Srgguide 0824

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PwC
Sustainability reporting guide

August 2024
About the Sustainability
reporting guide
PwC is pleased to present the inaugural edition of our Sustainability reporting guide
(SRG). This guide serves as a compendium of the reporting requirements under the
sustainability frameworks expected to have the broadest impact globally, including:
□ European Sustainability Reporting Standards (ESRS) adopted by the European

Commission (EC) for purposes of compliance with the Corporate Sustainability
Reporting Directive (CSRD) in the European Union (EU)
□ IFRS® Sustainability Disclosure Standards issued by the International

Sustainability Standards Board (ISSB)
□ Climate disclosure rules issued by the United States (US) Securities and
Exchange Commission (SEC)
California has also issued several laws that will require sustainability disclosures from
a broad range of public and private companies, including US subsidiaries of non-US
entities. In addition, this guide has chapters dedicated to greenhouse gas emissions
reporting as well as an introduction to the EU Taxonomy Regulation.
The guide provides our insights and perspectives, interpretive and application
guidance, illustrative examples, and discussion on emerging practices. It should be
used in combination with a thorough analysis of the relevant facts and circumstances,
review of the authoritative sustainability guidance, and appropriate professional and
technical advice.
Content
Chapters in the guide will be released in phases. The following chapters are available
now:
SRG 1: Introduction to sustainability reporting

SRG 2: Applicability of sustainability reporting
SRG 3: Boundaries of sustainability reporting
SRG 4: Materiality for sustainability reporting
SRG 5: Foundations of sustainability reporting
SRG 6: Pillars of sustainability reporting
SRG 7: Greenhouse gas emissions reporting
SRG 19: Introduction to EU Taxonomy reporting
Additional chapters will be issued addressing environmental, social, and governance

topics and jurisdictional sustainability reporting regimes, as well as additional content
related to the application of the EU Taxonomy Regulation.
About the Sustainability reporting guide

Copyrights
This guide has been prepared for general guidance on matters of interest only and
does not constitute professional advice. You should not act upon the information
contained in this guide without obtaining specific professional advice. Accordingly, to
the extent permitted by law, PricewaterhouseCoopers LLP (and its members,
employees, and agents) and publisher accept no liability, and disclaim all
responsibility, for the consequences of you or anyone else acting, or refraining from
acting, in reliance on the information contained in this document or for any decision
based on it, or for any consequential, special, or similar damages even if advised of
the possibility of such damages.
All references to companies or entities in the examples are fictional. All of the names,
businesses, places, events, and incidents described in the text or examples are
either the product of our imagination or used in a fictitious manner. Any resemblance
to actual companies or businesses, or actual events, is purely coincidental.
This publication contains copyright material of the IFRS® Foundation in respect of

which all rights are reserved. Reproduced by PwC with the permission of the IFRS
Foundation. No permission granted to third parties to reproduce or distribute. For full
access to IFRS Standards and the work of the IFRS Foundation please visit
http://eifrs.ifrs.org
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Table of contents
Chapter 1: Introduction to sustainability reporting
1.1 Introduction to sustainability reporting — chapter overview .................................................. 1-1

1.2 Background of the sustainability reporting frameworks .......................................................... 1-4
1.3 Overview of the sustainability reporting approach................................................................. 1-10
Chapter 2: Applicability of sustainability reporting
2.1 Applicability of sustainability reporting — chapter overview................................................... 2-1

2.2 EU Corporate Sustainability Reporting Directive .................................................................... 2-1
2.3 International Sustainability Standards Board ....................................................................... 2-28
2.4 United States .......................................................................................................................... 2-30
Chapter 3: Boundaries of sustainability reporting
3.1 Boundaries of sustainability reporting — chapter overview ..................................................... 3-1

3.2 Establishing the reporting boundary ....................................................................................... 3-3
3.3 Own operations......................................................................................................................... 3-4
3.4 Evaluating the value chain ...................................................................................................... 3-13
3.5 Time horizons ......................................................................................................................... 3-20
3.6 Effect of changes in the entity structure ................................................................................ 3-29
3.7 Changes to prior period information ..................................................................................... 3-34
3.8 Transitional provisions........................................................................................................... 3-34
Chapter 4: Materiality for sustainability reporting
4.1 Materiality for sustainability reporting – chapter overview..................................................... 4-1

4.2 Core materiality characteristics in each framework ................................................................ 4-3
4.3 ESRS materiality approach ...................................................................................................... 4-6
4.4 ISSB standards materiality approach .................................................................................... 4-48
4.5 SEC materiality approach....................................................................................................... 4-65
4.6 Frequently asked questions .................................................................................................... 4-73
Chapter 5: Foundations of sustainability reporting
5.1 Foundations of sustainability reporting — chapter overview ................................................... 5-1

5.2 Qualitative characteristics of sustainability information ........................................................ 5-3
5.3 Connected information............................................................................................................. 5-6
5.4 Measurements in sustainability reporting ............................................................................... 5-9
Table of contents
5.5 Omission of material information — commercially sensitive, classified, and prohibited
information .............................................................................................................................. 5-13
5.6 ESRS – General requirements disclosures ............................................................................. 5-16
5.7 ISSB standards – General requirements disclosures ............................................................ 5-23
5.8 SEC — General concepts......................................................................................................... 5-26
Chapter 6: Pillars of sustainability reporting
6.1 Pillars of sustainability reporting — chapter overview ............................................................. 6-1

6.2 Introduction to ESRS 2 and IFRS S1........................................................................................ 6-3
6.3 Governance over sustainability-related impacts, risks, and opportunities (as applicable) .... 6-6
6.4 Strategy regarding sustainability-related impacts, risks, and opportunities (as applicable) 6-13
6.5 Management of sustainability-related impacts, risks, and opportunities (as applicable) .... 6-26
6.6 Sustainability-related metrics and targets ............................................................................. 6-34
Chapter 7: Greenhouse gas emissions reporting
7.1 Greenhouse gas emissions reporting overview ......................................................................... 7-1

7.2 Understand GHG reporting requirements................................................................................7-4
7.3 Establish the organisational boundary ................................................................................... 7-21
7.4 Determine the operational boundaries ...................................................................................7-45
7.5 Scope 1 measurement .............................................................................................................. 7-57
7.6 Scope 2 measurement............................................................................................................. 7-68
7.7 Scope 3 measurement............................................................................................................. 7-83
7.8 Establishing base year emissions ............................................................................................ 7-97
7.9 GHG emissions reductions and removals ............................................................................. 7-102
7.10 Reporting GHG emissions ..................................................................................................... 7-105
7.11 Transitional provisions.......................................................................................................... 7-121
Chapter 19: Introduction to EU Taxonomy reporting
19.1 Introduction to EU Taxonomy reporting — chapter overview ............................................... 19-1

19.2 Legislation overview ................................................................................................................ 19-3
19.3 Environmental objectives ........................................................................................................ 19-6
19.4 Applying a 5-step approach ................................................................................................... 19-13
PwC | viewpoint.pwc.com
Chapter 1:
Introduction to
sustainability reporting
1.1 Introduction to sustainability reporting —
chapter overview
Sustainability reporting has its roots in reporting on climate and other
environmental issues. Because this reporting has historically been prepared
voluntarily, the sustainability matters disclosed — and what was disclosed about
them — has varied considerably among entities, depending on what individual
companies thought was most relevant to their investors and other stakeholders.
The sustainability reporting landscape has changed drastically in the past year
with impending mandatory reporting beginning to supplant voluntary reporting
worldwide. Further, one of the most notable aspects of the new rules is their
‘extraterritoriality’ — that is, their impact on entities outside of their direct
jurisdictions. The sustainability reporting frameworks expected to have the
broadest effect globally include:
□ European Sustainability Reporting Standards (ESRS) adopted by the

European Commission (EC) for purposes of compliance with the Corporate
Sustainability Reporting Directive (CSRD) in the European Union (EU)

Exchange Commission (SEC) 1
See SRG 2, Applicability of sustainability reporting requirements, for discussion of

the entities subject to these reporting regimes.
Understanding the basics about these standards and rules is the starting point to
maximising the value of sustainability reporting and moving beyond a compliance
exercise. Further, although the details of the standards and regulations differ, the
general process and approach to reporting aligns. This chapter discusses the
background on the frameworks and overall process for sustainability reporting as
follows:
□ Understanding the sustainability reporting frameworks (SRG 1.2)
□ Approach to sustainability reporting (SRG 1.3)
This overview provides an introduction that should be supplemented by the

remaining sections of this guide as discussed in SRG 1.1.1.
1.1.1 Navigating the Sustainability reporting guide
This Sustainability reporting guide (SRG) serves as a compendium of the

disclosure requirements under the primary sustainability reporting frameworks
with extraterritorial provisions. It also provides our insights and perspectives,
interpretative and application guidance, illustrative examples, and discussion on
emerging issues.
Figure SRG 1-1 summarises the overall structure of the guide and is divided
among general topics related to the structure and basis for preparation of
sustainability reporting (SRG 1 – SRG 6), GHG emissions reporting (SRG 7),
1 On 6 March 2024, the SEC issued its climate disclosure rules, The Enhancement and
Standardization of Climate-Related Disclosures for Investors. On 4 April 2024, the SEC
issued an order to stay the rules to “facilitate the orderly judicial resolution” of pending legal
challenges. SEC registrants should continue to apply the existing disclosure rules until the
stay is lifted or the litigation is resolved.
PwC | Introduction to sustainability reporting (as of 30 June 2024) 1-1

environmental disclosure topics (SRG 8 – SRG 13), social disclosure topics (SRG
14 – SRG 17), governance disclosures (SRG 18), disclosures related to the EU
Taxonomy Regulation (SRG 19 – SRG 21), and jurisdictional sustainability
disclosure requirements (SRG 22).
Figure SRG 1-1

Navigating PwC’s Sustainability reporting guide
Pillars SRG 18
Jurisdictional
Background and Foundational
requirements
approach concepts
Social Governance
SRG 6 SRG 19–21
Applicability SRG 5 GHG topics SRG 14–17
SRG 1 SRG 2 SRG 7 emissions
Reporting EU Taxonomy SRG 22
SRG 8–13 Regulations
boundaries
SRG 4 Materiality
Environmental
SRG 3
topics
This guide is intended to support an entity throughout its sustainability reporting

journey, detailing the required disclosures, but also highlighting where disclosures
are common among frameworks. The sequence of chapters is aligned to the
sustainability reporting approach described in SRG 1.3.
1.1.2 About this chapter
Throughout this SRG, we use common terms to describe aspects of the

sustainability standards and regulations, as well as references to interpretative
guidance as discussed below.
The sustainability reporting landscape continues to rapidly evolve. The content of

this chapter is based on information available as of 30 June 2024. Accordingly,
certain aspects of this publication may be superseded as new guidance or
interpretations emerge. Entities are therefore cautioned to stay abreast of — and
evaluate the effect of — developments subsequent to 30 June 2024.
Impacts, risks, and opportunities (as applicable)
Sustainability reporting is intended to provide material information about an

entity's sustainability matters. A sustainability-related impact is the effect an entity
has on people and the environment. Sustainability-related risks and opportunities
relate to the financial effect that sustainability matters have on the entity, including
its ability to generate cash flows and create value in the short-, medium-, and
long-term. Each sustainability framework requires reporting of different
sustainability matters.
□ ESRS — sustainability-related impacts, risks, and opportunities
□ IFRS Sustainability Disclosure Standards — sustainability-related risks and

opportunities
□ SEC climate disclosure rules — climate-related risks
Throughout this guide, when more than one sustainability framework is being
discussed, the term 'impacts, risks, and opportunities (as applicable)' is used as a
combined reference to ‘impacts, risks, and opportunities’ as required by ESRS
and ‘risks and opportunities’ as required by the ISSB standards. The term ‘IROs’

is used to refer to impacts, risks, and opportunities in discussions applicable only
to ESRS.
Disclosure and application requirements for ESRS
ESRS use a convention in which groups of related disclosures are separated into
Disclosure Requirements (referred to as ‘DRs’). The Disclosure Requirements in
ESRS 2 General disclosures are labelled based on the type of disclosure. For
example, Disclosure Requirement SBM-2 – Interests and views of stakeholders
refers to the second Disclosure Requirement related to an entity's strategy and
business model (SBM). In the topical standards, each Disclosure Requirement is
labelled with the standard to which it relates and a sequential number. For
example, Disclosure Requirement E1-1 – Transition plan for climate change
mitigation refers to the first Disclosure Requirement in ESRS E1 Climate change.
ESRS also include Application Requirements (ARs) that support the application of
the Disclosure Requirements. The ARs provide guidance on how to disclose the
mandatory information in the DRs and have the same authority as other parts of
ESRS.
Interpretive guidance for ESRS and the ISSB standards
In addition to releasing the reporting standards, standard setters are actively

working to provide implementation guidance to assist preparers with application.
These efforts include implementation guidance (IG) released by EFRAG, which
initially drafted the disclosure requirements detailed in the ESRS. EFRAG has
historically advised the European Commission on the endorsement of IFRS
Accounting Standards. As a result of the CSRD being issued, EFRAG extended
its mission and now also provides technical advice to the EC on sustainability
reporting. EFRAG has published the following sources of interpretive guidance
with respect to the ESRS:
□ EFRAG IG 1 Materiality Assessment (EFRAG IG 1)
□ EFRAG IG 2 Value chain (EFRAG IG 2)
□ EFRAG ESRS Implementation Q&A Platform — the EFRAG Q&A Platform is

updated with new information periodically, most recently with the publication
of the Compilation of Explanations January – July 2024 (EFRAG ESRS Q&A
Compilation of Explanations)
Although EFRAG’s guidance is non-authoritative, it provides a helpful perspective

about the application of ESRS. Further, the European Securities and Markets
Authority (ESMA) issued a public statement saying it “strongly encourages issuers
to consult the support material made available by EFRAG which provide insights
for practical use of the standards”. 2
In addition, the IFRS Foundation has established a task force to assist in

interpretation of matters related to the IFRS Sustainability Disclosure Standards.
Meeting minutes of the “Transition Implementation Group on IFRS S1 and IFRS
S2” (TIG) set forth the results of their discussions. Although non-authoritative, this
implementation guidance may be helpful to preparers in interpreting the
standards.
Interoperability among frameworks
Understanding where the different frameworks align and diverge will help entities
that are required to report under multiple frameworks develop the requisite
2ESMA, Public Statement, “Off to a good start: first application of ESRS by large issuers”,
5 July 2024.

reporting strategy and data gathering processes and related controls, leading to a
streamlined process and effective deployment of resources to meet each
framework’s individual reporting requirements.
Acknowledging the concerns of entities subject to both ESRS and the IFRS
Sustainability Disclosure Standards, EFRAG and the IFRS Foundation published
interoperability guidance (IG) to facilitate compliance with both sets of standards.
The ESRS-ISSB Standards: Interoperability Guidance describes the alignment
achieved between the two frameworks, specifically with respect to the climate-
related disclosure requirements. 3
The first section of the guidance discusses interoperability in relation to general

reporting requirements topics, such as the materiality of sustainability information
and the presentation and disclosures for sustainability topics other than climate.
The subsequent sections are organized as follows and discuss interoperability
regarding climate:
□ Common climate-related disclosures
□ ESRS to IFRS S2 (climate): information that an entity starting with ESRS

needs to know when also applying the ISSB Standards to enable compliance
with both sets of standards
□ IFRS S2 (climate) to ESRS: information that an entity starting with the ISSB
standards needs to know when also applying ESRS to enable compliance
with both sets of standards
The appendix of the document summarises the reliefs related to the climate
disclosures under the two standards. Although specific to climate, the information
and approach outlined in the interoperability guidance may be helpful across
topics to entities applying both frameworks.
1.1.3 Exclusions from this chapter
This chapter generally discusses the application of ESRS, the ISSB standards,
and the SEC climate disclosure rules. Other jurisdictional reporting requirements
— including sustainability-related laws passed in California in October 2023 — are
discussed in SRG 22, Jurisdictional reporting requirements [coming soon].
Additionally, entities in scope of the CSRD would also be subject to the EU

Taxonomy Regulation. This chapter also does not extend to the background and
the reporting process related to the EU Taxonomy. For details, see SRG 19,
Introduction to EU Taxonomy reporting.
1.2 Background of the sustainability reporting

frameworks
Both ESRS and the IFRS Sustainability Disclosure Standards require disclosures
related to environmental, social, and governance sustainability topics, whereas
the SEC climate disclosure rules mandate certain climate-related disclosures.
Figure SRG 1-2 summarises the scope of disclosures and the key standards by
framework.
3EFRAG and IFRS Foundation, ESRS-ISSB Standards: Interoperability Guidance, 2 May

2024.

Figure SRG 1-2
Summary of scope of frameworks
SEC climate
ESRS ISSB standards disclosure rules
Standard setter / European Commission IFRS Foundation US SEC

regulator
Entities in scope (note 1) EU and non-EU entities Jurisdictional-specific SEC registrants,

subject to certain criteria adoption including domestic and
foreign private issuers 4
Sustainability topics Sustainability-related Sustainability-related Climate-related risks,

covered impacts, risks, and risks and opportunities including footnote
opportunities across across environmental, disclosure
environmental, social, social, and governance
Separate guidance
and governance topics topics
addresses specified
human capital and
governance disclosures
Breakdown of standards □ ESRS sector agnostic □ IFRS S1 General SEC climate disclosure
standards Requirements for rules
Disclosure of
□ ESRS sector
Sustainability-related
standards (note 2)
Financial Information
□ ESRS standards for
□ IFRS S2 Climate-
small and medium-
related Disclosures
sized entities (note 2)
□ ESRS for non-EU
entities (note 2)
□ EU Taxonomy (note 3)
Note 1: See SRG 2, Applicability of sustainability reporting, for more information about the
entities in the scope of the requirements.
Note 2: These standards have yet to be released.
Note 3: The EU Taxonomy is not addressed by ESRS but is a separate regulation requiring
certain sustainability-related key performance indictors to be presented alongside ESRS
disclosures. Further, the EU Taxonomy Regulation is unrelated to XBRL and other digital
tagging taxonomies. For details, see SRG 19, Introduction to EU Taxonomy reporting.
These sustainability reporting frameworks include, to various degrees, reference

to, or consideration of, other sustainability reporting standards and regulations.
For example, both ESRS and the ISSB standards refer to each other as a source
of disclosure requirements when certain matters are not addressed in one or the
other framework. In addition, both the ISSB standards and ESRS refer to the
standards of the Global Reporting Initiative (GRI). 5 This guide does not address
GRI or other voluntary sustainability reporting frameworks.
4 The SEC climate disclosure rule exempts Canadian registrants reporting on Form 40-F
under the Multi-jurisdictional Disclosure System (MJDS). See SRG 2.4.1.2.
5 ESRS 1 General requirements, paragraph 114 and AR 4; IFRS S1 General Requirements
for Disclosure of Sustainability-related Financial Information, paragraph C2. For more

information, see SRG 4.3.2.2, SRG 4.3.4.3, and SRG 4.4.3.

