenic sinks. To pursue a durable net zero, carbon emissions from the geosphere and biosphere must be balanced with removal and storage of carbon back into the geosphere and biosphere respectively, like-for-like.
Finally, on all measures that deal with GHG removals the draft ESRS can further integrate the Carbon Removal Certification Framework in its reporting requirements, particularly when it comes to ensuring the credibility of carbon removal credits.
Next steps for the ESRS toward net zero
The European Commission will consider the feedback provided up until 7 July before adopting the ESRS as a delegated act in the upcoming months. For Carbon Gap’s response to the consultation please click here. The delegated act, once published by the Commission, will only enter into force if no objection is raised by the Council or the European Parliament, within the next 4 months as set in the basic act. The implementation period for these standards will vary depending on the size of a company and the standard in question.
In future years, the Commission is expected to adopt additional delegated acts for additional sets of standards. The CSRD requires the Commission to adopt by June 2024: sector-specific standards, proportionate standards for listed SMEs, and standards for non-EU companies.
By Lucian Morié, Associate Policy Analyst