As the effects of climate change evolve and countries announce net-zero targets, incentivizing the private sector to decarbonize is becoming increasingly critical.

Customers and legislators are now pressuring companies to disclose environmental indicators, including carbon emissions, considered as the first step towards reduction measures.

In addition to the existing frameworks and standards available, governments across the world are working on new laws, to ensure higher adoption and standardization of carbon accounting processes, letting companies’ stakeholders use carbon emission values as a KPI for decision-making.

This article clarifies the current and future reporting requirements for companies in the European Union and Switzerland, which include Scope 1-3 GHG emissions disclosures.

Is carbon reporting mandatory in the European Union?

Yes - currently large public-interest companies (listed companies, banks, insurance companies) with 500+ employees must report on carbon emissions, based on the Non-Financial Reporting Directive (NFRD). The level of detail of Scope 1-3 emissions disclosures depends on a materiality assessment explained below.

Starting in 2025, the Corporate Sustainability Reporting Directive (CSRD) will amend the NFRD and extend its scope.

What is the Non-Financial Reporting Directive (NFRD)?

The Non-Financial Reporting Directive (2014/95/EU) lays down the rules regarding non-financial information reporting requirements for large companies. This Directive amends the more general Accounting Directive (2013/34/EU). It is in force until the beginning of CSRD starting 1 January 2024 (detailed below).

Who is affected by NFRD?

Approximately 11’700 companies and groups across the EU are affected by NFRD and shall include a “Non-financial report” in their management report.

• Large public-interest companies (listed companies, banks, insurance companies)
• with 500+ employees

What must be reported in the NFRD?

The companies concerned with this regulation must report information in relation to, at least, the following 5 matters: environmental-, social & employee-, respect for human rights-, anti-corruption- and bribery matters.

This non-financial report must therefore include:

• a brief description of the company’s business model;
• a description of the policies pursued in relation to those matters and the due diligence processes implemented, and the outcomes of those policies;
• the principal risks related to those matters and how the company manages those risks;
• relevant non-financial KPIs.

The EU Commission published a non-binding guideline to clarify how to report this non-financial information. It includes a list of indicators that companies should disclose, such as Scope 1-3 greenhouse gas (GHG) emissions in metric tons.

To understand whether one of these indicators, such as Scope 1-3 GHG emissions, must be reported, it is important to know that:

• The NFRD is based on a “comply-or-explain principle”, stipulating that where a company does not pursue policies related to one or more of the matters above, it should provide a clear and reasoned explanation for not doing so;

• Whether or not an indicator recommended in the guideline should be disclosed is subject to the company’s materiality assessment;

• The NFRD follows the “double-materiality” concept, meaning that the company should consider (1) how sustainability issues may affect the company and its financial value (”Financial-”, “outside-in” materiality)

  (2) how the company affects society and the environment (”Environmental & Social-”, “inside-out” materiality).

In other words, taking the case of Scope 1-3 GHG emission indicators as an example, companies concerned by the NFRD must provide metrics tons of GHG emissions along the 3 scopes if GHG emissions (and changes thereof) affect the financial value of its company, and if an important amount of GHG is emitted by the company.

If the reporting company does not report on this indicator, it must provide a detailed explanation of why it is not relevant to its business.

As a result, a vast majority of the companies under the scope of the NFRD will have to provide Scope 1-3 GHG emissions in metric tons due to the breadth of the materiality assessment.

In 2020, the Climate Disclosure Standards Board analyzed a sample of the reports due under NFRD and declared that 100% of the companies disclosed GHG emission KPIs, including 74% along Scope 1-3.

What is the Corporate Sustainability Reporting Directive (CSRD)?

The CSRD (Directive EU 2022/2464) will amend and replace the current NFRD, from 1 January 2024 onwards. It requires companies related to the EU and EEA under the criteria listed below to provide Scope 1-3 GHG emission data in an auditable manner, including Scope 1-3 GHG emission information.

The scope of the CSRD is much larger than the NFRD:

• 50’000+ companies will be required to report according to CSRD, compared to 11’700 companies with NFRD.

The text of the CSRD is of EEA relevance, meaning that it applies to all EU countries including Norway, Liechtenstein, and Iceland. The requirements under the CSRD also applies beyond EU boundaries, as non-EU parent companies with significant operations in the EU and EEA, as described below, must also comply.

In this link, the CSRD as approved on December 14th 2022 can be found. It will apply from 1 January 2024, for the financial years starting on or after 1 January 2024.

Which companies are affected by CSRD?

• All large companies (>250 FTE, >40M EUR annual revenue, or >20M EUR on the balance sheet).
• All listed companies (except listed micro-undertakings).
• All non-EU companies with >150M EUR net turnover achieved in the EU and with at least one subsidiary or branch based in the EU or EEA.

When does the CSRD apply?

The CSRD applies gradually to different categories of companies, starting 1 January 2024:

• reporting in 2025 (on financial year 2024): all companies already subject to NFRD, meaning large public-interest companies with >500 FTE
• reporting in 2026 (on financial year 2025): all large companies not yet subject to NFRD
• reporting in 2027 (on financial year 2026): all listed SMEs, except micro-undertakings
• reporting in 2029 (on financial year 2028): all third-country undertakings with net turnover above 150 million in the EU if they have at least one subsidiary or branch in the EU exceeding certain thresholds.

What must be disclosed according to the CSRD?

The undertakings must provide the information necessary to understand their impact on sustainability matters, and how sustainability matters affect their development, performance, and position in their management report.

This includes information on the actual or potential impact connected with the company’s value chain and operations, including its products, services, business relationships, and supply chain, as well as measures to prevent, mitigate and reduce these negative impacts.

The undertakings must therefore include, among others, auditable Scope 1-3 emissions data, or follow the comply-or-explain principle applicable as part of the NFDR.

Is carbon reporting mandatory in Switzerland?

Yes - carbon reporting, including Scope 1-3 GHG emissions data, is mandatory for large companies in Switzerland, starting 1 January 2024, based on the Ordinance on Climate Disclosures adopted on 23 November 2022.

Which companies are affected by the Ordinance on Climate Disclosures?

The following companies are obliged to report publicly on climate issues under Swiss law starting 1 January 2024.

• Public companies, banks, and insurance companies in Switzerland;
• with >500 employees and CHF >20 million in total assets or CHF >40 million in turnover.

What is required under the Ordinance on Climate Disclosures?

With this ordinance, the Swiss Federal Council provides for the binding implementation of the recommendations from the Task Force on Climate-related Financial Disclosures (TCFD) in Switzerland.

The reporting requirements are two-fold:

• Information on the financial risk incurred by the company as a result of climate-related activities, as well as on the impact of the company on the climate must be provided.
• Where possible and appropriate, quantitative CO2 targets and disclosures of all GHG emissions must be provided.

How can companies comply with carbon reporting regulations?

Due to the importance of carbon reporting from a legal, financial, and competition perspective, as well as the difficulty and granularity behind the calculation processes of Scope 1-3 GHG emissions, automated processes using software are strongly recommended.

Tanso provides carbon accounting software automating processes in Scope 1-3 CO2 emissions calculations, specifically for manufacturing companies. It is available in German and English and trusted by a growing list of customers in Germany and Switzerland.

To learn more about Tanso, feel free to book a demo here.