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THE NEW FRONTIERS OF THE EUROPEAN LEGISLATION TOWARD A CLIMATE-NEUTRAL EUROPE

How will this impact the corporate world?

On the 11th of December 2019 the European Commission announced the European Green Deal to transform the EU into the first climate-neutral continent by 2050. The European Green Deal is a commitment to future generations to provide a prompt and sustainable response to climate-change, the most impactful long-term challenge of our days. Climate change and environmental degradation are an existential threat to Europe and the world. The legislative framework set out by the European Green Deal aims at tackling climate change by achieving a just and inclusive transition towards a clean, affordable and secure energy supply, a modernized EU industry, a clean and circular economy, the protection of biodiversity, sustainable resilient and smart mobility, and a fair and healthy food system. Quantitatively speaking one third of the €1.8 trillion investments from the NextGenerationEU Recovery Plan, and the EU’s seven-year budget will finance the European Green Deal. By knowing this you will realize that engaging in this common challenge will not just require the  adoption  of new regulations, but will open the way to emerging opportunities. 

What we’ll try to figure out today is how this new attention to environmental sustainability will impact the corporate world in the very next future. 

In December 2022, the Corporate Sustainability Reporting Directive (CSRD) was published in the official journal and it entered into force the last 5th of January. This new directive modernizes and strengthens the rules concerning the social and environmental information that companies have to report. A broader set of large companies, as well as listed SMEs, will now be required to report on sustainability – approximately 50 000 companies in total. The new set of rules established from the CSRD, will ensure that investors and other stakeholders have access to the information they need to assess investment risks arising from climate change and other sustainability issues. This will also create a culture of transparency about the impact of companies on people and the environment. Finally, reporting costs will be reduced for companies over the medium to long term by harmonizing the information to be provided. The public sector as well as those companies designated by national authorities as public-interest entities, will be on the front line in the implementation of this new directive. They will have to apply the new rules for the first time in the 2024 financial year, for reports published in 2025. Companies subject to the CSRD will have to report according to European Sustainability Reporting Standards (ESRS).

In this regard, the Commission is working alongside the European Financial Reporting Advisory Group to tailor the draft sustainability reporting standards to the EU policies, while building on and contributing to international standardization initiatives.

On the 6th of June, the Commission opened a four-weeks period of public consultation to collect feedback on a first set of sustainability reporting standards for companies. Taking into consideration the response received during the feedback period, the Commission will adapt the standards accordingly and proceed with the submission to the European Parliament and Council for scrutiny. 

 

The first environmental standard (E1) regards climate change.

Under this topic standard, the companies undertaking the report will have to declare how they plan to transition towards a sustainable, low carbon economy, which basically means reducing their greenhouse gas emissions and adapting their strategy and business model to become more resilient to climate change risks. The matters covered by this topic standard are: climate change mitigation and adaptation and energy topic. 

  • In regards to the general disclosure the undertaking will indicate if in the framework of the governance of climate related impact risks and opportunities, the company developed a remuneration instant tax scheme based on the achievement of the greenhouse gas emission reduction. 
  • Regarding the strategy pillar, the E1 requires whether and how the undertaking has defined a transition plan, including the greenhouse emission reduction targets, (benchmarked with a 1.5 degrees scenario). E1 also requires a resilience analysis of its strategy and business model and finally to explain how it has assessed the climate related impact risk and opportunity. 
  • The impact risks and opportunities management section requires to disclose any climate related policies, action plans and related resources, including how these resources are consistent with the Green OpEx (operating expenses) and CapEx (Capital expenditure) disclosed under the EU taxonomy. 
  • Finally the metrics and targets section addresses energy consumption and energy mix, greenhouse gas emissions removals and carbon credits, financial disclosure like any internal carbon pricing scheme and any potential financial effects from physical and transition risk and opportunities.

    In particular the undertaking will have to disclose the following elements:

     

    • Compatibility of GHG emission reduction targets with limiting global warming to 1.5°C;
    • Decarbonisation levers identified and key actions planned; 
    • Investments and funding supporting the implementation; 
    • Potential locked-in GHG emissions from key assets and products;
    • Objective of aligning its economic activities with the EU Taxonomy; 
    • Whether or not it’s excluded from EU Paris-aligned;
    • Benchmarks ELEMENTS;
    • Alignment with overall business strategy and financial planning; 
    • Implementation progress; 

     

    With regard to climate-related information users are interested in knowing about undertakings’ physical and transition risk and about their resilience as regards, but also their plans to adapt to different climate scenarios and to adapt to the Union’s objective of climate neutrality by 2050. 

