New CSRD Regulation from Europe Presents Big Opportunities for American Businesses
On the net-zero journey to cut greenhouse gas emissions—and as importantly, potent refrigerant emissions—competing targets and measurement systems have made it a bit like driving a car with no destination, speedometer, or navigation system. To address that, the European Commission released the Corporate Sustainability Reporting Directive (CSRD) at the beginning of this year with the goal of standardizing and operationalizing ESG measurement and reporting beginning in 2024. This initiative will herald a new era in environmental reporting and disclosures.
For the environment, it’s a big win as it will bring greater accountability, including for more shadowy areas like refrigerant emissions that have gone unscrutinized. In fact, refrigerants have been a top priority for Project Drawdown in its effort to curb climate change. And it’s for good reason. “Refrigerant gasses such as hydrofluorocarbons (HFCs) and hydrochlorofluorocarbons (HCFCs) are an under-reported contributor to global warming. In fact, these invisible and odorless gasses are ‘climate super-pollutants,’ with thousands of times the global warming potential of carbon dioxide,” notes the Yale Sustainability website.
Part of the European Green Deal, CSRD replaces a legacy reporting program, the Non-Financial Reporting Directive (NFRD), to expand the reach and spark greater urgency to achieve net zero by 2050. Built into CSRD are detailed technical rules—the European Sustainability Reporting Standards (ESRS)—designed to reduce uncertainty and accelerate progress through reporting requirements.
The ushering in of CSRD and ESRS presents a good opportunity for companies outside of Europe to double down on emissions tracking and reporting methods even if regulations may not yet directly apply. The sooner businesses understand the benefits and risks, the greater their advantage. One benefit: The ESRS consolidates disparate systems into a comprehensive new global standard to reduce the risk of wasted investments in multiple, diverse systems that may be abandoned in the future. What’s more, it can help shore up corporate reputation: Those that ignore CSRD might find themselves in the crosshairs of stakeholder skepticism, leading to eroded credibility. For many, the transparency of ESG metrics helps inform company investments and buying decisions. Ultimately, by paying attention now to CSRD, and using the new ESRS requirements to guide early actions, organizations can differentiate themselves powerfully as leaders in sustainability.
Scope 1: Getting the Upper Hand
Given the complexity of managing refrigerant assets, the introduction of additional regulations like CSRD and ESRS can seem daunting. And that’s why software with reliable monitoring and customizable reporting becomes so integral to the process. Trakref software, for instance, doesn’t just collect emissions data associated with enterprise-wide assets. It provides 360-degree visibility, analyzing it in the context of built-in regulations like CSRD and others to ensure credibility and compliance.
Key capabilities such as built-in logic to flag noncompliance; sophisticated reporting that anticipates audit questions and evolving regulatory standards; and multi-location, multi-system and multi-vendor asset management siphon off the complexity. As a result, scope 1 emissions reporting becomes far easier and more manageable.
Although scopes 2 and 3 are critical, they are harder to address because they fall outside the sphere of direct management. That’s why reducing scope 1 emissions is a natural place to start, given they stem from assets you control directly.
For companies responsible for HVAC systems, fugitive refrigerant emissions can dominate scope 1 for three key reasons: They are about 1,000 times more potent than CO2, as noted by the Environmental Protection Agency (EPA); sources are ubiquitous; and emissions can be hard to measure and control. Interestingly, as companies start collecting more comprehensive and accurate data, they are discovering even higher emissions numbers than anticipated.
ABCs of CSRD
CSRD and the vast array of shifting regulations can seem a bit like alphabet soup, but for businesses responsible for refrigerant assets, keeping current with compliance requirements is not just a good idea; it’s critical. In October alone, five significant regulatory announcements were published regarding management practices for refrigerants.
Specific to CSRD and ESRS, any HVAC/R unit with a refrigerant capacity greater than 15 pounds will require monitoring for leakage (need ref). Since 35-70 percent of most companies’ Scope 1 emissions can be chalked up to refrigerants, the new standards call for reducing use of high-GWP refrigerants and transitioning to new technologies such as heat pumps. Trakref publishes regular updates on its blog, to help zero in on the most essential developments.
