3. Table of Definitions and Acronyms

When talking about ESRS E1 and climate change you will encounter multiple definitions and acronyms. Below is a table that presents these definitions and acronyms.

4. Objective of ESRS E1

So, what is the ESRS E1 about? Let’s begin by deciphering its objectives. We'll break down its objectives into seven key components:

1. Climate Impact: Discover how undertakings influence climate change, encompassing both positive and negative real and potential impacts.

2. Mitigation Commitments: Unveil an undertaking's efforts, past, present, and future, aligned with global climate goals, aiming to limit warming to 1.5°C.

3. Adaptation Strategies: Explore how businesses plan to adapt their strategies and models to foster sustainability and contribute to the 1.5°C target.

4. Comprehensive Actions: Delve into actions taken to prevent, mitigate, or remediate adverse effects, addressing risks and opportunities.

5. Material Risks and Opportunities: Understand the nature and extent of climate-related risks and opportunities, and how undertakings manage them.

6. Financial Implications: Assess the financial ramifications, spanning short, medium, and long-term, arising from climate-related risks and opportunities.

Based on these objectives a company might need to disclose several pieces of information, depending on whether they are material to the company (read more about materiality here). This information can be related to governance, strategy, impacts, risks, opportunities, metrics, and targets. More on this in the next sections.

5. Governance

When looking at ESRS E1, governance isn't just about rules and structures. It extends to understanding how climate considerations are integrated into the compensation of decision-makers, such as administrative, management, and supervisory bodies.

Disclosures should shed light on whether these leaders' performance is evaluated against greenhouse gas (GHG) emission reduction targets. Moreover, it's important to reveal what portion of their bonusses is tied to climate-related factors, along with an explanation of what these climate considerations entail. This offers transparency into the alignment of leadership compensation with climate goals and responsibilities.

This part of ESRS E1 dives into how leaders' compensation connects to climate actions, ensuring openness about their incentives and accountability for climate responsibilities.

6. Strategy

One of the important aspects of ESRS E1's strategy component is the disclosure of a transition plan for climate change mitigation. This plan is all about understanding what the company has done in the past, what it's doing now, and what it plans to do in the future. The goal is to make sure its strategy and the way it does business match with the shift toward a more eco-friendly economy and the urgent need to limit global warming to 1.5°C, following the Paris Agreement and aiming for climate neutrality by 2050. The transition plan must include the following points:

If a transition plan is absent, the company must communicate whether it plans to adopt one.

Another essential facet of ESRS E1's strategy component is assessing and addressing climate-related risks. For the material climate-related risks, it's needed to identify whether these risks are primarily climate-related physical risks or climate-related transition risks. The strategy should then describe the resilience of the business model concerning climate change. This should includes:

• Defining the scope of the resilience analysis.

• Explaining how and when the analysis was conducted, including the use of climate scenario analysis.

• Presenting the results of the resilience analysis, which encompass the outcomes of scenario analysis.

This helps stakeholders to understand how the strategy and business model of the company adapt and endure in the face of climate-related challenges and uncertainties.

ESRS E1's strategy component has two main aspects:

1. Developing a plan to align with eco-friendly practices, limit global warming, and adapt to a greener economy.

2. Identifying and managing climate-related risks associated with both climate changes and the shift to a green economy.

7. Impact, Risk and Opportunity Management

This section is about the impacts, risks, and opportunities related to climate change and is subdivided into three sections.

7.1. Identifying and Assessing Climate-Related IRO

Understanding how companies manage the impact, risk, and opportunity (IRO) associated with climate change is at the heart of ESRS E1. Companies are required to describe their process for identifying and assessing climate-related IRO. This includes a comprehensive analysis of:

1. Impacts on Climate Change: Specifically, companies must disclose information about their greenhouse gas (GHG) emissions.

2. Climate-Related Physical Risks: This involves identifying climate-related hazards, particularly considering high-emission climate scenarios. Companies should assess how these hazards could affect their assets and business.

3. Climate-Related Transition Risks and Opportunities: This includes identifying climate-related transition events, considering scenarios aligned with limiting global warming to 1.5°C. It's essential to assess how these transition events may impact their assets and business activities.

Moreover, companies must disclose how climate-related scenario analysis, involving a range of climate scenarios, informed the identification and assessment of physical and transition risks.

7.2. Policies for Managing Material IRO

Companies must also disclose their policies for managing material IRO related to climate change mitigation and adaptation. This entails explaining the extent to which they have policies in place to address the identification, assessment, management, and remediation of these climate-related impacts, risks, and opportunities.