1.2.1 Corporate Sustainability Reporting Directive
The publication of the CSRD was driven, in part, by the European Green Deal, a
December 2019 package of European Union policy initiatives designed to achieve
climate neutrality by 2050 and protect Europe’s natural habitat. The CSRD goes
well beyond the EU’s current Non-Financial Reporting Directive (NFRD), which
has imposed requirements on certain companies to disclose some environmental
and social impacts since 2017. By design, the CSRD intends to drive changes in
company behaviour and bring sustainability reporting on par with financial
reporting over time by mandating extensive disclosures about environmental,
social, and governance topics.
The CSRD went into effect on 5 January 2023, and EU Member States have until
early July 2024 (18 months from the effective date) to incorporate its provisions
into national law. The directive sets forth the minimum requirements; thus,
Member States may add provisions during this period but cannot eliminate any of
CSRD’s provisions. The CSRD does, however, allow for EU Member States to
make several elections during the transposition process (for example, language
requirements for reporting, expansion of assurance providers beyond the statutory
auditor). The scope of entities directly impacted by CSRD reaches far beyond the
EU and requires entities to provide specific sustainability-related disclosures. The
applicability of CSRD and related reporting exemptions are discussed in SRG 2.2.
The CSRD will require comprehensive and granular disclosures covering the
entire spectrum of sustainability topics (for example, climate change, biodiversity
and ecosystems, working conditions, human rights, business ethics) as depicted
in Figure SRG 1-3. The European Sustainability Reporting Standards are the first
set of standards issued to implement the CSRD. Additional simplified standards
will be issued for use by certain small and medium-sized enterprises (SMEs),
small and non-complex institutions, and captive insurance and reinsurance
undertakings, as defined in EU regulation. Dedicated standards will also be issued
to be applied at a global consolidated level as part of reporting required for non-
EU headquartered entities. See SRG 2.2 for further information.
1.2.1.1 European Sustainability Reporting Standards
To date, the European Commission as adopted 12 sector-agnostic standards. The

12 standards span all aspects of sustainability reporting — addressing
environmental, social, and governance topics — and are intended to provide
insight into a company’s sustainability risks and opportunities, including its
sustainability strategy, targets and progress, products and services, business
relationships, incentive programs, and value chain.
Figure SRG 1-3 depicts the standards that the European Commission has
adopted to date together with references to the applicable chapters in this guide.
Figure SRG 1-3

ESRS and SRG chapter references
ESRS SRG chapters
Cross-cutting standards
ESRS 1 General requirements SRG 3, Boundaries of sustainability reporting

SRG 4, Materiality for sustainability reporting
SRG 5, Foundations of sustainability reporting
ESRS 2 General disclosures SRG 6, Pillars of sustainability reporting

ESRS SRG chapters
Environmental topics
ESRS E1 Climate change SRG 7, Greenhouse gas emissions reporting

SRG 8, Climate [coming soon]
ESRS E2 Pollution SRG 9, Pollution [coming soon]
ESRS E3 Water and marine resources SRG 10, Water [coming soon]
SRG 11, Marine resources [coming soon]
ESRS E4 Biodiversity and ecosystems SRG 12, Biodiversity and ecosystems [coming soon]
ESRS E5 Resource use and circular SRG 13, Resource use and circular economy
economy [coming soon]
Social topics
ESRS S1 Own workforce SRG 14, Own workforce [coming soon]
ESRS S2 Workers in the value chain SRG 15, Workers in the value chain [coming soon]
ESRS S3 Affected communities SRG 16, Affected communities [coming soon]
ESRS S4 Consumers and end-users SRG 17, Consumers and end-users [coming soon]
Governance
ESRS G1 Business conduct SRG 18, Governance [coming soon]
The required disclosures are interlinked with the entity’s discussion of its business
model and strategy to assist stakeholders in assessing how the entity fits into and
contributes to society more broadly. ESRS requirements are organised in three
categories: 6
□ Cross-cutting standards — consist of disclosure requirements and concepts

applicable to all entities in scope and required for all sustainability-related
impacts, risks, and opportunities; ESRS refers to these as sector-agnostic
standards
□ Topical standards — focused on disclosure requirements across

environmental, social, and governance sustainability matters; structured by
sustainability matters broken down by topics, sub-topics, and sub-subtopics
(see examples in Figure SRG 1-4) 7
□ Sector-specific standards — addressing sustainability-related impacts, risks,

and opportunities that are typically material to entities within a specific sector
6 ESRS 1 paragraphs 4, 5, 8 and 10.

7 Commission Delegated Regulation (EU) 2023/2772, Annex II Table 2 'Terms defined in
the ESRS', define sustainability matters as “Environmental, social and human rights, and
governance factors, including sustainability factors defined in Article 2, point (24), of
Regulation (EU) 2019/2088 of the European Parliament and of the Council”.

but are not sufficiently addressed in the topical standards; EFRAG will draft
around 40 sector standards, expected to be issued by 2026 8
All of these standards should be read together to determine the complete ESRS
disclosure requirements.
Figure SRG 1-4

Examples of the sustainability matters structure in the topical ESRS standards as
depicted in ESRS 1 AR 16
ESRS Topic Sub-topic Sub-sub-topic
ESRS E3 Water and marine □ Water □ Water consumption

resources
□ Marine resources □ Water withdrawals
□ Water discharges
□ Water discharges in
the oceans
□ Extraction and use of
marine resources
ESRS S4 Consumers and end- □ Personal safety of □ Health and safety

users consumers and/or
□ Security of a person
end-users
□ Protection of children
EFRAG has released implementation guidance related to materiality and the

value chain assessments. EFRAG also periodically releases non-authoritative
guidance on its EFRAG ESRS Q&A Compilation of Explanations. See discussion
of these resources in SRG 1.1.1.
1.2.2 IFRS Sustainability Disclosure Standards
The ISSB sits alongside the International Accounting Standards Board (IASB),
with both boards under the umbrella of the IFRS Foundation. In announcing the
formation of the ISSB at COP26 — the November 2021 United Nations global
summit to address climate change — the IFRS Foundation trustees said it “will
work with jurisdictions globally to deliver a ‘comprehensive global baseline’ of
sustainability disclosures for the capital markets”. 9
Although ESRS and the SEC climate disclosure rules are applicable to specified
groups of entities, the ISSB standards, similar to the IASB standards, need to be
adopted by a relevant jurisdictional regulator or standard setter before an entity is
required to report under them. Refer to our Territory adoption tracker [coming
soon] for more information.
The first two IFRS Sustainability Disclosure Standards issued are:
□ IFRS S1 General requirements for disclosure of sustainability-related financial

information — similar to ESRS ‘cross-cutting standards’, this sector-agnostic
standard is applicable to all entities in scope, and to all sustainability-related
risks and opportunities if not covered by a topical standard (see SRG 3,
Boundaries of sustainability reporting, SRG 4, Materiality for sustainability
8 On 29 April 2024, the European Council approved a two-year delay of the deadline for
adoption of certain sector-specific standards (extending the deadline to 30 June 2026). The
delay in issuance of the standards, however, does not impact the deadline for reporting.
See SRG 2.2.8 for information on the timing of first-time application.
9 IFRS Foundation, The need for a global baseline for capital markets, November 2021.

reporting, SRG 5, Foundations of sustainability reporting, and SRG 6, Pillars
of sustainability reporting)
□ IFRS S2 Climate-related disclosures — the first topical standard, covering

climate-related disclosures (see SRG 7, Greenhouse gas emissions reporting,
and SRG 8, Climate [coming soon])
The “Transition Implementation Group on IFRS S1 and IFRS S2” was established
as a mechanism to address questions from stakeholders regarding the
implementation of the ISSB standards. The TIG meets periodically to discuss
these questions and inform the ISSB if any further action is required (for example,
to provide further supporting materials in the form of webinars or case studies).
The SRG includes references to some of the questions discussed by the TIG.
Question SRG 1-1
Can an entity that prepares financial statements using generally accepted

accounting principles other than IFRS (for example, local GAAP) apply the IFRS
Sustainability Disclosure Standards?
PwC response
Yes. The IFRS Sustainability Disclosure Standards were designed to be used with
any accounting framework.
Excerpt from IFRS S1 paragraph 8
An entity may apply IFRS Sustainability Disclosure Standards irrespective of

whether the entity’s related general purpose financial statements … are prepared
in accordance with IFRS Accounting Standards or other generally accepted
accounting principles or practices (GAAP).
This guidance may be especially relevant to an entity reporting under local GAAP
in countries that adopt the IFRS Sustainability Disclosure Standards for purposes
of their local reporting.
1.2.3 US Securities and Exchange Commission
In March 2024, the SEC finalised climate disclosure rules that mandate robust
disclosures on climate risks.
The rules were accompanied by an adopting release, which is provided in

conjunction with the issuance of any new rule. This is a narrative document that
explains the basis for the new rules, the SEC’s response to public comments,
including changes to the rules, explanation of the final rules, and the economic
analysis supporting the costs and benefits of the new rules.
In addition, existing SEC rules address broad-based disclosures about an entity’s

governance and human capital. The specific regulations are listed in Figure SRG
1-5.

Figure SRG 1-5
Sustainability-related reporting rules issued by the SEC
Topic Title SRG chapters
Climate The Enhancement and SRG 7, Greenhouse gas emissions

disclosure Standardization of Climate-Related reporting, and SRG 8, Climate
Disclosures for Investors [coming soon]
Human Modernization of Regulation S-K SRG 14, Own workforce [coming

capital Items 101, 103, and 105 soon]
Governance Corporate Guidance of Regulation S- SRG 18, Governance [coming soon]

K Item 407
SEC climate disclosure rules
In March 2024, the SEC adopted rules that would enhance the climate-related
disclosures already required under existing Regulation S-K and Regulation S-X by
mandating disclosures about climate-related risks that are reasonably likely to
have a material impact on an entity’s business. On 4 April 2024, however, the
SEC issued a stay of its climate disclosure rules to “facilitate the orderly judicial
resolution” of pending legal challenges.
If the stay is lifted, the rules will require entities to disclose climate-related
information in various filings both inside and outside the financial statements. See
SRG 8, Climate [coming soon], for more information on the disclosure
requirements.
1.3 Overview of the sustainability reporting

approach
Both ESRS and the IFRS Sustainability Disclosure Standards include similar
required disclosures addressing governance, strategy, risk management, and
metrics and targets. In addition, the disclosure requirements under ESRS and the
IFRS Sustainability Disclosure Standards generally align with regard to
sustainability-related risks and opportunities. A similar approach is also followed
to identify the sustainability matters subject to the required disclosures. Further,
although the topic covered by the SEC climate disclosure rules is more narrow,
we believe this approach could also be applied by entities for purposes of
compliance with those requirements.
1.3.1 Four-step sustainability reporting approach
We believe an approach to the determination of required sustainability reporting

can be summarised in four steps.
□ Step 1: Determine the applicability of reporting

Planning for sustainability reporting cannot begin until an entity determines
the range of frameworks to which it is subject. Each framework determines
scope differently, and many entities will be subject to multiple sustainability
frameworks. See SRG 2, Applicability of sustainability reporting requirements,
for more information on this step.
□ Step 2: Establish the boundaries for sustainability reporting

An entity needs to determine the entities, assets, and operations that must be
considered when identifying material sustainability-related impacts, risks and

opportunities (as applicable), which may include an entity’s own operations,
upstream and downstream value chain, and other business relationships. In
addition to establishing its reporting boundaries, an entity must identify and
apply the relevant time horizons as part of preparing its sustainability
reporting. See SRG 3, Boundaries of sustainability reporting, for more
information on this step.
□ Step 3: Conduct a materiality assessment

Within the boundary established for its sustainability reporting, an entity needs
to identify its material sustainability-related impacts, risks, and opportunities
(as applicable). Despite differences in how ESRS and the ISSB standards are
structured, the population of financially material risks and opportunities
identified will generally be the same irrespective of the framework. See SRG
4, Materiality for sustainability reporting, for more information on this step.
□ Step 4: Prepare required disclosures

Once the population of sustainability-related impacts, risks, and opportunities
(as applicable) is compiled, there are various provisions in both ESRS and the
IFRS Sustainability Disclosure Standards that dictate the types of information
that must be disclosed, including basis of preparation and other general
requirements (see SRG 5, Foundations of sustainability reporting, and SRG 6,
Pillars of sustainability reporting).
General disclosures and details related to the material impacts, risks, and
opportunities (as applicable) resulting from the materiality assessment are
required. In addition, under ESRS, if the identified impact, risk, or opportunity
relates to a matter for which there is a specific topical standard, or a sector for
which there is a specific sector standard, incremental disclosures must be
made to comply with those standards (see discussion in the SRG topical
chapters [coming soon]). For both frameworks, specific disclosures (satisfying
relevant criteria) are required to the extent the delineated disclosures do not
address or sufficiently address an entity’s sustainability-related impacts, risks,
or opportunities (as applicable).
Similarities and differences in applying this approach to reporting in accordance

with ESRS and the IFRS Sustainability Disclosure Standards are highlighted in
Figure SRG 1-6.
Figure SRG 1-6

Summary of a sustainability reporting approach
Step ESRS ISSB
Step 1: Determine the scope of Consider applicability of the Consider applicability of the
reporting framework framework
(SRG 2)
Step 2: Establish the boundaries Identify own operations, value Identify own operations, value
for sustainability reporting chain, and time horizons chain, and time horizons
(SRG 3)

Step ESRS ISSB
Step 3: Conduct a materiality □ Identify impacts using impact □ Identify risks and
assessment materiality opportunities reasonably
expected to affect the entity’s
(SRG 4) □ Identify risks and
prospects
opportunities applying a
financial materiality lens □ Identify material information
to be reported
□ Identify material information
to be reported
Step 4: Prepare required □ Disclosures required by □ Disclosures required by IFRS

disclosures, including entity- ESRS 2 S1
specific disclosures:
□ Disclosure required by 10 □ Disclosures required by IFRS
□ cross-cutting topical standards (and sector S2, additional topical
standards, when available) standards to be developed
□ topical
□ ESRS sector standards are □ An entity must refer to and
□ sector specific
yet to be released consider the applicability of
(SRG topical chapters [coming the sector disclosures in the
soon]) Sustainability Accounting
Standard Board (SASB)
standards
The developing sustainability reporting mandates will be the subject of ongoing

interpretation. Entities need to be vigilant in their monitoring of new requirements
in the territories in which they operate. In addition to the initial issuance of the
chapters on topical standards, this guide will be updated for changes to the
frameworks as they evolve.
Acknowledgements
Our first edition of the Sustainability reporting guide represents the efforts and
ideas of many individuals within PwC. The following individuals served as
primary authors or technical reviewers for this chapter:
Peter Flick
Heather Horn
Andreas Ohl
Dara Sarasati
Olivier Scherer
Diana Stoltzfus
Valerie Wieman
Jan-Ben Wiese
Katie Woods
We are also grateful to others whose contributions enhanced the quality and
depth of this guide.

Chapter 2:
Applicability of
sustainability reporting
2.1 Applicability of sustainability reporting —
chapter overview
Jurisdictional authorities, standard setters, and regulators worldwide are enacting
sustainability laws and requirements with significant extraterritorial provisions —
that is, the requirements may apply to entities headquartered outside of the
location or territory imposing the reporting. Understanding whether these
requirements are applicable — and if so, when — is the first step in preparing for
mandatory sustainability reporting. This chapter discusses applicability of the most
significant sustainability standards and regulations with extraterritorial effect as
follows:
□ the Corporate Sustainability Reporting Directive (CSRD) in the European

Union (EU) (SRG 2.2)
□ the IFRS® Sustainability Disclosure Standards issued by the International

Sustainability Standards Board (ISSB) (SRG 2.3)
Exchange Commission (SEC) (SRG 2.4.1) 1
The chapter also addresses the applicability of several laws issued in California
that will require sustainability disclosures from a broad range of public and private
companies, including US subsidiaries of non-US entities (see SRG 2.4.2). See
SRG 22, Jurisdictional reporting requirements [coming soon], for further
information on the requirements of these laws.
The sustainability reporting landscape continues to evolve rapidly. The content of

interpretations emerge. Entities are therefore cautioned to stay abreast of and
evaluate the effect of subsequent developments.
2.2 EU Corporate Sustainability Reporting

Directive
The Corporate Sustainability Reporting Directive goes well beyond the EU’s
current Non-Financial Reporting Directive (NFRD). By design, the CSRD is
intended to drive changes in an entity’s behaviour and bring sustainability
reporting on par with financial reporting over time by mandating detailed
disclosures about environmental, social, and governance topics. Therefore,
although the NFRD has already imposed requirements to disclose certain
environmental and social impacts on some entities, the CSRD will result in both
more entities being subject to reporting requirements and more expansive
required disclosures.
The CSRD is an ‘amending EU Directive’, meaning that it revises the existing

regulations on non-financial reporting in the EU. The existing directives amended
by the CSRD include:
□ Directive 2013/34/EU — the ‘Accounting Directive’
□ Directive 2004/109/EC — the ‘Transparency Directive’
PwC | Applicability of sustainability reporting (as of 30 June 2024) 2-1

The Accounting Directive is applicable to EU entities — including EU entities with
non-EU ultimate parent entities — and the Transparency Directive is applicable to
both EU and non-EU entities that are issuers whose securities are ‘admitted to
trading’ (that is, listed) on a regulated market in an EU Member State. The
CSRD’s amendments to the Transparency Directive are intended to ensure that
issuers headquartered outside the EU (non-EU issuers) are subject to the same
sustainability reporting requirements as EU entities with listed securities (EU-
issuers). Whether an entity is in scope and required to provide sustainability
reporting in accordance with the CSRD is based on the definitions and relevant
terms from the Accounting Directive and the Transparency Directive. Entities that
are exempted under these directives are not in scope of the CSRD.
The CSRD went into effect on 5 January 2023, and EU Member States have until
early July 2024 (18 months from the effective date) to incorporate its provisions
into national law. The directive sets forth the minimum requirements; thus,
Member States may add provisions during this period but cannot eliminate any of
CSRD’s provisions. The CSRD does, however, allow for EU Member States to
make several elections during the transposition process (for example, language
requirements for reporting, expansion of assurance providers beyond the statutory
auditor).
The information in this Sustainability reporting guide (SRG) is based on the CSRD
as approved, and prior to the effect of transposition. Entities should monitor
developments in EU Member States for any modifications made in transposition.
In addition, refer to the Territory adoption tracker [coming soon] for status of
adoption and significant transposition elections in each of the EU Member States.
Reporting standards
The scope of entities directly impacted by CSRD is expansive. As highlighted in

Figure SRG 2-1, however, the reason why an undertaking is scoped into the
CSRD will affect which of three types of reporting standards apply:
□ European Sustainability Reporting Standards (ESRS) — 12 sector-agnostic

standards that became law in December 2023
□ Simplified standards — For use by certain small and medium-sized public

interest enterprises (SMEs), small and non-complex institutions, and captive
insurance and captive reinsurance undertakings (drafts of the simplified
standards have been issued by EFRAG for public consultation) 2
□ Non-EU dedicated standards — Dedicated standards to be applied at a global

consolidated level as part of the additional reporting for non-EU
headquartered companies (EFRAG has not yet issued a draft of the non-EU
dedicated standards) 3
Sector-specific standards are also in development. We expect there to be around

40 sector-specific standards issued although it is currently unclear how they will
apply to each type of entity subject to CSRD.
2 EFRAG, EFRAG’s public consultation on two exposure drafts on sustainability reporting

standards for SMEs, 22 January 2024. The public consultation period closed on 21 May
2024.
3 On 29 April 2024, the European Council approved a two-year delay of the deadline for
adoption of certain sector-specific and the non-EU dedicated standards (extending the
deadline to 30 June 2026). The delay in issuance of the standards, however, does not
affect the deadline for reporting. See SRG 2.2.8 for information on the timing of first-time
application.

Figure SRG 2-1
Overview of the main categories of entities subject to the CSRD
CSRD (note 1) Relevant section Applicable standards
‘Large’ EU undertakings SRG 2.2.1.1 ESRS
EU undertakings that are parents of a SRG 2.2.1.2 ESRS

‘large’ group
Non-EU entities with listed securities SRG 2.2.1.3 ESRS
Listed SME undertakings SRG 2.2.2 Simplified standards
Non-EU entities with significant activities SRG 2.2.3 Non-EU dedicated

in the EU standards
Note 1: the applicability of the CSRD is complex, and the table covers only the main
categories of companies within its scope.
CSRD applies to all entities listed on EU-regulated markets — with limited

exceptions — and to ‘large’ undertakings (as defined in the directive, see SRG
2.2.1.1) and ‘large’ groups in the EU. For discussion of limited exceptions to the
reporting requirement for listed entities, see Question SRG 2-10.
CSRD also affects non-EU headquartered companies, including through their EU

subsidiaries and due to a phased requirement for reporting at the global
consolidated level. The scoping requirements of CSRD reporting are complex and
may be nuanced. An entity will need to consider applicability at multiple levels
within its organisation to ensure all reporting obligations are identified. Engaging
with counsel may be helpful in this evaluation. Penalties for non-compliance will
be determined by each EU Member State and may include fines or incarceration.
For information on penalties imposed by EU Member States, see Territory
adoption tracker [coming soon].
EU entities subject to the requirements of the CSRD must also report in

accordance with the EU Taxonomy Regulation. The EU Taxonomy Regulation
requires an in-scope entity to disclose key performance indicators and other
information regarding how, and to what extent, it is associated with
environmentally sustainable economic activities. See SRG 19, Introduction to EU
Taxonomy reporting, for an overview of the EU Taxonomy Regulation.
For information on the timing of first-time application of the CSRD and the EU
Taxonomy Regulation, see SRG 2.2.8. See also Question SRG 2-16 for EU
Taxonomy Regulation reporting considerations when a non-EU entity’s global
consolidated reporting is being used to satisfy CSRD reporting requirements for its
in-scope EU subsidiaries.
Question SRG 2-1
What is an ‘undertaking’?
PwC response
Article 1 of the Accounting Directive defines an ‘undertaking’ as an entity of a
certain legal form established in the EU and governed by the laws and regulations
on corporate reporting of each EU Member State. The undertakings in scope of
the Accounting Directive are mainly entities with limited liability, including

partnerships with members that have limited liability for the partnership’s
obligations. 4
This publication generally refers to an undertaking or undertakings as an entity or

entities, respectively, unless quoting from official legislation. Whether an entity is
an undertaking, however, is an important criterion in determining applicability of
CSRD as illustrated in Figure SRG 2-1 and discussed in the following sections.
Question SRG 2-2
Does an entity’s status as a public interest entity (PIE) affect the application of
CSRD?
PwC response
Article 2 of the Accounting Directive generally defines public interest entities as
entities with securities admitted to trading on an EU-regulated market, entities that
meet the definition of a credit institution or an insurance undertaking, and any
other entities designated as PIEs by EU member states. 5 For financial reporting
purposes, PIEs are automatically treated as ‘large’ undertakings, regardless of
their size. This provision, however, does not apply to sustainability reporting
obligations. In general, PIEs are subject to the same criteria as non-PIE entities
for purposes of determining whether they are in the scope of CSRD. One
difference, however, is that small and medium-sized PIEs are exempt from CSRD
unless they have securities listed on an EU-regulated market. See SRG 2.2.2 for
information on the criteria for small and medium-sized undertakings.
In addition, refer to SRG 2.2.7 for special scoping considerations for certain
financial institutions.
Question SRG 2-3
Are entities located in the European Economic Area (EEA) required to comply with
the CSRD?
PwC response
Yes. The EEA is a single market that allows for free movement of goods and
people among the 27 countries in the European Union and 3 additional countries
— Iceland, Liechtenstein, and Norway. The CSRD notes that the directive is ‘EEA
relevant’, and as a consequence, applicable to the EEA countries as well.
Therefore, these countries are also required to adopt the CSRD following the
timeline outlined for transposition by the EU Member States.
2.2.1 Entities subject to ESRS
Entities subject to ESRS generally comprise ‘large’ EU undertakings and EU

undertakings that are parents of a ‘large’ group that meet specified size
thresholds, as well as non-EU entities with securities listed on an EU-regulated
market.
2.2.1.1 ‘Large’ EU undertakings
An entity organised in the jurisdiction of an EU Member State — including an EU

subsidiary of a non-EU headquartered company — that (1) meets the definition of
4 Directive 2013/34/EU, Annex I and Annex II.

