CSRD and Carbon Credits: A Simplified Guide for German Companies

Introduction

The Corporate Sustainability Reporting Directive (CSRD) marks a significant shift in sustainability reporting across the European Union, expanding the scope of reporting and introducing stringent transparency requirements. Senken and AtlasZero have collaborated to demystify the CSRD for businesses, particularly focusing on how your company can use carbon credits to compensate for residual emissions.

The full guide aims to simplify compliance, highlight strategic advantages, and explore the diverse options available for carbon credit engagement. To save you time, we have summarised the main concepts of the guide in this article.

Ok, so what is the CSRD all about?

In a nutshell, the Corporate Sustainability Reporting Directive (CSRD) seeks to establish a more standardised approach to sustainability reporting across the EU, ensuring that the information is uniform, reliable, and comprehensible to all stakeholders. This is done by outlining specific requirements companies must adhere to when developing their annual sustainability reports.

In essence, these requirements include:

• Double materiality: Companies must assess their sustainability impact from two perspectives: how their business affects people and the planet and how sustainability and climate change impact their business.
• Third-party assurance: The CSRD mandates that companies obtain limited assurance for their sustainability information. This entails an impartial, reliable, and knowledgeable third party reviewing the data to ensure its accuracy and reliability.
  • The information must be an integral part of the management report and be published digitally (XHTML).
• ESRS: Companies must adhere to the European Sustainability Reporting Standards (ESRS) for their sustainability reporting. These standards encompass environmental, social, and governance (ESG) aspects and are categorised into three groups:
  • 1 standard focusing on general principles for sustainability reporting (ESRS 1)
  • 1 standard covering overarching disclosure requirements (ESRS 2)
  • 10 topical ESG standards, each specifying distinct disclosure requirements (E1-E5, S1-S4, G1-G2).

Who will be affected by the CSRD?

Around 50,000 businesses operating within the European Union are expected to be affected by the recent introduction of the CSRD. Serving as an improved version of the Non-Financial Reporting Directive (NFRD), the CSRD is detailed here. Given the green light at the beginning of 2023, the CSRD initiated the countdown for the initial batch of companies obligated to comply with its reporting standards for the fiscal year 2024. It will then extend its compliance from all large companies to SMEs and finally to all non-EU-country companies.

Key concepts of CSRD compliance

Before starting to consider how to comply with the CSRD’s reporting, it's important to know when your company is required to act on the CSRD and to get familiar with the processHow to do this:

1. Use the timeline below to check in on when your company needs to begin reporting.
2. Begin to set up the processes to collect the data needed to report and fulfil requirements now, even if you do not need to begin reporting this year, and start to set up the internal processes for collating the data needed to report.

Other key concepts of compliance:

• Emissions Reporting: The CSRD necessitates a clear distinction between direct company emissions and offset efforts through carbon credits.
• Transparency in Carbon Credits: Detailed disclosures are required on the types, quality, and strategic use of carbon credits, aiming to ensure authenticity and impact.
• Net Zero and Carbon Neutrality Claims: Additional reporting guidelines apply for companies making these claims, focusing on the genuine reduction of emissions and the strategic use of offsets.
  • For net zero targets, disclose the methodologies and frameworks applied to create targets.
  • Example: Company X has set a Net Zero target of 2045 for scope 1, 2, and 3 emissions, using the IPCC guidelines and other tools to decide on a commitment that the company would be able to achieve. The company would disclose which tools it used, e.g., the IPCC guidelines.

What does the ESRS mean for companies purchasing carbon credits?

ESRS E1 focuses on Climate Change, detailing specific criteria for greenhouse gas emissions, net zero targets, climate-related claims, and carbon credits.

Specifically with regards to removal and mitigation projects, the ESRS 1 includes (art 53;(a;b)).

(a) insetting strategies - GHG removals and storage from its operations and its upstream and downstream value chain it may have developed in metric tonnes of CO2e

(b) BVCM through carbon credit projects  - the amount of GHG emission reductions or removals from climate change mitigation projects outside its value chain it has financed through any purchase of carbon credits.