Disclosures should include information about policies that address specific areas, including climate change mitigation, climate change adaptation, energy efficiency, renewable energy deployment, and any other relevant factors.

7.3. Climate Change Mitigation and Adaptation Actions

Companies are also required to disclose the actions they have taken and plan to take to achieve their climate-related policy objectives and targets. Specifically, when presenting key actions taken or planned for the future, companies should categorize climate change mitigation actions by decarbonization lever, including nature-based solutions. They should also describe the outcomes of these actions, including achieved and expected greenhouse gas (GHG) emission reductions.

Additionally, companies should disclose how much money they've spent, capital and operational expenditure, or plan to spend on these actions and how it affects their financial statements. This transparency enables stakeholders to gauge the company's commitments to climate action and their financial implications.

This part of ESRS E1 focuses on how companies manage climate change's impact, risks, and opportunities, requiring them to disclose their processes for identifying and assessing climate-related impacts, policies for managing these impacts, and the actions they've taken or plan to take to meet climate-related goals.

8. Metrics and Targets

ESRS E1 contains a lot of metrics and targets and is therefore relatively long. This section is subdivided into eight pieces.

8.1. Climate-Related Targets for Mitigation and Adaptation

Companies are required to share the specific targets they've set to support their efforts in combating climate change and adapting to its impacts. These targets are important for managing the company's climate-related impact, risk, and opportunities (IRO). The disclosure includes the following details:

1. GHG Emissions Reduction Targets: Companies must indicate whether and how they have established targets to reduce GHG emissions or other targets to address climate-related IRO.

2. Details of GHG Emission Reduction Targets: If GHG emission reduction targets are set, companies should provide information about these targets, such as:

   • Whether the targets are absolute values (in tons of CO2eq or as a percentage of emissions from a base year) and, if relevant, in intensity values.

   • Whether the targets cover Scope 1, 2, and 3 GHG emissions separately or combined (more about the scopes will follow).

   • The base year and baseline value, and a plan to update the base year after every five-year period from 2030.

   • Information about the alignment of GHG emission reduction targets with science-based goals and the methodology used for determination.

   • Expected decarbonization levers and their contributions to achieving these targets.

8.2. Energy Consumption and Mix

Companies are required to disclose information about their energy consumption and sources. This disclosure helps stakeholders understand the company's energy usage and mix, including aspects like efficiency, exposure to fossil fuels, and the presence of renewable energy. The disclosure includes:

1. Total Energy Consumption: The absolute value of the company's total energy consumption in megawatt-hours (MWh), broken down by the following categories:

   • Energy consumption from fossil sources.

   • Energy consumption from nuclear sources.

   • Energy consumption from renewable sources, further divided into fuel consumption, purchased or acquired electricity, heat, steam, and cooling from renewable sources, and self-generated non-fuel renewable energy.

2. Additional Disaggregation for High Climate Impact Sectors: Companies operating in sectors with a significant climate impact (see below) must provide further details, including fuel consumption from specific fossil sources and purchased or acquired energy from fossil sources.

3. Separate Disclosure for Energy Production: If applicable, companies should also provide separate information about non-renewable and renewable energy production in MWh.

High climate impact sectors can be summarised as:
agriculture, forestry and fishing; mining and querrying; manufacturing; electricity, gas, steam and air conditioning supply; water supply, sewerage, waste management and remediation activities; construction; wholesale and retail trade, repair of motor vehicles and motorcycles; transportation and storage; and real estate activities.

8.3. Energy Intensity in High Climate Impact Sectors

For companies engaged in activities with substantial climate impact (high climate impact sectors), it is required to calculate and disclose energy intensity. Energy intensity is determined as the total energy consumption from activities in high climate impact sectors in MWh, divided by the net revenue generated from these activities in monetary units. This calculation helps assess how efficiently the company uses energy in relation to its revenue in sectors with a significant climate impact.

8.4. Greenhouse Gas Emissions for Scope 1, 2, and 3

Companies must disclose specific metrics related to their greenhouse gas (GHG) emissions. This information helps stakeholders understand the company's environmental impact and its contribution to climate change. The disclosure includes:

1. Scope 1 Emissions: These are the direct GHG emissions from sources owned or controlled by the company. The disclosure should provide:

   • The total amount of Scope 1 GHG emissions in metric tonnes of CO2eq.

   • The percentage of Scope 1 GHG emissions covered by regulated emission trading schemes.

2. Scope 2 Emissions: These are indirect GHG emissions associated with the generation of purchased or acquired electricity, heat, steam, and cooling consumed by the company. The disclosure should provide:

   • The total location-based Scope 2 GHG emissions in metric tonnes of CO2eq, which are calculated based on the emissions associated with the location where the electricity is generated.

