Carbon Credits Integration in the CSRD: Everything you Need to Know

The European Union (EU) Directive 2022/2464, commonly known as the "CSRD" (Corporate Sustainability Reporting Directive), marks a turning point in how companies report their sustainability actions including the management of carbon credits. This article focuses on the integration of carbon credits into the CSRD, exploring how companies are required to manage and report them as part of their sustainability obligations.

Integration of Carbon Credits in ESRS E1 - Climate Change

The CSRD covers various aspects of sustainability, and the integration of carbon credits falls primarily within the scope of ESRS E1 – Climate Change.

The ESRS E1 standard is specifically dedicated to climate change. It outlines the 9 required Disclosure Requirements (DRs) necessary for preparing the climate section of the sustainability report. Its objective is to enable readers of the sustainability report, such as investors, customers, and other stakeholders, to understand several key elements, including:

• How the company impacts the climate, including its positive and negative effects, both current and potential.
  
  
• The initiatives implemented by the company to prevent, reduce, or remediate these impacts, and to manage the risks and opportunities related to climate change.
  
  
• How the company plans to adapt its strategy and business model to the transition toward a sustainable economy.
  
  
• The financial consequences of climate-related risks and opportunities for the company.

Among these nine requirements, one specifically concerns carbon credits: Disclosure Requirement E1-7 – GHG removal and mitigation projects financed through carbon credits.

Disclose Requirement E1-7 - GHG Removal and Mitigation Projects Financed through Carbon Credits

What does Disclosure Requirement E1-7 consist of?

This obligation mandates companies to disclose in detail the efforts undertaken to finance the reduction or removal of greenhouse gas (GHG) emissions, with a particular emphasis on the use of carbon credits.

According to the disclosure requirement E1-7, reporting companies must disclose information regarding: 

• The removal and storage of GHGs, expressed in metric tons of CO2 equivalent, resulting from projects carried out within the company’s own operations or to which it has contributed within its upstream or downstream value chain.
  
  
• The amount of GHG emissions reductions or removals resulting from climate change mitigation projects financed outside the company’s value chain through the purchase of carbon credits.
  
  

This requirement aims to provide a clear understanding of the company's actions to actively support the removal of GHGs from the atmosphere, with the potential goal of achieving “net-zero” targets.

It also allows an understanding of the scale and quality of carbon credits purchased on the voluntary carbon market (VCM) and retired during the reporting period (removal and mitigation projects financed through carbon credits), which may support GHG neutrality claims.

In this regard, the information to publish on carbon credits include:

• The total amount of carbon credits outside the company’s value chain, expressed in metric tons of CO₂ equivalent, that have been verified against recognized quality standards and retired during the reporting period; and
• The total amount of carbon credits outside the company’s value chain, expressed in metric tons of CO₂ equivalent, that are planned to be retired in the future, whether or not this is based on existing contractual agreements.

How to carry out reporting on carbon credits?

Financing GHG emission reduction projects outside the company’s value chain through the purchase of carbon credits that meet high-quality standards can effectively contribute to climate change mitigation.

The standard requires the company to indicate whether it uses carbon credits separately from the information related to GHG emissions and GHG emission reduction targets. It also requires the company to demonstrate the scope of the use of these carbon credits as well as the quality criteria applied.

The reporting must include:

1/ The total amount of carbon credits purchased, verified by national or international quality standards, and retired during the reporting period, broken down by:

• The share (as a percentage of the volume) related to emission reduction projects and carbon removal projects: companies must disclose the quantity of carbon credits purchased on the voluntary carbon market, highlighting both greenhouse gas (GHG) mitigation and removal projects;
  
  
• For carbon credits originating from removal projects, an explanation of whether they come from biogenic or technological sinks;
  
  
• The share (as a percentage of the volume) associated with each recognized quality standard;
  
  
• The share (as a percentage of the volume) issued from projects carried out within the EU; and
  
  
• The share (as a percentage of the volume) that can be considered a corresponding adjustment under Article 6 of the Paris Agreement.