5 Directive 2013/34/EU, Article 2, paragraph 1.

an ‘undertaking’ (see Question SRG 2-1) and (2) meets the criteria to be ‘large’ is
required to provide sustainability reporting prepared in accordance with ESRS. 6
A ‘large’ undertaking is defined as an undertaking that exceeds at least two of the

following three size criteria as of the end of the last two consecutive financial
years: 7
□ ‘Balance sheet total’: €25 million
□ ‘Net turnover’: €50 million
□ ‘Average number of employees during the financial year’: 250
As discussed in Question SRG 2-4, the size criteria should be determined based
on the generally accepted accounting principles (GAAP) applied in the entity’s
financial statements. In addition, the criteria are measured as of the entity’s
balance sheet dates of the last two consecutive financial years. Fluctuation in the
‘balance sheet total’ during the year would not affect the measurement. Once an
entity qualifies as ‘large’, it will continue to be subject to the requirements unless it
fails to meet at least two of the three criteria for two consecutive years.
Definition of net turnover for EU entities
Article 2, paragraph 5 of the Accounting Directive provides a definition of ‘net

turnover’ for various entities, beginning with a general definition.
Excerpt from the Accounting Directive, Article 2, paragraph 5
‘Net turnover’ means the amounts derived from the sale of products and the
provision of services after deducting sales rebates and value added tax and other
taxes directly linked to turnover.
The definition goes on to provide specific guidance for insurance entities and
credit institutions, as discussed in SRG 2.2.7. It also provides guidance for non-
EU entities with significant activities in the EU, as discussed in SRG 2.2.3.
Question SRG 2-4
What accounting principles should be applied in assessing the size criteria?
PwC response
We believe that entities should evaluate the size criteria based on the GAAP
applied in accordance with the laws of the applicable EU Member State.
Entities should also determine the average number of employees by applying the
term as defined by each EU Member State. There may be differences among the
EU Member States in both in the definition of ‘employee’ and in the rules on how
to calculate the average number of employees.
6Directive 2013/34/EU, Article 19a, paragraph 1.

7Directive 2013/34/EU, Article 3, paragraphs 4 and 10, as amended by Commission
Delegated Directive 2023/2775, Article 1, paragraph 4.

2.2.1.2 EU undertakings that are parents of a ‘large’ group
An entity that does not meet the criteria to be a large undertaking on its own may
be in scope if it is the parent of a ‘large’ group. Article 2 of the Accounting
Directive provides relevant definitions as follows.
Excerpt from the Accounting Directive, Article 2
9. ‘Parent undertaking’ means an undertaking which controls one or more

subsidiary undertakings;
10. ‘Subsidiary undertaking’ means an undertaking controlled by a parent
undertaking, including any subsidiary undertaking of an ultimate parent
undertaking;
11. ‘Group’ means a parent undertaking and all its subsidiary undertakings.
As with other terms, the terms ‘subsidiary’ and ‘control’ may be defined differently
by the GAAP used by the entity. The prevailing definition is the one referred to in
the national law of the applicable EU Member State.
A ‘large’ group is defined as a group consisting of a parent and subsidiary entities

that, on a consolidated basis, exceed at least two of the following three size
criteria on two consecutive annual balance sheet dates: 8
□ ‘Balance sheet total’: €25 million
□ ‘Net turnover’: €50 million
□ ‘Average number of employees during the financial year’: 250
See SRG 2.2.1.1 for general information on how to apply the size criteria and
Question SRG 2-4 for discussion of which GAAP to apply in making this
assessment.
The subsidiary entities considered in the calculation would include both the EU
and non-EU subsidiaries of the EU parent (see Example SRG 2-1) with limited
exemptions. 9 Because the criteria are assessed on a consolidated basis, the
amounts should be calculated after intercompany eliminations unless the EU
Member State dictates another calculation method.
Question SRG 2-5
If an entity meets the definition of a large undertaking on a standalone basis and

is also the parent of a large group, is it required to provide sustainability reporting
on both a standalone and consolidated basis?
PwC response
No. When an entity is a large undertaking on a standalone basis and is also a
parent entity of a large group, it only needs to prepare sustainability reporting for
the large group (that is, consolidated sustainability reporting). In accordance with
the Accounting Directive, if a parent entity complies with the CSRD reporting
requirements for a parent entity of a large group, it is deemed to have complied
8 Directive 2013/34/EU, Article 3, paragraphs 7 and 10, as amended by Commission

Delegated Directive 2023/2775, Article 1, paragraph 7.

with the requirements set out for a large undertaking. 10 This means that only the
group reporting is mandatory.
Question SRG 2-6
Is an EU holding company or EU intermediate entity required to prepare

sustainability reporting if it is exempt from financial reporting (that is, it does not
prepare consolidated financial statements)?
PwC response
Yes. According to Recital 26 of the CSRD, the available exemptions from
preparing a management report or financial statements are separate and
independent from the exemptions available for CSRD reporting. Therefore, EU
holding companies or intermediate entities may benefit from exemptions for
consolidated financial reporting that do not extend to sustainability reporting. As a
result, an EU holding company or intermediate entity may be required to provide
consolidated sustainability information under the CSRD even though it does not
prepare financial information at that level.
Practical challenges may arise in these cases as certain ESRS disclosure

requirements leverage financial information, such as intensity metrics and
disclosures under the EU Taxonomy Regulation (see SRG 19, Introduction to EU
Taxonomy reporting). Absent clarifying guidance, we expect that an entity in
scope of the CSRD will need to prepare the financial information required for its
sustainability reporting.
See Questions SRG 3-1 and SRG 3-2 in SRG 3.2 for matters to consider in
preparing financial information to support sustainability reporting when the
reporting entity is exempt from preparing consolidated financial statements.
Example SRG 2-1

Parent undertaking of a large group
Dutch HoldCo is a limited liability entity established in the Netherlands with a
subsidiary in Germany and another in the UK. Dutch HoldCo is a holding company
with no operations of its own.
Dutch HoldCo
German
UK subsidiary
subsidiary
10 Directive 2013/34/EU, Article 29a, paragraph 7.

Financial information for Dutch HoldCo and its subsidiaries is as follows (currency
in millions):
Dutch
Size criteria Dutch HoldCo
(currency in millions) HoldCo German sub UK sub consolidated
20X3
Balance sheet total €1 €8 €1 €10
Net turnover - €52 €8 €60
Average number of employees 20 270 60 350
20X4
Balance sheet total €1 €11 €3 €15
Net turnover - €60 €15 €75
Average number of employees 20 280 100 400
There are no intercompany eliminations.
Does Dutch HoldCo meet the criteria to be considered a parent entity of a large
group as of 31 December 20X4?
Analysis
Yes, although Dutch HoldCo would not meet the definition of a large undertaking
itself, it is the parent entity of a large group as of 31 December 20X4 as follows:
□ Jurisdiction: Dutch HoldCo is a limited liability entity established in the

Netherlands; a limited liability entity meets the definition of an undertaking,
thus Dutch HoldCo is an undertaking established in an EU Member State.
□ Group criteria: Dutch HoldCo controls the German subsidiary and the UK
subsidiary, so all entities together are considered a ‘group’.
□ Size criteria: It meets two of the three criteria on a consolidated basis during
the last two consecutive financial years: (1) it has more than €50 million of net
turnover and (2) it has more than 250 average number of employees during
the financial year.
Although Dutch HoldCo would not be in the scope of the CSRD on a standalone
basis, because it is the parent of a large group, Dutch HoldCo would be subject to
the requirements of CSRD at the consolidated holding company level.
2.2.1.3 Non-EU entities with listed securities
A non-EU entity with securities (equity or debt) admitted to trading (that is, ‘listed’)
on an EU-regulated market is required to issue a CSRD report in accordance with
ESRS. 11 This type of entity is also referred to as an ‘issuer’. 12
11 Directive 2004/109/EC, Article 4, paragraph 5.

12 Directive 2004/109/EC, Article 2, paragraph 1(d).

Excerpt from the Transparency Directive, Article 2, paragraph 1(d)
‘Issuer’ means a natural person, or a legal entity governed by private or public

law, including a State, whose securities are admitted to trading on a regulated
market. In the case of depository receipts admitted to trading on a regulated
market, the issuer means the issuer of the securities represented, whether or not
those securities are admitted to trading on a regulated market.
‘Admitted to trading’ is defined in the national laws and associated regulations of

each EU Member State. Generally, an entity meets this criterion when its equity or
debt is officially admitted to trading on a regulated market or a multilateral trading
facility. Simply because a security is available to be purchased or sold on a given
exchange does not mean that it is admitted to trading.
Further, the CSRD, applies only to entities with securities listed on EU-regulated
markets. A ‘regulated’ market is a market that is licensed and authorised by a
financial services authority in the jurisdiction or an external regulator or relevant
competent authority. 13
Excerpt from Directive 2014/65/EU, Article 4, paragraph 1(21)
‘Regulated market’ means a multilateral system operated and/or managed by a

market operator, which brings together or facilitates the bringing together of
multiple third-party buying and selling interests in financial instruments – in the
system and in accordance with its non-discretionary rules – in a way that results in
a contract, in respect of the financial instruments admitted to trading under its
rules and/or systems, and which is authorised and functions regularly and in
accordance with Title III of this Directive.
Throughout Europe, there are markets referred to as multilateral trading facilities

(MTFs), which are self-regulated financial trading venues, such as Chi-X Europe,
UBS MTF, Liquidnet Europe and Currenex. As MTFs are not regulated or
governed by a jurisdiction's competent authority, they are not considered
regulated markets.
Some exchanges, such as the Frankfurt Stock Exchange, include both EU-
regulated segments and exchange-regulated segments. Securities listed on
exchange-regulated segments are not in scope of reporting. A complete listing of
EU-regulated markets can be found in a database compiled by the European
Securities and Markets Authority (ESMA). 14
The advice of counsel may be needed to determine if securities are admitted to

trading on an EU-regulated market.
2.2.2 Listed small and medium-sized undertakings
A listed small or medium-sized undertaking is required to issue a CSRD report in

accordance with simplified standards designed specifically for these types of
undertakings. 15 Micro-undertakings are exempt from issuing a CSRD report. 16
Figure SRG 2-2 provides the thresholds that define small- and medium-sized
(SME) undertakings as well as micro-undertakings. To be a SME or micro-

14 ESMA, List of EU regulated markets. To find the list of regulated markets, choose
'Regulated market' under the 'Entity type' drop down menu in the left-hand side bar.
16 Directive 2013/34/EU, Article 36, paragraph 1(c).

undertaking, two of the three respective thresholds cannot be exceeded as of the
balance sheet date of two consecutive financial years.
Figure SRG 2-2

Framework for evaluating an undertaking’s size classification (not to exceed at
least two of the three size criteria) 17
Micro- Small Medium-sized
undertakings undertakings undertakings
‘Balance sheet total’ €450 thousand €5 million €25 million
‘Net turnover’ €900 thousand €10 million €50 million
‘Average number of 10 employees 50 employees 250 employees

employees during the
financial year’
See SRG 2.2.1.1 for general information on how to apply the size criteria.
2.2.3 Non-EU entities with significant activities in the EU
Even if it does not have listed securities, a non-EU entity that has significant
activities in the EU will be required to provide global consolidated reporting
prepared in accordance with non-EU dedicated standards beginning in fiscal year
2028 (reporting in 2029) if: 18
□ consolidated net turnover (revenue) generated in the EU exceeds €150 million

for each of the last two consecutive financial years; and
□ either:
o at least one entity in the consolidated group within the scope of CSRD is a
large undertaking or a listed small or medium-sized undertaking; or
o at least one branch generated more than €40 million annual net turnover
in the EU in the preceding financial year.
A non-EU entity, often also referred to as a ‘third-country undertaking’, is defined

as an entity not governed by the law of an EU Member State but that has a legal
form comparable to an EU undertaking. 19
The CSRD does not define ‘branch’ for purposes of determining whether reporting
is required at the global consolidated level, and there is no single definition that
exists in other EU regulations or directives (except for a definition given for
insurance/reinsurance entities and credit institutions (see SRG 2.2.7)). In
assessing whether this criterion is met, we recommend that entities consider
existing relevant national definitions with advice from legal counsel. That said, the
assessment of whether an entity has a branch is only relevant if the non-EU
parent entity does not have a subsidiary that is in the scope of the CSRD.
17 Directive 2013/34/EU, Article 3, paragraphs 1-3, as amended by Commission Delegated

Directive 2023/2775, Article 1, paragraphs 1-3.

Question SRG 2-7
Which entity in the consolidated group is required to publish the global

consolidated sustainability report?
PwC response
The obligation to publish the global consolidated sustainability report for a non-EU
headquartered entity that is reporting under the €150 million criterion sits with the
relevant EU subsidiaries (or branches), not with the non-EU parent. In the event
the subsidiary or branch is unable to obtain the required information from its
parent, it would "draw up, publish and make accessible the sustainability report...,
containing all information in its possession, obtained or acquired, and issue a
statement indicating that the [non-EU parent] did not make the necessary
information available”. 20
EU Member States may inform the European Commission on an annual basis of

the subsidiaries or branches of non-EU companies that fulfilled the publication
requirement as well as instances when a report was published with a statement
that not all necessary information was made available. 21
Definition of net turnover for non-EU entities
Article 2, paragraph 5 of the Accounting Directive provides a definition of ‘net

turnover’ for various entities, beginning with a general definition (see SRG
2.2.1.1). It also provides specific guidance for entities whose ultimate parent is not
governed by the laws of an EU Member State (that is, entities subject to Article
40(a)) as follows.
Excerpt from the Accounting Directive, Article 2 paragraph 5
‘Net turnover’ means … the revenue as defined by or within the meaning of the
financial reporting framework on the basis of which the financial statements of the
undertaking are prepared.
This definition confirms that a non-EU parent entity should calculate net turnover
following the GAAP applied when preparing its consolidated financial statements.
A question also arises, however, as to which entities should be included in the
calculation. The Accounting Directive uses the language “at its group level” in
describing the €150 million annual net turnover threshold. 22 Therefore, we believe
this is intended to cover net turnover as a result of all sales from the global
consolidated group to customers in the EU. Other methodologies, such as net
turnover recognised by sales from entities established in the EU — whether to
customers in the EU or otherwise — may also be permitted.
Additional clarifications may be provided upon transposition of the amendments

into national law. Until more detail is provided, we recommend that entities
consider evaluating this criterion from multiple perspectives and prepare for
implementation based on the methodology that yields the highest net turnover
(revenue) generated in the EU.


Example SRG 2-2
Global consolidated reporting by a non-EU parent entity
A US Ultimate Parent has global operations as well as multiple EU and non-EU
subsidiaries. Net turnover generated in the EU is in excess of the €150 million
threshold in both of the last two years. In addition, all of the entities in the group
have a form of organisation that meets the definition of an undertaking and none
of the entities are listed in the EU.
US Ultimate Parent
Dutch HoldCo German OpCo UK Greek HoldCo

Parent of a large Entity Not a parent of a
group
HoldCo large group
is ‘large’
French OpCo Italian OpCo Spanish OpCo Mexican OpCo Brazilian OpCo
Entity is ‘large’ Entity is not ‘large’ Entity is ‘large’
Algerian OpCo Entities required to report under CSRD

Entity required to provide global consolidated
reporting under CSRD
What are the sustainability reporting requirements for the global consolidated
group?
Analysis
This consolidated group will have reporting obligations as follows:
□ ‘Large’ EU entities — French OpCo, German OpCo, and Spanish OpCo are
all ‘large’ undertakings that are not listed. These entities will be required to
report in accordance with ESRS beginning in 2026 on 2025 sustainability
information.
Note that French OpCo is required to report under CSRD; however, it may be
eligible for a subsidiary exemption because it is included in Dutch HoldCo’s
consolidated ESRS report. For further information on available exemptions
and the related reporting requirements, see SRG 2.2.6.
□ Parent of a ‘large’ group — Dutch HoldCo is the parent of a large group and
will be required to report in accordance with ESRS beginning in 2026 on 2025
sustainability information, including its subsidiaries (French OpCo, Italian
OpCo, and Algerian OpCo). All subsidiaries must be included in the
consolidated sustainability reporting, regardless of whether a subsidiary itself
is in the scope of CSRD.
□ US Ultimate Parent — US Ultimate Parent meets all requirements under

Article 40a of the Accounting Directive for sustainability reporting: (1) the
consolidated group generated ‘net turnover’ in the EU of greater than €150
million in both of the last two years; (2) at least one of its subsidiaries is a
‘large’ undertaking in the EU and (3) it has a form of organisation consistent
with an undertaking. Thus, US Ultimate Parent will be required to provide
global consolidated sustainability information in accordance with the non-EU
dedicated standards beginning in 2029 on 2028 sustainability information. Its
subsidiaries will have responsibility for submitting the consolidated reporting
(see Question SRG 2-7).

All other companies are out of scope because they are not issuers and are
either (1) EU companies that do not meet the size thresholds (standalone or as
the parent of a group) or (2) non-EU companies (therefore the size criteria do not
apply).
See SRG 2.2.5 and Example SRG 2-4 for the timing requirements and available
exemptions.
Example SRG 2-3

Determining whether the €150 million net turnover threshold for non-EU
consolidated reporting is met
US Parent Company has a subsidiary in Italy and another in the United Kingdom.
Net turnover for US Parent Company and its subsidiaries is as follows (currency in
millions):
US Parent
Revenue in million € US Parent Italy sub UK sub consolidated
20X7
Sales to German customers - - €30 €30
Sales to French customers - €105 - €105
Sales to US customers - €50 - €50
Total - €155 €30 €185
20X8
Sales to German customers - - €50 €50
Sales to French customers - €110 - €110
Sales to US customers - €50 - €50
Total - €160 €50 €210
In addition, Italy sub’s balance sheet is €105 million at the end of each of 20X7
and 20X8.
Is US Parent Company required to provide global consolidated sustainability

reporting?
Analysis
It depends. US Parent Company meets the first criterion because it has a

subsidiary that is a ‘large’ undertaking located in the EU and thus in the scope of
CSRD. Whether it has net turnover generated in the EU in excess of €150 million,
however, will depend on how it calculates this amount. We believe there may be
more than one acceptable method including:
□ Destination of sales (that is, products or services delivered to the EU)

Following this approach, net turnover in the EU would be €135 million and
€160 million in 20X7 and 20X8, respectively. Because net turnover generated
in the EU is not more than €150 million in two consecutive years, no global
consolidated sustainability reporting would be required.
□ Generated by subsidiaries in the EU

Under this method, net turnover in the EU would be equal to Italy sub’s net
turnover: €155 million and €160 million in 20X7 and 20X8. Because net
turnover generated in the EU is more than €150 million in two consecutive
years, global consolidated reporting would be required.

