The systematic measurement of energy performance is the cornerstone of any robust Energy Management System (EnMS). While the international standard ISO 50001 establishes the high-level framework for managing energy, ISO 50006 offers the technical guidance on how to measure it.

This article translates that technical guidance into action via 6 steps. It provides the methodology needed to transform raw utility data into a sophisticated system of Energy Performance Indicators (EnPIs) and Energy Baselines (EnBs).

For any organization, moving from simple bill tracking to a normalized system is the difference between guessing and knowing exactly where your efficiency stands.

In this article, you’ll learn:

✅ The fundamental framework: The relationship between Energy Baselines, Performance Indicators, and energy targets.
✅ How to set boundaries using energy fence diagrams.
✅ How to distinguish routine relevant variables (like weather and production) from static factors (like building size).
✅ The different types of EnPIs—choosing the right indicator for each user
✅ Establishing your historical baseline and utilizing three different methods to calculate energy savings.
✅ Visualizing your success with SEC, X-Y Scatter, and CUSUM charts, along with the specific operational triggers that require you to reset your baseline.

1. The fundamental framework of energy performance

Energy performance itself is a broad concept, encompassing three distinct but interrelated categories: energy consumption, energy use, and energy efficiency. To manage these effectively, an organization must understand the core relationship between its performance metrics and its reference points.

The interrelationship between EnPIs, EnBs, and energy targets is the engine of continual improvement:

• EnPI (Energy Performance Indicator): A quantitative value or measure of performance. It could be a simple number, a ratio, or a complex mathematical model .

• EnB (Energy Baseline): A quantitative reference period. It is the “yardstick” against which current performance is measured.

• Energy Target: A specific, quantifiable requirement you intend to meet.

• EnPI Improvement: The gap between your current performance and your baseline.

2. A 6-step guide to proving energy savings

Before we dive into the math and methodology, here is a high-level look at the six steps required to build an energy measurement system from the ground up:

Now, let’s break down how to execute each of these steps.

Step 1: Setting the perimeter: EnPI boundaries

Before you can measure anything, you must define where the measurement starts and stops. There are three levels of boundaries :

1. Individual level: A physical perimeter around a single piece of equipment or process (e.g., a boiler or a production line).

2. System level: A group of facilities or equipment interacting together (e.g., the steam production system plus the dryers that use that steam).

3. Organizational level: The entire site or multiple sites under management control.

To visualize these boundaries, you can make a fence diagram or, in other words, an energy map.

This is a schematic map of your facility. A bold line (the fence) is drawn around the area you are measuring. Raw energy inputs like natural gas and electricity are shown entering the fence at specific metering points (M). Inside the fence, the diagram maps how that energy flows to different departments. You can show the largest energy users with the tag SEU (Significant Energy Use). An energy fence visualization ensures you know exactly which meters belong to which indicator.

Step 2: Variable analysis: relevant variables and static factors

Once the boundary is set, you must account for factors inside and outside that boundary that influence energy performance. We distinguish between two types of factors: relevant variables and static factors.

Relevant variables

Relevant variables are quantifiable factors that impact energy performance and change routinely. Common examples include production parameters (e.g., tonnage, units produced), weather conditions (e.g., outdoor temperature, degree days), and operating hours. Because these factors change frequently, they must be used to normalize energy data. Normalization is the process of routinely modifying energy data to account for these changes, allowing for a fair comparison between the baseline and reporting periods.

Determining significance

To determine the relevance of specific variables, it is essential to visualize the relationship between your potential drivers and energy consumption. This is typically achieved by plotting the potential driver (e.g., outdoor temperature or production volume) on the horizontal axis and energy use on the vertical axis of an X-Y scatter diagram.

Based on the resulting visual distribution, you can categorize the variable into one of two scenarios:

Scenario A: High correlation (significant variable)

If the data points form a clear path or cluster tightly around a mathematical trend line, the variable has a high correlation.

• Interpretation: This indicates that when the variable changes, energy consumption changes in a predictable manner.

• Action: Keep this variable. It is a significant driver and should be included in your Energy Performance Indicator (EnPI) model.

Scenario B: No correlation

If the data points appear as a random, scattered cloud with no discernible direction, there is no meaningful relationship between the two factors.

• Interpretation: The variable has little to no impact on your energy usage.

• Action: Exclude this variable. Removing irrelevant data prevents over-complicating the model and ensures your performance tracking remains accurate.

Focusing only on significant variables ensures your sustainability reporting and energy management systems are built on credible, actionable data.

Static factors

Static factors are identified factors that impact energy performance but do not routinely change. Examples include facility size, the design of installed equipment, the number of production shifts, and the range of products manufactured. While static factors remain constant during typical operations, a significant change in one (such as a factory expansion or a switch from manufacturing aluminum to plastic parts) constitutes a change in the equivalent conditions of the baseline.

Step 3: The different types of EnPIs: Choosing indicators & matching them to users

With boundaries defined and variables analyzed, you can select the right type of EnPI. Each offers a different level of detail and suitability for various stakeholders.

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Understanding how much power equipment consumes is important to reduce energy usage. For companies managing energy use, reporting emissions, or planning decarbonization, calculating the rated power of machines and systems is a foundational skill.

At the core of energy accounting lies a deceptively simple question:
How much power does this device use at full load?
The answer often hides in plain sight — on nameplates, datasheets, and technical manuals.
Learning how to extract and interpret this information enables companies to estimate consumption, compare systems, and support energy reporting frameworks like the CSRD or ISO 50001.

This article focuses on how to theoretically calculate rated power across energy-consuming systems — without sensors or field measurements.

What you’ll learn:

✅ How to decode equipment nameplates and specifications
✅ Formulas for estimating power from volts, amps, BTU/h, horsepower, and flow rates
✅ Conversion factors across electrical, thermal, and fuel energy units
✅ Estimation methods for electric motors, HVAC systems, gas burners, and vehicles
✅ Key regional differences (US vs EU) in labeling and units
✅ Tips for handling incomplete, ambiguous, or legacy nameplate data

When calculating power (P), the most accurate results come as close to the source as possible — ideally from sensors, submeters, or equipment readings that measure actual voltage, current, flow, or fuel use.

When such data aren’t available, engineers turn to technical documentation — like nameplates or datasheets — and use standard formulas and conversion factors to estimate power from known parameters (volts, amps, flow rate, heating value, etc.).

This article focuses on determining rated input power (P) — the first step in understanding how much energy a system uses or delivers.

In the overall workflow:

• PART 1 → shows how to combine P × t = E to calculate energy use.

  As a reminder, energy use can be calculated as follows:

• PART 2, this article → explains how to determine power (P).

• PART 3, article coming soon → covers operating time (t).

So this step is about quantifying input power — using the most accurate data available, from direct readings when possible, or from calculated estimates when not.

2. What is rated power and why should you understand it?

Rated power refers to the maximum continuous power a device can consume or deliver under specified conditions. It’s typically indicated in watts (W), kilowatts (kW), horsepower (HP), or BTU per hour (BTU/h), depending on the system and region.

From a sustainability perspective, understanding rated power enables:

• Energy use estimation, especially in bottom-up inventorying

• Load profiling, helping prioritize submetering or monitoring

• Sustainability reporting, including GHG Scope 1 and Scope 2 emissions

• Equipment sizing, infrastructure planning, and efficiency evaluations

This practice also directly supports energy audits and regulatory compliance under frameworks like ISO 50001 and the CSRD. The ability to calculate energy input from documentation alone is important where real-time sensors are not installed.

3. How to read nameplate data: common terms and units

Most energy-consuming devices include a nameplate or technical sheet showing key specifications. These include:

• Voltage (V) and Current (A): Used for electrical power estimation

• Power (W or kW): Sometimes given directly

• Horsepower (HP): Mechanical output, often used for motors and vehicles

• BTU/h or kcal/h: Used for thermal systems and HVAC

• Flow rates: For gas or fuel consumption, usually in m³/h or gallons/hour

• Power factor (pf): Ratio of real to apparent power in AC systems

These terms are explained in more detail below.

4. Calculating power for electrical equipment

To estimate energy use from documentation, you must first calculate the rated input power of a device. This depends on whether the equipment runs on AC or DC power, and whether it’s connected to a single-phase or three-phase supply.

Below is a breakdown of how to recognize the system type and apply the right formula.

Calculating electrical power from volts and amps

Understanding system types: DC vs AC, single-phase vs three-phase

Before you calculate power, you need to know what kind of electricity the device uses.

• DC (Direct Current): power flows in one direction. It’s common in electronics, battery-powered systems, solar panels, and electric vehicles. Because it delivers constant voltage, DC is ideal for sensitive devices like computers and LED lighting.
  > Nameplates may show “VDC”, “DC”, or the ⎓ symbol.

• AC (Alternating Current): switches direction 50 or 60 times per second (50 Hz in Europe, 60 Hz in the US). It’s the standard for power grids, buildings, and large machines.
  > Marked as “VAC”, “~”, or labeled with phase info.

Within AC systems, there are two setups:

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Energy is the heartbeat of every company’s operations — from lighting offices to powering production lines and heating facilities. Yet many businesses still struggle to quantify their true energy consumption. Without this understanding, strategies for efficiency, emissions reduction, or cost control remain guesswork.

At its core, calculating energy usage means translating what happens in day-to-day operations — machines running, heating cycles, fuel burned — into measurable data.

Under frameworks such as the Corporate Sustainability Reporting Directive (CSRD) and ISO 50001, companies are expected to monitor, measure, and disclose energy consumption systematically. The GHG Protocol also requires accurate energy data as the basis for Scope 1 (direct fuel use) and Scope 2 (purchased energy) emissions.

In this article, we’ll explore practical ways to measure energy use, whether or not you have sensors installed. You’ll learn:

✅ How to calculate electricity, gas, heat, and fuel consumption from equipment data (bottom-up approach)
✅ How sensors and smart meters improve accuracy and insight
✅ What other methods — like utility bills, modeling, or benchmarking — can complement calculations
✅ Which tools and templates make energy tracking manageable
✅ How different industries can tailor their approach for meaningful results

By the end, you’ll have a practical playbook to quantify total energy use across all carriers and sites, using methods aligned with your data reality and maturity level.

2. Bottom-up energy estimation: calculating from the ground up

The bottom-up approach starts with what you can see: the equipment, systems, and devices that consume energy. Instead of relying on utility data, you build your total energy picture from individual loads, summing their estimated use.

This approach is indispensable when sensors are absent — for example, during an energy audit or initial CSRD data inventory.