     

    In summary, the undertaking is expected to provide a high-level explanation of how it will adjust its strategy and business model to ensure compatibility with the transition to a sustainable economy and with the limiting of global warming to 1.5°C in line with the Paris Agreement and the objective of achieving climate neutrality by 2050 with no or limited overshoot, and where applicable, its exposure to coal, oil and gas related activities. 

    In the framework of assessing the climate related material impact risks and opportunities,the impact refers directly to the greenhouse gas emissions calculation. Gross material risks and opportunities result from the physical hazard like the sea level rise and transition events like the eventuality of a new carbon tax in some countries. Under certain climate scenarios that will be factored based on the location of the assets, these gross risks should then be translated into potential financial effects expressed in monetary amounts. The transition plan, which is the ensemble of actions and resources planned to mitigate the risks related to climate change, is then leading to the resilience analysis which reflects the net risks for the undertaking. The net risks are explanatory of the undertaking’s ability to absorb material risks or adapt the business model to new sustainability requirements.  

    Finally, for what concerns metrics and standards, the focus falls on the targets related to climate change mitigation and adaptation. So, the undertakings shall disclose whether and how they have set GHG emission reduction targets. If any, the description shall include the expected decarbonisation levers like energy efficiency, electrification or use of renewables and their overall quantitative contributions to achieve the targets. On the contrary removals and carbon credits should not be mentioned as means to achieve the emissions’ reduction target. Also the energy consumption and mix shall be disclosed and broken down between nonrenewable and renewable sources, for example: 

    • fuel consumption from coal, oil, natural gas or other non-renewable sources;
    • consumption from nuclear;
    • consumption of electricity, heat, steam and cooling from nonrenewable sources; 

    While for the renewable energy the undertaking will report: 

    • fuel consumption from renewable sources;
    • consumption of electricity, heat, steam and cooling from renewable sources;
    • consumption of self-generated non-fuel renewable energy.

     

    Also the energy intensity per revenue will have to be disclosed under this pillar and will have to meet the SFDR requirements for the data infrastructure for sustainable finance.

     

The second environmental standard (E2) regards pollution : 

The objective of the E2 pollution related standards is to understand: 

  • How the undertaking affects pollution of air, water and soil, in terms of positive and negative material actual and potential impacts. 
  • Actions taken, and the result of such actions, to prevent, mitigate or remediate actual or potential material negative impacts. 
  • The plans and capacity of the undertaking to adapt its strategy and business model in line with the transition to a sustainable economy. 
  • The nature, type and extent of the undertaking’s material risks and opportunities related to the undertaker’s pollution-related impacts and dependencies, and how the undertaking manages them. 
  • The financial effects on the undertaking over the short-, medium- and long-term time horizons of material risks and opportunities. 

E2 standard is structured around two sections: 

  • Impact, risk and opportunity management;
  • Metrics and Targets.                                                                                                                      The first section regarding impact risk and opportunity management includes two pillars: General disclosures and Policies, actions and resources. 

GENERAL DISCLOSURES

The disclosures require a description of processes to identify and assess material pollution-related impact risks and opportunities that include: 

  • methodologies, assumptions and tools used to screen its site locations and business activities;
  • interconnection between risks and opportunities; 
  • process for conducting consultations and in particular with affected communities. 

According to the corresponding application requirements the undertaking shall consider the LEAP approach: LOCATE, EVALUATE, ASSESS, PREPARE.

LOCATE : The undertaking should consider location, including:

– Site locations of direct assets and operations and related upstream and downstream activities across the value chain;

– Site locations where emissions of water, soil and air pollutants occur; 

– Sectors or business units related to those emissions or with the production, use, distribution, commercialisation and import/export of substances of concern and substances of very high concern on their own, in mixtures or in articles. 

EVALUATE : Evaluate impacts and dependencies for each material site or sector/business unit including by assessing the severity and likelihood of impacts on the environment and human health. 

ASSESS : Based on phase 1 and 2 the undertaking shall consider assessing the material risk and opportunities by: 

– identifying transition risks and opportunities in its own operations and its upstream and downstream value chain.  

– identifying physical risks. 