□ Combined
This alternative would include (1) all revenue generated by EU subsidiaries
and (2) sales from non-EU subsidiaries into the EU. In this fact pattern, all of
US Parent Company’s revenue would be considered in the evaluation
because it is either generated from an EU subsidiary or related to sales to EU
customers. This approach would also require global consolidated reporting
because the threshold is exceeded in both years.
There may be other approaches. Given the potential disparity in results as

illustrated by this example, we recommend that entities consider multiple methods
of determining net turnover generated in the EU and use the method that yields
the highest turnover. The methodology selected should be applied consistently. In
addition, entities should monitor the transposition process by EU Member States
to see if further guidance is provided.
2.2.4 Location of disclosures
For an EU entity, sustainability reporting in accordance with ESRS is required to

be included within a dedicated section of the management report identified as the
sustainability statement. 23 The management report is submitted based on the
requirements of the relevant regulator and EU Member States, and is required to
be filed together with the financial statements.
Among other requirements, the Transparency Directive requires EU and non-EU

entities with securities listed on an EU regulated market to include a statement by
management that the management report — which includes the sustainability
statement — provides a fair review of the development, performance, and position
of the entity. 24
For more information about the structure of sustainability reporting in accordance

with ESRS, see SRG 5.6.1.
Question SRG 2-8
If a non-EU parent of a subsidiary in scope of the CSRD reports at a global

consolidated level, is it required to include ESRS disclosures as part of a
management report?
PwC response
No. Although EU entities are required to include ESRS disclosures in their
management report, the CSRD permits non-EU entities to provide the required
disclosures as part of their ‘consolidated sustainability reporting’. 25 A non-EU
entity does not need to create a management report just for sustainability
reporting purposes. An EU subsidiary electing an exemption because it is included
in its non-EU parent’s ESRS reporting, is required to provide web links to its
parent’s consolidated sustainability reporting in its management report (see SRG
2.2.6 for information regarding subsidiary exemptions).
It is unclear, however, if a non-EU entity listed on an EU-regulated market would

be able to satisfy its requirements through a sustainability report. These entities
should perform additional analysis together with their legal counsel.
23 Directive 2013/34/EU, Article 19a, paragraph 1, and Article 29a, paragraph 1.

24 Directive 2004/109/EC, Article 4, paragraph 2(c).
25 Directive 2013/34/EU, Article 29a, paragraph 8(c).

2.2.5 Timing of reporting
The date by which entities will be required to publish their sustainability reporting
in accordance with CSRD is governed by each EU Member State. EU Member
States are required to ensure entities publish their management report and annual
financial statements within a ‘reasonable period of time’ that is within twelve
months after the balance sheet date, together with the relevant audit opinion. 26
This principle applies equally to EU entities with non-EU parents.
Entities should refer to the laws of the relevant EU Member State to determine the
specific timing of reporting required.
Question SRG 2-9
Are entities subject to CSRD required to provide interim sustainability reporting?
PwC response
Interim reporting is not required by ESRS, the Accounting Directive, or the
Transparency Directive. Interim reporting may be required, however, by EU
Member State laws.
2.2.5.1 Management statement
The Transparency Directive, Article 4, paragraph 2 requires an entity whose

securities are admitted to trading on a regulated market, amongst other
requirements, to include a management statement that the management report
(which includes the sustainability statement) provides a fair review of the
development, performance and position of the entity (as well as entities included
for consolidation purposes).
Excerpt from the Transparency Directive, Article 4, paragraph 2
The annual financial report shall comprise: …

(b) the management report; and
(c) statements made by the persons responsible within the issuer … to the best
of their knowledge … the management report includes a fair review of the
development and performance of the business and the position of the issuer
and the undertakings included in the consolidation taken as a whole, together
with a description of the principal risks and uncertainties that they face and,
where appropriate, that it is prepared in accordance with sustainability
reporting standards referred to in Article 29b of Directive 2013/34/EU and with
the specifications adopted pursuant to Article 8(4) of Regulation (EU)
2020/852 of the European Parliament and of the Council.
In addition, an entity is required to provide a description of the principal risks and

uncertainties the entity (as well as entities included for consolidation purposes)
faces, and a statement that the management report is prepared in accordance
with relevant sustainability reporting standards.
2.2.6 Exemptions
Although each EU entity that is in scope has its own reporting obligation by
default, there are exemptions to the reporting requirement if certain conditions are
met. An EU subsidiary (or subgroup) may be able to satisfy its own sustainability

reporting requirements if it is included in the CSRD reporting of an EU or non-EU
parent (referred to as the ‘subsidiary exemption’). In addition, there is a special
variant of the subsidiary exemption — ‘artificial consolidation’ — that is temporarily
available for EU subsidiaries (or subgroups) in the scope of CSRD with a non-EU
parent company.
These exemptions are available to all qualifying entities, including insurance

entities and credit institutions (see SRG 2.2.7) that meet the definition of
subsidiaries. Public interest entities (PIEs) listed on EU-regulated markets that
meet the size thresholds to be ‘large’ are not eligible for any exemptions. Such
entities must comply with the CSRD separately even if they are included in their
parent entities’ consolidated CSRD report. 27
EU Member States may also prohibit certain exemptions upon transposition of the
CSRD into national law. Entities should monitor developments in EU Member
States for any modifications made in transposition. In addition, please refer to the
Territory adoption tracker [coming soon] for the status of adoption in each of the
EU Member States.
Given differences in the scope of the information required for standalone reporting
or for preparation of a consolidated report, we recommend companies carefully
assess the required level of effort before pursuing these exemption possibilities.
For an analysis of the considerations that may influence the decisions about which
exemption elections to make, see PwC’s publication, Take the next step — decide
how to report under CSRD.
Question SRG 2-10
What are the limited exceptions for listed entities from reporting under the CSRD?
PwC response
Micro-undertakings and certain debt-only issuers are exempt from the CSRD.
A micro-undertaking is defined as an undertaking that does not exceed at least

two of the following three size criteria on two consecutive annual balance sheet
dates: €450,000 in ‘balance sheet total’, €900,000 in ‘net turnover’ (revenue) and
‘average number of employees during the financial year’ of 10 employees. 28
Micro-undertakings are not in scope of the CSRD.
In addition, a non-EU issuer is exempt from compliance with the CSRD in

accordance with Article 8 of the Transparency Directive if (1) the only securities it
has listed on an EU-regulated market are debt securities with a denomination per
unit that is at least €100,000 (or equivalent) and (2) the securities were not listed
before 31 December 2010. 29
EU entities with only debt securities listed on EU-regulated markets must comply
with the CSRD under the Accounting Directive if they meet the size criteria.
27 Directive 2013/34/EU, Article 19a, paragraph 10, and Article 29a, paragraph 9.
28 Directive 2013/34/EU, Article 3, paragraph 1, as amended by Commission Delegated
Directive (EU) 2023/2775, Article 1 paragraph 1.
29 Directive 2004/109/EC, Article 8, paragraph 1(b).

Question SRG 2-11
What reporting is required if an EU subsidiary (or subgroup) subject to the CSRD

elects an exemption?
PwC response
To qualify for a reporting exemption, an EU subsidiary (or subgroup) in scope of
reporting is still required to provide certain information in its own management
report, including: 30
□ a statement that it is exempt from CSRD reporting obligations
□ the name and registered address of the parent entity preparing the CSRD
report
□ web links to either (1) the consolidated management report or (2) the
consolidated sustainability report, as applicable, of the parent entity preparing
the report
□ web links to the applicable assurance opinion
In addition, the report in which the EU subsidiary (or subgroup) is included must:
□ be prepared in accordance with ESRS or equivalent standards (non-EU

parent only, see SRG 2.2.6.2)
□ include the disclosures required by Article 8 of the EU Taxonomy Regulation

(see SRG 19, Introduction to EU Taxonomy reporting)
□ meet the limited assurance requirements
□ comply with the laws of the subsidiary’s EU Member State, including any
language translation requirement
Additional criteria may apply depending on the exemption elected. See SRG
2.2.6.1, SRG 2.2.6.2, and SRG 2.2.6.3 for supplementary guidance about the
various exemption options as well as the criteria and disclosure requirements
specific to each exemption.
Question SRG 2-12
Is an entity required to use an exemption if it is available?
PwC response
No. Although Article 19a, paragraph 9 of the Accounting Directive states that if the
criteria are met, “a subsidiary undertaking shall be exempted”, we do not believe
that this phrase indicates a requirement. Thus, the application of the exemptions
is not mandatory.

Question SRG 2-13
Is an EU subsidiary undertaking that is subject to the CSRD eligible for the

reporting exemptions if its EU or non-EU parent entity has a different financial
period end?
PwC response
The CSRD does not have explicit provisions addressing this situation. Entities
should monitor developments in EU Member States for any modifications made in
transposition. In addition, please refer to the separate Territory adoption tracker
[coming soon] for the status of adoption in each of the EU Member States.
Question SRG 2-14
Are reporting exemptions available for associates or joint ventures accounted for
under the equity method or proportionally consolidated in the financial
statements?
PwC response
The exemptions detailed in SRG 2.2.6 are specific to subsidiary entities. We do
not believe they can be applied to associates or joint ventures accounted for
under the equity method or proportionally consolidated irrespective of whether the
reporting entity has operational control over the associate or joint venture.
2.2.6.1 Subsidiary exemption through inclusion in report of EU parent
An in-scope EU subsidiary or subgroup will be exempt from issuing its own CSRD
reporting if its information is included in the consolidated management report of an
EU parent (including a holding company or intermediate entity) that (1) is prepared
in accordance with ESRS, (2) includes all subsidiaries of the EU parent (that is,
the full consolidated group), including subsidiaries located outside the EU and (3)
meets the other criteria for exemptions (see SRG 2.2.6).
An in-scope EU parent entity that is an intermediate holding entity, not the ultimate
EU parent entity, is also eligible to apply the subsidiary exemption.
2.2.6.2 Subsidiary exemption through inclusion in report of a non-EU parent
An in-scope EU subsidiary or subgroup will be exempt from its own CSRD

reporting if it is included in the consolidated report of a non-EU parent (whether an
intermediate holding company or the global ultimate parent) that is (1) prepared in
accordance with ESRS or in a manner deemed equivalent to those standards by
the European Commission, (2) includes all subsidiaries of the non-EU parent (that
is, the parent’s full consolidated group), including non-EU subsidiaries, and (3)
meets the other criteria for exemptions (see SRG 2.2.6).
Although the exemption referred to in SRG 2.2.6.1 require an EU subsidiary to be

included in the consolidated management report of its EU parent, the CSRD
permits a non-EU entity to provide the required disclosures as part of its
consolidated sustainability reporting. Therefore, an EU subsidiary can be exempt
if it is included in a consolidated sustainability report of its non-EU parent prepared
in accordance with ESRS (or in a manner deemed ‘equivalent’ to those standards
by the European Commission, see Question SRG 2-15).
Example SRG 2-4 illustrates a subsidiary exemption through inclusion in the

report of a non-EU parent entity.

Note that practical application of the subsidiary exemption through inclusion in the
reporting of a non-EU parent may be complex. Entities may perform an
assessment with advice from legal counsel to determine whether the criteria for an
exemption have been met.
Question SRG 2-15
What reporting frameworks or standards would be considered ‘equivalent’ to the

European Sustainability Reporting Standards?
PwC response
To date, the European Commission has not made any equivalency
determinations, and it is unclear how long that process may take. Further, given
certain differences in scope and key concepts (such as materiality approach)
among other sustainability disclosure frameworks, it remains to be seen whether
the European Commission will identify any other frameworks as equivalent. At this
time, we recommend that entities expecting to be in scope of the CSRD plan to
prepare the full disclosures required by ESRS.
Question SRG 2-16
If an in-scope EU subsidiary entity is included in the consolidated sustainability

reporting of its non-EU parent, at what level should the required disclosures under
Article 8 of the EU Taxonomy Regulation be reported to meet the reporting
exemptions?
PwC response
Article 19a, paragraph 9(c) of the Accounting Directive includes one of the criteria
to qualify for exemption.
Directive 2013/34/EU, Article 19a, paragraph 9(c)
If the parent undertaking is established in a [non-EU] country, the disclosures laid

down in Article 8 of [the EU Taxonomy] covering the activities carried out by the
exempted subsidiary undertaking established in the Union and its subsidiary
undertakings are included in the management report of the exempted subsidiary
undertaking, or in the consolidated sustainability reporting carried out by the
parent undertaking established in a [non-EU] country.
See SRG 19, Introduction to EU Taxonomy reporting, for more information on the
reporting requirements of Article 8 of the EU Taxonomy Regulation.
2.2.6.3 Artificial consolidation (temporary exemption available until 6

January 2030)
Until 6 January 2030, EU subsidiaries (or subgroups) in scope of CSRD with a

non-EU ultimate parent may prepare a consolidated CSRD report using ‘artificial
consolidation’ (that is, a CSRD report combining the information of all EU
subsidiaries in scope, similar to combined financial statements). 31 Subsidiary
entities would be exempt from separate reporting if the combined report includes
all subsidiaries of the non-EU parent that are in the scope of the CSRD and the
other criteria for exemptions are met (see SRG 2.2.6).
The EU subsidiary that prepares and publishes the report must be one of the
subsidiaries that recorded the highest net turnover (revenue) generated in the EU
31 Directive 2013/34/EU, Article 48i, paragraph 1.

in at least one of the preceding five years. 32 The report, however, must still be
published in accordance with the laws of the EU Member State governing the
subsidiaries in scope for the subsidiaries to be exempt. 33
After the transitional period, EU subsidiary entities will be required to report

individually or meet the requirements for subsidiary exemption through inclusion in
the consolidated reporting of an EU or non-EU parent entity (see SRG 2.2.6.1 and
SRG 2.2.6.2).
Question SRG 2-17
How is ‘greatest net turnover generated in the EU’ calculated for purposes of
determining which entity included in an artificial consolidation is obligated to
report?
PwC response
There is no explicit guidance addressing how ‘greatest net turnover generated in
the EU’ should be calculated. As discussed in SRG 2.2.3 and Example SRG 2-2,
absent clarification in the transposition process there may be multiple acceptable
approaches. The method used should be consistently applied and transparently
disclosed.
If more than one entity has had the ‘greatest net turnover generated in the EU’ in
the preceding five years, the report may be issued by any of the subsidiaries that
meet the criterion.
Question SRG 2-18
Do combined financial statements need to be prepared for the EU subsidiary

entities included in an artificial consolidation?
PwC response
No. There is no legal obligation to prepare combined financial statements for the
artificial consolidation. That said, EU subsidiary entities are still obligated to
prepare disclosures under Article 8 of the EU Taxonomy Regulation (see SRG 19,
Introduction to EU Taxonomy reporting, for information on EU Taxonomy
disclosures). As discussed in Question SRG 2-6, the EU Taxonomy disclosures
and certain ESRS disclosures include or reference information from the financial
statements and thus may create a constructive obligation to perform a formal
combination to determine certain specific amounts, although a full set of combined
financial statements would not be required.
Question SRG 2-19
Does the 6 January 2030 end to the artificial consolidation exemption apply to
periods ending prior to that date or does the report need to be filed by that date?
PwC response
It is unclear if the date refers to periods ending prior to 6 January 2030 or if such
reports need to be published by 6 January 2030. EU Member States may provide
additional clarification on this matter during transposition.


Question SRG 2-20
How should an artificial consolidation be applied if each EU subsidiary entity —

under the same non-EU ultimate parent entity — has different intermediate non-
EU parent holding entity?
PwC response
It is unclear if EU subsidiary entities held by different intermediate companies can
be combined in the same sustainability reporting under artificial consolidation. The
phrase ‘parent undertaking’ in Article 48i, paragraph 1 of the Accounting Directive
may refer to the non-EU ultimate parent entity, or alternatively may mean any non-
EU entity within an organisation that is a parent entity.
The former interpretation would mean one CSRD report for all EU subsidiary
entities with a common non-EU ultimate parent while the latter would expand the
number of reports because only EU subsidiary entities under a common
intermediate non-EU parent holding entity would be included in the same
consolidated sustainability. See Example SRG 2-4.
Example SRG 2-4

Application of reporting exemptions
A US Ultimate Parent has global operations as well as multiple EU and non-EU
subsidiaries. Net turnover generated in the EU is in excess of the €150 million
threshold in both of the last two years. In addition, all of the entities in the group
have a form of organisation that meets the definition of an undertaking and none
of the entities are listed in the EU.
US Ultimate Parent
Dutch HoldCo German OpCo UK Greek HoldCo

Parent of a large Entity Not a parent of a
group
HoldCo large group
is ‘large’
French OpCo Italian OpCo Spanish OpCo Mexican OpCo Brazilian OpCo
Entity is ‘large’ Entity is not ‘large’ Entity is ‘large’
Entities required to report under CSRD

Algerian OpCo Entity required to provide global
consolidated reporting under CSRD
Potential scope of artificial consolidation
What are the potential exemptions available to EU entities in scope of CSRD

reporting?
Analysis
See analysis of the reporting requirements of the group in Example SRG 2-2.
Potential exemptions and related considerations are as follows:
Subsidiary exemption
Considerations for reporting on the entity/subgroup level include:
□ Dutch HoldCo would include its ESRS reporting in its consolidated

management report. All subsidiaries of Dutch HoldCo (French OpCo, Italian

OpCo, and Algerian OpCo) must be included in the consolidated sustainability
reporting, regardless of whether a subsidiary itself is in scope of CSRD.
□ German OpCo and Spanish OpCo would each include its ESRS reporting in
its management report.
□ French OpCo is required to report under CSRD; however, it is eligible to apply

the subsidiary exemption because it is included in Dutch HoldCo’s
consolidated ESRS report. To qualify for the exemption, it would also need to
meet the other requirements for the exemption, including providing web links
to Dutch HoldCo’s consolidated management report and the related
assurance opinion as well as meet translation requirements, if any.
Artificial consolidation
The effect of application of the artificial consolidation exemption and related

considerations are as follows:
□ All in-scope EU entities and subgroups (Dutch HoldCo plus its three
subsidiaries, German OpCo, and Spanish OpCo) potentially could be included
in ‘consolidated sustainability reporting’ (that is, an artificial consolidation
which combines their information into one report), prepared in accordance
with CSRD and ESRS.
□ The EU subsidiary that prepares and publishes the report must be one of the
subsidiaries that generated the highest ‘net turnover’ (revenue) generated in
the EU in at least one of the preceding five years.
□ The combined report would exempt French OpCo, German OpCo, and
Spanish OpCo from reporting separately under the CSRD. Each company
would also need to meet the other requirements for the exemption, including
providing web links to the artificial consolidation prepared by Dutch HoldCo
and the related assurance opinion.
□ This option is available until 2030 (see Question SRG 2-19).
Note, however, as discussed in Question SRG 2-20, there are two potential views
on the grouping of entities in an artificial consolidation. View one would support
grouping all entities under a common non-EU ultimate parent company (as
illustrated in the diagram and discussed above). There is, however, an alternative
view that only entities under a common holding company could be grouped.
Following this interpretation, the artificial consolidation would exclude Spanish
OpCo — because it is owned by a different parent than Dutch HoldCo and
German OpCo, which are both direct subsidiaries of Non-EU Ultimate Parent.
Spanish OpCo would be required to prepare its own reporting.
Consolidated reporting by US Ultimate Parent
Another reporting option would be for US Ultimate Parent to prepare global

consolidated reporting as discussed below.
□ Under this reporting approach, US Ultimate Parent would prepare a

consolidated sustainability report in accordance with ESRS (or in a manner
that is equivalent to ESRS). No sustainability reporting standards have yet
been determined to be equivalent.
□ The global consolidated sustainability report would include all subsidiaries —

EU and non-EU — regardless of whether they are individually in the scope of
CSRD.

□ The global consolidated report would exempt Dutch HoldCo, French OpCo,
German OpCo, and Spanish OpCo from reporting separately under the
CSRD. Each company would also need to meet the other requirements for the
exemption, including providing web links to the global consolidated
sustainability report prepared by US Ultimate Parent and the related
assurance opinion.
Prior to adopting a global consolidated reporting approach by a non-EU ultimate

parent, a reporting entity should evaluate the potential implications. For further
discussion, including an analysis of the considerations that may influence the
decisions about which exemption elections to make, see PwC’s publication, Take
the next step — decide how to report under CSRD.
2.2.7 Special scoping considerations for certain financial institutions in

the EU
EU entities that meet the definitions of credit institutions and insurance or

reinsurance undertakings are subject to industry-specific directives in addition to
the Accounting Directive. These industry-specific directives provide definitions
unique to those entities in scope as further discussed in this section.
2.2.7.1 Credit institutions
Credit institutions are governed by Regulation (EU) No 575/2013 (the ‘Capital

Requirements Regulations’ or CRR)). The CRR defines a credit institution as an
entity with the business to, regardless of its legal form that meets either of the
following: 34
□ “take deposits or other repayable funds from the public and to grant credits for
its own account”
□ carry out activities related to “dealing on own account” and certain

“underwriting of financial instruments and/or placing of financial instruments
on a firm commitment basis” when the total value of consolidated assets
meets certain thresholds
Specific considerations for determining whether a credit institution is subject to

CSRD are discussed below.
Size criteria
Credit institutions are subject to the same size criteria as other EU entities to
determine whether they are required to report under CSRD (see SRG 2.2.1). In
addition, a credit institution may also be in scope of the CSRD if it is a ‘small and
non-complex institution’ as defined in Article 4, paragraph 145 of the CRR.
Definition of net turnover for credit institutions
One of the criteria for determining whether an entity will be required to provide
sustainability reporting under CSRD is net turnover (see SRG 2.2.1). Net turnover
for credit institutions is specifically defined in the Council Directive 86/635/EEC
(the ‘Banking Account Directive’) as the sum of the following: 35
□ interest receivable and similar income
34Regulation (EU) No 575/2013, Article 4, paragraph 1(1).