Step 1 – Create an inventory of energy-consuming equipment

Make an overview of all the systems that consume energy, such as lighting, climate control, IT, and so on.

For each system, list every energy consumer, such as machines, lights, motors, PCs, AC units, and so on. For each, record its:

• Power rating or fuel input (from nameplates or manuals)

• Energy source (electricity, gas, fuel)

• Typical operating hours per day or per year

• Usage (how much of the rated power it actually uses on average)

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Step 2 – Apply standard formulas

Once the data are collected, the calculations are straightforward:

• Power (kW) → how strong the machine or device is (its maximum rating).

• Usage (%) → how hard it’s actually working (for example, 70% of full power).

• Time (h) → how long it runs.

• 100 = 100,000 → converts percent (usage) to a fraction.

Example electricity

This shows a 200 W (200 W = 0.2 kW) fridge running at 85% of full power for 6 hours per day → uses ≈ 1.02 kWh of energy in a day.

Example natural gas

Consider a 6.7 kW gas heater used for 5 hours per day over 150 days per year.

In case you want to convert the kWh to cubic meter: natural gas contains roughly 10 kWh of energy per m³, so you can divide the kWh by 10.

For liquid fuels: Use the total volume of fuel consumed (i.e. in liters). If this information is not available, estimate it by multiplying the average fuel consumption rate (i.e. liters per hour) by the total operating hours.

For thermal energy (steam or heat): Use the total amount of heat energy supplied (in kWh, MJ, or kg of steam). If this is not directly known, estimate it by multiplying the average thermal power output (i.e. kW) by the total operating hours.

Step 3 – Convert to a common unit

Energy can be measured in many different units depending on the source — such as kilowatt-hours (kWh) for electricity, litres for fuel, cubic metres for gas, or megajoules (MJ) for heat.

To compare total energy consumption or calculate overall efficiency, all energy types should be converted into a common unit such as kWh or GJ (gigajoules).

When to Use kWh

• Common in buildings, utilities, and energy bills.

• Matches how electricity use and costs are typically recorded.

• Easy to relate to emissions and costs.

1 GJ = 277.78 kWh

When to Use GJ

• Preferred in scientific, industrial, or engineering contexts.

• Compatible with the SI (International System) of units.

• Useful when dealing with large-scale or thermal energy (e.g., steam, fuel, process heat).

1 kWh = 0.00360 GJ

Step 4 – Validate and cross-check

The bottom-up total should be compared with monthly utility bills. A deviation within ±10 % suggests reasonable accuracy; large gaps indicate that operating hours or usage need refining.

Advantages and limitations

Advantages

• Works without sensors or digital infrastructure.

• Reveals where energy is actually used, equipment by equipment.

• Enables quick identification of “hot spots” for savings.

Limitations

• Relies on estimates and manual data gathering.

• Risk of missing hidden or intermittent loads.

• Time-consuming for large facilities.

3. Measurement through sensors and smart meters

Once companies install smart meters or submeters, energy data becomes continuous, accurate, and location-specific. Sensors replace assumptions with real measurements, capturing how much electricity, gas, or heat each process uses in real time.

Types of meters and sensors

Metering systems can be divided into:

• Main utility meters: provided by energy suppliers, measuring total facility consumption for billing.

• Submeters: installed on specific areas or machines to separate usage (e.g., lighting circuits, HVAC systems, compressors).

• Smart meters: digital, often with two-way communication, logging data at 15-minute or hourly intervals.

• IoT sensors: clamp-on current sensors, smart plugs, flow or temperature sensors that transmit data wirelessly to energy management platforms.

In advanced setups, these feed into an Energy Management System (EMS) or Building Management System (BMS) that aggregates and visualizes usage.

Data collection and integration

Collected data flows to a central dashboard or cloud platform, for example through Wi-Fi, LoRaWAN, or wired networks. Each meter provides time-stamped readings of kWh, kW demand, or gas flow.

Key features include:

• Real-time dashboards for electricity, gas, and heat consumption

• Trend analysis over days, weeks, or months

• Automated alerts when usage spikes or deviates from expected patterns

• Reporting functions for CSRD, ISO 50001, or internal KPIs

Advanced EMS platforms can integrate multiple data sources — meters, PLCs, or even production data — to calculate metrics such as energy per unit of product or energy cost per site.

Advantages

• High accuracy and time resolution (often 5- to 15-minute intervals)

• Enables load profiling to identify peak demand times

• Supports measurement and verification of savings projects

• Allows automated alerts and optimization (e.g., shutting off idle equipment)

• Enhances employee engagement through transparent dashboards

Limitations

• Higher upfront cost for meters, software, and installation

• Requires IT integration and data management

• May produce overwhelming data volumes without proper analytics

• Needs calibration and maintenance to stay accurate

Still, once deployed, smart metering systems transform energy management from reactive to proactive, turning consumption data into operational intelligence.

Learn more about IoT here

4. Complementary methods for a complete energy picture

Even with calculations and meters, other data sources can refine accuracy and strategic insight.

Utility bill analysis

Utility bills remain the most accessible data set for many companies. Analyzing them can reveal consumption trends, cost structures, and anomalies.

Key indicators include:

• Energy Use Intensity (EUI): total energy use per floor area (kWh/m²) or per unit of output.

• Load factor: total kWh ÷ (peak kW × hours), showing how evenly electricity is used.

• Weather normalization: adjusting consumption for heating and cooling degree-days to separate weather effects from operational changes.

• Tariff breakdown: identifying high demand or power-factor charges that could be reduced.

Cross-checking internal (bottom-up) calculations with billed totals helps validate estimates. Plotting at least twelve months of billing data can immediately reveal seasonal variations or abnormal spikes in use or cost.

Energy modeling and digital twins

When data is scarce or forward-looking scenarios are needed, energy modeling and digital twins can simulate consumption.

A Building Energy Model (BEM) represents geometry, materials, HVAC systems, and occupancy to calculate theoretical energy needs. These models can be calibrated with actual bills to increase accuracy.

A digital twin goes further: a dynamic model that receives live sensor data and predicts performance. In factories or large campuses, twins can test “what-if” scenarios — for instance, simulating a 2 °C reduction in heating setpoints to estimate fuel savings.

Such modeling supports long-term planning and investment decisions (e.g., sizing renewables or retrofits) and complements real-time monitoring.

Benchmarking tools

Benchmarking helps companies understand how their energy performance compares to peers or best-practice standards.

• The ENERGY STAR Portfolio Manager (U.S.) calculates normalized scores (1–100) for many building types, adjusting for climate and operating hours. A score ≥ 75 indicates top-quartile efficiency.

• The CIBSE TM46 benchmarks (U.K.) provide typical kWh/m² per year by building type — for example, general offices or hospitals — and guide target setting.

Load disaggregation (NILM)

Non-Intrusive Load Monitoring (NILM) uses algorithms to infer which devices are operating from aggregate meter data. NILM can separate major electrical loads (lighting, HVAC, motors) without physical submeters.

While accuracy varies, NILM offers a cost-effective way to identify key consumers and behavioral savings opportunities, especially in offices or small sites.

5. Choosing the right approach for your organization

No single method fits all companies. The optimal mix depends on energy intensity, data maturity, and budget.

A hybrid strategy usually works best: start with a manual inventory, validate with utility bills, then expand to sensors where the biggest loads or uncertainties lie.

6. Key takeaways for corporate professionals

• Start simple, refine over time. A well-structured equipment inventory can yield credible first-year energy data even before sensors are installed.

• Validate across sources. Always cross-check manual calculations against utility bills and meter data for consistency.

• Invest in data systems strategically. Focus metering on high-consumption areas first; expand once ROI is proven.

• Use energy data as a management tool. The goal is not just reporting — it’s discovering inefficiencies and reducing cost and carbon emissions.

• Normalize and benchmark. Adjust for climate, operating hours, and production to make comparisons meaningful.

• Integrate into sustainability reporting. Reliable energy data directly supports CSRD disclosures, ISO 50001 audits, and GHG Scope 1–2 inventories.

Relevant Sources

Prices of natural gas and electricity | CBS

Comparing running costs of diesel, LPG and electrical pumpsets

Higher Calorific Values of Common Fuels: Reference & Data

Energy savings measurement guide

An energy efficiency indicator based on the actual energy use of a building

Steps to Develop a Baseline: A Guide to Developing an Energy Use and Energy Intensity Baseline and the Reporting Requirements for the Save Energy Now LEADER Pledge

1. Introduction

Climate change has become a defining business issue. Companies across all sectors are expected to measure their environmental footprint and to demonstrate how they will transition to a climate-neutral economy.

This article isn’t only for companies in scope of the CSRD. It’s for any organisation that wants to report credibly on climate: EU or non-EU, listed or private, big or small. I use European Sustainability Reporting Standard (ESRS) E1 as a clear and practical blueprint for climate disclosure. If CSRD doesn’t apply to you (yet), you can still use this guide to structure your reporting.

ESRS E1 addresses how companies disclose their climate change impacts, risks, and opportunities, along with the strategies, actions, and metrics that support them. It is designed to align business reporting with the Paris Agreement, the EU Climate Law, and global standards such as the GHG Protocol and ISO 14064.

In this article, you will learn:

✅ What climate change is

✅ The main objectives of ESRS E1

✅ How ESRS E1 connects with other environmental standards, like water and biodiversity

✅ The key components of ESRS E1 (E1-1 to E1-11), from transition plans to financial impacts

✅ Acronyms and terms used in ESRS E1

By the end, you’ll gain a clear, structured understanding of ESRS E1.

2. What is climate change?

First of all, it is important to know what climate change actually is. In short: Climate change is the long-term alteration of Earth's average weather patterns, including shifts in temperature and precipitation.

In today's world, climate change is becoming more and more evident. Escalating floods, relentless droughts, and scorching heatwaves have been observed. Simultaneously, extreme weather events, leave millions of people grappling with acute food and water shortages.

The threat of global warming at 1.5 degrees Celsius carries irrevocable consequences. Central to this crisis is the burning of fossil fuels for electricity generation. This practice inundates the atmosphere with greenhouse gases, leading to global warming.

For context, in 2020, a staggering 73% of total anthropogenic greenhouse gas emissions originated from fossil fuel combustion. To avoid catastrophic temperature increases and limit global warming to 1.5 degrees Celsius, an urgent transformation is needed: achieving net-zero emissions by 2050, a goal championed by the United Nations in 2022.

Because, climate change is so important it is included as the first ESRS E in the CSRD.