– identifying opportunities related to pollution prevention and control.

PREPARE : The outcome of the materiality assessment consists in: 

– a list of site locations where pollution is a material issue for the undertaker’s operations and its value chain;  

– a list of business activities associated with pollution material impacts, risks and opportunities.

POLICIES, ACTIONS AND RESOURCES

According to ESRS 1 a policy implements the undertaking’s strategy or management decisions related to a material sustainability matter. If pollution has been assessed as a material topic, the undertaking shall disclose its policies implemented to manage its material related to pollution prevention and control. 

So basically, the undertaking will have to indicate whether and how its policies address the following areas on its own operations and throughout the upstream and downstream value chain: 

  • Mitigating negative impacts related to pollution of air, water and soil including prevention and control; 
  • Minimizing and substituting substances of concern and phasing out substances of very high concern, in particular for non-essential societal use and in consumer products; 
  • Avoiding incidents and emergency situations, and if and when they occur, controlling and limiting their impact on the environment and/or civil society. 

If the policy was not yet implemented by the undertaking, this information should be disclosed as well as the time frame for the policy implementation. 

Under the policy section of the report, the undertaking shall disclose its pollution-related actions and the resources allocated to their implementation. This ensemble of actions should refer to a mitigation hierarchy structured in 3 layers: 

  • Avoid pollution including any phase out of materials or compounds that have a material negative impact;
  • Reduce pollution including any phase-out of materials or compounds and by meeting enforcement requirements such as Best Available Techniques (BAT) requirements or the address of Do No Significant Harm criteria for pollution prevention and control; 
  • Restore, regenerate and transform ecosystems where pollution has occurred.

METRICS AND TARGETS

Follows the metrics and targets section that combines qualitative and quantitative data points.Targets refer to measurable, outcome-oriented goals that the undertaking aims to achieve in relation to material impacts, risks or opportunities. Under this specific topic, the disclosure shall indicate whether and how targets relate to the prevention and control of: 

  • Air pollutants 
  • Emissions to water 
  • Pollution to soil 
  • Substances of concern and substances of very high concern.

If ecological and entity-specific thresholds were taken into consideration when setting targets, the undertaking shall also specify: 

  • The ecological thresholds identified, and the methodology used to identify such thresholds; • Whether or not the thresholds are entity-specific and if so, how they were determined; and • How responsibility for respecting identified ecological thresholds is allocated in the undertaking. 

Metrics refer to qualitative and quantitative indicators that the undertaking uses to measure and report on the effectiveness of the delivery of its sustainability-related policies and against its targets over time. 

The undertaking shall disclose the pollutants that are generated or used during production processes or that are procured, such as:

  • Emissions of air pollutants generated by the undertaking;
  • Emissions to water generated by the undertaking;
  • Emissions of inorganic pollutants generated by the undertaking;
  • Emissions of ozone-depleting substances generated by the undertaking;
  • Microplastics generated or used by the undertaking.

In addition, under this topic standard the undertaking shall disclose any relevant information regarding the production, use, distribution, commercialisation and import/export of substances of concern and substances of very high concern on their own operations, to enable an understanding of the impact of the undertaking on the environment. 

Lastly,the undertaking shall disclose its potential financial effects of material risks and opportunities arising from pollution-related impacts (impact on the undertaking’s cash flows, performance, position, development, cost of capital or access to finance over the short-, medium- and long-term time horizons). In particular the disclosure shall include a quantification of the potential financial effects in monetary terms with the inclusion of:

  • the share of net revenue made with products and services that are either containing substances concerned and substances of very high concern; 
  • separately OpEx and CapEx associated with the major incidents and deposit; 
  • the provision for environmental protection and remediation costs.

When practicable the undertaking shall disclose the following qualitative information: 

  • Description of the effects considered, the related impacts and the time horizon in which they are likely to materialize;
  • Critical assumptions used in the estimate.

The third environmental standard (E3) regards water and marine resources:

According to the statistics of the European Environment Agency’s State of the environment report for 2020, the water demand will increase by 55% by 2050. The report states that 40% of marine environments are now severely altered and also EU water abstraction decreased by 19 % between 1990 and 2015, 89% of water bodies have achieved a good quantitative status, but only 40% of water bodies have achieved a good ecological status in terms of quality and just 38% a good chemical quality status. 