35Council Directive 86/635/EEC, Article 27, paragraphs 1, 3, 4, 6, and 7, Article 28,
paragraphs B(1)–B(4) and B(7), and Article 43, paragraph 2(c).

□ income from securities:
o income from shares and other variable-yield securities
o income from participating interests
o income from shares in affiliated undertakings
□ commissions receivable
□ net profit or net loss on financial operations
□ other operating income
This definition is also applicable to an EU branch or subsidiary of a non-EU parent

entity that meets the definition of an EU credit institution. A branch and a
subsidiary for a credit institution are defined as follows:
□ A ‘branch’ is “a place of business which forms a legally dependent part of an

institution and which carries out directly all or some of the transactions
inherent in the business of institutions” 36
□ A ‘subsidiary’ is an entity that is permanently affiliated with a central body that

supervises it 37
Credit institutions that meet the definition of a subsidiary may apply the subsidiary
exemption if they meet the criteria (see SRG 2.2.6). 38 Further, certain credit
institutions are excluded from CSRD reporting as follows:
□ funds that do not meet the definition of undertakings
□ alternative investment funds (AIF) 39
□ undertakings for collective investment in transferable securities (UCITS)

funds 40
□ certain credit institutions that EU Member State may opt to exclude as

permitted by Article 1, paragraph 3(b) (for example, central banks and post
office giro institutions) 41
Except as noted above, the general CSRD terms and requirements apply to credit
institutions consistent with other entities.
2.2.7.2 Insurance and reinsurance undertakings
Insurance and reinsurance undertakings are governed by Council Directive

91/674/EEC (the ‘Insurance Directive’) and Directive 2009/138/EC (the ‘Solvency
II Directive’). The Solvency II Directive defines insurance and reinsurance
undertakings as follows:
36 Regulation (EU) No 575/2013, Article 4, paragraph 17.

37 Regulation (EU) No 575/2013, Article 4, paragraph 16; Directive 2013/34/EU, Article 19a,
paragraph 9.
39 Directive 2013/34/EU, Article 1, paragraph 4; Regulation (EU) 2019/2088, Article 2,
paragraph 12(b).
40 Directive 2013/34/EU, Article 1, paragraph 4; Regulation (EU) 2019/2088, Article 2,
paragraph 12(f).
41 Directive 2013/34/EU, Article 1, paragraph 3(b); Directive 2013/36/EU, Article 2,
paragraphs 5(2)-(24).

□ an ‘insurance undertaking’ is a direct life or non-life insurance undertaking that
has received authorisation under Article 14 and in scope of the Solvency II
Directive 42
□ a ‘reinsurance undertaking’ is an undertaking authorised under Article 14 to

perform activities of accepting risks given up by an insurance or a reinsurance
undertaking or any member of Lloyd’s, an association of underwriters 43
□ certain insurance and reinsurance undertakings are ‘captive insurance or

reinsurance undertakings’, which are those with the purpose to provide
insurance or reinsurance coverage exclusively for the risks of their owners
who are not themselves insurance or reinsurance entities 44
Specific considerations for determining whether an insurance or reinsurance

undertaking are subject to the scope of the CSRD are discussed below.
Size criteria
Insurance and reinsurance undertakings are subject to the same size criteria as
other EU entities to determine whether they are required to report under the
CSRD (see SRG 2.2.1).
Definition of net turnover for insurance and reinsurance

undertakings
Net turnover for insurance and reinsurance undertakings are defined separately
as gross premiums written based on the definition in Article 35 of the Insurance
Directive.

44 Directive 2009/138/EC, Article 13, paragraph 2 and 5.

Excerpt from the Council Directive 91/674/EEC, Article 35
Gross premiums written shall comprise all amounts due during the financial year
in respect of insurance contracts regardless of the fact that such amounts may
relate in whole or in part to a later financial year, and shall include inter alia:
(i) premiums yet to be written, where the premium calculation can be done
only at the end of the year:
(ii) − single premiums, including annuity premiums,
− in life insurance, single premiums resulting from bonus and rebate
provisions in so far as they must be considered as premiums on the
basis of contracts and where national legislation requires or permits
their being shown under premiums;
(iii) additional premiums in the case of half-yearly, quarterly or monthly
payments and additional payments from policyholders for expenses borne
by the insurance undertaking;
(iv) in the case of co-insurance, the undertaking’s portion of total premiums;
(v) reinsurance premiums due from ceding and retroceding insurance
undertakings, including portfolio entries,
after deduction of:
– portfolio withdrawals credited to ceding and retroceding insurance
undertakings, and
– cancellations.
This net turnover definition is also applicable to an EU branch or a subsidiary of a

non-EU parent entity that meets the definition of an insurance or a reinsurance
undertaking.
A branch and a subsidiary for an insurance or a reinsurance undertaking are

defined as follows:
□ Branch
A ‘branch’ is “an agency or a branch of an insurance or reinsurance entity
which is located in the territory of a Member State other than the home
Member State” 45
□ Subsidiary
A ‘subsidiary’ is an entity that is a part of a group where there is another entity
within the group that exercises a centralised coordination or a dominant
influence over decisions (including financial decisions) of other entities in the
group 46 and the establishment or dissolution of such relationship is subject to
the approval of a group supervisor 47
Insurance and reinsurance undertakings that meet the definition of a subsidiary

may apply subsidiary exemptions if certain criteria are met (see SRG 2.2.6).
2.2.8 Timing of first-time application
Determining when reporting will initially be required will depend on an entity’s facts
and circumstances. Generally, however, the size criterion is the most relevant
factor in determining the timing of first-time application of CSRD. In addition, while

46 Directive 2009/138/EC, Article 212, paragraph 1(c)(ii).
47 Directive 2009/138/EC, Article 212, paragraph 1(c)(ii).

entities currently reporting under the NFRD are already required to comply with
the EU Taxonomy Regulation, other entities will need to comply with its
requirements upon their initial application of the CSRD. Figure SRG 2-3 provides
a summary of the timing of first-time application for all entities.
Figure SRG 2-3

Summary of timing of first-time application for all entities
Relevant
Entity type First-time application date section
Entities subject to the current Reporting on financial years beginning on SRG 2.2
NFRD requirements or after 1 January 2024
‘Large’ non-EU entities that are (1) Reporting on financial years beginning on SRG 2.2.1.3
listed and (2) have more than 500 or after 1 January 2024
employees
‘Large’ EU undertakings that are Reporting on financial years beginning on SRG 2.2.1.1
(1) listed and (2) have more than or after 1 January 2024
500 employees
All other ‘large’ EU undertakings Reporting on financial years beginning on SRG 2.2.1.1
and EU undertakings that are or after 1 January 2025
parents of a ‘large’ group
Certain small and non-complex Reporting on financial years beginning on SRG 2.2.7
credit institutions, captive or after 1 January 2026
insurance entity and captive
reinsurance entity
Listed SMEs Reporting on financial years beginning on SRG 2.2.2

or after 1 January 2026, with an optional
deferral by two years (to 1 January 2028)
Non-EU entities with significant Reporting on financial years beginning on SRG 2.2.3
activities in the EU or after 1 January 2028
The CSRD does not explicitly govern whether such timing of first-time application
applies to certain small and non-complex credit institutions and captive insurance
and reinsurance entities that are listed large undertakings. EU Member States
may provide additional clarifications upon transposition of the amendments into
national law.
ESRS contain transitional provisions providing reliefs for certain disclosures

during the first years of reporting. See SRG 3.8 for more information.
Question SRG 2-21
What is the timing of first-time application of the CSRD sustainability reporting

requirements for newly listed issuers?
PwC response
The CSRD does not include explicit provisions addressing this situation. Entities
should monitor transposition of the CSRD into national law for developments.

2.3 International Sustainability Standards
Board
Individual jurisdictions will determine if application of the IFRS Sustainability
Disclosure Standards is required or permitted as a basis for sustainability
reporting in their territory, akin to the process for adopting IFRS Accounting
Standards for financial reporting. Note that an entity may apply the IFRS
Sustainability Disclosure Standards irrespective of the accounting principles
applied in the related financial statements.
In July 2023, the International Organization of Securities Commissions (IOSCO)

announced its endorsement of the standards, and has called on its 130 member
jurisdictions, regulating more than 95% of the world’s financial markets, to
consider ways in which they might adopt, apply, or otherwise be informed by the
standards of the ISSB in their jurisdictions. Numerous jurisdictions have
announced support for the standards or are in the process of adoption. For an
overview of adoption status by jurisdiction, refer to the Territory adoption tracker
[coming soon].
Excerpt from IFRS Foundation press release, The IFRS Foundation releases
Jurisdictional Guide at IOSCO Annual Meeting to support regulators
More than 20 jurisdictions have already decided to use or are taking steps to
introduce ISSB Standards in their legal or regulatory frameworks. Together, these
jurisdictions account for,
• nearly 55% of global GDP;
• more than 40% of global market capitalisation; and
• more than half of global greenhouse gas emissions.
The IFRS Sustainability Disclosure Standards provide some transitional reliefs for
initial application (see SRG 3.8). The timing of adoption, assurance requirements,
and additional transition provisions, if any, however, will be determined by the
individual jurisdictions.
2.3.1 Location of disclosures
IFRS S1 General Requirements for Disclosure of Sustainability-related Financial

Information (IFRS S1) mandates that the disclosures required by the ISSB
standards be included as part of an entity’s general-purpose financial reporting,
but it provides flexibility on the specific location within that reporting. 48 Further,
entities that are required to report in accordance with the ISSB standards by local
laws or regulations should follow any local regulatory requirements with respect to
the location of reporting.
Entities that voluntarily apply the ISSB standards, or entities in jurisdictions where
the local law and regulation does not provide more specificity, may also consider
including the sustainability information in its management commentary.
Management commentary forms part of the entity’s general-purpose financial
reports but may be included in different reports. Management commentary is
known by various names including, but not limited to, ‘management’s discussion
and analysis’, ‘integrated report’, ‘strategic report’, and ‘operating and financial
review’. 49
48 IFRS S1 General Requirements for Disclosure of Sustainability-related Financial
Information, paragraphs 60–61.

49 Further information about management commentary can be found at the IASB’s
Management Commentary project page.

Entities may include the sustainability disclosures required by the ISSB standards
in the same location as information disclosed to meet other reporting
requirements. The entity should, however, ensure that the sustainability
information is clearly identifiable and not obscured by other information. 50 See
SRG 4.4.2.2 for more information on not obscuring.
2.3.2 Timing of reporting
IFRS S1 paragraph 64 requires an entity to publish its sustainability disclosures

and annual financial statements at the same time although there is transition relief
available in the initial year of application (see SRG 3.8.2.1).
Question SRG 2-22
Are entities reporting in accordance with the IFRS Sustainability Disclosure

Standards required to provide interim sustainability reporting?
PwC response
The ISSB standards do not require interim reporting, however, local security
exchanges and other regulators may require an entity to provide interim
sustainability disclosures. 51 IFRS S1 paragraph B48 contains specific guidance
about the focus of interim sustainability-related financial disclosures for those
entities which are required — or voluntarily elect — to provide interim
2.3.3 Statement of compliance
An entity that complies with all the requirements of the IFRS Sustainability
Disclosure Standards is required to include an explicit and unqualified statement
of compliance to that effect based on the requirements in IFRS S1 paragraph 72.
An entity whose sustainability-related financial disclosures comply with all the

requirements of IFRS Sustainability Disclosure Standards shall make an explicit
and unreserved statement of compliance. An entity shall not describe
sustainability-related financial disclosures as complying with IFRS Sustainability
Disclosure Standards unless they comply with all the requirements of IFRS
Sustainability Disclosure Standards.
This approach is different from current practice where entities often prepare
sustainability disclosures that comply with only portions of the relevant
sustainability reporting frameworks under which they report.
An entity reporting under IFRS Sustainability Disclosure Standards is permitted to

include other information in the same location as its required disclosures. As long
as the other information is clearly distinguished from information required under
the ISSB standards, and does not obscure material information, then an entity
may still make an unreserved statement of compliance with the IFRS
Sustainability Disclosure Standards. 52
50 IFRS S1 paragraph 62.

52 IFRS S1 paragraphs 62 and B27.

2.4 United States
The sustainability reporting landscape in the United States is primarily driven by
the SEC’s sustainability-related disclosure rules as well as sustainability-related
disclosure laws approved by individual states.
2.4.1 Securities and Exchange Commission
On 6 March 2024, the SEC released climate disclosure rules as discussed in SRG
2.4.1.3. Understanding the applicability of the rules, however, requires
foundational knowledge of the requirements of the SEC as discussed in this
section.
2.4.1.1 Background on SEC Regulations S-X and S-K
The SEC regulates entities offering securities through public sale in the United
States — including both domestic and foreign private issuers — as follows:
□ entities with securities publicly traded or exchange traded on any of the

securities exchanges in the United States, such as the New York Stock
Exchange or the NASDAQ
□ entities with securities registered with the SEC under the Securities Act of
1933 (the ‘Securities Act’)
□ entities filing a registration statement under the Securities Act or the Securities
Exchange Act of 1934 (the ‘Exchange Act’)
US public companies are required to file quarterly and annual reports following
two SEC regulations:
□ Regulation S-X details the form and content requirements for quarterly and
annual financial statements of public companies.
□ Regulation S-K states the requirements for the content of the non-financial
statement portions of annual, quarterly, and other filings under the Exchange
Act.
Regulation S-X and Regulation S-K also apply to registration statements — which
are used to offer securities — filed with the SEC. Regulation S-X governs the
financial statements disclosures section and Regulation S-K governs the section
referred to as the ‘prospectus’ in these registration statements. 53
An issuer that meets certain criteria — generally related to the location of

executives, board members, assets, and securities holders — qualifies as a
foreign private issuer (FPI). 54 FPIs are subject to the requirements of Regulation
S-X, but not to Regulation S-K. Instead, guidance on the non-financial statement
portions of filings under the Securities Act and the Exchange Act are written into
the body and instructions of Form 20-F (filed annually by FPIs).
SEC registrants (including domestic registrants and FPIs) are also divided into
types of issuers based on size. Filer type was originally used to determine filing
timelines for annual and quarterly filings. Filer size is now also leveraged to
administer other SEC reporting requirements, including adoption of new rules.
This section discusses types of issuers as well as the SEC’s disclosure

requirements related to environmental (climate), social, and governance matters.
53SEC, What is a Registration Statement?

54As are defined in SEC Rule 230.405 of the Securities Act 1933 and Rule 240.3b–4 of the
Exchange Act 1934.

2.4.1.2 Types of issuers
Issuer type is determined primarily based on an entity’s worldwide market value of

voting and non-voting common equity held by non-affiliates (referred to as ‘public
float’), as measured as of the last business day of the issuer's most recently
completed second fiscal quarter. Although the measurement of public float is as of
the second fiscal quarter, the determination of filer status is performed at each
fiscal year end. See Figure SRG 2-4 for a summary of the registrant types.
Figure SRG 2-4

Types of SEC issuers
Registrant type Criteria 55
Large accelerated filers Public float of $700 million or more
Accelerated files Public float of at least $75 million, but no more than $700 million
Non-accelerated files Public float of less than $75 million
Smaller-reporting Either (1) public float of less than $250 million or (2) revenue of less than $100
company (SRCs) million and public float less than $700 million
Emerging growth Revenue of less than $1.235 billion annually during its most recently completed
companies (EGCs) fiscal year. An entity continues to be an EGC for the first five fiscal years after its
initial public offering, unless:
□ Revenue equals to $1.235 billion or more
□ Non-convertible debt of more than $1 billion has been issued
□ Becomes a ‘large accelerated filer’
To qualify as an accelerated filer or large accelerated filer, an issuer also needs to

meet the following criteria. 56
□ The issuer has been required to submit its financial statements for a period of
at least twelve calendar months;
□ The issuer has filed at least one annual report; and
□ The issuer is not eligible to use the requirements for smaller reporting
companies.
Issuers that do not meet these criteria are considered non-accelerated filers. Note
that these criteria are used to determine initial classification under the accelerated
filer system. An issuer retains its status until it fails to meet specified size criteria
that are lower than the initial classification thresholds listed above.
For further details regarding classification under the accelerated filer system, see
Section 3125 in PwC’s SEC Volume.
2.4.1.3 SEC climate-related disclosure rules
On 6 March 2024, the SEC adopted new climate disclosure rules, The
Enhancement and Standardization of Climate-Related Disclosures for Investors
(the ‘SEC climate disclosure rules’). The new climate disclosure rules join existing
required climate disclosures that apply to all registrants.
55 SEC Rule 240.12b-2 of the Exchange Act 1934.

56 SEC Rule 240.12b-2 of the Exchange Act 1934.

The new SEC climate disclosure rules apply to both domestic registrants and
foreign private issuers, although Canadian registrants reporting on Form 40-F
under the Multi-jurisdictional Disclosure System (MJDS) are exempt. Consistent
with the structure and purpose of this system, MJDS registrants will continue to
follow Canadian requirements, including any local jurisdiction climate-related
disclosures, when filing with the SEC. 57
The new rules create a new ‘Climate-Related Disclosure’ section in annual reports
(that is, Forms 10-K and 20-F) and registration statements (for example, Forms S-
1, F-1). The required disclosures — including scope 1 and scope 2 greenhouse
gas (GHG) emissions disclosures for certain registrants, if material — may be
included in this section or other parts of a registration statement or annual report.
The new rules also require certain disclosures in the audited financial statements.
Location of disclosures
The location of climate-related disclosures under Regulation S-K is summarised

by the type of SEC filing in Figure SRG 2-5. There are no interim reporting
requirements in the SEC climate disclosure rules.
Figure SRG 2-5

Location of climate-related disclosures by SEC form
Form and Part Relevant regulation Location of climate disclosures
Annual filing on: Regulation S-K Item 1500 to □ Separately captioned: Climate-
1507: climate disclosures outside Related Disclosure
Form 10-K:
of financial statements
□ May be cross-referenced to other
□ Item 6. Climate-
parts of the filing (for example, Risk
Related Disclosure
Factors, Business, or Management’s
Discussion and Analysis); see SRG
5.8.1
Quarterly filing on: Regulation S-K Item 1505 □ If an entity elects to include scope 1
and 2 GHG emissions disclosures in
Form 10-Q:
Form 10-Q, then it should be provided
□ Item 1B. Climate- in the Form 10-Q for the second
Related Disclosure quarter following the fiscal year to
which the emissions relate (see
Timing of reporting below)
Annual filing for FPI on: Regulation S-K Item 1500 to □ Same as Form 10-K
1507: climate disclosures outside
Form 20-F:
□ Item 3. Key
Information: E.
Climate-related
disclosure
57SEC, Final climate disclosure rules, page 571. The SEC provides an adopting release in
conjunction with the issuance of any new rule. This is a narrative document that explains
the basis for the new rules, the SEC’s response to public comments, including changes to
the rules, explanation of the final rules, and the economic analysis supporting the costs and
benefits of the new rules.

Form and Part Relevant regulation Location of climate disclosures
Registration statements: Regulation S-K Item 1500 to □ Same as Form 10-K

1507: climate disclosures outside
□ Form 10: Item 3.A
Climate-Related
Disclosure
□ Form S-1: Item 11.
Information with
Respect to the
Registrant
Climate-related
disclosure
Registration statements: Regulation S-K Item 1500 to □ Same as Form 10-K except a
1507: climate disclosures outside separate disclosure for an acquiree
□ Form S-4 and Form F-
of financial statements that is registering securities, as
4 (for FPI)
applicable, is required.
□ Incorporation by reference is
permitted if certain conditions are met;
see SRG 5.5.3
Registration statements: Regulation S-K Item 1505(a): □ Incorporation of scope 1 and 2 GHG
GHG emissions metrics emissions by reference—to Form 10-
K or 10-Q for Form S-3 or to Form-F-
Incorporation of
20 for Form F-3—with the most
Certain Information by
recently completed fiscal year that is
Reference
at least 225 days prior to the date of
□ Form F-3 (for FPI): effectiveness of the registration
Item 6. Incorporation statement or otherwise the period
of Certain Information prior to the most recent fiscal year
by Reference
The SEC climate disclosure rules require certain climate disclosures under
Regulation S-X to be included in the footnotes of the entity’s financial statements
as governed by Article 14 of Regulation S-X. This means that these disclosures
would be included in the financial statements or incorporated by reference in the
forms listed in Figure SRG 2-5.
Additionally, large accelerated and accelerated filers are required to obtain an

attestation from an independent third party covering the disclosure of scope 1
and/or scope 2 GHG emissions with certain exemptions for the registration of
securities using Form F-4 and S-4.
Timing of reporting
The effective dates and transitional provisions vary by type of registrant and for
certain disclosure provisions, as summarised in Figure SRG 2-6.