3. Understanding the objective of ESRS E1

The objective of ESRS E1 is straightforward: it requires companies to disclose information on climate change whenever it represents a material impact, risk, or opportunity for the business. This covers policies, actions, targets, dependencies, metrics, and anticipated financial effects.

The standard defines three sub-topics:

1. Climate change mitigation – reducing greenhouse gas (GHG) emissions in line with the Paris Agreement and EU Climate Law.

2. Climate change adaptation – adjusting to actual or expected climate impacts, such as physical risks.

3. Energy – reporting on energy production and consumption.

Interaction with other topics (ESRS Standards)

Importantly, ESRS E1 interacts with other topical standards. For example, ESRS E1 focuses on seven main greenhouse gases (like CO₂ and methane). Other harmful air emissions, such as ozone-depleting substances, are covered in ESRS E2.

Climate change also connects closely with ESRS E3 Water and ESRS E4 Biodiversity. For example, changes in climate can cause water-related problems, like floods and droughts, which in turn affect ecosystems and species. Actions to fight climate change, such as protecting forests, restoring wetlands, or changing how land is used, can also help nature. These “nature-based solutions” can reduce greenhouse gases while improving water quality, protecting wildlife habitats, and keeping ecosystems healthy.

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4. The different components of ESRS E1

The standard is structured around three pillars: Strategy (long-term plans, risk analysis, and resilience), Implementation (policies, actions, and resources), and Targets & Metrics (quantifiable goals, emissions data, and financial implications).

Read more below to explore each element in detail. I’ve also linked to my other articles below, where you can dive deeper into each specific topic, from ESRS E1-1 through ESRS E1-11, for a more comprehensive understanding.

E1-1: Transition plans: the cornerstone of mitigation

The transition plan for climate change mitigation (E1-1) is arguably the heart of ESRS E1. Companies must disclose how their strategy and business model align with limiting global warming to 1.5°C and achieving climate neutrality by 2050.

If no transition plan exists, companies must state whether they intend to adopt one and when.

Read more about ESRS E1-1 here:

E1-2, E1-3: Climate-related risks and resilience

E1-2: Identifying risks through scenario analysis

Under E1-2, companies must explain how they identify and assess climate-related risks and opportunities. These are split into:

• Physical risks (acute and chronic hazards such as floods, droughts, or heatwaves)

• Transition risks (regulatory, market, or technological changes from the shift to a low-carbon economy)

Read more about ESRS E1-2 here:

E1-3: Resilience of strategy and business model

E1-3 requires disclosure of how resilient the company’s strategy and business model are in relation to identified risks.

Read more about ESRS E1-3 here:

E1-4, E1-5: Policies, actions, and resources

Beyond strategy, ESRS E1 emphasizes operational measures.

E1-4 (Policies): disclosure of climate policies in line with ESRS 2.

Read more about ESRS E1-4 here:

E1-5 (Actions and resources): companies must report their key mitigation actions, expected GHG reductions, and financial resources allocated—quantified where possible as CapEx/OpEx.

Read more about ESRS E1-5 here:

E1-6: Absolute, science-based, and transparent targets

E1-6 focuses on climate targets, particularly GHG reduction. Targets must be gross, excluding removals or carbon credits. Intensity targets are allowed but must be accompanied by absolute values.

Read more about ESRS E1-6 here:

E1-7: Energy consumption and mix

E1-7 requires disclosure of total energy consumption.

This disclosure links directly with SFDR indicators on non-renewable energy use, ensuring financial market participants can assess transition alignment.

Read more about ESRS E1-7 here:

E1-8: Measuring GHG emissions

The most technical requirement is E1-8, which mandates disclosure of gross Scope 1, 2, and 3 emissions:

• Scope 1: direct emissions (with percentage under emissions trading schemes)

• Scope 2: indirect emissions (both location-based and market-based)

• Scope 3: significant categories across the value chain, disaggregated

Read more about ESRS E1-8 here:

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E1-9, E1-10: Carbon removals, credits, and internal pricing

E1-9 addresses carbon removals and credits. Companies must disclose projects for GHG removal (e.g., nature-based or technological) and their permanence, reversals, and leakage risks.

Read more about ESRS E1-9 here:

E1-10 requires disclosure of internal carbon pricing: how carbon prices are used in decision-making and the price per tonne applied.

Read more about ESRS E1-10 here:

E1-11: Financial effects of climate risks and opportunities

Finally, E1-11 requires companies to quantify the anticipated financial effects of climate risks and opportunities.

Read more about ESRS E1-11 here:

4. Acronyms and terms

Relevant Sources

Amended ESRS E1 – Exposure Draft – July 2025

IPCC. (2022). Climate Change 2022: Impacts, Adaptation and Vulnerability . https://doi.org/10.1017/9781009325844

Climate change affects money.
E1-11 asks companies to show how climate-related risks and opportunities are expected to influence their finances over time.

This disclosure connects sustainability and finance. It helps investors understand how your assets, revenues, and costs might change as the world transitions to a low-carbon, climate-resilient economy.

I will briefly explain the requirements for companies to disclose their anticipated financial effects.

More elaborate articles are available, which can be found below.

2. What are climate-related financial effects?

In simple terms, these are the ways that climate change — and the response to it — can change what your company owns, earns, or spends.

They come from three main sources:

• Physical risks: damage or disruption from floods, heatwaves, droughts, or storms.

• Transition risks: financial losses caused by new climate laws, carbon pricing, shifting markets, or technological change.

• Opportunities: new or growing markets for low-carbon products, energy efficiency, or adaptation solutions.

E1-11 asks you to identify the monetary size and share of assets and revenues affected by these factors, and to explain how you estimated them.

The ESRS defines anticipated financial effects as follows:

“Financial effects that do not meet the recognition criteria for inclusion in the financial statement line items in the reporting period and that are not captured by the current financial effects.”

3. ESRS E1-11 at a glance

E1-11 requires you to disclose:

Read more about anticipated financial effects from material physical and transition risks and potential climate-related opportunities:

Coming soon!

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4. How E1-11 links to the rest of ESRS E1

• E1-2 and E1-3 identify and test the risks and resilience.

• E1-5 to E1-6 show the actions and targets to reduce those risks.

• E1-11 translates all of that into financial terms — what it means for your assets, revenues, and liabilities.

Together, these disclosures show the full picture: from climate risk to business impact to financial outcome.

5. Bottom line

E1-11 closes the loop between climate strategy and financial performance. To meet the requirement:

1. Quantify exposure — show which assets and revenues are at risk or in opportunity.

2. Explain your methods — timeframes, assumptions, and data sources.

3. Link to actions and transition plans — show how you’re managing those effects.

When done clearly, this disclosure demonstrates that your company understands how climate change shapes its financial future.

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Relevant Standards

ESRS E1

Amended ESRS E1 – Exposure Draft – July 2025

Putting a price on carbon is one of the most powerful ways to make climate impact visible in everyday business decisions.
E1-10 asks companies to explain whether and how they apply a carbon price internally — that is, how they assign a financial value to their own greenhouse gas (GHG) emissions when making investment, planning, or risk decisions.

The goal is straightforward: to demonstrate to investors and stakeholders that your company understands the cost of carbon and is using it to inform smarter, lower-emission choices.

I will briefly explain the requirements for companies to disclose their internal carbon pricing.

More elaborate articles are available, which can be found below.

2. What is internal carbon pricing?

Internal carbon pricing (ICP) refers to treating carbon emissions as if they have a cost, even if no government tax or trading system is currently in place.

Companies can use different forms:

• Shadow price: a hypothetical price per tonne of CO₂e used when evaluating investments.

• Internal carbon fee: an actual payment charged to business units for their emissions.

• Implicit price: the average cost your company already bears through existing carbon taxes or emissions trading schemes.

Example:

When choosing between two production lines, a company might add €100 per tonne of CO₂e as a “shadow cost.”
The option with lower emissions then shows a lower total lifetime cost — encouraging climate-friendly investment.

The ESRS defines an internal carbon price as follows:

“Price used by an undertaking to assess the financial implications of changes to investment, production, and consumption patterns, and of potential technological progress and future emissions abatement costs.”

3. ESRS E1-10 at a glance

E1-10 requires you to disclose:

Read more about how internal carbon pricing works here:

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4. How E1-10 links to the rest of ESRS E1

• E1-8 (GHG emissions) gives you the quantity of emissions to which the price applies.

• E1-5 (actions & resources) and E1-6 (targets) show how internal pricing influences where you invest.

• E1-11 (financial effects) connects the carbon price to anticipated financial risks and opportunities.

Together, these disclosures show whether your financial decisions truly reflect the cost of carbon.

5. Bottom line

E1-10 turns climate strategy into economics. To comply and communicate clearly:

1. State whether you use internal carbon pricing — and if not, whether you plan to.

2. Disclose the price per tonne of CO₂e and how it’s applied.

3. Link it to decisions and financial impacts, not just policy statements.

Done well, internal carbon pricing shows that your company is preparing for a world where emitting greenhouse gases has a real and rising cost — and that you’re ready to compete in it.

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Relevant Standards

ESRS E1

Amended ESRS E1 – Exposure Draft – July 2025

While most climate disclosures focus on reducing emissions, E1-9 looks at the other side of the equation — removing greenhouse gases (GHGs) from the atmosphere and funding carbon reduction projects outside your own operations.

This disclosure explains what removals you achieve, how permanent they are, and what carbon credits you use or plan to use.
The goal is transparency: readers should clearly see how much of your progress comes from cutting your own emissions versus relying on external offsetting projects.

I will briefly explain the requirements for companies to disclose their GHG removals and GHG mitigation projects financed through carbon credits.

More elaborate articles are available, which can be found below.

2. What are GHG removals and carbon credits?

• GHG removals happen when carbon dioxide or other greenhouse gases are taken out of the atmosphere and stored — either by nature (for example, trees or soil capturing carbon) or by technology (such as carbon capture and storage, or direct air capture).

• Carbon credits represent one tonne of CO₂ (or equivalent) that has been avoided or removed elsewhere. Companies can buy and cancel these credits to compensate for some of their own emissions.

However, under ESRS, credits cannot be counted toward your emission reduction targets (E1-6). You must report them separately here to avoid double-counting.

The ESRS defines a carbon credit as follows:

“A transferable or tradable instrument that represents one metric tonne of CO2eq emission reduction or removal and is issued and verified according to recognised quality standards.”