The objective of this topic standard is to understand how the undertaking affects water and marine resources, in terms of positive and negative material actual and potential impacts. The undertaking will be requested to disclose information regarding actions taken, and the result of such actions, to prevent, mitigate or remediate actual or potential material negative impacts and to protect water and marine resources, as well as the plans and capacity of the undertaking to adapt its strategy and business model in line with the preservation and restoration of water and marine resources.The topic standard E3 will focus also on the nature, type and extent of the undertaking’s material risks and opportunities related to the undertaker’s impacts and dependencies on water and marine resources, and the financial effects on the undertaking over the short-, medium- and long-term time horizons of material risks and opportunities. 

POLICY, ACTIONS AND RESOURCES

In the policy section, the policies will have to be disclosed when they address the identification, assessment, management and/or remediation of material water-related impacts, risks and opportunities. Then the undertaking shall disclose whether and how its policies address the following matters: 

  • Water management including the use and sourcing of water and marine resources in their own operations;
  • Product and service design in view of addressing water-related issues and the preservation of marine resources;
  • Commitment to reduce material water consumption in areas at water risk in its own operations and along the upstream and downstream value chain. 

Also other two elements have to be disclosed in a mandatory manner, which are the policies in relation to sites located in areas of high-water stress and policies or practices related to sustainable oceans and sea. 

In regards to the actions and resources, the undertaking shall disclose a description of actions and the resources allocated to the implementation of water and marine resources-related policies. Also in this case the actions refer to the mitigation hierarchy, including avoid the use of marine resources, reduce it and restore, regenerate and transform marine ecosystems and basins. The undertaking shall also specify actions and resources in relation to areas at water risk, including areas of high-water stress. In addition it’s  important  in the application requirement considering water and marine resources as shared resources which may require collective actions, or action plans, involving other stakeholders. If this is the case the undertaking may provide information on those specific collective actions. 

METRICS AND TARGETS

The undertaking shall indicate whether and how its targets set out in relation to the metrics provided in the standards, relate to: 

  •   the management of material impacts, risks and opportunities;
  •  the responsible management of marine resources impacts including the nature and   quantity of marine resources-related commodities used by the undertaking;
  •  the reduction of water consumption  including an explanation of how those targets relate to areas at water risk, including areas of high water-stress.

If ecological and entity-specific thresholds were taken into consideration when setting targets, the undertaking shall also specify: 

  • The ecological thresholds identified, and the methodology used to identify such thresholds; • Whether or not the thresholds are entity-specific and if so, how they were determined; and • How responsibility for respecting identified ecological thresholds is allocated in the undertaking. 
  • Whether the targets it has adopted and presented are mandatory (based on legislation) or voluntary and if and how such legal requirements were taken into account when considering ecological thresholds. 

Moving now to the metrics, the main metric regards the water consumption. 

The undertaking shall disclose information on its water consumption performance related to its material impacts, risks and opportunities. In particular the undertaking shall disclose on its own operations: 

  • Total water consumption in m3;
  • Total water consumption in m3 in areas at material water risk, including areas of highwater stress; 
  • Total water stored and changes in storage in m3;
  • Total water recycled and reused in m3; 
  • Total water consumption in m3 per net revenue;
  • Any contextual information related to the above, including regarding the local basins’ water quality and quantity, how the data have been compiled, such as any standards, methodologies, and assumptions used, including whether the information is calculated, estimated, modeled, or sourced from direct measurements, and the approach taken for this, such as the use of any sector-specific factors. 

And finally the potential financial effects from water and marine resources. 

The objective of the disclosure requirement is to provide an understanding of:

  • Potential financial effects due to material risks arising from water and marine resources-related impacts and how these risks have a material influence on the undertaking’s cash flows, performance, position, development, cost of capital or access to finance over the short-, medium- and long-term time horizons; 
  • Potential financial effects due to material opportunities arising from water and marine resources-related material impacts and dependencies and how the undertaking may financially benefit from material water and marine resources related opportunities.

The disclosure shall include: 

  • A quantification of the potential financial effects in monetary terms, or where impracticable, qualitative information. 
  • A description of the effects considered, the related impacts and the time horizons in which they are likely to materialize. 
  • The critical assumptions used in the estimate, as well as the sources and level of uncertainty attached to those assumptions.