Figure SRG 2-6
Summary of compliance dates for the SEC climate disclosure rules (note 1)
Disclosure and financial

Registrant type statements effects Greenhouse gas emissions / Assurance
All
disclosures, S-K Item
except as 1502(d)(2), Item Scopes 1 Limited Reasonable
noted in this 1502(e)(2), and and 2 (Item assurance assurance
table Item 1504(c)(2) 1505) (Item 1506) (Item 1506)
Large accelerated FYB 2025 FYB 2026 FYB 2026 FYB 2029 FYB 2033
filers
Accelerated files FYB 2026 FYB 2027 FYB 2028 FYB 2031 Not
(other than SRCs applicable
and EGCs)
SRCs, EGCs, and FYB 2027 FYB 2028 Not Not Not
non-accelerated applicable applicable applicable
files
Note 1: ‘FYB’ refers to any fiscal year beginning in the calendar year listed. For example, a
calendar year-end domestic large accelerated filer would begin including disclosures in its
31 December 2025 Form 10-K. Information for prior periods is only required to the extent it
was previously disclosed in an SEC filing.
The rules provide relief for EGCs, SRCs, and non-accelerated filers, which are not
required to report GHG emissions and are provided with longer phase-in periods
for the other required disclosures. All registrants will have additional time for
certain qualitative and quantitative disclosures related to estimates and
assumptions, and to obtain assurance over GHG emissions when required to be
disclosed (see Figure SRG 2-6).
The SEC acknowledges that it may be difficult for an entity to provide GHG
emissions information by the deadline of the annual report filing. In this case, the
entity may provide such information in the Form 10-Q of the second quarter of the
following fiscal year and incorporate it by reference) in the Form 10-K of the
current fiscal year (see SRG 5.8.1 for more information on incorporation by
reference). If the entity is a foreign private issuer, however, such emissions may
be disclosed in an amendment to the annual report on Form 20-F due by 225
days after the related fiscal year. In both cases, the entity must indicate the
intention to incorporate by reference to its second quarter Form 10-Q or to amend
its Form 20-F. 58
Further, the entity must include the required sustainability information in the
relevant filings by the due date of those filings, which vary depending on factors
such as the entity’s financial statement period end, filer status, and type of filing.
The deadlines for annual filings on Form 10-K and quarterly filings on Form 10-Q
are summarised in Figure SRG 2-7. 59
58 SEC, Climate disclosure rules, Item 1505(c)(1).

59 SEC, Financial Reporting Manual, section 1330.1.

Figure SRG 2-7
Timing of reporting for Form 10-K and Form 10-Q by type of filer
Form Large accelerated filer Accelerated filer Non-accelerated filer
Annual filing: 60 days after financial 75 days after financial 90 days after financial
year-end year-end year-end
Form 10-K
Quarterly filing: 40 days after financial 40 days after financial 45 days after financial
quarter-end quarter-end quarter-end
Form 10-Q
Annual filing for an FPI on Form 20-F must be filed four months after its financial
year end. 60 Other filings subject to the climate rules are registration statements
with timing of reporting at the reporting entity’s discretion. The financial statement
reporting period included in the registration statements, however, may be subject
to certain staleness dates. This means that the reporting periods included depend
on the timing of the filing, among other factors.
See SRG 8, Climate [coming soon], for general reporting requirements under the
SEC climate disclosure rules. See also SRG 7, Greenhouse gas emissions
reporting, for information on the GHG emissions reporting requirements for certain
registrants.
Management certifications and assessment over controls
The SEC’s climate disclosure rules require disclosures that are subject to an
entity’s disclosure controls and procedures, as well as the related certifications
provided by the entity’s principal executive and financial officers under Sarbanes-
Oxley Section 302. The financial statement disclosures will be subject to an
entity’s internal control over financial reporting, including management’s
assessment about the effectiveness of those controls, and, when required, the
independent auditor’s related attestation.
Question SRG 2-23
What is the effect of the stay of the climate disclosure rules that the SEC issued
on 4 April 2024?
PwC response
Legal challenges related to the climate disclosure rules have been filed against
the SEC by multiple parties. On 4 April 2024, the SEC stayed the rules to
“facilitate the orderly judicial resolution” of pending legal challenges. 61 SEC
registrants should continue to apply the existing climate disclosure rules until the
stay is lifted or the litigation is resolved. 62 See SRG 8, Climate [coming soon], for
general reporting requirements under existing SEC rules.
60 SEC, Financial Reporting Manual, section 6240.1.

61 SEC, Order issuing stay, In the Matter of the Enhancement and Standardization of
Climate-Related Disclosures for Investors.
62 For supplementary guidance on the existing rules see our publication, Don’t wait until the
SEC staff asks you about climate change.

Question SRG 2-24
How do the SEC climate disclosure rules apply to an entity planning to conduct an
initial public offering (IPO)?
PwC response
The SEC’s climate disclosure rules are applicable to IPO registration statements
(that is, Form S-1, F-1, 20-F, or Form 10). As such, new offerings will be required
to comply with these rules, subject to the compliance dates and transition rules.
As noted above, GHG emissions disclosures are only required for large
accelerated and accelerated filers and only if material. An entity conducting an
initial public offering would generally not meet the criteria to be considered an
accelerated or large accelerated filer and, as a result, would not be required to
include GHG emissions disclosures in the initial public offering.
Question SRG 2-25
Do the SEC rules apply to debt-only registrants?
PwC response
Yes. The new rules apply to both domestic and foreign private issuers subject to
Exchange Act reporting requirements, including debt-only registrants. Debt-only
registrants, however, generally do not meet the definition of a large accelerated
or accelerated filer because they do not have common equity held by non-
affiliates (that is, these entities generally have no public float). In this scenario,
they would not be subject to the GHG emissions disclosure requirements.
Registrants should consult with legal counsel to determine their public float and
filer status.
2.4.1.4 SEC human capital disclosure rules
In August 2020, the SEC issued a rule that included amendments intended to
modernise some of the disclosures required in the ‘description of business’
section of certain filings under the Exchange Act and the Securities Act. 63 This
rule applies to US domestic registrants; the disclosure requirements do not extend
to foreign private issuers. A US public company is now required to disclose, if
material, the number of its employees, a description of its human capital
resources and any human capital measures or objectives that the registrant
focuses on in managing its business. The SEC has announced that it plans to
propose rulemaking expanding required disclosures of human capital matters. The
timing of this proposal is uncertain.
See SRG 14, Own workforce [coming soon], for information about the general
reporting requirements under the SEC’s existing human capital disclosure rules.
2.4.1.5 SEC governance disclosure rules
Regulation S-K requires an entity reporting under the Securities Act or the
Exchange Act to provide specific disclosures about the role of its board of
directors and its committees, corporate governance policies and executive
compensation (see SRG 18, Governance [coming soon]).
63 SEC, Modernization of Regulation S-K Items 101, 103, and 105.

2.4.2 California
In October 2023, California changed the US sustainability reporting landscape

when the California governor signed into law four sustainability disclosure bills.
Three of California’s new sustainability laws are related to climate disclosure as
summarised in Figure SRG 2-8.
Figure SRG 2-8

Summary of California climate disclosure laws
Voluntary carbon market Greenhouse gas
disclosures disclosures Climate-risk disclosures
Bill name Assembly Bill (AB) 1305, Senate Bill (SB) 253, SB 261, Greenhouse
Voluntary carbon market Climate Corporate Data gases: climate-related
disclosures Accountability Act financial risk
Primary (1) Emissions claims, (2) Scope 1, scope 2, and (1) Climate-related
disclosure topic use of carbon offsets, and scope 3 GHG emissions financial risks and (2) the
(3) sale of carbon offsets measures a company has
adopted to reduce and
adapt to such risks
Framework Not applicable Prepared in accordance Prepared in accordance

with the Greenhouse Gas with the Task Force on
Protocol Climate-related Financial
Disclosure (TCFD) or
equivalent standard
Scope Entities that (1) operate US entities — including US entities — including

and make emissions US subsidiaries of non- US subsidiaries of non-
claims within California, or US parent companies — US parent companies —
(2) buy or sell carbon with annual revenue over with annual revenue over
offsets within California $1 billion that do business $500 million that do
in California business in California
Where filed Publicly available on the Publicly available digital Publicly available on the
company’s website platform company’s website
Compliance 1 January 2024, with Annual reporting of scope On or before 1 January

date information updated at 1 and scope 2 GHG 2026, and biennially
least annually emissions starting in 2026 thereafter
(on 2025 information);
scope 3 starting in 2027
(on 2026 information)
The due date for GHG information will be determined by the California Air
Resources Board (CARB), with scope 3 information to be due 180 days after
scope 1 and scope 2.
In addition, a fourth bill, California SB 54, Venture capital companies: reporting,

which requires certain human capital disclosures was also signed into law in
October 2023. In June 2024, this law was amended by California SB 164, State
government. Compliance with California SB 54, as amended, is required starting
on 1 March 2026, and annually thereafter.
The provisions of the climate disclosure bills are incorporated in new sections
within the California Health and Safety Code and the provisions of SB 54 are
incorporated into the California Corporations Code. The laws are commonly
referred to using their original bill numbers.

The scope of each of the four laws is further discussed below.
2.4.2.1 Applicability of California AB 1305 — Voluntary carbon market

disclosures
The bill includes three different sets of disclosures, each with different scoping
requirements, applicable to an entity that engages in the following activities:
□ Makes emission claims

An entity ‘operating’ in California that make claims in the state (1) about the
achievement of net zero emissions or (2) that the company, its affiliated
entities, or products are (a) carbon neutral or otherwise imply they do not add
to greenhouse gas emissions or (b) have significantly reduced emissions
□ Uses or purchases voluntary carbon offsets

An entity ‘operating’ in California that (1) make emissions claims and (2) buy
or use voluntary carbon offsets sold in California; voluntary carbon offsets
exclude those that relate to a legal or regulatory mandate to reduce or prevent
emissions (for example, California's Cap-and-Trade Program)
□ Markets or sells voluntary carbon offsets

An entity that markets or sells voluntary carbon offsets in California
Certain issues with respect to application of the California AB 1305 scoping

criteria are discussed below.
‘Operating’ in California
California AB 1305 does not provide any explanation about what it means to
operate in California. We believe ‘operating’ in California would encompass
entities that are ‘doing business’ in California (as discussed in SRG 2.4.2.2) but
may also apply to any entity that makes emissions-related claims in California.
This could include, for example, disclosing claims on a website that is accessible
in California. Because no additional guidance is given in the regulations, we
recommend that entities consult with their legal counsel to determine whether they
are in scope.
Definition of voluntary carbon offset
The definition of a ‘voluntary carbon offset’ is broad and includes instruments

beyond those typically referred to as such. Specifically, the definition states that it
includes “any product sold or marketed in the state that … prevents the emission
of greenhouse gases into the atmosphere that would have otherwise been
emitted”. 64
Because the definition extends beyond greenhouse gas emissions reduction to

apply to products that prevent greenhouse gas emissions, we believe the scope
includes products such as energy attribute certificates and renewable energy
credits (RECs).
2.4.2.2 Applicability of California SB 253 and SB 261 — GHG and climate-

related risk disclosures
These laws apply to what California SB 253 refers to as a ‘reporting entity’ and
California SB 261 refers to as a ‘covered entity’, although other than a difference
in the applicable revenue threshold, the definitions are the same.
64Section 44475(d)(3)(A) of the California Health and Safety Code added by California AB
1305.

Excerpts from California SB 253 and SB 261
California SB 253 — ‘Reporting entity’ means a partnership, corporation, limited

liability company, or other business entity formed under the laws of this state, the
laws of any other state of the United States or the District of Columbia, or under
an act of the Congress of the United States with total annual revenues in excess
of one billion dollars ($1,000,000,000) and that does business in California.
Applicability shall be determined based on the reporting entity’s revenue for the
prior fiscal year. 65
California SB 261 — ‘Covered entity’ means a corporation, partnership, limited
liability company, or other business entity formed under the laws of the state, the
laws of any other state of the United States or the District of Columbia, or under
an act of the Congress of the United States with total annual revenues in excess
of five hundred million United States dollars ($500,000,000) and that does
business in California. Applicability shall be determined based on the business
entity’s revenue for the prior fiscal year. 66
Factors to consider in determining whether California SB 253 or SB 261 apply

include (1) entity type, (2) entity location, (3) total annual revenue for the prior
fiscal year, and (4) whether the entity ‘does business’ in California.
Whether an entity is subject to the laws is based on the legal structure of the
organisation (‘entity type’). There is no specific exemption for nonprofit entities
and we believe the laws are intended to be broadly applicable to for-profit and
nonprofit organisations (except for the exemption for the University of California
discussed below). Further, these definitions do not make an exception based on
the location of the ultimate parent of the business entity — meaning that US
subsidiaries of non-US companies would be in scope if the other criteria are met.
Under both definitions, whether an entity meets the revenue threshold will be
measured based on its revenue for the prior fiscal year. And, the revenue
thresholds are not based just on revenue generated in California. Instead, an
entity that meets the type and location criteria would need to consider its total
annual revenue, regardless of where the revenue was generated (including
revenue generated outside the United States). Further, absent additional
clarification, we believe that revenue should be calculated in accordance with the
applicable accounting principles used in the annual financial statements (for
example, IFRS Accounting Standards or US GAAP).
‘Doing business’ in California
An entity that exceeds the revenue threshold in California SB 253 or SB 261

would next need to assess whether it is ‘doing business’ in California. Although
this term is not defined by California SB 253 or SB 261, it is defined in California’s
existing tax code, which was referenced in legislative meeting materials. The
California Franchise Tax Board considers a company to be ‘doing business’ if it
meets any of the following:
□ engages in any transaction for the purpose of financial gain within California
□ organised or commercially domiciled in California
□ California sales, property, or payroll exceed specified amounts, which are

adjusted annually
65 Section 38532(b)(2) of the California Health and Safety Code added by California SB
253.
66 Section 38533(a)(4) of the California Health and Safety Code added by California SB
261.

A company may need to assess whether it “engages in transactions for purposes
of financial gain within California,” as we believe this may be interpreted broadly.
In addition, the specified sales, property, and payroll metrics are relatively low; in
2023, they were just over $711,000 for sales, and just over $71,000 for property
and payroll. 67
Further, the definition of sales within the California Revenue and Taxation Code is
expansive. It states, in part, that sales represent the following.
Excerpt from California Revenue and Taxation Code Section 25120
The gross amounts realized … on the sale or exchange of property, the

performance of services, or the use of property or capital (including rents,
royalties, interest, and dividends) in a transaction that produces business income,
in which the income, gain, or loss, is recognized (or would be recognized if the
transaction were in the United States) under the Internal Revenue Code.
These definitions have some additional complexity and we recommend that

entities consult with their tax and legal advisors in assessing whether they meet
these criteria.
Exemptions
California SB 253 and SB 261 both include limited exemptions as discussed in

this section. Importantly, however, the exemptions vary between the two laws and
exemption from one of the laws does not affect the applicability of the other.
California SB 261
Similar to ESRS, California SB 261 provides a ‘subsidiary’ exemption for entities

included in the report of a parent company:
Excerpt from California SB 261 68
Climate-related financial risk reports may be consolidated at the parent company

level. If a subsidiary of a parent company qualifies as a covered entity …, the
subsidiary is not required to prepare a separate climate-related financial risk
report.
Consistent with this guidance, an in-scope entity would not be required to provide
a separate report if the entity is included in a report of its parent that meets the
requirements of California SB 261.
In addition, insurance companies (that is, business entities subject to regulation by

the Department of Insurance) are fully exempt from the requirements of California
SB 261. In 2022, the National Association of Insurance Commissioners, which
includes California’s Insurance Commissioner, adopted a new standard for
insurance companies to report their climate-related risks in alignment with the
TCFD framework. Thus, insurance companies are already required to provide
reporting prepared in accordance with the TCFD framework.
67State of California Franchise Tax Board, Doing business in California.

68Section 38533(b)(2) of the California Health and Safety Code added by California SB
261.

California SB 253
California SB 253 includes a specific exemption for the University of California

unless the Regents of the University of California choose to require it. Otherwise,
the bill applies to all reporting entities, as defined, that meet the stated thresholds.
The law further specifies that its disclosures will satisfy current reporting
requirements that apply to a number of California electricity generators, industrial
facilities, fuel suppliers, and electricity importers under Assembly Bill 32, the
Global Warming Solutions Act of 2006.
2.4.2.3 Applicability of California SB 54, as amended — Venture capital

companies
California SB 54 was signed into law in October 2023. This law was amended in
June 2024, when California SB 164 was signed into law. California SB 164
amends certain of the provisions in California SB 54, specifically the definition of
entities subject to the law, the California state agency to which the related report
must be submitted, and the effective date. This summary reflects the amended
requirements.
These requirements apply to venture capital companies that: 69
□ invest in or finance startups, early stage, or emerging growth companies, and
□ are headquartered in, have a significant presence or operational office in,

invest in businesses located or with significant operations in, or solicit or
receive investments from a resident of California.
Entities in scope of California SB 54, as amended, are required to survey their

venture capital investees to obtain diversity information (for example, gender
identity, race, ethnicity) about the investees’ founders. Based on the survey
results, and beginning 1 March 2026 and annually thereafter, a covered entity will
need to report specified information about those founders and the diversity of
businesses in which it made investments in the prior year (on an anonymised
basis) to the California Department of Financial Protection and Innovation. The
Department will make the information publicly available through its website.
See SRG 22, Jurisdictional reporting requirements [coming soon], for details on
the reporting requirements under this California law.
Question SRG 2-26
How does the California law define ‘venture capital companies’?
PwC response
The California law refers to the California Code of Regulations for the definition of
‘venture capital companies’, which defines the term to include the following types
of entities: 70
□ on at least one occasion during the year, more than 50% of non-short term
investments, valued at cost, are invested in venture capital investments and
derivatives (as discussed below)
□ ‘Venture capital funds’, as defined by the SEC in the Investment Advisers Act
of 1940, Rule 203(l)-1
69Section 27500(b) of the California Corporations Code amended by California SB 164.

70Section 260.204.9 of Title 10, Chapter 3, Subchapter 2, Article 8, paragraph (a)(4) of the
California Code of Regulations.

□ ‘Venture capital operating companies’ as defined by US Department of Labor
under the Employee Retirement Income Security Act of 1974 (ERISA), Rule
2510.3-101(d)
The California Code of Regulations also provides a definition of ‘venture capital

investment’. The term refers to an investment in which the investment advisor, an
entity advised by the investment advisor, or an affiliate obtains certain
management rights. Management rights include the ability to participate in or
substantially influence the management, operations, or business objectives of the
underlying investee. 71
Acknowledgements
Peter Flick
Heather Horn
Andreas Ohl
Dara Sarasati
Nina Schäfer
Olivier Scherer
Diana Stoltzfus
Valerie Wieman
Katie Woods
71Section 260.204.9 of Title 10, Chapter 3, Subchapter 2, Article 8, paragraph (a)(5) of the
California Code of Regulations.

Chapter 3:
Boundaries of sustainability
reporting
3.1 Boundaries of sustainability reporting —
chapter overview
The entities, assets, and operations included in a reporting entity’s sustainability
reporting comprise its reporting boundary. Sustainability reporting standards and
regulations also generally require disclosure of information about the reporting
entity’s upstream and downstream value chain (referred to herein as the ‘value
chain’). This chapter discusses the determination of the reporting boundary for an
entity’s ‘own operations’ and its value chain as well as application guidance under
the following standards and regulations:


See SRG 2, Applicability of sustainability reporting, for discussion of the entities

subject to these reporting regimes. Further, although the breadth of these
standards and regulations differ — ESRS and the ISSB standards broadly
address a range of topics in sustainability reporting, whereas the SEC rules are
focused only on climate disclosures — the concepts applied in determining the
reporting boundary and related time horizons generally align as discussed in the
following sections:
□ Establishing the reporting boundary (SRG 3.2)
□ Own operations (SRG 3.3)
□ Evaluating the value chain (SRG 3.4)
□ Time horizons (SRG 3.5)
□ Effect of changes in the entity structure (SRG 3.6)
□ Changes to prior period information (SRG 3.7 [coming soon])
This chapter also discusses the transitional provisions for first time application
(SRG 3.8).
Throughout this Sustainability reporting guide (SRG), we use common terms to

describe aspects of the sustainability standards and regulations, as well as
references to interpretative guidance as discussed below.

challenges. SEC registrants should continue to apply the existing climate disclosure rules
until the stay is lifted or the litigation is resolved.
PwC | Boundaries of sustainability reporting (as of 30 June 2024) 3-1

evaluate the effect of — subsequent developments.


opportunities
to ESRS.
ESRS.



