cross functional network of ESRS
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Sustainability Reporting

How are EU Taxonomy, CO2 Footprinting & Supply Chain Risk relevant for ESRS Reporting?

January 22, 2024

The EU’s body of sustainability reporting legislation, public disclosure regulations, and reporting standards or benchmarks have created a closely interconnected network that is more closely related than meets the eye. We recommend integrating compliance efforts where possible to achieve the most cohesive and sensible reporting strategy. In this article, we explore the relationship between the Corporate Sustainability Reporting Directive (CSRD), its reporting framework, the European Sustainability Reporting Standards (ESRS), and three key areas of reporting: EU Taxonomy, carbon footprinting, and supply chain risk.

EU Taxonomy and the CSRD

The EU Taxonomy is a classification system for economic activities deemed sustainable. It is used by the investment community to assess eligibility of products or companies that qualify as ‘sustainable’ or satisfying ESG criteria, such as inclusion in an ESG fund. The taxonomy has helped to curb greenwashing by setting benchmarks and defining criteria for ESG investing, as well as to facilitate meaningful financial flows to sustainable activities.

Companies that fall within scope of the CSRD are automatically obliged to report according to the EU Taxonomy, as both are part of a broader initiative by the EU sustainable finance framework. This is relevant for both financial and non-financial institutions. CSRD-aligned reports should contain information that enable investors to determine where the reporting company sits in the Taxonomy, hence solid understanding of both these frameworks are necessary. 

Aligning two related but separate frameworks is made easier by using an integrated reporting software that brings together all the different considerations in an automated system. Software tools like Daato incorporates EU reporting requirements in one cloud-based platform, enabling compliance with several different sustainability legislation or standards. During the reporting process, companies are prompted with questions to provide accurate disclosures, removing much of the guesswork in data collection.

Carbon footprinting and the CSRD

Carbon footprinting forms the basis of emissions monitoring. At the simplest level, companies use baseline emissions data in order to set meaningful and achievable targets for reduction trajectories or for transition planning. The GHG Protocol Corporate Standard is the globally accepted accounting methodology for carbon footprinting, and the ESRS refers to it for Scope 1,2, 3 and total emissions. The science behind carbon footprinting requires technical expertise, increasingly deploying more advanced climate analysis such as scenario analysis that predicts the outcome of business in the context of different potential future warming levels. 

It's worth noting that in addition to carbon dioxide, ESRS E1: Climate Change requires other greenhouse gas emissions disclosures, namely methane (CH4), nitrogen dioxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), sulfur hexafluoride (SF6), and nitrogen trifluoride (NF3). Thus, footprinting should cover these greenhouse gases as well. 

The process of carbon footprinting especially where Scope 3 is concerned often significantly involves the value chain. Detailed requirements for climate data in the value chain are outlined in ESRS 1 section 5.1, the value chain includes associates, joint ventures, unconsolidated subsidiaries, and contractual arrangements in joint arrangements. This presents massive challenges to keep track of climate-related data in one’s own operations let alone in the various entities along the value chain. This is where having a reliable and powerful reporting software like Daato can help. Companies appreciate the ability to allow multiple users in their value chain to share data while all changes are tracked in the system for traceability.

Supply Chain Risk and the CSRD

Supply chain risk constitutes a significant portion of CSRD reporting requirements. The ESRS Social Standards are four sets of standards covering social risks in the value chain, from a company’s own workforce to workers in the value chain, affected communities, and end users and consumers. Supply chain risks under the ESRS don’t stop there, however, as environmental risks such as climate-related risks can also manifest in the value chain, which is covered in the respective ESRS standards.

One of the top challenges is the complexity of information gathering in multi-tiered supply chains, where ownership of data can be scattered across different sources and traceability is a key priority. Here is yet another reason to utilise a well-designed data management software that allows third-party data sharing, tracks data ownership, and enhances traceability and transparency. Daato is allows data imports from other organisational software and third-party information sharing without compromising business integrity. Every change in the system is recorded to ensure traceability.

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