The fourth environmental standard (E4) regards Biodiversity and ecosystems:

 

The disclosure requirements were designed to generate data with the objective in mind to help users understand : 

  • How the undertaking affects biodiversity and ecosystems, in terms of positive and negative material actual and potential impacts. 
  • Actions taken, and the result of such actions, to prevent, mitigate or remediate actual or potential adverse impacts and to protect and restore biodiversity and ecosystems. 
  • The plans and capacity of the undertaking to adapt its business model and operations in line with international frameworks and strategies.
  • The nature, type and extent of the undertaking’s material risks and opportunities related to the undertaker’s impacts and dependencies on biodiversity and ecosystems, and how the undertaking manages them. 
  • The financial effects on the undertaking over the short-, medium- and long-term time horizons of material risks and opportunities arising from the undertaker’s impacts and dependencies on biodiversity and ecosystems. 

For the E4, the first individual disclosure requirement regards the transition plan for biodiversity and ecosystems. 

 

This general disclosure is mandatory just for the following priority sectors: 

Agriculture & Farming Forestry; 

• Construction & Engineering; 

• Oil & Gas from Midstream and Downstream; 

• Energy Production and Utilities;

• Water & Waste Services; 

• Food & Beverages; 

• Paper & Wood Products; 

• Building materials; 

• Chemical products; 

• Coal Mining;

• Mining; 

• Oil & Gas Upstream & Services; 

• Pharma;

• Biotechnology; 

• Textiles; 

• Accessories; 

• Footwear & Jewelleries; 

• Tobacco; 

• Transportation.

 

If the undertaking has implemented a transition plan it shall disclose its plans for operations throughout the upstream and downstream of the value chain, as well as how the business development strategy interact with the achievability of the transition plan.The mitigation hierarchy plays an important role here, as the undertaking is requested to disclose the main path-dependencies and locked-in assets and resources that are associated with biodiversity and ecosystems change, as well as to indicate whether or not biodiversity offsets are part of the transition plan. And if so, where the offsets are planned to be used, the extent of use in relation to the overall transition plan, and whether the mitigation hierarchy was considered.

 

The second individual requirement of E4 was designed to understand how resilient the strategy and business model of the undertaking is from a biodiversity and ecosystem perspective. The description of the integration of material impact, risks and opportunities in the business model should include: 

  • An assessment of the resilience of the current business model(s) and strategy to biodiversity and ecosystems related physical and transition risks.

  • The scope of the resilience analysis, (i) along the own operations and related upstream and downstream value chain and (ii) the material transition and physical biodiversity and ecosystems-related risks covered. 

  • The key assumptions made. 

  • The time horizon over which the analysis has been conducted. 

  • The results of the resilience analysis. 

  • The involvement of stakeholders, including, where appropriate, holders of indigenous and local knowledge.

 

The undertaking will also have to provide a description of processes to identify and assess material biodiversity and ecosystem-related impacts, risks and opportunities. In particular, the undertaking shall disclose whether or not it has sites located in or near biodiversity-sensitive areas and whether activities related to these sites negatively affect these areas by leading to the deterioration of natural habitats and the habitats of species and to the disturbance of the species for which a protected area has been designated.

 

The sustainability measures covered by E4 include the direct drivers of biodiversity loss: Climate change;

Land-use change, freshwater-use change and sea-use change;

Direct exploitation;

Invasive alien species;

Pollution;

but also Impacts on the extent state of species (i.e., species population size, species global extinction risk), impacts on the extent and condition of ecosystems and impacts and dependencies on ecosystem services.

 

POLICY, ACTIONS AND RESOURCES

 

In regards with the policies related to biodiversity and ecosystems, the undertaking is requested to disclose those policies that:

  • Are connected to and in alignment with the Post-2020 Global Biodiversity framework as well as the EU Biodiversity Strategy for 2030 and other relevant EU and national policies and legislation related to biodiversity and ecosystems, 

  • Relate to its material biodiversity and ecosystems-related impacts, 

  • Relate to material dependencies and material physical and transition risks and opportunities. 

  • Support traceability of products, components and raw materials with significant actual or potential impacts on biodiversity and ecosystems along the value chain. (Demonstrated by regular monitoring and reporting of biodiversity status and gains or losses).

  • Addresses production, sourcing or consumption from ecosystems that are managed to maintain or enhance conditions for biodiversity. 

  • Addresses social consequences of biodiversity and ecosystems related impacts. 



