About 250 standards globally dictate the process of non-financial reporting, also known as ESG (environment, social, and governance) reporting. The European Commission has established a unified standard called the European Sustainability Reporting Standard (ESRS).
Starting next year, companies will be required to disclose details on sustainability. It will include environmental information such as carbon footprints, and other information such as land consumption, biodiversity, and water consumption.
“The company must also report social aspects such as human rights and governance-related information, such as implementing anti-bribery and anti-corruption solutions,” Has said.
Important legal frameworks in EU
Although CO2 footprints are a small subsection in ESRS, there’s significantly more to the report.
“When we do an internal report, it has to be signed by the person who is legally responsible for the financial reporting. Hence, financial and non-financial reporting are of equal importance,” he said.
For instance, banks use non-financial reporting to determine the interest rates you would have to pay, reflecting the outcomes of such reporting.
There are some important legal frameworks that organisations should comply with. They are:
EU Corporate Sustainability Directive (CSRD): It requires EU businesses, including EU subsidiaries of non-EU companies, to report on the environmental and social impact of their business activities, and on the business impact of their ESG efforts and initiatives.
EU Taxonomy Directive: This requires companies to disclose the sustainability performance of their activities and will have to reflect this information in their CSRD disclosures.
ETS/Carbon Border Adjustment Mechanism: It aims to prevent ‘carbon leakage’ by subjecting the import of certain groups of products from third (non-EU and non-EFTA) countries to a carbon levy linked to the carbon price payable under the EU Emissions Trading System (ETS) when the same goods are produced within the EU.
Act on Corporate Due Diligence Obligations in Supply Chains: It places enterprises that have their central administration, principal place of business, administrative headquarters, or branch office in Germany under the obligation to respect human rights by implementing defined due diligence obligations.
Product Environmental Footprint Guide: Its goal is to provide a common way of measuring environmental performance for companies within in EU wishing to market their product.
Are there any hard rules?
“Yes, there are hard rules, but they’re not played hard,” Has said. The regulations that are present in Germany also exist in Europe and the United States. For instance, the SEC proposal in the USA is similar to the CSRD in Europe.
“In all legal environments, the heads of the companies must prevent risks. They are also held legally responsible if they do not take actions on possible risks,” he said, adding, “If you know that something is about to happen, you need to act. And that also refers to sustainability related information.”
This means precise documentation on sustainability is critical for any organisation.
Identify risks, determine targets to reduce CO2 footprint
Two ISO standards are important for carbon footprint calculations – ISO 14040 and 14064-3. This comprises a set of 35 questions that companies must answer.
“Although it sounds simple, it’s complex,” Has said, adding, “I always urge companies to consider both energy and material-related consumption. Sooner or later, both need consideration to reduce the CO2 impact of companies.”
The standardised approach subdivides the emissions into three different categories (Scope 1, Scope 2 and Scope 3).
Under Scope 1 are emissions that relate to those originating out of internal activities.
Scope 2 refers to the energy that comes into the company.
Scope 3 refers to the inbound and the outbound value chain.
These calculations require quite some know-how.
But, for those companies that find it difficult to track the emissions of their vendors, Has recommends a non-standardised approach or the ‘economic input-output approach’.
“If you don’t know something, you simply take a look at literature of companies that have similar workflows. Consider how they are reporting,” he said. Each aspect of the value chain should be analysed for identifying the largest carbon contributor.
“With this, you make a balance sheet, which contains the most important contributors. Most often, physical products in Scope 3 contribute between +/- 75-90 percent of all emissions,” Has added.
After this, the company must identify the risks and investigate strategies to reduce CO2 footprint. The risks and the strategies will determine the actions and targets to reduce carbon footprints.
Accurate error calculation is crucial. The report should clearly address any potential ambiguity that may arise. Failing to do so could lead to legal repercussions, according to Has.
Can CO2 footprint calculation software help?
“Most software has significant issues,” he said. “They usually provide templates where companies need to input values. If you’re unsure how to input the information, they may offer consultancy services, costing you more.”
Has suggested manually writing the first three reports and calculations. “Yes, that is painful and frustrating. It takes time and effort,” Has said, adding that this will help one understand what to ask for or test in a software.
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