The Voluntary Carbon Market (VCM) has become an integral part of corporate strategies for managing greenhouse gas (GHG) emissions. The VCM enables companies to invest in projects that generate independently verified carbon reductions, leading to the issuance of carbon credits, often termed 'carbon offsets'. These offsets represent the reduction or removal of one metric tonnes of CO2 or an equivalent amount of other key greenhouse gases and are tracked through an electronic registry.
For companies subject to the Corporate Sustainability Reporting Directive (CSRD) in the European Union, the purchase of voluntary carbon credits is not just beneficial but also aligns with broader sustainability goals and net-zero ambitions. These entities include those who utilize carbon offsets to achieve emission reduction targets, develop carbon offsets, or trade in or invest in carbon offsets.
Reporting of carbon offsets under CSRD is governed by stringent guidelines. Entities
must disclose their GHG emissions (scope 1, 2, and 3) on a gross basis before
accounting for any carbon offsets. Additionally, the quality and nature of the carbon
offsets used must be disclosed, providing stakeholders with insights into the entity’s
carbon offset strategy.
The benefits of carbon offsets in sustainability reporting are recognized when the offsets
are cancelled or retired. This means that the offsets can no longer be sold and are
effectively used by the reporting entity. The cancellation process, sometimes referred to
as ‘retirement’, ensures that the offset is removed from active listings in the registry and
cannot be reused or resold.
Entities under CSRD must differentiate their reporting between offsets cancelled in the
reporting period and those planned for future cancellation. This distinction is crucial as
many offsets in the VCM are transferable, meaning they can be sold to third parties.
The reporting format should provide a clear linkage to the entity’s overall sustainability
strategy, including scenario analysis, risk management, and other relevant disclosures.
European Sustainability Reporting Standards (ESRS) play a vital role in shaping these
disclosures. Under ESRS E1-7, companies must separately report their emissions and
carbon credits, including details on insetting efforts within their value chain and carbon
credit portfolios beyond the value chain. The disclosures must also cover the types of
projects financed through carbon credits, such as reduction or removal projects, and the
nature of these projects (e.g., nature-based or engineered removal).
In conclusion, for companies eligible under the CSRD, purchasing voluntary carbon
credits is not only beneficial for offsetting emissions but also for aligning with the
broader sustainability and net-zero objectives. The reporting standards under CSRD
and ESRS ensure that the companies provide transparent, detailed, and reliable
information about their environmental impact and efforts towards mitigating climate
change, including the use and quality of carbon credits. This approach promotes accountability and supports the integrity of claims made by companies in their journey
towards sustainability and climate action.
How to report Voluntary Carbon credits under CSRD
In the context of the Corporate Sustainability Reporting Directive (CSRD) and the
European Sustainability Reporting Standards (ESRS), companies eligible under these
frameworks should include detailed information about their use of voluntary carbon
credits in their annual sustainability reports. This reporting is crucial for transparency
and accountability in their carbon offsetting efforts. Here’s an example of how and what
companies should report:
1. Overview of Carbon Offset Strategy
Introduction to Carbon Offsetting: Briefly explain the company's approach to using
carbon offsets as part of its broader sustainability and net-zero strategy. This section
should outline the role of offsets in achieving emission reduction targets.
Commitment to Standards: State the company's commitment to high-integrity carbon
credits, as recommended by frameworks like the Science Based Targets initiative (SBTi)
and Voluntary Carbon Markets Integrity (VCMI) initiative.
2. Detailed Emissions Reporting
Gross Emission Disclosure: Disclose the total scope 1, 2, and scope 3 (if applicable)
GHG emissions, reported on a gross basis, as per ESRS E1 and IFRS S2 standards.
Contextual Information: Provide context for the emissions data, including any significant
changes from the previous reporting period and the factors driving those changes.
3. Carbon Offset Details
Offset Portfolio: Detail the types and quantities of carbon offsets purchased during the
reporting period, differentiating between reduction projects (like renewable energy) and
removal projects (like reforestation).
Quality of Offsets: Discuss the quality and certification standards of the purchased
offsets, such as adherence to recognized quality standards and whether the offsets are
nature-based or engineered removals.
Cancellation and Retirement of Offsets: Clearly state the number of offsets that have
been cancelled or retired in the reporting period, ensuring that these are distinct from
offsets planned for future cancellation.
4. Future Offset Plans
Planned Offsets: Disclose any offsets already held and intended for future cancellation,
along with the estimated timing and the rationale behind this strategy.
Link to Emission Reduction Goals: Explain how these future offset plans align with the
company's overall emission reduction goals and net-zero commitments.
5. Linkage to Broader Sustainability Reporting
Integration with Sustainability Strategy: Show how the use of carbon offsets is
integrated into the company's overall sustainability strategy, including any scenario
analysis, risk management, and climate-related financial disclosures.
Science-Based Targets: If applicable, mention how the company's strategy aligns with
Science Based Targets, especially in terms of prioritizing emission reductions within the
value chain before relying on offsets.
6. Additional Disclosures (if applicable)
Financial Implications: If the company has recognized any financial liability related to
future offset commitments, this should be disclosed, including references to relevant
notes in the financial statements.
Deviations and Adjustments: Report any significant deviations from previous reporting
periods, especially if there are material differences in the quantity or quality of offsets
used.
By including such detailed disclosures in their annual reports, companies not only adhere to the requirements of CSRD and ESRS but also demonstrate a transparent and comprehensive approach to carbon offsetting. This enhances credibility and stakeholder confidence in their sustainability efforts.