   • The total market-based Scope 2 GHG emissions in metric tonnes of CO2eq, which focus on the emissions associated with the specific electricity the company purchases.

3. Scope 3 Emissions: These are other indirect GHG emissions that occur along the value chain of the company, including both upstream and downstream emissions. The disclosure should include GHG emissions in metric tonnes of CO2eq for each significant Scope 3 category, which can encompass various aspects of a company's operations, products, and supply chain.

These metrics help stakeholders gauge the company's environmental impact, considering both direct and indirect GHG emissions. By breaking down emissions into different scopes, it becomes clearer how the company contributes to climate change and where emissions can be reduced or mitigated.

8.5. GHG Removals and Mitigation Projects Financed Through Carbon Credits

Companies are required to disclose information related to GHG removals and climate change mitigation projects that they have been involved in. This disclosure includes:

1. GHG Removals and Storage: Companies must report the metric tonnes of CO2eq (carbon dioxide equivalent) associated with GHG removals and storage resulting from projects conducted within their own operations or those in which they've participated in the upstream and downstream value chain.

2. GHG Emission Reductions from Carbon Credit Projects: Companies should also provide details about the amount of GHG emission reductions or removals achieved through climate change mitigation projects that are outside their immediate value chain but have been financed or are intended to be financed through the purchase of carbon credits.

This information helps stakeholders understand the company's efforts in reducing GHG emissions and supporting climate mitigation projects, both within and beyond their direct operations.

8.6. Internal Carbon Pricing

Companies are required to disclose information about their internal carbon pricing schemes, which play a role in decision-making and encouraging the implementation of climate-related policies and targets. This disclosure includes:

• Type of Scheme: Explain the type of internal carbon pricing scheme in place, such as shadow prices used for investment decisions or the use of internal carbon fees or funds.

• Scope of Application: Describe where the carbon pricing schemes are applied, including specific activities, geographic areas, or entities.

• Carbon Prices: Share the carbon prices applied within the scheme, along with the key assumptions used to determine these prices. Explain the source of these carbon prices and why they are relevant to the chosen application.

• GHG Emissions Coverage: Provide the approximate gross GHG emission volumes for Scopes 1, 2, and, if applicable, Scope 3, in metric tonnes of CO2eq, that are covered by these schemes. Also, indicate their share of the company's overall GHG emissions for each respective scope.

These metrics and targets help stakeholders understand how companies use internal carbon pricing to guide decision-making and promote climate-related actions.

8.7. Anticipated Financial Effects

To assess the impact of climate-related risks and opportunities on a company's financial health, the following disclosures are crucial:

1. Anticipated Financial Effects from Material Physical Risks: This information helps stakeholders understand the expected financial impacts resulting from significant physical risks related to climate change. These effects can affect the company's financial position, performance, and cash flows across short, medium, and long-term periods.

2. Anticipated Financial Effects from Material Transition Risks: Companies should disclose how they anticipate being financially affected by significant transition risks associated with climate change. This includes understanding how these risks could influence their financial position, performance, and cash flows over different time horizons.

3. Potential to Benefit from Material Climate-Related Opportunities: This disclosure provides insight into the opportunities that companies may leverage to enhance their financial standing. These opportunities are linked to climate-related factors and can positively impact financial position, performance, and cash flows in the short, medium, and long term.

In summary, these disclosures help stakeholders comprehend how climate-related risks and opportunities may have a significant financial influence on a company across various timeframes. This information is vital for investors and decision-makers to assess the financial resilience and potential of a company in the context of climate change.

This section requires companies to reveal climate-related targets they've set, including GHG emission reduction targets, and detailed information about how these targets are structured. Companies must also disclose energy consumption, sources, and intensity, along with greenhouse gas emissions in different categories. Additionally, they need to share insights into GHG removal and mitigation projects, internal carbon pricing, and the expected financial effects of climate-related risks and opportunities. These disclosures provide stakeholders with a comprehensive view of a company's climate-related goals, performance, and financial outlook in the face of climate change.

9. Conclusion

ESRS E1 is vital for addressing climate change, guiding companies to report their climate impact, mitigation efforts, and strategies. It includes components like governance, strategy, impact, risk, opportunity management, metrics, and targets.

These disclosures help stakeholders understand a company's approach to climate action, environmental impact, and financial resilience in the context of climate change. Because the topics under ESRS E1 are likely to be material it is important to start deepening your knowledge about ESRS E1 rather sooner than later.

In articles that will follow we will dive into topics such as the different scopes, internal carbon pricing, data collection, and more.