2/ The total amount of carbon credits, in tCO₂eq, scheduled to be retired in the future based on existing contractual agreements. Indeed, companies must also report on carbon credits that are scheduled to be retired in the future, based on contractual agreements.

Information related to carbon credits canceled during the reference year and those planned to be canceled in the future can be showcased using the following table formats:

When preparing the required information on carbon credits, the company must:

• Use recognized quality standards for carbon credits;
• Explain, where applicable, how the carbon credits fit into its climate change mitigation policy;
• Ensure that carbon credits from GHG removal projects within its value chain are not included (to avoid double counting), since these reductions are already reported under specific disclosure rules (Scope 2 or 3);
• Not account for carbon credits from GHG removal projects within its value chain for the same reason of double counting;
• Not declare carbon credits as offsets for its GHG emissions under disclosure requirement E1-6 (Gross GHG emissions for Scopes 1, 2, or 3 and total GHG emissions);
• Not present carbon credits as a means to achieve its GHG emissions reduction targets under disclosure requirement E1-4 (GHG emissions reduction targets);
• Calculate the amount of carbon credits to be retired in the future as the sum of carbon credits, expressed in metric tons of CO2 equivalent, over the duration of existing contractual agreements.

The importance of transparency and communication regarding carbon credits

The CSRD emphasizes the need for companies to demonstrate increased transparency around the use of carbon credits, particularly by clarifying how these efforts align with broader greenhouse gas (GHG) emissions reduction targets, in line with commitments made under the global goal of limiting global warming to 1.5°C.

The case of public greenhouse gas (GHG) neutrality claims

When a company makes public claims of GHG neutrality, it must explain how these claims are supported by GHG emissions reduction targets and how the use of carbon credits contributes to achieving those targets without compromising their integrity.

The company must therefore explain:

(a) Whether and how these claims are accompanied by GHG emissions reduction targets, as required by disclosure requirement ESRS E1-4 (GHG emissions reduction targets);
(b) Whether and how these claims and the use of carbon credits do not prevent or undermine the achievement of these GHG emissions reduction targets or, where applicable, the company’s “net zero” goal; and
(c) The credibility and integrity of the carbon credits used, including by referencing recognized quality standards.

The case of publishing a "net-zero target"

If a company publishes a “net zero” target in addition to its gross GHG emissions reduction targets, it implies:

• Achieving a level of emissions reduction across the value chain that is consistent with the reduction required to meet the global “net zero” objective in pathways that limit the global warming to 1.5°C.
  
  
• Neutralizing the impact of any residual emissions (after reducing GHG emissions by approximately 90 to 95%, with potential sector-specific adjustments based on recognized sectoral pathways) by permanently removing an equivalent amount of CO₂.
  
  

The question has been raised whether a company must wait until it has reduced 90–95% of its GHG emissions before being allowed to work with GHG removals such as through the use of carbon credits. EFRAG has recently clarified that this is not the case.

If a company publishes a “net zero” target, it must describe the scope, methodologies, and frameworks adopted, as well as how the residual GHG emissions are intended to be neutralized.

However, this does not prevent companies from engaging in GHG removals before reaching the 90–95% emissions reduction threshold close to the “net zero” point, it is quite the opposite.

According to the SBTi, value chain decarbonization is increasingly becoming a minimum expectation, and the world currently faces a major investment gap, particularly in terms of funding climate projects in developing countries.

The latest BVCM (Beyond Value Chain Mitigation) report from the SBTi is a call to action: companies must scale up climate action financing, notably through the use of high-quality carbon credits, to go beyond science-based emissions reductions.

Conclusion

The integration of carbon credits into the CSRD, and more specifically into ESRS E1 - Climate Change, represents a significant step forward in enhancing corporate responsibility and transparency in sustainability matters.

By requiring detailed and transparent reporting on the use of carbon credits, the CSRD encourages companies to adopt more robust and credible strategies for reducing GHG emissions, thereby contributing effectively to the fight against climate change.

Sources : 

• ANC
• Europa
• E Frag