And the ESRS defines a GHG removals as follows:

“(Anthropogenic) removals refer to the withdrawal of GHGs from the atmosphere as a result of deliberate human activities. These include enhancing biological anthropogenic sinks of CO2 and using chemical engineering to achieve long-term removal and storage. Carbon capture and storage (CCS) from industrial and energy-related sources, which alone does not remove CO2 from the atmosphere, can remove atmospheric CO2 if it is combined with bioenergy production (Bioenergy with Carbon Capture & Storage - BECCS). Removals can be subject to reversals, which are any movement of stored GHG out of the intended storage that re-enters the atmosphere. For example, if a forest that was grown to remove a specific amount of CO2 is subject to a wildfire, the emissions captured in the trees are reversed.”

3. ESRS E1-9 at a glance

E1-9 asks companies to disclose information on:

Read more about carbon removals, credits and mitigation (and the differences between them) here:

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4. How E1-9 links to the rest of ESRS E1

• E1-8 (GHG emissions) shows your total footprint.

• E1-9 (removals and credits) shows how much is taken back out of the atmosphere or financed externally.

• E1-6 (targets) and E1-1 (transition plan) explain how these removals fit (or don’t) into your long-term decarbonisation pathway.

This ensures transparency between genuine emission reductions and compensatory mechanisms like carbon credits.

5. Bottom line

E1-9 helps separate real emission cuts from offsetting activities. To meet the requirements and maintain credibility:

1. Disclose both removals and purchased credits clearly and separately.

2. Explain permanence and quality — how reliable are your projects or credits?

3. Avoid double counting between your own removals and external offsets.

Done well, this disclosure shows stakeholders that your company understands the limits of offsetting and is building a balanced approach: reduce first, remove second, and offset only where unavoidable.

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ESRS E1

Amended ESRS E1 – Exposure Draft – July 2025

Climate commitments mean little without concrete steps to back them up.
E1-5 focuses on what your company is actually doing to address climate change and how much you’re investing to make it happen.

This disclosure links your policies (E1-4) and your targets (E1-6). It demonstrates that your business is actively implementing plans with actions, funding, and accountability.

I will briefly explain the requirements for companies to disclose their actions and resources in relation to climate change.

More elaborate articles are available, which can be found below.

2. What counts as a climate action?

A climate action is any initiative that reduces greenhouse gas (GHG) emissions, removes them from the atmosphere, or helps the business adapt to climate impacts. Examples include:

• Switching to renewable electricity or green heat sources.

• Electrifying fleets or production processes.

• Improving energy efficiency in buildings and operations.

• Developing low-emission products or services.

• Engaging suppliers to reduce upstream emissions.

• Building flood protection or climate-resilient infrastructure.

Each action should connect back to a specific goal in your transition plan (E1-1) or target (E1-6).

The ESRS defines actions as follows:

“Actions refer to:

i. actions and action plans (including transition plans) that are undertaken to ensure that the undertaking delivers against targets set and through which the undertaking seeks to address material impacts, risks and opportunities; and
ii. decisions to support these with financial, human or technological resources.

Actions can be individual actions, taken only by the undertaking, or collective actions, this is, collaborative efforts by a group of stakeholders - such as undertakings, governments, civil society, or communities - to address shared challenges or achieve common goals, particularly when those goals cannot be effectively achieved by any single actor working alone.”

3. ESRS E1-5 at a glance

E1-5 requires you to disclose:

Read about who owns the climate policy in the C-suite here:

More articles about actions and resources coming soon!

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4. How E1-5 links to the rest of ESRS E1

• E1-4 (policies) defines the rules guiding your climate actions.

• E1-5 (actions & resources) shows what you’re doing and funding.

• E1-6 (targets) explains the goals these actions contribute to.

• E1-1 (transition plan) connects them all into a single transformation roadmap.

Together, these disclosures build a credible picture: what your plans are, how you’ll execute them, and whether your investments match your ambition.

5. Bottom line

E1-5 turns your climate strategy into evidence. To meet this requirement and tell a convincing story:

1. List your key mitigation and adaptation actions, grouped by decarbonisation lever.

2. Quantify both the financial input (CapEx/OpEx) and the expected emission reductions.

3. Show progress — what has been done, what is underway, and what comes next.

When done clearly, this section demonstrates that your company is moving from planning to performance — making climate action measurable, funded, and real.

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Relevant Standards

ESRS E1

Amended ESRS E1 – Exposure Draft – July 2025

Behind every credible climate strategy are the policies that turn intent into daily action. E1-4 asks companies to describe those policies — the official rules, principles, and commitments that guide how they deal with climate change.

This disclosure is short but important: it connects your overall sustainability governance (ESRS 2) to your climate-specific actions (E1-5) and targets (E1-6).

I will briefly explain the requirements for companies to disclose their policies in relation to climate change.

More elaborate articles are available, which can be found below.

2. What is a climate policy?

A climate policy is a statement of how your company intends to manage and reduce its greenhouse gas (GHG) emissions, adapt to climate risks, and align its business with the goals of the Paris Agreement.

Typical examples include:

• Internal policies to cut GHG emissions or improve energy efficiency

• Rules for sourcing renewable energy or sustainable materials

• Policies on business travel, fleet management, or product design

• Supplier or investment criteria linked to climate performance

• Commitments to phase out or transform carbon-intensive activities

The policy should show how climate considerations are built into your decision-making, not treated as an add-on.

The ESRS defines a policy as follows:

“A set or framework of general objectives and management principles that the undertaking uses for decision-making. A policy implements the undertaking’s strategy or management decisions related to a material sustainability topic. Each policy is under the responsibility of defined person(s), specifies its perimeter of application, and includes one or more objectives (linked when applicable to measurable targets). A policy is validated and reviewed following the undertakings’ applicable governance rules. A policy is implemented through actions or action plans.”

3. ESRS E1-4 at a glance

E1-4 requires companies to disclose their climate change policies in line with the general rule for policies in ESRS 2 GDR-P

Read about who owns the climate policy in the C-suite here:

More articles coming soon!

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4. How E1-4 links to the rest of ESRS E1

• E1-4 (policies) sets out your rules and commitments.

• E1-5 (actions and resources) shows how you carry them out.

• E1-6 (targets) defines what success looks like.

• E1-1 (transition plan) brings all of these elements together in a strategic roadmap.

Together, they give readers confidence that your climate strategy is backed by clear governance and policies applied consistently across the business.

5. Bottom line

E1-4 is your opportunity to show that climate responsibility is built into company policy. To comply and communicate well:

1. Write or update a clear climate policy with defined goals, scope, and references to credible standards.

2. Show alignment with your transition plan, actions, and targets.

3. Be transparent about what’s covered, what isn’t, and what’s changing.

A strong, well-defined climate policy transforms your climate strategy from words into a functioning system that investors, employees, and regulators can trust.

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Relevant Standards

ESRS E1

Amended ESRS E1 – Exposure Draft – July 2025

Climate change is also about showing whether your business can withstand climate risks. That’s where E1-3 comes in. This disclosure asks companies to explain how resilient their strategy and business model are when faced with climate-related risks. In other words: if extreme weather, new carbon taxes, or rapid technology shifts happen, can your business still adapt and succeed?

I will briefly explain the requirements for companies to disclose their resilience in relation to climate change.

More elaborate articles are available, which can be found below.

2. What does resilience mean here?

In plain terms, resilience means the ability to keep going, adapt and remain competitive even under tough climate conditions. For a company, this involves:

• Testing how your strategy performs under different climate scenarios (e.g. 1.5°C vs high emissions).

• Identifying where your business might be vulnerable.

• Explaining how your current or planned actions and investments will help you adapt.

• Being clear about uncertainties — no company has all the answers.

The ESRS defines climate resilience as follows:

“The capacity of an undertaking to adjust to climate changes, and to developments or uncertainties related to climate change. Climate resilience involves the capacity to manage climate-related Scope 1 and benefit from climate-related opportunities, including the ability to respond and adapt to transition risks and physical risks. An undertaking’s climate resilience includes both its strategic resilience and its operational resilience to climate-related changes, developments or uncertainties associated with climate change.”

3. ESRS E1-3 at a glance

Under E1-3 you must disclose:

Coming soon!

E1-3: Resilience assessment with ISO 14091

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4. How E1-3 links to the rest of ESRS E1

• E1-2 (risks and scenarios) provides the input: which risks you face and under what scenarios.

• E1-3 (resilience) explains how your business would cope with those risks.

• E1-11 (financial effects) shows the expected impact in monetary terms.

Together, these disclosures tell the full story: what risks you face, how resilient you are, and what that means for your financial performance.

5. Bottom line

E1-3 asks companies to demonstrate that their climate strategy is stress-tested and adaptable. To do this well, focus on:

1. Being transparent about the outcomes of your resilience analysis.

2. Showing how your plans and investments strengthen resilience.

3. Admitting where there are uncertainties and how you plan to manage them.

Done right, this disclosure builds trust: it shows stakeholders that your business is ready to handle whatever climate change throws at it.

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ESRS E1

Amended ESRS E1 – Exposure Draft – July 2025

Climate change brings risks to companies today. Floods, heatwaves, supply chain disruptions, and stricter climate rules all affect business operations and financial performance.

E1-2 requires companies to explain how they identify, assess and analyse these climate-related risks. The idea is simple: investors, regulators and other stakeholders need to know how vulnerable your business is, and what tools you use to test your resilience under different possible futures.

I will briefly explain the requirements for companies to disclose their climate-related risks and scenario analysis.

More elaborate articles are available, which can be found below.

2. What are climate-related risks?

Risks fall into two main groups:

• Physical risks: harm caused by climate hazards like storms, floods, heatwaves, sea-level rise or drought.

• Transition risks: changes linked to the shift towards a climate-neutral economy — for example, stricter emissions regulations, carbon pricing, shifting customer demand, or rapid technology change.

E1-2 asks you to show how you classify your risks into these categories and what methods you use to assess them.

The ESRS defines these risks as follows:

“Climate-related physical risk
Risks resulting from climate change that can be event-driven (acute) or from longer-term shifts (chronic) in climate patterns. Acute physical risks arise from particular hazards, especially weather-related events such as storms, floods, fires or heatwaves. Chronic physical risks arise from longer-term changes in the climate, such as temperature changes, and their effects on rising sea levels, reduced water availability, biodiversity loss and changes in land and soil productivity.

Climate-related transition risk
Risks that arise from the transition to a low-carbon and climate-resilient economy. They typically include policy risks, legal risks, technology risks, market risks and reputational risks.”