Following the policies the undertaker’s asked how it substantiates the policies. The objective of this requirement is to understand the key actions taken and plans that significantly contribute to the achievement of biodiversity and ecosystem related policies objectives and targets.The description of these actions shall: 

  • Indicate to which layer in the mitigation hierarchy a key action plan can be allocated to.

  • Explain whether or not it used biodiversity offsets in its action plans. If the action plans do contain biodiversity offsets, the undertaking shall disclose.

  • Describe how it has incorporated local and indigenous knowledge and nature-based solutions into biodiversity and ecosystems-related actions plans. 



The undertaker should provide the following details for key action plans: 

 

i. a list of key stakeholders involved and how they are involved; 

ii. where applicable, an explanation on the need for appropriate consultations and the need to respect the decisions of affected communities; 

iii. a brief assessment whether the key action plans may induce significant adverse sustainability impacts; 

iv. an explanation whether the key action plan is intended to be a one time initiative or systematic practice; 

v. an explanation whether the key action plan is carried out only by the undertaking or whether it is part of a wider action plan.

 

METRICS AND TARGETS

 

In this section the undertaking shall describe the biodiversity and ecosystem-related targets it has adopted, underlining whether ecological thresholds and allocations of impacts to the undertaking were applied when setting targets. This will help understand if such targets are set, based on conclusive scientific evidence. Also the undertaking shall specify if those targets are connected to and / or aligned with the Post-2020 Global Biodiversity Framework, the EU Biodiversity Strategy for 2030 and other biodiversity and ecosystem-related national policies and legislation. 

 

Regarding the metrics: 

  • If the undertaking identifies sites located in or near biodiversity-sensitive areas that it is negatively affecting, it shall disclose the number and area (in hectares) of sites owned, leased or managed in or near these protected areas or key biodiversity areas. 

  • If the undertaking has identified material impacts with regards to land-use change, or impacts on the extent and condition of ecosystems it shall disclose their land-use via a Life Cycle Assessment, based on a Life Cycle Assessment. 

  • If the undertaking directly contributes to the impact drivers of accidental or voluntary introduction of invasive alien species, it shall disclose how it manages pathways of introduction and spread of invasive alien species and the risks posed by invasive alien species. 

 

If the undertaking identified material impacts related to the state of species, it shall report metrics it considers relevant and:

  • Consider population size, range within specific ecosystems as well as extinction risk. 

  • Include one or more indicators that measures changes in the number of individuals of a species within a specific area. 

  • Include one or more indicators when disclosing information on species at global extinction risk such as the threat status of species and how activities/pressures may affect the threat status or the change in the relevant habitat for a threatened species as a proxy for the undertakings impact on the local population’s extinction risk. 

 

Finally the last disclosure requirement is about potential financial effects from biodiversity and ecosystem-related impacts, risks and opportunities The objective of this Disclosure Requirement is to provide an understanding of: 

  • potential financial effects due to material risks arising from biodiversity- and ecosystem-related impacts and dependencies and how these risks have a material influence (or are likely to have a material influence) on the undertaking’s cash flows, performance and position, development, cost of capital or access to finance over the short-, medium- and long-term time horizons; 

  • potential financial effects due to biodiversity- and ecosystem-related material opportunities and how the undertaking may financially benefit from such material opportunities. 

 

The disclosure do not differ from the other topic standards and shall include: 

• A quantification of the potential financial effects in monetary terms, or where impracticable, qualitative information. (it may be a single amount or a range);

• A description of the effects considered, the related impacts and the time horizons in which they are likely to materialize; 

• The critical assumptions used in the estimate, as well as the sources and level of uncertainty attached to those assumptions.

 

The fifth environmental standard (E5) regards Resource use and circular economy: 

 

From the EU circular economy action plan : 

“There is one planet Earth yet by 2050 the world will be consuming as if there were three.”

 

Global consumption of material such as biomass, fossil fuel, metals and minerals is expected to double in the next 40 years, while annual waste generation is projected to increase by 70% by 2050, which gives the ambition of the EU in terms of circular economy and resources use. The CSDR emphasizes the concept of circular economy stating that: 

 

“Achieving a climate neutral and circular economy without diffuse pollution requires the full mobilization of all economic sectors”, Recital 42. 