EFRAG also worked with the IFRS Foundation to prepare joint interoperability
guidance to facilitate compliance with both sets of standards. The ESRS-ISSB
Standards: Interoperability Guidance describes alignment of the climate-related
disclosure requirements (see SRG 1.1.2). 3

standards.
In addition, this chapter does not extend to the specialised reporting requirements
applicable to reporting greenhouse gas (GHG) emissions. Please refer to SRG 7,
Greenhouse gas emissions reporting.
3.2 Establishing the reporting boundary

An entity’s sustainability reporting includes its own operations and its upstream
and downstream value chain. Distinguishing between an entity’s own operations
and its value chain is important because the sustainability-related impacts, risks,
and opportunities (as applicable) and accompanying disclosures may differ.
Figure SRG 3-1 depicts at high-level the potential scope of an entity’s own
operations and value chain.
2 ESMA, Public Statement, “Off to a good start: first application of ESRS by large issuers”,
5 July 2024.
3 EFRAG and IFRS Foundation, ESRS-ISSB Standards: Interoperability Guidance, 2 May
2024.

Figure SRG 3-1
Illustration of scope of sustainability reporting
Value chain
Own operations
Parent and consolidated subsidiaries

Upstream Downstream
activities, Leased assets
activities,
resources, Joint operations resources,
and and
Entities under operational control, where required by
relationships relationships
topical ESRS
Other entities and business

relationships
The following sections discuss in more detail how to determine the scope of an
entity’s value chain and own operations in sustainability reporting.
3.3 Own operations

A reporting entity’s financial statements are the starting point for identifying the
entities, assets, and operations included in its own operations. Own operations
may also extend beyond the financial statements in certain instances.
Components of an entity’s own operations include: 4
□ the parent entity or holding company
□ consolidated subsidiaries, including consolidated subsidiaries that are less

than wholly owned (SRG 3.3.1 and SRG 3.3.2)
□ leased assets (SRG 3.3.3)
□ joint operations (SRG 3.3.4)
□ entities, assets, operations, and sites under operational control, where

required by topical ESRS (SRG 3.3.5)
ESRS distinguishes between an entity’s own operations and its value chain. The
IFRS Sustainability Disclosure Standards and SEC climate disclosure rules do not
use the term ‘own operations’. We believe, however, that this terminology is useful
to distinguish between the entity’s reporting boundary — which starts with the
entities, assets, and operations included in a reporting entity’s financial statements
— and the upstream and downstream value chain.
The following discussion addresses frequently asked questions in determining the

reporting boundary of sustainability reporting. Note that this chapter does not
4ESRS 1 General requirements, paragraph 62; IFRS S1 General Requirements for

Disclosure of Sustainability-related Financial Information, paragraphs 20 and B38; SEC,
The Enhancement and Standardization of Climate-Related Disclosures for Investors,
Regulation S-X Item 14-01(c).

address considerations in determining the organisational boundary for reporting of
greenhouse gas emissions. See SRG 7.3.
Question SRG 3-1
For purposes of compliance with CSRD, does an entity need to prepare

consolidated financial statements to support consolidated sustainability reporting if
the financial statements are not otherwise required?
PwC response
Some holding companies or other intermediate entities in the scope of
sustainability reporting may not prepare consolidated financial statements. For
example, as discussed in Question SRG 2-6 in SRG 2.2.1.2, there are exemptions
from preparing consolidated financial statements or a consolidated management
report that are separate and independent from the exemptions for CSRD
reporting. As a result, an EU holding company or intermediate entity may be
required to provide consolidated sustainability reporting to comply with CSRD,
even if it does not prepare financial information at that level.
To establish the reporting boundary for sustainability reporting, the reporting entity
would need to identify the entities, assets, and operations that would be included
in the consolidated group if it prepared consolidated financial statements in
accordance with the applicable GAAP of the relevant jurisdictions. Such entities
will also need to prepare selected consolidated financial information to support
disclosures in accordance with ESRS (for example, ESRS E1 Climate change
requires disclosure of energy intensity based on net revenue) as well as
information required for disclosures under the EU Taxonomy Regulation. A full set
of consolidated financial statements, however, is not required.
Parent entities may also need to prepare consolidated financial information

beyond the line items needed for specific sustainability disclosures in order to
properly assess the financial effects from risks and opportunities. For example, an
entity would need to consider consolidated assets to determine the anticipated
financial effects from physical climate risks.
Question SRG 3-2
Which GAAP should be used to determine the reporting boundary — and prepare
financial information for use in sustainability reporting — if no financial statements
are prepared by the reporting entity?
PwC response
We believe the reporting entity should determine its reporting boundary and
prepare its financial information for use in sustainability reporting based on the
GAAP required in accordance with the laws of the jurisdiction where the
sustainability reporting is published. For example, financial information prepared
for purposes of compliance with CSRD should use the GAAP allowed by the
relevant EU Member State. This is consistent with the discussion in Question
SRG 2-4 in SRG 2.2.1.1.
Also see Question SRG 2-5 in SRG 2.2.1.2 for more information regarding
whether an entity is required to provide sustainability reporting on both a
standalone and consolidated basis.

3.3.1 Consolidated group
A reporting entity is required to include all entities in its consolidated group in its
sustainability reporting. The EFRAG ESRS Q&A Compilation of Explanations,
Question ID 148 provides a helpful description of the relationship between the
financial statements and a reporting entity’s sustainability reporting, stating, “The
starting point of the sustainability statement is the perimeter used for financial
reporting.” 5 Further, a reporting entity will also be required to provide information
that extends beyond the reporting boundary, as discussed in SRG 3.4 with
respect to inclusion of information related to the value chain.
No entities that are part of the consolidated group may be excluded from
sustainability reporting. As such, a reporting entity’s process to identify material
sustainability-related impacts, risks, and opportunities (as applicable) must
consider all consolidated subsidiaries, including those that are financially
immaterial, operate in different lines of business or different countries, or that
provide only internal services (for example, internal service centres for accounting
and reporting). 6 Sustainability reporting also includes subsidiaries that are less
than wholly-owned, as discussed in SRG 3.3.2.
While a reporting entity is not permitted to exclude any consolidated entities from
its sustainability reporting, disclosure is only required of material sustainability
information. For discussion of the materiality approach when preparing reporting
in accordance with ESRS, the IFRS Sustainability Disclosure Standards, and the
SEC climate disclosure rules, see SRG 4, Materiality for sustainability reporting.
Question SRG 3-3
May a reporting entity exclude a subsidiary that is not financially material for
financial reporting purposes from its sustainability reporting?
PwC response
No. A reporting entity’s sustainability reporting should include all material
sustainability-related actual and potential impacts, risks, and opportunities (as
applicable) for its own operations and value chain. This requires consideration of
all subsidiaries in the consolidated group. An entity that is excluded from the
consolidated financial statements for practical reasons because it is not financially
material to the parent entity, is still part of the reporting boundary. Further, even a
subsidiary that is not financially material from a financial reporting perspective
may result in, or contribute to, material sustainability-related impacts, risks, or
opportunities (as applicable). 7
3.3.2 Less than wholly-owned consolidated subsidiaries
ESRS 1 General requirements and IFRS S1 General Requirements for Disclosure

of Sustainability-related Financial Information state that sustainability reporting
shall be for the same reporting entity as the financial statements, as discussed in
SRG 3.3. 8 This is also the case for the SEC climate disclosure rules, which
require disclosure in the financial statements and as part of the related SEC filing.
The standards and rules, however, do not provide specific guidance for reporting
5 EFRAG ESRS Implementation Q&A Platform, Compilation of Explanations January–July

2024, Question ID 148, pages 25–26.
6 EFRAG ESRS Q&A Compilation of Explanations, Question ID 148, pages 25–26.
7 EFRAG IG 2 Value chain, paragraph 35, page 12; EFRAG ESRS Q&A Compilation of
Explanations, Question ID 148, pages 25–26.

8 ESRS 1 paragraph 62; IFRS S1 paragraph 20.

sustainability information related to less than wholly-owned consolidated
subsidiaries.
As the reporting entity controls its consolidated subsidiaries and has responsibility
for managing their material sustainability-related impacts, risks, and opportunities
(as applicable) including any related targets and goals, a reporting entity’s
consolidated sustainability reporting should include 100% of the sustainability
information for all of its consolidated subsidiaries, including subsidiaries that are
not wholly-owned.
Question SRG 3-4
May a reporting entity report only its proportionate share of sustainability

information related to subsidiaries that are not wholly-owned?
PwC response
No. For purposes of financial reporting, a reporting entity typically records 100% of
the assets, liabilities, income, and expenses of its less than wholly-owned
subsidiaries in its consolidated financial statements. The consolidated financial
statements also include an allocation of a portion of the equity and net income to
the third-party holders of the ownership interests (typically referred to as non-
controlling interests).
From a sustainability reporting perspective, however, the reporting entity

determines the subsidiary’s response to material sustainability-related impacts,
risks, and opportunities (as applicable), irrespective of other ownership interests.
The non-controlling interest holder may provide input to decisions but ultimately
the reporting entity has financial control over entities in its consolidated group.
Therefore, reporting only a portion of the sustainability information (sometimes
referred to as the ‘proportionate approach’) is inconsistent with the reporting
entity’s responsibility. Consequently, the reporting entity should reflect a 100%
interest in its sustainability reporting to reflect its decision-making authority over
material sustainability-related impacts, risks, and opportunities (as applicable).
Note that there may be a different result for reporting greenhouse gas emissions,
depending on the organisational control approach used by the entity. See SRG
7.3.
3.3.3 Own operations — Leased assets
The sustainability standards and rules provide limited guidance on how to

consider and report material sustainability-related impacts, risks, and opportunities
(as applicable) associated with leased assets. In the absence of specific
guidance, we believe that reporting entities should follow the general principles of
sustainability reporting in evaluating leased assets. Specifically, the sustainability
standards and rules require an entity’s reporting boundary or perimeter to include
the entities, assets, and operations that are included in its consolidated financial
statements. 9
In accordance with IFRS Accounting Standards and US GAAP, a contract is or

contains a lease if it conveys the right to control the use of an identified asset for a
period of time in exchange for consideration. Control is determined by assessing
whether the customer has the (1) the right to obtain substantially all of the
economic benefits from the use of the asset and (2) the right to direct its use.
9ESRS 1 paragraph 62; IFRS S1 paragraph 20; SEC climate disclosure rules, Regulation
S-X Item 14-01(c).

Under both IFRS 16 Leases and ASC 842 Leases, a lease provides the lessee
with the right to control the use of the asset as well as the right to substantially all
of the related economic benefits during the term of the lease. Although the lessor
legally owns the leased asset, it typically cannot use the leased asset without
lessee consent during the lease term. Therefore, in general, this control is
reflected through the recognition of a right-of-use asset on the lessee’s statement
of financial position.
For entities preparing financial statements in accordance with the IFRS

Accounting Standards or US GAAP, we believe an approach to identifying
material sustainability-related impacts, risks, and opportunities (as applicable)
associated with leased assets is as follows:
□ Lessee accounting
Consistent with the lessee’s control and inclusion of the right-of-use asset on
its statement of financial position, we believe the lessee should consider the
leased asset as part of its own operations for the lease period.
□ Lessor accounting
The lessor’s financial accounting for the leased asset depends on whether the
lease is classified as an operating lease or a finance or sales-type lease. For
an operating lease, the lessor maintains the physical asset on its statement of
financial position, whereas for a finance or sales-type lease, the lessor
derecognizes the physical lease and records a lease receivable.
Because the lessor recognises an interest in the leased asset on its statement
of financial position, we believe it is part of its own operations. The difference
in the nature of the interest recorded on the statement of financial position,
however, may affect how the lessor considers the leased asset in its
assessment of sustainability-related impacts, risks, and opportunities (as
applicable).
This approach is supported by the limited guidance in ESRS related to leases;

there is no such guidance in the IFRS Sustainability Disclosure Standards or the
SEC rules. ESRS E1 Climate change and ESRS E4 Biodiversity and ecosystems
address leases in the context of material and physical climate risks disclosures
and certain biodiversity metrics. Relevant considerations are as follows:
□ ESRS E1 — climate-related physical and transition risks

ESRS E1 treats a right-of-use asset recorded by a lessee as equivalent to
other assets owned by the reporting entity in assessing climate-related
physical risks and transition risks. ESRS E1 AR 67 indicates: “Material
climate-related physical risks and transition risks may affect the
undertaking’s financial position (for example, owned assets, financially-
controlled leased assets, and liabilities)”. Further, ESRS E1 AR 70 and AR 73
explicitly require inclusion of finance-lease assets and right-of-use assets in
the determination of total assets for purposes of the calculation of anticipated
financial effects from physical risks and transition risks, respectively.
□ ESRS E4 — biodiversity sensitive areas

ESRS E4 paragraphs 24(a) and 35 require disclosures about biodiversity
sensitive areas. These paragraphs explicitly require inclusion of “sites owned,
leased or managed”.
The references in ESRS E1 to lessee right-of-use assets recognised under IFRS

Accounting Standards and US GAAP are consistent with an overall view that
leased assets should be treated as part of the lessee’s own operations. ESRS
E4’s more general reference to “leased” sites also supports this conclusion.

In addition, a reporting entity should consider whether it should cross-reference to
the financial statements where more information regarding the lease is disclosed,
such as the lease term, and any restrictions or covenants imposed by the
agreement (also referred to as incorporation by reference). This approach
enhances the users’ understanding of the associated sustainability-related
impacts, risks, and opportunities (as applicable), as well as the linkage between
sustainability and financial reporting.
See discussion of specific considerations related to reporting GHG emissions

associated with leased assets in SRG 7.4.2.
Question SRG 3-5
How should a lessee assess and report sustainability-related impacts, risks, and
opportunities (as applicable) related to leased assets when no right-of-use asset is
recognised under local GAAP?
PwC response
Some entities may follow local accounting principles whereby lessees do not
recognise a right-of-use or other asset in the statement of financial position for
leases classified as ‘operating leases’. Notwithstanding the accounting treatment,
however, we believe the lessee would have control over the sustainability-related
matters with respect to the leased asset. Examples of lessee decisions that may
affect sustainability-related impacts, risks, and opportunities (as applicable)
include the following:
□ Selection of the asset to lease — for example, the lessee could elect to lease
space in an older building or alternatively it could lease space in a newer
facility that is more energy efficient, causes less pollution, and has more
advanced water recycling technology.
□ Directing the use of the asset during the lease term — for example, the lessee
will determine the level of output produced by a leased factory which will affect
emissions, pollution, and water consumption. It would also decide matters
related to worker safety and other social issues related to the leased facility.
Consistent with these facts, a lessee may conclude that leased assets — whether
or not recognised on the statement of financial position in accordance with local
GAAP — should be included in its sustainability reporting as part of own
operations.
We believe other approaches may be acceptable. The approach selected should

be applied consistently and transparently disclosed. In addition, a reporting entity
should be aware that sustainability standards and regulations may include specific
disclosure requirements related to leases, which would apply irrespective of the
accounting treatment or broader approach taken toward sustainability matters
related to leased assets. For example, ESRS E4 requires inclusion of all leases in
disclosures about biodiversity sensitive areas.
3.3.4 Own operations — Joint operations
A reporting entity may have arrangements for which its financial statements reflect
its proportionate share of the assets, liabilities, income, and expenses of an entity,
site, operation, or asset. This may include, for example, jointly controlled assets,
jointly controlled entities, and joint arrangements classified as joint operations
under IFRS 11 Joint Arrangements, as well as undivided interests accounted for
following proportionate consolidation under US GAAP. For the purposes of this
guide, we refer to these arrangements collectively as ‘joint operations’.

The specific considerations for reporting joint operations under ESRS and the
IFRS Sustainability Disclosure Standards vary as discussed in SRG 3.3.4.1 and
SRG 3.3.4.2, respectively. Under both sets of standards, however, we believe that
an entity’s own operations include sustainability information related to any assets
and liabilities associated with joint operations for which it recognises its
proportionate share as part of the statement of financial position.
Question SRG 3-6
How should a reporting entity report sustainability information related to a joint

operation?
PwC response
In general, a reporting entity should disclose sustainability information associated
with any recognised assets and liabilities associated with joint operations as part
of its own operations. See further discussion in SRG 3.3.4.1 and SRG 3.3.4.2.
The sustainability reporting frameworks, however, do not address how a reporting

entity should disclose material sustainability-related impacts, risks, and
opportunities (as applicable) related to the assets, liabilities, revenues, and
expenses of the joint operations that are not recognised on its statement of
financial position.
In a joint arrangement, the reporting entity has a business relationship with the
joint operator. As with other business relationships, the reporting entity would
need to consider this arrangement in assessing its material impacts, risks, and
opportunities (as applicable) in its value chain (see SRG 3.4 for discussion of
business relationships in the value chain). Given the lack of guidance in this area,
we believe there may be flexibility in how information related to the joint
arrangement is incorporated in the entity’s sustainability reporting. One approach
would be for the reporting entity to disclose sustainability information related to the
unrecognised assets and liabilities of the joint operation as part of its value chain-
related information. For example, assume the following fact pattern:
□ a company identifies the generation of microplastics in its own operations as a

material risk (ESRS E2 Pollution paragraph 26)
□ the company also identifies the generation of microplastics in its value chain
as a material entity-specific risk related to the value chain
□ the company enters into a joint arrangement that encompasses factories

owned by the company, jointly owned with its partner, and owned by its
partner
In accordance with the standards and regulations, the company’s own operations
would include microplastics generated in the factories recorded on its statement of
financial positions (that is, factories it owns as well as its proportionate share of
the factories jointly owned) as part of its own operations. It could also disclose the
nature of the joint operation and the amount of microplastics generated by the
factories owned by its partner as part of its value chain disclosures.
Other approaches related to unrecognised assets and liabilities may be

acceptable. The approach selected should be applied consistently and
transparently disclosed.
3.3.4.1 Joint operations — ESRS
On 31 May 2024, EFRAG released IG 2 Value chain. Although EFRAG IG 2 is

non-authoritative, it provides perspective that is helpful to preparers. It clarifies

that arrangements accounted for as joint operations in accordance with IFRS 11
are part of a reporting entity’s own operations.
EFRAG IG 2 paragraph 39
This means that [a joint operation’s] assets and liabilities forming part of the
financial perimeter are own operations rather than value chain.
The conclusion that joint arrangements accounted for as joint operations under
IFRS 11 are part of own operations is also highlighted in EFRAG IG 2 paragraphs
139 and 140, pages 31–32 (in the context of ESRS E1).
The guidance in EFRAG IG 2 is specific to arrangements accounted for under

IFRS 11. We believe undivided interests accounted for following proportionate
consolidation under US GAAP would also form part of an entity’s own operations
as the accounting is analogous to IFRS 11. A reporting entity should perform
further analysis under local GAAP, if applicable. This is consistent with the
guidance in EFRAG IG 2 paragraph 139, which states, “Similar concepts exist in
local GAAP in EU countries, but the specifics may differ.”
3.3.4.2 Joint operations — ISSB standards
IFRS S1 does not refer to or provide any guidance regarding how to consider and
report material sustainability-related risks and opportunities related to joint
operations. In the absence of specific guidance, we believe that a reporting entity
should follow the general principles of sustainability reporting in evaluating joint
operations. Specifically, IFRS S1 requires an entity’s reporting boundary or
perimeter to include the entities, assets, and operations that are included in its
consolidated financial statements. 10
In the case of joint arrangements classified as joint operations under IFRS 11, as
well as undivided interests accounted for following proportionate consolidation, the
reporting entity’s share of assets, liabilities, revenues, and expenses related to the
joint operation are recorded in its financial statements. Consequently, these
operations should be included as part of the entity’s own operations.
This approach is also supported by the limited guidance in IFRS S2 Climate-

related Disclosures, related to joint operations. IFRS S2 Basis for Conclusions
paragraph BC103 states that any scope 1 and scope 2 GHG emissions related to
joint operations are required to be included in the consolidated accounting group
and not as part of ‘other investees’.
Based on the general principles of sustainability reporting as supported by the

discussion in the IFRS S2 Basis for Conclusions, a reporting entity should include
sustainability-related risks and opportunities for assets and liabilities related to a
joint operation recognised by the reporting entity for financial reporting purposes
as part of own operations.
3.3.5 Own operations — Entities under operational control, where required

by ESRS
In addition to entities, assets, sites, and operations included in the financial

statements, certain environmental ESRS require the reporting entity to include
information about impacts, risks, and opportunities related to entities, assets,
10ESRS 1 paragraph 62; IFRS S1 paragraph 20; SEC, Climate disclosure rules,
Regulation S-X Item 14-01(c).

sites, or operations under operational control as part of its own operations. 11
Operational control is relevant to the ESRS listed in Figure SRG 3-2. 12
Figure SRG 3-2

Relevant ESRS and related SRG sections where operational control is relevant
Topical ESRS SRG section
ESRS E1 Climate change SRG 7, Greenhouse gas emissions reporting

SRG 8, Climate [coming soon]
ESRS E2 Pollution SRG 9, Pollution [coming soon]
ESRS E4 Biodiversity SRG 12, Biodiversity and ecosystems [coming

and ecosystems soon]
A reporting entity should apply a consistent approach in assessing operational

control. As a result, under each of the environmental standards for which
operational control is applicable, we would expect a reporting entity to reach the
same conclusion about whether it has operational control of an entity (including
associates, joint ventures, or other unconsolidated arrangements), asset, site, or
operation. The approach applied, including key factors evaluated in the
assessment, should be transparently disclosed.
For discussion of the definition of operational control and how it is applied in

determining the organisational boundary for reporting GHG emissions, see SRG
7.3.2 and Question SRG 7-17.
Question SRG 3-7
Should operational control be considered in sustainability reporting other than as

required by ESRS E1, ESRS E2, and ESRS E4?
PwC response
No. Both ESRS and the IFRS Sustainability Disclosure Standards require the
reporting boundary to include the same entities, assets, and operations as the
financial statements. The inclusion of associates, joint ventures, and other
unconsolidated arrangements as part of own operations as a result of operational
control should only be applied when specifically required.
As such, when reporting in accordance with ESRS, a reporting entity would not
consider operational control in the evaluation of impacts, risks, and opportunities
and related disclosures under ESRS E3 Water and marine resources and ESRS
E5 Resource use and circular economy. Further, EFRAG IG 2 confirms that the
concept of operational control does not apply to the social standards. 13
In addition, an entity reporting in accordance with the ISSB standards would only
apply operational control in reporting GHG emissions if that is the approach
selected for the determination of organisational boundaries (see SRG 7.3). It
would not otherwise be applicable.
11 ESRS E1 Climate change paragraph 46; ESRS E2 Pollution paragraph 26; ESRS E4
Biodiversity and ecosystems, paragraph 16(a).