3. What is scenario analysis?

Scenario analysis is a tool to explore “what if” futures. Instead of predicting one outcome, you test your business against different plausible climate and policy scenarios. Examples:

• A 1.5°C scenario (Paris Agreement-aligned) with rapid decarbonisation.

• A high-emissions scenario with little global action, leading to severe physical impacts.

By applying scenarios, companies can show how their assets, supply chains and financial results would hold up under both best- and worst-case conditions.

The ESRS defines scenario analysis as follows:

“A process for identifying and assessing a potential range of outcomes of future events under conditions of uncertainty.”

4. ESRS E1-2 at a glance

Under E1-2 you must disclose:

Read what climate scenarios are here:

Read about scenario analysis with the TCFD here:

5. How E1-2 links to the rest of ESRS E1

• The results of E1-2 feed directly into E1-3 (resilience), which asks how prepared your strategy is for these risks.

• They also connect to E1-11 (financial effects), where you must quantify how risks and opportunities affect your balance sheet and revenue.

• Together with E1-1 (transition plan), these disclosures show whether your strategy is credible, resilient, and financially sound.

6. Bottom line

E1-2 pushes companies to move from general statements about climate risk to transparent, structured analysis. To comply, focus on:

1. Naming your key physical and transition risks clearly.

2. Explaining how you assessed them — including the scenarios and tools used.

3. Showing time horizons and geographic detail where relevant.

If done well, this disclosure shows investors and regulators that your company isn’t just aware of climate risks, but is actively preparing for a range of possible futures.

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Relevant Standards

ESRS E1

Amended ESRS E1 – Exposure Draft – July 2025

Greenhouse gas (GHG) emissions are the main cause of climate change — and one of the clearest indicators of a company’s climate impact.
E1-8 requires companies to measure and disclose how much GHG they emit, where those emissions come from, and how they are changing over time.

This disclosure is one of the most data-heavy under ESRS E1, but it’s also the backbone of your entire climate report. Your actions, targets, and transition plan all rely on these numbers.

I will briefly explain the requirements for companies to disclose their gross Scopes 1, 2 and 3 GHG emissions.

More elaborate articles are available, which can be found below.

2. What are greenhouse gas (GHG) emissions?

Greenhouse gases (GHGs) are gases in the atmosphere that trap heat from the sun and make the Earth warmer — a natural process known as the greenhouse effect.

Human activity, especially the burning of fossil fuels, has sharply increased the amount of these gases, which is why the planet is heating faster than ever before.

The main greenhouse gases are:

• Carbon dioxide (CO₂) – released from burning coal, oil, and gas, or from deforestation.

• Methane (CH₄) – emitted from livestock, waste, and gas leaks.

• Nitrous oxide (N₂O) – from fertilisers and industrial processes.

• Fluorinated gases (HFCs, PFCs, SF₆, NF₃) – used in cooling systems and manufacturing.

Because each gas traps different amounts of heat, they’re combined into a single unit called CO₂ equivalent (CO₂e).
This lets companies report a total climate impact as one comparable number — for example:

“Our operations emitted 1.2 million tonnes of CO₂e in 2024.”

So, when we talk about GHG emissions, we mean all the gases that contribute to global warming, expressed together as CO₂ equivalents.

The ESRS defines GHG as follows:

“Greenhouse Gases (GHG) The gases listed in Part 2 of Annex V of Regulation (EU) 2018/1999 of the European Parliament and of the Council8 . These include Carbon dioxide (CO2), Methane (CH4), Nitrous Oxide (N2O), Sulphur hexafluoride (SF6), Nitrogen trifluoride (NF3), Hydrofluorocarbons (HFCs), Perfluorocarbons (PFCs).”

3. Understanding the scopes

The ESRS uses the same structure as the GHG Protocol, which divides emissions into three scopes:

• Scope 1 – Direct emissions
  Emissions from sources you own or control, such as company vehicles, boilers, or production facilities.

• Scope 2 – Indirect emissions from energy
  Emissions from the electricity, heat, or steam you purchase and use. They occur at your energy supplier, but result from your energy demand.

• Scope 3 – Other indirect emissions
  Emissions that happen in your value chain, both upstream and downstream — for example:

  • Purchased goods and materials

  • Employee commuting and business travel

  • Product use and disposal

  • Transport, investments, and cloud services

Scope 3 is usually the largest and hardest to measure but gives the most complete view of your footprint.

The ESRS defines the scopes as follows:

“Scope 1 GHG emissions Direct GHG emissions from sources that are owned or controlled by the undertaking.

Scope 2 GHG emissions Indirect emissions from the generation of purchased or acquired electricity, steam, heat or cooling consumed by the undertaking. Scope 3 GHG emissions All indirect GHG emissions (not included in Scope 2 GHG emissions) that occur in the value chain of the reporting undertaking, including both upstream and downstream emissions.

Scope 3 GHG emissions can be broken down into Scope 3 categories.”

4. ESRS E1-8 at a glance

E1-8 requires you to disclose:

Read about boundaries for emissions reporting:

Read more about choosing operational boundaries here:

Read about location-based vs market-based emissions:

Read about emission factors:

Read about the EU ETS:

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5. How E1-8 links to the rest of ESRS E1

• E1-8 gives the baseline for your emissions footprint.

• E1-6 (targets) and E1-5 (actions) use these numbers to show how emissions will fall over time.

• E1-1 (transition plan) brings it all together by explaining how your strategy leads to real emission reductions.

Without reliable data under E1-8, the rest of your climate disclosure loses credibility — it’s the foundation of the entire E1 topic.

6. Bottom line

E1-8 is about turning climate impact into numbers that can be tracked and verified. To meet the requirement:

1. Measure comprehensively across Scopes 1, 2, and 3.

2. Be transparent about methods, boundaries, and data sources.

3. Keep consistency so that year-over-year comparisons are meaningful.

Strong GHG data lets you prove progress — and helps investors, regulators, and the public see that your climate actions are producing real results.

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ESRS E1

Amended ESRS E1 – Exposure Draft – July 2025

Energy use sits at the heart of every company’s climate footprint.
E1-7 asks you to show how much energy your company consumes, where it comes from, and how it is changing over time.

This disclosure links directly to your emissions reporting (E1-8).
By tracking and reporting energy mix clearly, you demonstrate how your business is reducing its reliance on fossil fuels and moving toward cleaner energy sources.

I will briefly explain the requirements for companies to disclose their consumption and mix.

More elaborate articles are available, which can be found below.

2. What is an energy mix?

Your energy mix shows where your energy comes from.
It’s the combination of all energy sources your company uses to power its activities — such as electricity, heating, fuel for vehicles, or production energy.

Think of it as your company’s “energy recipe”:

• Fossil fuels (like coal, oil, or natural gas) are the high-carbon ingredients.

• Renewables (like solar, wind, hydro, or biomass) are the clean ingredients.

• Nuclear energy is sometimes included as a low-carbon but non-renewable option.

By comparing how much energy comes from each source, you can see how dependent your business still is on fossil fuels and how quickly it is moving toward cleaner energy.

A company with a renewable-heavy mix contributes less to greenhouse gas emissions and is better prepared for future carbon rules.
A company with a fossil-heavy mix faces higher climate risks and potential costs from rising carbon prices.

The ESRS does not have a definition for energy mix.

3. ESRS E1-7 at a glance

E1-7 requires you to disclose information on:

Read more about the energy mix here:

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4. How E1-7 links to the rest of ESRS E1

• E1-7 provides the energy data that feeds into E1-8 (GHG emissions).

• It also connects to E1-5 (actions) — especially those related to efficiency, electrification, and renewable sourcing.

• Your progress here supports your targets (E1-6) and overall transition plan (E1-1).

Together, these disclosures let readers see what powers your operations today and how that’s changing.

5. Bottom line

E1-7 turns energy use into a clear climate performance indicator.
To comply and add value:

1. Measure and disclose total energy consumption with clear fossil-versus-renewable breakdowns.

2. Apply consistent boundaries with your emissions reporting.

3. Track improvement — show trends in efficiency and renewable share year over year.

Done well, this disclosure gives an honest view of how your company is moving from high-carbon energy toward cleaner, more resilient operations.

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Relevant Standards

ESRS E1

Amended ESRS E1 – Exposure Draft – July 2025

1. Introduction

Corporate climate plans live or die on the credibility of the actions behind them. Leaders are under pressure to move beyond slogans and show precisely how they will cut emissions—what levers they will pull, in what order, and how those levers differ from adaptation, offsetting, or carbon removal.

Put simply, a decarbonisation lever is an action a company uses to reduce its greenhouse gas (GHG) emissions or remove CO₂ as part of mitigation. This article clarifies that boundary so you can design plans that stand up to scrutiny.

What you’ll learn:

✅ The distinction between mitigation, adaptation, offsetting, and carbon removal

✅ What does not count as a lever

✅ A practical taxonomy of decarbonisation levers: nature-based, technology-based, and operational/value-chain levers

✅ A checklist to stress-test your decarbonisation plan against these boundaries

By the end, you’ll be able to map your actions to defensible levers, avoid misclassification, and communicate progress with confidence.

2. Decarbonisation levers explained

Mitigation vs adaptation.

Mitigation refers to actions that directly reduce greenhouse gas emissions or increase carbon sinks. These are the heart of decarbonisation levers, because they physically lower a company’s footprint. Adaptation, on the other hand, is about adjusting to climate impacts—such as building flood defences or heat-resistant infrastructure. Adaptation strengthens resilience but does not usually lower emissions. Therefore, adaptation measures are not decarbonisation levers, unless they deliver quantifiable mitigation benefits (e.g., restoring mangroves for flood protection and measurable carbon sequestration).

Mitigation vs offsetting.

Offsetting means purchasing carbon credits from projects outside your operations or supply chain. While offsets can complement a climate strategy, they do not reduce emissions in your own footprint. As such, offsets are not counted as decarbonisation levers. Only actions that directly reduce or remove emissions inside your boundary—such as switching to renewables or improving efficiency—qualify. Offsets should be reported separately as compensation, not confused with progress on levers.

Mitigation vs carbon dioxide removal (CDR).

Carbon removal activities (e.g., reforestation, soil carbon improvement, direct air capture, BECCS) do reduce atmospheric CO₂ and can be part of a mitigation strategy. But the link to levers is specific: emission reductions at the source take priority as levers, while removals are typically reserved for residual emissions that cannot be cut otherwise. In practice, reductions like electrification or efficiency are treated as primary levers; removals are supporting levers applied later in the hierarchy.

Insetting vs offsetting.