The objective of the standard is to understand: 

  • how the undertaking affects resource use in terms of positive and negative material actual and potential impacts;
  • The actions taken, and the result of such actions, to prevent, mitigate or remediate actual or potential material negative impacts arising from resource and circular economy; 
  • The plans and capacity of the undertaking to adapt its strategy and business model in line with circular economy principles; 
  • The nature, type and extent of the undertaking’s material risks and opportunities related to the undertaker’s impacts and dependencies arising from resource use and circular economy, and how the undertaking manages them;
  • The financial effects on the undertaking over the short-, medium- and long-term time horizons of material risks and opportunities. 

 

The first section is about the impact risks and opportunities management. It has to be understood and read in conjunction with ESRS 2 which states how to describe the process to identify and assess material impact risk and opportunities and add some information in relation with resource use and circular economy. In particular the LEAP approach shall be followed when undertaking the materiality assessment. 

LOCATE: The first phase of the LEAP approach shall take in consideration the location in terms of areas at risk for inflows (resource use) and outflows (waste treatment, circular economy strategies), but also in consideration of other matters like contribution to direct impact drivers and dependencies on ecosystem services. Basically we can think about location as an element of key importance for the dependency on some materials and resources, but also in terms of output it may be relevant, since for instance, the waste treatment challenges are not the same depending on the area where the production and operations of a company take place. 

EVALUATE: The second phase of the LEAP approach is the evaluation of the impact and dependencies. 

ASSESS: Then we move to the assessment of risks and opportunities. This phase includes the identification of transition risks and opportunities (policy and regulation, technology, market, reputation), of physical risks (resource depletion) and opportunities (resource efficiency, markets, financing, resilience, reputation) , with the possibility to provide life cycle assessment and other tools including the organizational environmental footprint (OEF) and the product environmental footprint (PEF). 

PREPARE: In this last phase of this materiality assessment, the undertaking may include the possible outcomes of the actions described in the previous phases. For instance: 

  • a list of business units associated to resource use and circular economy material impacts, risks and opportunities in the context of the products and services of the undertaking and the waste it generates; 
  • a list and prioritization of the material resources used by the undertaking; 
  • the material impacts and risks of staying in business as usual; 
  • the material opportunities related to a circular economy; 
  • the material impacts and risks of a transition to a circular economy; 
  • the stages of the value chain where resource use, risks and negative impacts are concentrated.

 

POLICIES, ACTIONS AND RESOURCES

 

The policies have to be disclosed only when aligned with the circular economy and resource use related impact risks and opportunities. In this case the undertaking shall indicate whether and how its policies that have been implemented address the transition away from extraction of virgin non-renewable resources, the securing and contribution to the regenerative production of renewable resources and the regeneration of ecosystems they are part of.

 

Moving to actions and resources related to resource use and circular economy, they only have to be disclosed when related to material arrows and to the policies that have been implemented. 

The undertaking shall specify whether and how action and resources cover: 

  • Any of the layers of the waste hierarchy: a) prevention; (b) preparing for re-use; (c) recycling; (d) other recovery, e.g., energy recovery; and (e) disposal.
  • More detailed circular economy strategy throughout the value chain of the product: Refuse, Rethink, Reduce, Reuse, Repair, Refurbish, Remanufacture and Repurpose), Recycle; 
  • A description of the actions, including circularity measures, taken to prevent waste generation in the undertaking’s upstream and downstream value chain and to manage material impacts arising from waste generated. 

 

TARGETS AND METRICS

The undertaking shall disclose the targets related to resource use and circular economy,  indicating whether and how they relate to the: 

  • Increase of circular design (including for instance product design); 
  • Increase of circular material use rate; 
  • Minimisation of virgin non-renewable raw material with possibly targets for virgin non renewable raw material and targets for virgin renewable raw material; 
  • Reversal of the depletion of the stock of renewable resources; 
  • Waste management, including preparation for proper treatment. 

 

If ecological and entity-specific thresholds were taken into consideration when setting these targets, the undertaking shall also specify:

  • The ecological thresholds identified, and the methodology used to identify such thresholds; • Whether or not the thresholds are entity-specific and if so, how they were determined; and • How responsibility for respecting identified ecological thresholds is allocated in the undertaking. 
  • Whether the targets it has adopted and presented are mandatory (based on legislation) or voluntary and if and how such legal requirements were taken into account when considering ecological thresholds.

