Carbon Accounting in CSRD: Your Path to E1 Compliance

With the first wave of the Corporate Sustainability Reporting Directive (CSRD) reporting around the corner, businesses across the EU face increasing pressure to implement reliable carbon accounting practices to meet stringent disclosure requirements. The CSRD’s emphasis on comprehensive GHG measurement and transparent emissions disclosure, in the European Sustainability Reporting Standards (ESRS) E1 on Climate Change, signals a new era of corporate accountability. Accurate GHG accounting is both a compliance necessity and a crucial step toward enhancing environmental transparency and driving impactful climate action.

This article explores the importance of carbon accounting, or more broadly GHG accounting, its role in the CSRD, and the key challenges reporters are set to encounter as the first year of CSRD reporting rolls in. 

Introducing Carbon Accounting and GHG Accounting

While carbon accounting primarily focuses on carbon dioxide (CO₂) emissions, GHG accounting is a systematic approach organisations use to measure, manage, track, and report an organisation’s greenhouse gas (GHG) emissions. GHG accounting categorises emissions into three scopes, depending on their source and location in the value chain:

1. Scope 1: Direct emissions from company-owned sources, such as vehicles or stationary equipment.
2. Scope 2: Indirect emissions from purchased energy, such as electricity or steam.
3. Scope 3: All other indirect emissions, including those from the supply chain such as purchased goods and services or employees commuting.

This methodology is guided by the internationally recognised GHG Protocol, the most widely used global standard for GHG accounting. Developed by the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD), the GHG Protocol provides a comprehensive framework to ensure consistency and accuracy in measuring and reporting emissions. 

By converting emissions from carbon dioxide (CO2) and other greenhouse gases such as methane (CH₄), nitrous oxide (N₂O), and fluorinated gases through their Global Warming Potential (GWP) into CO2-equivalents (CO₂e), GHG accounting enables organisations to accurately calculate their total GHG inventory. The goals of GHG accounting include:

1. Measurement: Quantifying emissions across an organisation's value chain, following GHG protocol guidelines to ensure consistency and reliability.
2. Management: Leveraging data to set emission reduction targets, manage climate change-related risks, and develop mitigation strategies.
3. Reporting: Providing transparent, standardised emissions data for stakeholders, aligning with reporting frameworks such as the CDP, CSRD and SBTi.
4. Improvement: Continuously tracking emissions over time while improving the calculation methodologies will enable businesses to assess their progress toward climate goals and identify opportunities for further reductions.

This process not only enhances a company’s environmental accountability and reporting requirements, but also helps align its operations with global climate objectives, such as the Paris Agreement. 

Quick Reminder

The Paris Agreement, adopted in 2015 at COP21, aims to limit global warming to well below 2°C, with an emphasis on staying under 1.5°C. The UN’s IPCC warns that exceeding this threshold could lead to more severe climate impacts like droughts, heat waves, and intense rainfall. The agreement requires countries to set and regularly update national goals (NDCs) for reducing emissions and adapting to climate change. It also prioritises climate finance to help developing nations build resilience and support a global shift to a low-carbon economy.

The Role of Carbon Accounting in the CSRD

The European Sustainability Reporting Standards (ESRS), established under the CSRD, define reporting requirements for a comprehensive range of sustainability topics, including environmental, social, and governance matters. Within the environmental standards, ESRS E1 specifically addresses climate-related disclosures. 