Insetting describes projects within your own value chain—such as helping suppliers adopt regenerative agriculture—that directly lower emissions linked to your footprint. Because the reductions occur inside your chain, they are valid decarbonisation levers. Offsetting, in contrast, involves buying credits from unrelated projects elsewhere, which does not alter your Scope 1–3 emissions. Offsetting is therefore not a lever in the strict sense.

Avoided emissions (“Scope 4”).

Some companies highlight avoided emissions, for example when a product allows customers to emit less compared to alternatives. These avoided emissions are valuable in a global context, but they do not shrink your own Scope 1–3 inventory. Because levers must show up as actual reductions in your reported footprint, avoided emissions are not counted as decarbonisation levers. They can be communicated as context, but they cannot substitute for internal mitigation.

What does not count as a decarbonisation lever?

Certain actions may be valuable but do not qualify as decarbonisation levers:

• Offsets purchased outside your value chain

• Adaptation measures without a measurable emissions benefit

• Outsourcing or divesting emitting activities (emissions simply move elsewhere)

• Generic avoided-emissions claims that do not reduce your own footprint

• Low-integrity measures with little or no additional impact

• Compliance-only purchases (e.g., taxes, allowances) without underlying abatement

3. A practical taxonomy of decarbonisation levers

When designing a decarbonisation plan, it helps to organise actions into three broad groups.

1) Nature-based levers

Mechanism: Harness ecosystems to avoid emissions or capture and store carbon.
Examples:

• Re/afforestation to sequester CO₂ over time

• Preventing deforestation or land degradation

• Regenerative agriculture that builds soil carbon

• Restoring wetlands, peatlands, or mangroves

When it counts: Projects within your operations or supply chain, where you retain the claim, can be included as levers. Purchasing credits from unrelated projects falls under offsetting, not decarbonisation.

2) Technology-based levers

Mechanism: Reduce emissions through engineering and energy transition.
Examples:

• On-site renewable generation or high-quality procurement to replace fossil power

• Electrifying fleets and equipment; switching to clean fuels such as green hydrogen

• Process optimisation and energy-efficient systems

• Carbon capture and storage for industrial emissions

• Product or process redesign to reduce emissions intensity

When it counts: Only when the action physically lowers emissions within your operational or value-chain boundary. In renewable procurement, for instance, quality matters—contracts that add new clean supply carry more weight than certificates with no additional impact.

3) Operational and value-chain levers

Mechanism: Change how you operate, source, transport, and design products.
Examples:

• Working with suppliers to cut emissions or switch to lower-carbon inputs

• Optimising logistics routes, modes, and loads

• Reducing waste and designing for reuse, repair, or recycling

• Developing products with lower energy use in the customer phase

• Detecting and fixing methane leaks; reducing business travel

When it counts: When reductions are measurable and show up in your reported Scope 1–3 inventory.

4. A quick checklist to stress-test each action

Use this quick test to decide if an action belongs in your decarbonisation lever set:

Read more

1. Introduction

Energy has moved from a background operational cost to a central strategic issue for companies. Rising energy prices, climate regulations, and investor demands are prompting businesses to reassess their energy sourcing and consumption strategies. Companies that fail to act risk exposure to transition costs, reputational damage, and stranded assets.

The concept of an ideal energy mix offers a roadmap for balancing sustainability with financial performance. It means combining different energy sources and financing mechanisms in ways that reduce emissions, stabilize costs, and protect against regulatory and market volatility.

In this article, you will read about:
✅ Energy mix as a corporate strategy
✅ What short-term (2030) and long-term (2050) scenarios mean for corporate strategy
✅ Why carbon pricing, policy incentives, and early action shift the economics of energy strategies

2. Energy mix as a corporate strategy

The energy mix refers to the share of electricity and heat a company sources from various technologies such as solar, wind, hydro, natural gas, nuclear, or hydrogen. What makes the concept strategic is its direct link to emissions, cost structures, and resilience.

• Profitability: Renewable energy sources like wind and solar now provide some of the lowest-cost electricity globally. However, their intermittency requires companies to balance them with storage or complementary baseload supply .

• Sustainability: Reducing dependence on fossil fuels cuts Scope 2 emissions (from purchased electricity) and aligns with net-zero targets.

• Risk management: A diversified energy mix reduces vulnerability to price shocks and regulatory changes, particularly carbon pricing.

Thus, the “ideal” mix is not fixed but depends on corporate profile, geography, and time horizon.

You can usually find your company’s energy mix from two sources:

• Supplier level: Your electricity supplier is required (in most regions) to publish an annual “fuel mix disclosure” or “energy label” showing what percentage of their electricity comes from renewables, nuclear, gas, coal, etc. This is often available on their website, in customer portals, or on your electricity bill.

• National level: Governments and energy regulators regularly publish the national electricity mix, often through energy agencies (e.g., the U.S. EIA, UK BEIS, EU Eurostat). These figures show the overall grid mix.

3. 2030: Renewables reshape corporate energy

According to the IEA’s Renewables 2024 report, the world will add more than 5,500 GW of renewable capacity by 2030—equal to the current power capacity of China, the EU, India, and the United States combined. By then, renewables are expected to cover nearly half of global electricity demand.

Solar will lead this surge, accounting for 80% of new capacity, while wind is set to double its recent growth rate. Together, they are forecast to supply 30% of global electricity generation by 2030, twice today’s share.

For companies, these developments carry several strategic implications:

• Prioritize solar procurement: Solar is now the cheapest option for new power plants in almost every country, making it the anchor of corporate decarbonization strategies.

• Expand wind sourcing where viable: Onshore and offshore wind can provide balance to solar-heavy mixes, especially in regions with high wind potential.

• Invest in flexibility and storage: Curtailment rates for renewables are already rising to around 10% in some countries. Firms should explore battery storage, demand-side management, and flexible PPAs to ensure reliable supply.

• Prepare for policy-driven acceleration: Nearly 70 countries are expected to meet or exceed their current renewable ambitions by 2030, but achieving the COP28 target of tripling global capacity will require governments to further streamline permitting, expand grids, and reduce financing barriers in emerging markets.

• Complementary natural gas use: While gas is a fossil fuel, its lower carbon intensity and ability to provide flexible generation make it a transitional option in certain regions.

4. 2050: Net-zero energy systems

By 2050, energy systems are expected to be deeply decarbonized, in line with global net-zero commitments. For companies, this means that energy strategies must evolve well beyond incremental efficiency measures and reflect the following structural shifts:

• Dominance of renewables: Solar, wind, and hydro are projected to supply the vast majority of electricity generation. The IEA’s Net Zero by 2050 scenario shows renewables accounting for around 90% of global power by mid-century, making them the backbone of corporate electricity sourcing.

• Storage and hydrogen integration: As the share of variable renewables rises, battery storage, demand-side flexibility, and green hydrogen will be critical for balancing supply and ensuring system reliability. Companies in heavy industry, transport, and chemicals will increasingly depend on hydrogen and synthetic fuels for processes that cannot be easily electrified.

• Decline of unabated fossil fuels: Even natural gas, once a “transition fuel,” will need to be phased out or paired with carbon capture and storage (CCS). IPCC AR6 highlights that continued fossil use is only compatible with net zero if combined with large-scale abatement.

• Emerging baseload options: Technologies such as small modular nuclear reactors (SMRs), advanced geothermal, and bioenergy with carbon capture and storage (BECCS) may provide firm, low-carbon generation to complement variable renewables. While not yet widely deployed, they are expected to play a role in regional or sector-specific mixes.

By 2050, the “ideal” energy mix will be almost entirely low-carbon, built around renewables and supported by storage, hydrogen, and next-generation baseload technologies.

5. Key strategic takeaways

Designing an energy mix requires evidence on what strategies actually pay off under different conditions. Recent studies and reports provide valuable lessons:

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1. Introduction

Climate strategy has moved from side reports to the center of corporate decision-making. Investors demand credible transition plans, regulators require detailed disclosures, and employees want to work for companies that take climate seriously. Physical risks—from floods to heatwaves—add further urgency.

At stake is a fundamental question of accountability: should the CFO, CSO, or CEO own climate policy? And perhaps more importantly, what actually drives outcomes?

Frameworks like the EU’s CSRD, the ISSB’s IFRS S2, and the TCFD have raised the stakes. They require clear reporting, board oversight, and governance structures that go beyond aspiration.

By reading this piece, you will learn:
✅ How CFO-, CSO-, and CEO-led models work in practice and where each excels
✅ What research says about boards, executives, and climate outcomes
✅ Where incentives, committees, and cross-functional integration strengthen execution

2. Three models of climate leadership

ompanies typically adopt one of three leadership patterns:

• CFO-led: Finance integrates climate into capital allocation, disclosure, and risk.

• CSO-led: A dedicated executive orchestrates decarbonization across functions.

• CEO-led: The chief executive makes climate a core part of corporate vision.

In practice, the most effective firms combine these approaches. The CEO sets direction, the CFO ensures rigor and credibility, and the CSO drives implementation.

3. The CFO-led model: finance as climate architect

CFOs are moving into the spotlight as disclosure frameworks mature. They oversee ESG data accuracy, internal controls, and reporting—often supported by new roles like ESG controllers. When climate policy sits with finance, it stops being an ethical side project and becomes a core financial risk and opportunity.

Strengths
CFOs embed climate into budgets, investment decisions, and risk models. This adds credibility for boards and investors who expect climate information to meet the same standard as financial disclosures. CFOs also bring discipline: they force sustainability initiatives to clear the hurdle of a business case.

Challenges
The risk is narrow framing. If finance leaders treat climate only as compliance, it can limit ambition. CFOs also face pressure to deliver short-term earnings, which can conflict with the long payback periods of decarbonization projects. And many still lack deep literacy in climate science.

Examples
At eBay, the CFO’s office works closely with sustainability and SEC reporting teams so climate risks are treated with the same rigor as revenue recognition. At Asahi Group, the CFO reframes sustainability as “an investment in our future,” quantifying risks like carbon pricing alongside opportunities like low-carbon product growth. Research shows companies with active, engaged CFOs perform better on sustainability, facing less resistance and reducing the risk of greenwashing.

Takeaway: CFOs bring rigor and board confidence. But they must avoid reducing climate to a compliance exercise and embrace it as a driver of resilience and long-term growth.

4. The CSO-led model: expertise and orchestration

The CSO role has transformed from managing reputational risk to coordinating strategy. Most large companies now have one, reflecting the recognition that climate requires expertise at the top table.

