Facing an inconvenienth truth

ESRS requires to report on absolute emissions targets

Early 2025, many financial institutions will need to extend their sustainability reporting in accordance with the Corporate Sustainability Reporting Directive (CSRD) and corresponding European Sustainability Reporting Standards (ESRS). Although many have enhanced their climate change transition plans over the last years, this regulation implies that most are ‘facing an inconvenient truth’. While the ESRS require that companies disclose absolute targets for their financed emissions or at least report the anticipated absolute GHG emission reductions associated with their intensity targets, most financial institutions have currently only set and only report on intensity targets.

Following the Paris Climate Agreement and further encouraged by a variety of commitments and standards (e.g. GFANZ, SBTi), many banks, insurance companies and asset managers have raised their reduction targets on financed emissions. Generally, they have either set or increased their intensity-based targets (e.g. tCO2e per mln EUR lent / invested, or sector-based metrics such as tCO2e per m2). Thereby staying away from (publicly) tying in their climate change transition plans with their growth ambitions. This in part makes sense, as (i) growth of the portfolio / loan book is to a degree at the expense of the growth of another institution and (ii) the size of the portfolio / loan book is partly determined by conditions beyond the control of the institution (e.g. interest rate fluctuations).

The ESRS require financial institutions to connect the company’s growth ambitions to their climate transition plans, as per:

ESRS E1 34 (a): “GHG emission reduction targets shall be disclosed in absolute value (either in tCO2e or as a percentage of the emissions of a base year) and, where relevant, in intensity value.”

ESRS E1 AR 23: “Under paragraph 34 (a), the undertaking may disclose GHG emission reduction targets in intensity value. Intensity targets are formulated as ratios of GHG emissions relative to a unit of physical activity or economic output. Relevant units of activity or output are referred to in ESRS sector-specific standards. In cases where the undertaking has only set a GHG intensity reduction target, it shall nevertheless disclose the associated absolute values for the target year and interim target year(s). This may result in a situation where an undertaking is required to disclose an increase of absolute GHG emissions for the target year and interim target year(s), for example because it anticipates organic growth of its business.”

These requirements from the standards result in financial institutions having to ‘face an inconvenient truth’, as setting climate targets that are in line with the expectations of stakeholders may require divestments and/or limit future growth, or disclose associated absolute values that are underwhelming to their stakeholders. The latter may in some cases contrast the sustainability positioning these companies have sought after in recent years.

Addressing this gap is no easy feat, since either setting absolute targets or projecting associated absolute emission values requires institutions to gain a deep understanding of the transition pathways for their financed activities, estimate the effects of their policy interventions, and project how their portfolio will develop over the long term. All for which strong assumptions will need to be applied that are expected to be consistent with other strategic plans communicated and disclosures made. ESRS 1 is also clear that using reasonable estimates is essential in preparing sustainability-related financial disclosures.

As this disclosure will need to be assured, assurance providers will challenge the analyses and the underpinning assumptions.

Given the technicality of this and the sensitivity of the resulting disclosure, it is beneficial to involve management of the institution and have open discussions with the assurance provider at an early stage.

How KPMG can help

KPMG has significant sector expertise and in-house knowledge on climate change mitigation and the CSRD / ESRS, and can therefore help you to amend your climate change transition plan, prepare your (dummy) ESRS disclosure on climate change mitigation targets, or assess the (dummy / draft) disclosure and provide assurance over this. Please contact us if you would like to learn more.