And while CSRD’s focus on European companies might make it seem like it’s irrelevant for US-based companies, its tendrils reach out, with global implications. Below is a primer for a quick understanding of what to expect from the new directive and associated standards.
Applicability. At least 50,000 publicly-owned companies globally will be subject to mandatory reporting requirements beginning with disclosing 2024 emissions in their 2025 reporting. This is a major expansion, quadrupling the 11,700 companies covered by the old NFRD rules. Specifically, CSRD will apply to all large EU companies, defined as organizations with more than 250 employees, a turnover of more than €40 million, or total assets of €20 million, according to Harvard Law School Forum on Corporate Governance.
In addition, CSRD’s reach already extends globally to 10,000-plus non-EU companies that have significant operations in Europe. That number will continue to grow, as the CSRD eventually requires non-EU companies to report not only on European operations, but on operations worldwide.
For US-based businesses, the CSRD impact and timeline is a bit of a Rubik’s Cube, dependent on certain conditions, but three qualifying questions can help determine relevance.
- Do you have securities listed on an EU-regulated market?
- Do you have annual net turnover of €150M?
- Do you have an EU subsidiary with net turnover greater than €40M?
If the answer to even one of those questions is yes, it would be wise to dig deeper to better understand how the new reporting measures apply.
Disclosure requirements will be phased in between over the next several years, with the expectation that the framework will become less onerous. Both Harvard Law School on Corporate Governance and Consulting firm Deloitte provide detailed insights into the timeline and relevance for various types of businesses.
- CSRD is the overarching directive that includes ESRS standards.
- ESRS covers a comprehensive program with 12 elements
- 2 cross-cutting standards on general principles and disclosures
- 10 topical standards in the areas of environment, social, and governance [see figure below]
Objectives and provisions
- CSRD aims to achieve European Green Deal goals of 55% greenhouse gas reductions by 2030 and Net Zero by 2050.
- ESRS requires measurement and disclosure of all emissions footprints across scopes 1-3, along with an assessment of climate risks.
Within ESRS, the climate change factor (ESRS E1) will likely be the greatest concern for companies with refrigerant emissions. Among its requirements:
- Disclosures on greenhouse gas emissions
- Removals and mitigation projects to achieve targets for climate change mitigation and adaptation
- Reporting of potential financial effects from related risks
Because many refrigerants are fluorinated, the pollution factor (ESRS E2) could also become more significant as momentum with polyfluoroalkyl substances (PFAS) regulation grows rapidly.
With an understanding of existing and pending regulations—and software that does the heavy lifting in tracking emissions and ensuring compliance with changing regulations—organizations can develop a cost-effective and nimble approach for compliance.
Here are some actionable steps US-based companies can take now to integrate refrigerant tracking into their ESG reporting practices.
- Understand pending European (CSRD) and ESRS disclosure requirements and how they apply to your company. Trakref regularly reports on the latest news in this area.
- Use ESRS1 climate-related disclosure standards to outline information needed for greenhouse gas reporting.
- Focus on fugitive refrigerant emissions, likely your greatest source of scope 1 emissions.
- Review and update your inventory of refrigerant assets, along with potential sources of emissions and losses.
- Refine and expand your greenhouse gas emissions data collection program to meet pending requirements.
- Look for software and systems that capture data to meet analytical and reporting needs, including:
- Integrated regulatory compliance and industry best practices that merge with workflows
- Tools to reduce refrigerant emissions, extend equipment life, and minimize maintenance and material costs
Optimizing the Future
Remember that CSRD is not just another set of rules to address, but an opportunity for growth and differentiation and can help fortify the corporate brand and attract investors. Transparency brings insight and shines a light on how to optimize areas that are falling short.
To learn more about regulatory compliance and how to make it work for your organization versus against it, explore the Trakref compliance webinar series.