The CSRD requirements for carbon credit compensation

The CSRD stipulates a clear demarcation in reporting between direct emissions and carbon credits purchased for offsetting. This distinct reporting ensures transparency and accurately assesses a company's direct environmental impact versus its compensation efforts through carbon offsets.

• Mandatory Quality Assurance: The directive stresses the acquisition of carbon credits that meet recognised quality standards, reinforcing the role of credible carbon credits in genuine environmental stewardship.
• Detailed Reporting Requirements: Companies are expected to report comprehensively on the carbon credits they purchase, highlighting their importance in their broader emission reduction strategies, especially net zero targets.
  • Companies must prepare plans for neutralising 5-10% of residual emissions. Carbon removal credits play a key role in achieving neutralisation.
• Strategic Approach to Net Zero: The CSRD underlines the necessity for a deliberate strategy regarding the application of carbon credits towards achieving net-zero goals, ensuring that these efforts are integral to a company's overall sustainability agenda.

Carbon credit options and associated benefits

• Diversification and Strategy: A diversified portfolio of carbon credits, considering project types and geographical locations, supports risk management and aligns with sector-specific impacts.
• An example of a diversified portfolio:

• Immediate and Future Planning: Businesses can opt for spot purchases for current needs or offtake/forward agreement contracts to secure future credits, balancing immediate compliance with long-term strategies.
  • Carbon credit prices are expected to increase 6 fold by 2031. -EY Net Zero Centre report
  • Offtake agreements are preferred by companies today due to their ability to secure scarce, high-quality credits for multiple years in advance at pre-determined, non-volatile price points.
• Needs Alignment: Before selecting a carbon credit strategy, it's critical to consider regulatory changes, budget, and corporate goals, ensuring that the chosen approach supports the broader sustainability objectives.

• Associated Benefits: Engaging with carbon credits offers companies a pathway to not only comply with the CSRD but also to:
  • Enhance brand reputation
  • Meet consumer demand for sustainability
  • Prepare for future regulations.

How to report on the carbon credits you have purchased

Companies within the CSRD's scope will have to disclose their emissions separately from any carbon credits purchased without aggregating the two. The reporting requirements for carbon credit projects purchased depend on whether and what climate-related target/claim is made.

• All companies must disclose the amount of tCO2e verified against recognised quality standards and cancelled in the reporting period.
• Companies who have already purchased carbon credits must declare the most important information about those carbon credits AND their future plans for using carbon credits.
• A company with net zero targets must explain how 5-10% of residual emissions will be neutralised.
• If a company makes carbon-neutral claims, it must be accompanied by GHG reduction targets, prove that the carbon credits purchased neither impede nor reduce the GHG reduction strategy and disclose the credibility and integrity of the carbon credits used (art.58).

Certain disclosure requirements need further clarification, particularly concerning the definition of "recognised quality standards” and "credibility and integrity of the carbon credits used" for companies with Net Zero targets.

Moreover, the interaction between CSRD, the upcoming EU Carbon Removal Certification Framework (CRCF), and the Green Claims Directive remains uncertain.

How Senken can help your company

Senken provides tools and resources to assist companies in developing their carbon credit strategy and achieving net zero goals, underscoring the importance of informed decision-making and strategic planning in the context of CSRD compliance.

Our approach focuses on helping companies de-risk their decarbonisation, and specifically neutralisation and BVCM strategies, and gain a competitive advantage through:

• Helping to create long-term strategies to lower cost, eliminate risk, and ensure net zero goals are achieved
• Risk-free purchases of high-quality carbon credits using the Senken Guarantee.
• Automatic reporting on your carbon credit purchases for CSRD
• Being there every step of the way with free advisory and marketing tools.

Explore Senken’s free tools today!

1. Senken Scorecard: Estimate your carbon footprint in 10 seconds using the Senken scorecard.
2. Net Zero Planner: Align your Net Zero journey with the 1.5 °C pathway with Senken's AI Net Zero Planner.
3. The Senken Academy: Created to break down the basics of Net Zero. Learn at your own pace or via the 5-day email crash course. Access it for free here.