Strengths
CSOs provide subject-matter knowledge and credibility with stakeholders. They act as conductors of an orchestra—coordinating procurement, operations, R&D, and HR to embed climate into daily decisions. For employees, having a CSO signals that climate is being managed by someone with real expertise.

Challenges
Authority remains the sticking point. Many CSOs lack the power to hold others accountable. This can lead to a “two-strategy” problem: bold climate goals in glossy reports that are disconnected from capital budgeting or product pipelines. Political backlash against ESG has also led some companies to downgrade CSOs, showing their vulnerability when not backed by strong governance.

Examples
At PepsiCo, the Global Sustainability Office ensures that regional leaders and functional heads align business plans with the company’s Pep+ climate strategy. At Travelers, the CSO chairs a sustainability committee and sits on the disclosure committee, ensuring ESG is tied to risk management and reporting. Research confirms that appointing a CSO alone doesn’t guarantee results; performance improves only when CSOs are embedded in governance and supported by regulation.

Takeaway: CSOs are essential integrators, but they must be empowered by boards and connected to finance and strategy to avoid becoming symbolic roles.

5. The CEO-led model: sponsorship and integration

When the CEO owns climate policy, it signals that sustainability is central to strategy, not a peripheral initiative. Employees see it as part of corporate culture, and external stakeholders see it as credible.

Strengths
CEO sponsorship breaks silos, aligns incentives, and enables long-term investments. CEOs can also represent the company in external coalitions, shaping reputation and stakeholder trust.

Challenges
The model is fragile if climate ambition rests on one leader. CEO turnover or shifting priorities can stall progress, as seen in companies where successors abandoned sustainability agendas. In polarized markets, CEOs may also face backlash for taking strong public stances.

Examples
At Stockland, the CEO led an 18-month process to embed climate into every business unit. At Mahindra & Mahindra, the CEO personally chairs the sustainability council, ensuring climate goals are backed by authority. At Microsoft, the CEO and president anchor the company’s carbon-negative 2030 goal, linking it directly to corporate strategy. Research shows CEOs with sustainability backgrounds drive stronger environmental performance and innovation, but also highlights how leadership changes can undo progress if systems aren’t institutionalized.

Takeaway: CEO sponsorship is indispensable for alignment and culture. But resilience depends on embedding climate in committees, metrics, and systems—not just one leader’s vision.

6. What research tells us

Scientific studies provide evidence on what actually moves emissions, disclosure quality, and firm value.

• Boards multiply impact: Companies with directors who have environmental expertise emit less carbon, especially when those directors sit on committees. Board sustainability committees also improve disclosure quality.

• CSOs help—when embedded: Appointing a CSO alone can be ineffective. But under strict regulation and strong governance, CSOs drive better performance by improving sustainability practices.

• CEOs set tone and continuity: CEO sustainability orientation improves performance and green innovation. Yet leadership changes often reduce environmental responsibility, showing why climate governance must be institutionalized.

• Disclosure drives value and innovation: Climate disclosure is generally linked to higher firm value and stimulates green innovation. Adoption of frameworks like TCFD improves the quality of ratings, though market responses can be mixed when climate topics are politicized.

• Incentives shape outcomes: Linking executive pay to climate can work, but effectiveness depends on target design, coverage, and board oversight. Weak targets or limited scope often blunt impact.

Implication: No single leader owns climate policy. The best results come from shared accountability—CEO for direction, CFO for rigor, CSO for orchestration—amplified by board expertise and committee oversight.

7. Final thoughts

Operational execution requires shared responsibility. Some firms use a “spiderweb” model where each executive sponsors a part of the climate strategy.

The answer is not a single title, but a system: CEOs provide vision and authority, CFOs connect climate to capital and markets, CSOs bring expertise and coordination, and boards multiply impact through oversight and incentives.

Relevant Sources & Standards

How boards bridge the sustainability ambition-action gap | EY - UK

Do Board Expertise and Networked Boards Affect Environmental Performance? | Journal of Business Ethics

From attention to action: How board environmental expertise influences corporate environmental performance - Sarosh Asad, Jan C Hennig, Jana Oehmichen, Michael Wolff, Veronika Haas, 2025

To green or not to green: The influence of board characteristics on carbon emissions - ScienceDirect

The Sustainability committee and environmental disclosure: International evidence - ScienceDirect

Assessing the Impact of Board Sustainability Committees on Greenhouse Gas Performance: Evidence From Industrialised European Countries - Morrison - 2025 - Business Strategy and the Environment - Wiley Online Library

Can climate-related information disclosures strengthen green innovation capacity? Firm-level evidence using textual analysis - ScienceDirect

Voluntary Adoption of the TCFD Framework and Environmental Rating Quality by Ling Lei Lisic, Zihang Ryan Peng, Cecilia (Xiwen) Sun, Liang Tan :: SSRN

The Impact of Chief Sustainability Officers on Environmental Performance of Korean Listed Companies: The Mediating Role of Corporate Sustainability Practices

ESRS E1

1. Introduction

Internal carbon pricing (ICP) converts an organization’s emissions into a financial signal that can steer investments, budgets, and behaviors toward a low-carbon trajectory. By assigning a monetary value to each ton of CO₂ (or CO₂-equivalent), companies turn climate risk into a line item that leaders can manage.

At its core, ICP is a voluntary corporate mechanism that helps firms anticipate policy, align with climate targets, and fund decarbonization. It increasingly features in disclosure frameworks: ISSB/IFRS S2 asks companies to disclose if and how they use an internal carbon price; the EU’s CSRD and TCFD encourage transparent treatment of carbon-related risks and pricing assumptions.

By reading this piece, you will learn:
✅ The four main models of internal carbon pricing, how they work, and when to use them
✅ Why ICP matters now: regulation readiness, climate targets, risk management, and innovation
✅ A step-by-step playbook for implementation
✅ Typical pitfalls and how to avoid them
✅ Real-world case snapshots from Microsoft, Mahindra, BHP, Swiss Re, and others

You’ll come away with a better understanding of ICP, what it is, why it works, and how to design a version that influences decisions.

2. What internal carbon pricing is

Internal carbon pricing assigns a monetary value (e.g., $/tCO₂e) to company emissions so that carbon shows up in investment cases, operating budgets, product decisions, and supply-chain choices. Companies apply four main models:

A hypothetical carbon cost (e.g., $40–$80 per ton of CO₂e) applied in financial models. No money changes hands. It is mainly used to “future-proof” projects by testing how they would perform if external carbon prices rise. This approach is particularly relevant for long-lived investments (factories, infrastructure, or energy assets) and for portfolio strategy decisions.

A real financial mechanism. Business units pay a fee for each ton of emissions they generate. The collected funds go into a central pool, which finances decarbonization projects such as efficiency upgrades, renewable energy, or removals. This makes carbon a visible line in budgets and creates a direct incentive to reduce emissions, since lower emissions mean lower costs.

A backward-looking calculation of how much the company has effectively spent on emission reductions in the past. It is computed as the total spend on abatement projects or offsets divided by the tons of emissions avoided or offset. While not a tool for forward planning, it provides useful insight into actual costs of decarbonization and helps benchmark against future pricing strategies.

An intra-company trading system. Units or divisions receive emission allowances under an internal cap. If one unit reduces more than required, it can sell its surplus allowances to another. This creates a mini carbon market inside the company, encouraging reductions where they are cheapest. While powerful, this model is complex to design and administer, and therefore less commonly used.

Why companies blend approaches

Many organizations use two tools side by side: a shadow price for long-term planning and a carbon fee for daily operations.

Together, the two tools create a dual system:

• The shadow price shapes strategic decisions about where to invest for long-term resilience.

• The internal fee drives operational discipline and ensures money is available to actually finance decarbonization.

3. Why you should use internal carbon pricing now

Prepare for regulation
By using an internal carbon price, companies can test whether their assets and projects would remain profitable under stricter rules and avoid locking themselves into stranded assets.

Meet climate and ESG targets
Many companies are experimenting with internal carbon pricing, but the values they set often fall below Paris-aligned levels. Research suggests that prices of $40–$80 per ton by 2020 and $50–$100 per ton by 2030 are needed to align with the Paris Agreement. In practice, most firms use much lower thresholds or none at all, meaning their current internal prices may underestimate future risks and opportunities. Recalibrating these values can close the gap between corporate ambition and climate goals.

Unlock reductions and innovation
When emissions carry a cost, more projects suddenly become financially viable. Internal fees also generate funds that can be reinvested in energy efficiency, renewable power, low-carbon R&D, or removals.

Manage transition risk
Carbon pricing translates climate risk into clear monetary terms, which finance teams can model and incorporate into scenario analysis. This strengthens resilience and aligns with frameworks like TCFD.

Mobilize climate finance
The world faces a large funding gap for mitigation. Internal carbon pricing allows companies to assign a value to their emissions and channel equivalent funds into projects such as removals, going beyond their own footprint.

Signal leadership to stakeholders
Using and disclosing an internal carbon price shows strong governance and transparency. It signals to investors, regulators, and customers that the company takes climate seriously and has integrated it into financial performance.

4. Make it change decisions: integration into business

Internal carbon pricing has the most impact when it is fully embedded in core business processes:

• Capital planning and M&A – Use a shadow price in investment models (NPV/IRR) so projects are tested against future carbon costs. This steers capital toward assets that remain profitable in a low-carbon economy.

• Budgeting and forecasting – Apply the carbon fee like a cost line in each unit’s budget. Business areas that cut emissions keep more funds for other priorities, creating a built-in incentive.

• Product design and R&D – Include carbon costs in product P&Ls. High-emission designs become less attractive, while efficient or low-carbon innovations gain a financial edge.

• Procurement and suppliers – Add carbon costs into tender processes and vendor scorecards. This pressures suppliers to lower emissions and strengthens decarbonization across the value chain.

• Risk and scenarios – Stress-test strategies against higher carbon prices (e.g., $100/t by 2030). This helps companies adjust early instead of reacting late to regulation or market shifts.

• Incentives and KPIs – Link bonuses, performance metrics, or unit targets to carbon-adjusted results. This ties leadership and team success directly to emissions performance.

• Culture and change management – Make carbon a visible part of everyday decisions. Training, clear communication, and executive backing are crucial, since changing behaviors is often harder than setting the price itself.

5. Implementation playbook (10 steps)

1. Define objectives and scope
   Start by clarifying what you want ICP to achieve: is it mainly a risk screening tool (to test investments against future carbon costs), a funding mechanism (to generate money for decarbonization projects), or both? Decide which parts of the business to cover first.

   • Decide whether to apply ICP only to company operations (Scopes 1–2) or also to supply chain and product use (Scope 3).