ESRS E1 requires companies to disclose detailed information on GHG emissions across scopes 1, 2, and 3, as well as to outline their strategies, actions, and forward-looking plans for tackling climate change. Carbon accounting plays a central role in this framework, supported by the following key Disclosure Requirements:

• E1-1: Transition Plan for Climate Change Mitigation – Requires companies to develop a roadmap for reducing emissions in line with the Paris Agreement's 1.5°C target.
• E1-4: Targets Related to Climate Change Mitigation or Adaptation – Aims to enable an understanding of the targets set by companies to support their climate change mitigation and adaptation policies.
• E1-6: Gross Scopes 1, 2, 3 and Total GHG Emissions – Focuses on the disclosure of gross emissions, ensuring comprehensive reporting of total GHG emissions.
• E1-7: GHG Removals and GHG Mitigation Projects – Requires disclosure of GHG removals and storage resulting from projects developed in a company’s own operations or those it has contributed to in its upstream and downstream value chain

The goal is to ensure that companies report transparently and comprehensively on their environmental impact. This enables stakeholders to assess the organisation's commitment to sustainability and its alignment with global climate goals. Through ESRS E1, the CSRD aims to standardise environmental reporting across the European Union, enhancing the consistency, comparability, and reliability of sustainability information disclosed by companies.

Learn more about the CSRD in our comprehensive ebook “The Essentials of the CSRD”.

What Does the CSRD Require from Companies Regarding GHG Accounting

Under CSRD E1-6 all listed undertakings have to report both scope 1 and scope 2 emissions. Regarding scope 3 emissions requirements, companies with more than 750 employees may demonstrate a “reasonable effort” to gather data in their first reporting year, acknowledging the complexities involved in measuring indirect emissions across the value chain. 

These companies shall explain the efforts made to gather information about their value chain, including the specific steps taken to gather the necessary data and to disclose any reasons why certain information could not be obtained. Additionally, plans for obtaining the missing data in the future shall be disclosed. 

Smaller companies, with fewer than 750 employees, are permitted to omit scope 3 calculations in their initial reporting year but must meet reasonable effort standards in their second and third years. 

Following this phase-in period, all companies must complete full scope 3 calculations, ensuring comprehensive emissions reporting over time. Additionally, if a company lacks a transition plan for climate change mitigation as per E1-1, it must disclose whether it intends to adopt such a plan and, if so, provide a timeline, ensuring clarity on its commitment to emission reductions over time.

Reasonable Effort in Reporting Scope 3 Emissions

When gathering full data on upstream and downstream value chains to calculate scope 3 emissions is challenging or burdensome, the CSRD allows companies to make 'reasonable efforts' to obtain and estimate this information. This approach allows organisations to report estimated or partial emissions data, using reliable sources such as sector averages and proxies, while committing to improve data quality over time. There is no official definition of "reasonable effort” in the CSRD as it can change considerably between companies depending on the available information.

The goal is to ensure transparent reporting that reflects the company’s current capacity to collect emissions data, while steadily advancing toward comprehensive GHG accounting. The reasonable effort method allows companies to provide meaningful emissions disclosures in the first year, even when full precision is not possible while fostering continuous improvement in emissions measurement and reporting in the following reporting periods.

Key Challenges in Carbon Accounting

Carbon accounting—and even more so, GHG accounting—pose several key challenges for companies, especially as they try to navigate increasingly complex regulatory landscapes and stakeholder expectations. 

• Data availability and accuracy: Companies must gather emissions data from a wide range of sources, including energy consumption, supply chain activities, and investments, which can be difficult to standardise and verify, particularly for scope 3 emissions. This lack of consistent, high-quality data remains one of the biggest challenges and can lead to gaps or inaccuracies in GHG accounting. 

• Manual data collection methods: Most GHG accounting processes still rely on manual methods, such as Excel spreadsheets, which can lead to inefficiencies and inaccuracies. Companies now realise that they need to move beyond manual data collection and implement automated systems to comply with evolving legislation, including audit trails and real-time tracking. The CSRD’s focus on transparency and accuracy means that companies must adopt more robust solutions to improve the quality and credibility of their GHG data.
• Resource and Capacity Constraints: Companies may lack the resources (personnel, financial, and technological) to implement robust carbon accounting systems. This can hinder their ability to collect accurate data, maintain compliance with regulations and report emissions consistently. Even larger companies may face challenges scaling up their efforts across multiple sites or geographies.
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