 

Before moving to metrics which differ among resource inflow and outflow, let’s clarify these two concepts: 

 

  • Resource inflow refers to the movement or influx of resources into an organization. It represents the acquisition or addition of resources that contribute to the functioning, development, or growth of the entity receiving them. In particular natural resource inflow pertains to the influx of natural resources, such as minerals, water, timber, or energy sources, into a country or region. It can involve the extraction, importation, or discovery of natural resources that contribute to economic activities and development. In general, resource inflow is crucial for the sustainability, growth, and success of an entity. It enables organizations and countries to access the necessary inputs, capabilities, or assets required to carry out their operations, drive development, and achieve their goals. Effective management and utilization of resource inflows are essential to optimize their benefits and ensure long-term viability. 
  • Resource outflow refers to the movement or release of resources from an  organization. It represents the depletion, utilization, or transfer of resources that were previously acquired or present within the entity. In particular, natural resource outflow refers to the consumption, extraction, or export of natural resources from a country or region. It involves the utilization or depletion of resources such as minerals, water, timber, or energy sources, either for domestic or international purposes. Resource outflow is a natural consequence of resource utilization or the need to transfer resources to other entities. Effective management of resource outflows is important to ensure sustainable use of resources, optimize efficiency, and maintain a balance between resource acquisition and depletion. Additionally, strategic decisions regarding resource outflows can influence organizational development, competitiveness, and long-term sustainability.

 

With regards to the resources inflow, the undertaking shall disclose information on the material resource inflows in its operations and along the value chain.  For instance the undertaking shall provide a description of the products and materials used or produced including the packaging, and information regarding property, plant and equipment. 

 

Considering that the key products value chain according to the EU Circular economy action plan, are the following: 

-electronics and ICT, 

-batteries and vehicles, 

-packaging, 

-plastics, 

-textiles, 

-construction and buildings, 

-food, water and nutrients,

 

the undertakings who are active in one of “key products value chain” shall also include: 

  • The overall total weight of products and materials used during the reporting period; 
  • The weight in both absolute value and percentage of renewable input materials from regenerative sources used to manufacture the undertaker’s products and services (including packaging) ; 
  • The weight in both absolute value and percentage, of reused or recycled products and materials (non-virgin) used to manufacture the undertaker’s products and services (including packaging). 
  • Information on the methodologies used to calculate the data, including whether the data is sourced from direct measurement or estimations, and disclose the key assumptions used. 

 

With regards to the resource outflow, the structure  of the data disclosure is parallel to the one used for the resource inflow. The undertaking shall provide a description of its key products and materials that come out of the undertaking’s production process and that are designed along circular principles outflows in its own operations and along the value chain: durability, reusability, repairability, disassembly, remanufacturing, refurbishment, recycling or other optimisation of the use of the resource. 

 

Undertakings active in one of “key products value chain” shall also include: 

  • The weight and percentage of products and materials that come out of the undertaking’s products and services designed along circular principles: durability, reusability, repairability, disassembly, remanufacturing or refurbishment, recycling, recirculation by the biological cycle and other potential optimisation of product and material use. 
  • The weight and percentage of products and materials designed to enhance/enable circular economy for customers further down the value chain. 

 

In this context it is also interesting to understand the total amount of waste that the undertaking generates on its own operations at the reporting period. For instance the undertaking should disclose: 

  • The total amount of waste generated; 
  • For each type of hazardous and non-hazardous waste, the amount by weight diverted from disposal by recovery operation type: preparation for reuse, recycling and other. 
  • For each type of hazardous and non-hazardous waste, the amount by weight directed to disposal by waste treatment type: incineration, landfilling and other. 
  • The total amount and percentage of non-recycled waste.

 

Finally the last disclosure requirement is about potential financial effects from resource use and circular economy-related impacts, risks and opportunities. There is not a specific requirement for E5, the information disclosed is the same asked for the other environmental topics. Once again, the objective of this disclosure is to understand  how the risks related to resource use and circular economy have a material influence on the undertaking’s cash flows, performance, position, development, cost of capital or access to finance over the short-, medium- and long-term time horizons and how the undertaking may financially benefit from material resource use and circular economy related opportunities. 

 

The disclosure shall include: 

  • A quantification of the potential financial effects in monetary terms, or where impracticable, qualitative information. (it may be a single amount or a range);
  • A description of the effects considered, the related impacts and the time horizons in which they are likely to materialize; 
  • The critical assumptions used in the estimate, as well as the sources and level of uncertainty attached to those assumptions.