   • Define whether the goal is cost awareness, emissions reduction, or revenue for green projects.
     

2. Secure leadership and governance
   Strong leadership support is critical. ICP needs champions at the top and clear governance structures to avoid being sidelined.

   • Get CEO/CFO sponsorship to give the program credibility.

   • Create a cross-functional task force with finance, ESG, and operations to design and manage ICP.
     

3. Measure emissions and set targets
   ICP is only as strong as the emissions data behind it. Establish a reliable baseline to calibrate your price ambition.

   • Map emissions by unit and activity (Scope 1 = direct fuel use, Scope 2 = purchased electricity, Scope 3 = value chain).

   • Align the internal price with your reduction targets or net-zero pathway.
     

4. Determine price and structure
   Choose the right carbon price level and how it will be applied.

   • Test different scenarios (e.g., moderate vs. high future policy costs).

   • Decide between a single global price or regional variations.

   • Plan escalators (scheduled increases) so the price rises over time.

   • When setting an internal price, link it to credible references instead of picking a number at random. Common anchors include:

     

5. Design mechanisms
   Decide how ICP will be built into day-to-day business processes.

   • Add a shadow price (a hypothetical $/t added in financial models) to capital expenditure templates.

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1. Introduction

The European Union Emissions Trading System (EU ETS) has become an important tool in Europe's climate policy. It puts a price on greenhouse gas emissions, which means companies must now consider carbon as an environmental concern and also as a financial cost.

The EU ETS works as a cap-and-trade system. This means the EU sets a total limit (or cap) on the emissions allowed from certain sectors, and companies within those sectors must hold enough "allowances" to cover their emissions. One allowance equals one tonne of CO2. Companies can trade these allowances with each other, adding flexibility while keeping the overall emissions within the cap.

In this article you will learn:

✅ How the EU ETS cap-and-trade system works
✅ What’s new in Phase 4 (2021–2030)
✅ How free allowances are changing
✅ The annual compliance process
✅ The financial and strategic impact
✅ What companies must report under the CSRD if they fall under the EU ETS

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Reading this will help you understand how the EU ETS works and how it can influence corporate decisions and sustainability strategies.

2. The basics of cap-and-trade in the EU ETS

The EU ETS sets a yearly cap on emissions from sectors like power generation, steel, cement, chemicals, intra-EU aviation, and (from 2024) maritime shipping. This cap shrinks every year, supporting the EU’s climate targets.

Companies must have a sufficient number of allowances, called EU Allowances (EUAs), to cover their emissions. Each EUA equals one tonne of CO2. If a company emits more than it has allowances for, it must buy more from the market. If it emits less, it can sell its surplus.

The system covers about 40% of the EU’s total greenhouse gas emissions. In Phase 4, the cap is reducing faster than before — by 4.3% per year starting in 2024, and 4.4% from 2028. A one-time cut of 117 million allowances was also introduced to speed up reductions.

Allowances can be saved for future years (banked), but not borrowed from future years. Since 2020, companies can no longer use international carbon offsets.

Example case. Between 2020 and 2021, the UK Environment Agency fined 33 companies over £27 million for failing to comply with climate-related reporting and emissions reduction schemes. Power and energy firms were penalized under the EU ETS for under-reporting emissions or missing reports. Brewing and automotive companies were fined for not meeting voluntary carbon reduction targets tied to tax discounts. Other businesses, including those in insurance and manufacturing, faced penalties under the Energy Savings Opportunity Scheme for skipping mandatory energy audits.

3. What’s new and important in Phase 4 (2021–2030)

Phase 4 raises ambition and tightens the rules. Key updates include:

• Wider coverage:
  The EU ETS now applies to more sectors. Maritime shipping has been added, and waste incineration might be next. The system also covers more gases, not just CO₂, but also nitrous oxide (N₂O) and perfluorocarbons (PFCs).

• Stricter cap:
  The total amount of emissions allowed under the system is getting smaller. By 2030, the goal is to cut emissions by 62% compared to 2005 levels, making the system tougher and more ambitious.

• No free allowances for power generators:
  Companies that produce electricity can no longer get free carbon allowances. They must now pay for 100% of their emissions.

• Changes for aviation and shipping:
  The rules are changing over time. Aviation will lose its free allowances by 2026, and shipping enters the system in 2025, starting with partial coverage and building up.

• Market Stability Reserve (MSR):
  This is a tool to keep the carbon market balanced. If there are too many allowances, the MSR will take some out of circulation and even cancel them starting from 2023 to prevent prices from dropping too low.

• No offsets allowed:
  Companies can no longer use international carbon credits (like CERs) to meet their obligations. Only EU Allowances (EUAs) are valid now, ensuring all reductions happen within the EU system.

4. Free allocation: who gets what, and why it’s changing

To help industries compete globally and prevent production from moving abroad (carbon leakage), some companies still receive allowances for free. This is based on

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1. Introduction

Atmospheric CO₂ accumulates because every year humanity adds more than natural sinks can remove. Until that imbalance is reversed, concentrations (and therefore climate risks) will keep rising.

Therefore, companies are turning to greenhouse gas (GHG) removals and mitigation. But without clarity on definitions, reporting, and quality, these efforts risk being seen as greenwashing. Understanding the distinctions between removals and mitigation, and how to report them under frameworks like the CSRD, is important for credibility and compliance.

What you’ll learn:

✅ The difference between GHG removals and mitigation
✅ How to classify climate projects inside vs. outside the value chain
✅ Which projects are eligible under CSRD reporting rules (ESRS E1-9)
✅ What to disclose under the CSRD

By the end, you’ll understand how to integrate removals and mitigation into a climate strategy.

2. GHG removals and mitigation: core concepts clarified

GHG removals refer to processes that permanently remove greenhouse gases from the atmosphere, such as planting forests, restoring wetlands, or using engineered technologies like Direct Air Capture (DAC). These can be either nature-based (e.g. afforestation, soil carbon projects, mangrove restoration) or technological (e.g. BECCS, enhanced mineralization, or using wood in construction if it avoids decay for ≥35 years).

GHG mitigation reduces emissions before they enter the atmosphere.

Examples include:

• Installing solar or wind power

• Improving energy efficiency in factories

• Capturing methane from agriculture or landfills

• Mitigation slows down emissions going into the atmosphere.

• Removals speed up the process of taking carbon out of it.

3. Reporting under CSRD

Under the amended ESRS E1, Disclosure Requirement E1-9 requires companies to clearly separate:

1. GHG removals and storage within own operations or value chain (insets)

   • Describe each removal/storage project (e.g., afforestation, soil carbon enhancement, direct air capture).

   • State which GHGs are involved.

   • Identify whether the method is biological, technological, or hybrid.

   • Explain how the carbon is stored and how permanence is ensured.

   • Disclose any reversals (in tCO₂e) during the reporting period.

   • Include assumptions on permanence, leakage, and risk management.

2. Carbon credits from projects outside own operations/value chain (offsets/mitigation)

   • Disclose the volume of credits verified against recognised quality standards and cancelled in the reporting year.

   • State the volume planned for cancellation in the future.

   • Explain whether projects are nature-based or technological removals.

   • Clarify if credits are EU-based and/or aligned with Article 6 of the Paris Agreement.

   • Credits from internal projects cannot be reported here to avoid double counting.

Important:

• Credits cannot be included in gross GHG reduction targets under E1-6.

• Use of credits should be supplementary — generally for residual emissions after deep decarbonisation (90–95% reduction), based on science-based pathway guidance.

• Public claims of climate or carbon neutrality must explain how credit use does not delay or reduce own reductions, and must describe credit integrity and quality.

In practice, the first step for any company is to map where emissions are occurring, across Scopes 1, 2, and 3, and determine whether to focus on emissions reduction (mitigation) or atmospheric carbon removal.

Learn more about scope 1, 2 and 3 here:

4. Related articles

Want to learn more about reporting emissions? Check out these articles?

Share CSRD Simplified

Relevant Standards

GHG Protocol Scope 3 Standard

ESRS E1

Amended ESRS E1 – Exposure Draft – July 2025

1. Introduction

The Science Based Targets initiative (SBTi) is a global corporate climate action partnership launched by CDP, the UN Global Compact, the World Resources Institute, and WWF. Its mission is to help companies set emissions reduction targets in line with climate science, to limit warming to well below 2°C, ideally 1.5°C, above pre-industrial levels.

As of this writing, thousands of businesses worldwide are registered, with 7,810 companies holding validated science-based targets (and 1,764 with net-zero targets) on the SBTi Target Dashboard. (In total, 10,572 firms have either set targets or committed to do so.) These numbers include global companies of all sizes and sectors (from tech and consumer goods to finance and heavy industry) taking concrete action to cut emissions.

This article will help you understand:

✅ What the Science Based Targets initiative (SBTi) is
✅ How companies are using science-based targets to align with a 1.5°C climate future
✅ The role of Scope 1, 2, and 3 emissions in SBTi target-setting , and when Scope 3 is required
✅ A step-by-step breakdown of the SBTi process
✅ The different methods available for setting targets, and how to choose the right one for your business
✅ Examples of companies that are using SBTi to cut emissions
✅ How SBTi can help meet CSRD climate target disclosure requirements
✅ What’s new in 2025, and how the SBTi is evolving

By the end of this article, you’ll understand how science-based targets work and what your organization needs to do to set credible and validated targets.

2. Why do we need science-based targets?

Setting climate targets anchored in science helps companies chart a clear path to net-zero emissions. International reports show the urgency: the 2018 IPCC Special Report found that to limit warming to 1.5°C, global greenhouse-gas (GHG) emissions must halve by 2030 and reach net-zero by 2050. Businesses are responsible for a large share of emissions, so their targets and actions are critical.

Importantly, SBTi-aligned companies are already cutting emissions faster than required by 1.5°C pathways: one SBTi progress report found that companies with approved science-based targets cut their Scope 1+2 emissions at roughly 6.4% per year (exceeding the ~4.2% annual reduction needed on average). Across 338 such companies, combined emissions fell by 25% since 2015, equal to the output of some 78 coal-fired power plants.

Science-based targets also bring concrete business benefits. The SBTi notes that companies on track with science-based targets often experience:

By committing to hard science-aligned goals, companies signal leadership on climate risk and stay ahead of regulation. Companies using SBTi targets avoid the pitfalls of vague or misaligned promises. The initiative’s guidance gives companies confidence that their near- and long-term decarbonization plans are aligned with climate science.

3. Setting Science-Based Targets: scope and process

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