12 EFRAG IG 2 paragraphs 47 and 52, pages 14–15 .
13 EFRAG IG 2 paragraphs 60–61, page 18.

3.4 Evaluating the value chain
Beyond an entity’s own operations, each of the sustainability reporting standards
and regulations require consideration of information related to an entity’s
upstream and downstream value chain. Note that the definitions of an entity’s
value chain in Commission Delegated Regulation (EU) 2023/2772 Annex II (ESRS
Annex II) Table 2 ‘Terms defined in the ESRS’ and IFRS S1 include its own
operations as well as its upstream and downstream value chain. In this guide, we
use the term ‘value chain’ to refer to entities or arrangements beyond an entity’s
own operations, as illustrated in Figure SRG 3-3.
Figure SRG 3-3

Illustration of scope of sustainability reporting
Value chain
Own operations
Upstream Parent and consolidated subsidiaries Downstream

activities, Leased assets activities,
resources, resources,
and Joint operations and
relationships Entities under operational control, where required relationships
by topical ESRS
Other entities and business

relationships
Inclusion of the value chain in an entity’s sustainability reporting extends the

entities, activities, resources, and relationships that would be assessed in
identifying an entity’s material sustainability-related impacts, risks, and
opportunities (as applicable). An entity should consider the following in
determining what value chain information should be included in its sustainability
reporting:
□ definition of value chain per the applicable standards (SRG 3.4.1)
□ actors in the entity’s upstream and downstream value chain — that is,
suppliers and customers (SRG 3.4.2)
□ other business relationships — for example, joint ventures, associates, other

contractual arrangements (SRG 3.4.3)
Preparing information related to the value chain may be complicated as it

generally requires a reporting entity to obtain data from third parties and often
relies on the use of estimates. For discussion of the use of estimates, see SRG
5.4.4.
3.4.1 Definition of value chain
The value chain is defined similarly in ESRS Annex II Table 2 and IFRS S1
Appendix A Defined terms.

Excerpt from ESRS Annex II Table 2 [IFRS S1 Appendix A]
Value chain: The full range of activities [interactions], resources and relationships
related to the undertaking’s [a reporting entity’s] business model and the
external environment in which it operates.
A value chain encompasses the activities [interactions], resources and
relationships the undertaking [an entity] uses and relies [depends] on to create its
products or services from conception to delivery, consumption and end-of life.
Relevant activities [including interactions], resources and relationships include:
i. those in the undertaking’s [entity’s] own operations, such as human resources;
ii. those along its supply, marketing and distribution channels, such as materials
and service sourcing and product and service sale and delivery; and
iii. the financing, geographical, geopolitical and regulatory environments in which
the undertaking [entity] operates.
IFRS S1 paragraph 2 also notes that “an entity’s ability to generate cash flows
over the short, medium and long term is inextricably linked to the interactions
between the entity and its stakeholders, society, the economy and the natural
environment throughout the entity’s value chain”. It also highlights the reporting
entity’s dependencies on these resources and relationships.
Together, the entity and the resources and relationships throughout its value chain
form an interdependent system in which the entity operates. The entity’s
dependencies on those resources and relationships and its impacts on those
resources and relationships give rise to sustainability-related risks and
opportunities for the entity.
EFRAG IG 2 similarly describes how a reporting entity’s assessment of

sustainability matters is expected to consider risks and opportunities related to
how entities in its value chain are dependent on natural, human, and social
resources.
Excerpt from EFRAG IG 2 paragraph 99
To assess risks and opportunities, the undertaking considers its own

dependencies on natural, human and social resources. The undertaking identifies
potential changes in the availability, price and quality of such resources, which are
sources of risks and opportunities, including those stemming from its upstream
and downstream [value chain].
Both sets of reporting standards acknowledge the importance of an entity’s value

chain on its operations. As a result of these dependencies, value chain
information is a critical component for reporting under the sustainability standards
and regulations. An entity will need to identify its material sustainability-related
impacts, risks, and opportunities related to the value chain and identify the
material information to be disclosed.
Figure SRG 3-4 summarises the value chain provisions in the sustainability
standards and regulations related to the identification of impacts, risks, and
opportunities (as applicable). This discussion does not extend to reporting scope 3
GHG emissions because of specific considerations around those disclosures, as
discussed in SRG 7.7.

Figure SRG 3-4
Summary of provisions related to impacts, risks, and opportunities (as applicable)
in the value chain
ESRS ISSB standards SEC
Material impacts, risks, and Describe risks and opportunities Actual and potential material
opportunities connected with the that could reasonably be impacts of any climate-related
entity through its direct and expected to affect the entity’s risk on suppliers, purchasers, or
indirect business relationships in prospects, including those in the counterparties to material
the upstream and/or value chain. 15 contracts, to the extent known or
downstream value chain 14 reasonably available 17
Current and anticipated effects
of sustainability-related risks and
opportunities on the
entity’s value chain, including
where the risks and
opportunities are concentrated. 16
Although the terms and description used in the standards and rules vary, the
value chain includes suppliers (upstream entities) and distributors and customers
(downstream entities). The value chain may also include other entities, activities,
resources, arrangements, and relationships as discussed in the following sections.
Question SRG 3-8
What is the extent of information about the value chain that is required by the SEC
climate disclosure rules?
PwC response
The value chain disclosure requirements in the SEC climate disclosure rules are
limited to the information required by Regulation S-K Item 1502(b)(3). This
disclosure is applicable when climate-related risk has materially impacted or is
reasonably likely to materially impact the entity’s business, results of operations,
or financial condition. 18
Excerpt from SEC climate disclosure rules, Regulation S-K Item 1502
(b) Describe the actual and potential material impacts of any climate-related risk
identified…on the registrant’s strategy, business model, and outlook,
including, as applicable, any material impacts on the following non-exclusive
list of items: …
(3) Suppliers, purchasers, or counterparties to material contracts, to the
extent known or reasonably available.
The SEC’s adopting release (which accompanied the climate disclosure rules)
states that the value chain disclosure was limited to eliminate “any potential need
14 ESRS 1 paragraph 63.

17 SEC, Climate disclosure rules, Regulation S-K Item 1502(b)(3).
18 SEC, Climate disclosure rules, Regulation S-K Item 1502(a).

for [entities] to undertake unreasonable searches or requests for information from
their value chains”. 19
Because the requirements to disclose value chain information are more limited in
the SEC climate disclosure rules, the requirements are not specifically addressed
further in this section. See SRG 8, Climate [coming soon], for more information on
the disclosures required.
3.4.2 Identifying value chain actors and business relationships
A reporting entity’s assessment of its value chain should begin with its suppliers
and customers, who are integral parts of the value chain. Suppliers and customers
— which are sometimes referred to as ‘first tier’ entities — are the most direct
upstream and downstream participants in the value chain. A reporting entity
reporting in accordance with ESRS and the ISSB standards, however, must also
consider its suppliers’ and customers’ business relationships — second tier, or
indirect relationships, and beyond. As a result, a counterparty may be considered
part of the reporting entity’s value chain even if it does not have a direct
contractual relationship with the reporting entity. 20
The extent of value chain disclosures may extend up and down the value chain far
beyond the entity’s own operations. Figure SRG 3-5 illustrates where material
impacts, risks, and opportunities (as applicable) may originate, with each arrow
representing a successive relationship.
Figure SRG 3-5

Extent of material value chain information under ESRS and the ISSB standards
Own operations
Upstream or downstream value chain
Material impacts, risks, or

opportunities
EFRAG’s implementation guidance also notes that an entity “can consider tracing
or mapping its [value chain] activities and actors to identify whether and which
19 SEC, Final climate disclosure rules, page 117. The SEC provides an adopting release in
the basis for the new rules, the SEC’s response to public comments, including changes to
the rules, explanation of the rules, and the economic analysis supporting the costs and
benefits of the new rules.
20 Commission Delegated Regulation (EU) 2023/2772, Annex II Table 2 ‘Terms defined in
the ESRS’, definition of ‘Business relationship’; IFRS S1 paragraph B2.

parts of its value chains are in areas of heightened risks”, such as the origin of the
fabric used by a chair manufacturer. 21 In addition, it states that the effort placed on
obtaining information from actors in the value chain should be proportionate. 22
Although specific to ESRS, the EFRAG IG 2 guidance may also be helpful for an
entity identifying value chain actors for purposes of reporting in accordance with
the IFRS Sustainability Disclosure Standards. This discussion is also
complemented by the value chain-related guidance in IFRS S1. In determining the
breadth and composition of the value chain, IFRS S1 paragraph B6 states that an
entity should consider “all reasonable and supportable information that is available
to the entity at the reporting date without undue cost or effort”.
Considerations in assessing whether a value chain actor may be associated with

material impacts, risks, and opportunities (as applicable) may include factors such
as:
□ the significance of the value chain relationship to the reporting entity’s

operations (for example, is the value chain actor a major or the only supplier
of a crucial raw material?)
□ whether the reporting entity is a significant customer of and its influence over
the value chain actor (for example, does the reporting entity have the ability to
change the value chain actor’s operations because it is a major customer?)
□ whether the value chain actor engages in activities that affect impacts, risks,
or opportunities (as applicable) that are material to the entity, the environment,
or community
We believe these areas should not be considered in isolation, but instead should
be evaluated holistically. In addition, this guidance generally aligns with EFRAG
IG 2 which highlights that entities should focus their efforts on relationships likely
to identify material sustainability-related impacts, risks, and opportunities. 23 For
information about how the materiality assessment impacts the extent of value
chain information required to be disclosed, see SRG 4.3.1.1. Figure SRG 3-6
provides examples of risks and opportunities in the value chain.
Figure SRG 3-6

Examples of sustainability-related risks and opportunities in the value chain
Value chain Scenario Example of risk Example of opportunity
Upstream A supplier’s production of a Operational disruptions and The supplier is developing

vital raw material is highly the need to find alternative an alternative production
dependent on water sourced raw material sources will process that is less water
from an area experiencing increase costs and affect dependant that will give the
increasingly severe drought contract fulfilment (revenue). reporting entity a competitive
conditions. advantage.
Downstream New regulations will prevent The reporting entity’s sales The reporting entity has
a significant retailer from may be impacted and contracted with a third-party
selling the reporting entity’s additional costs will be to certify the lack of allergens
bakery products because needed to modify existing in the production process,
they lack adequate allergen packaging. exceeding the minimum
labelling. labelling requirements, which
is expected to increase
sales.
21 EFRAG IG 2 paragraph 111, page 27.


Note that the sustainability reporting standards and regulations prohibit the
offsetting of risks and opportunities. 24 See SRG 4.3.2.2 and 4.4.2.3 for further
discussion of disaggregation requirements.
3.4.3 Other business relationships
The reporting entity’s interaction with its stakeholders, society, the economy, and
the natural environment throughout its value chain may give rise to material
sustainability-related impacts, risks, and opportunities (as applicable). In
assessing these sustainability-related matters, a reporting entity should consider
the dependencies and effects of its products or services on activities, resources,
and relationships outside its own operations, but should not solely consider its
direct and indirect upstream suppliers and downstream customers. There may be
other business relationships that give rise to material sustainability-related
impacts, risks, and opportunities (as applicable).
ESRS specifically require the reporting entity to evaluate its business

relationships, as defined in ESRS Annex II Table 2, broadly in identifying
sustainability-related impacts, risks, and opportunities related to the value chain.
Excerpt from ESRS Annex II Table 2
Business relationships: The relationships the undertaking has with business

partners, entities in its value chain, and any other non-State or State entity
directly linked to its business operations, products or services. Business
relationships are not limited to direct contractual relationships. They include
indirect business relationships in the undertaking’s value chain beyond the first
tier, and shareholding positions in joint ventures or investments.
IFRS S1 paragraph B5 provides similar guidance related to an entity’s

relationships that may give rise to sustainability-related risks and opportunities in
its value chain.
IFRS S1 paragraph B5
An entity’s dependencies and impacts are not limited to resources the entity
engages with directly, and to the entity’s direct relationships. Those dependencies
and impacts also relate to resources and relationships throughout the entity’s
value chain. For example, they can relate to the entity’s supply and distribution
channels; the effects of the consumption and disposal of the entity’s products; and
the entity’s sources of finance and its investments, including investments in
associates and joint ventures. If the entity’s business partners throughout its value
chain face sustainability-related risks and opportunities, the entity could be
exposed to related consequences of its own.
Consistent with the above provisions, EFRAG IG 2 notes that impacts are not
limited based on proximity or contractual relationship, but need to be assessed if
they occur in connection with any stage of the value chain that contributes to the
entity’s operations, products, or services, or that result from the use or end use of
those products or services. 25
Business relationships that may generate material impacts, risks, and

opportunities beyond suppliers and customers may include:
24 ESRS 1 QC 8; IFRS S1 paragraph B27(d); EFRAG IG 1 Materiality Assessment,

paragraphs 162–164, pages 38–39.

□ investments through associates (equity method investments), joint ventures,
and other equity or debt investment entities
□ a charitable foundation operating under the reporting entity’s brand name
□ other contractual arrangements, such as a third-party agreement to use

assets not accounted for as a lease
These business relationships may relate to entities that are not consolidated by
the reporting entity. Further, the reporting entity will often lack operational or
financial control over these entities, but they are nonetheless part of the reporting
entity’s value chain. As such, the reporting entity would need to consider if the
relationships give rise to material impacts, risks, or opportunities (as applicable).
The nature of all relationships with these entities needs to be considered. For
example, a reporting entity may have purchases or sales from or to its associates
and joint ventures in addition to the investor/investee relationship. If this is the
case, a reporting entity is required to include disclosures about the material
impacts, risks, and opportunities (as applicable) in the same manner as provided
for any other supplier or customer in the value chain. That is, for example, metrics
are not limited to the extent of equity ownership. As noted in ESRS 1, the data
“shall be taken into account on the basis of the impacts that are connected with
the undertaking’s products and services through its business relationships”. 26 For
discussion of value chain partners that have multiple types of relationships, see
Question SRG 7-35 in section 7.7.1.3.
If the reporting entity has no other business relationship with the associate or joint
venture, they still must be assessed for the existence of material impacts, risks,
and opportunities (as applicable) related to the investment relationship. The same
assessment would need to be made for investments without joint control or
significant influence, which under IFRS Accounting Standards and US GAAP
generally applies to investments below 20% ownership.
While investments represent a type of business relationship and need to be part of

the assessment of the value chain, there are no reporting requirements in ESRS
or the ISSB standards as to how to measure the related impacts, other than as
part of scope 3 category 15 greenhouse gas emissions. For discussion of scope 3
emissions, see SRG 7.7. Further, we expect more detailed guidance on reporting
of sustainability impacts of investments as sector standards evolve.
Another example of a business relationship that could give rise to a material

sustainability-related impact, risk, or opportunity (as applicable) is an entity’s
relationship with its charitable foundation. The reporting entity may contribute to a
charitable foundation operating under the reporting entity’s brand name. The
foundation may leverage the entity’s brand name and network to raise funds for a
cause that improves lives in the surrounding community. The charitable
foundation may therefore result in a positive social impact for the reporting entity.
The reporting entity should also consider business relationships with borrowers.
ESRS 1 AR 12(b) provides an example of a lender relationship.
ESRS 1 AR 12(b)
If the undertaking provides financial loans to an enterprise for business activities

that, in breach of agreed standards, result in the contamination of water and land
surrounding the operations, this negative impact is connected with the undertaking
through its relationship with the enterprise it provides the loans to.

Note that although this guidance is in the context of ESRS, we believe these
considerations are also helpful in making this assessment for purposes of
reporting in accordance with the IFRS Sustainability Disclosure Standards.
3.5 Time horizons

In addition to establishing its reporting boundaries, an entity must identify and
apply the relevant time horizons as part of preparing its sustainability reporting.
Applicable time horizons include the reporting period, the base year for measuring
progress towards a sustainability target, and the short-, medium-, and long-term
periods used to identify and report on sustainability-related impacts, risks, and
opportunities (as applicable).
Although the sustainability report will cover a specified period (see SRG 3.5.1),
the entity may also need to provide information related to other periods. Other
required disclosures may include:
□ subsequent events (see SRG 3.5.2)
□ forward looking disclosures — short-, medium-, and long-term time horizons

(see SRG 3.5.3)
□ base year information (see SRG 3.5.4)
□ prior year comparative disclosures, after applying any transitional reliefs (see
SRG 3.5.5)
In providing sustainability disclosures, the standards and regulations emphasise

the importance of creating linkages between historic and forward-looking
information, as well as connections with information in financial reporting. 27 The
sustainability standards and regulations interact with financial reporting in various
ways, including disclosures of sustainability metrics involving financial information
(for example, GHG intensity metrics) and current financial effects from
sustainability-related impacts, risks, or opportunities (as applicable).
3.5.1 Determining the reporting period
The reporting period is the time span covered by the sustainability report, which is
the same as the financial statements. 28 ESRS, the IFRS Sustainability Disclosure
Standards, and the SEC climate disclosure rules mandate alignment of the
reporting period for sustainability reporting with the financial statements. The
standards and rules do not provide flexibility for an entity to report selected
sustainability information as of a different date (for example, as of the calendar
year end for an entity with a different financial or fiscal year). 29 Further, any
change in the period covered by the financial statements (for example, due to a
change in financial year end) would also result in a change to the period for the
sustainability report.
Although the concept of the reporting period is straightforward, a number of

questions may arise as discussed below.
27 ESRS 1 paragraphs 74 and 123; IFRS S1 paragraphs 21–24.

28 ESRS 1 paragraph 73; IFRS S1 paragraph 64; SEC, Climate disclosure rules,
Regulation S-X Item 14-01(d) and Regulation S-K Item 1505(a)(1).
29 EFRAG ESRS Q&A Compilation of Explanations, Question ID 286, pages 29–31. We
believe this interpretation is also helpful in applying the ISSB standards and the SEC
climate disclosure rules. The ISSB standards and SEC rules also require reporting on the
same period as the financial statements and thus would not permit information as of a
different period.

Question SRG 3-9
What period should the sustainability report cover if an entity follows a financial
reporting period other than a year?
PwC response
ESRS, the ISSB standards, and the SEC climate disclosure rules define the
reporting period as the period covered by the financial statements. We believe this
alignment applies even if the period used in preparing the financial statements is
more or less than a year, in accordance with the GAAP applied. For example,
some retail entities report their financial results on a 52- or 53-week fiscal period.
IFRS S1 specifically addresses this practice as follows:
IFRS S1 paragraph 65
Normally, an entity prepares sustainability-related financial disclosures for a 12-

month period. However, for practical reasons, some entities prefer to report, for
example, for a 52-week period. This Standard does not preclude that practice.
For ESRS and the SEC climate disclosure rules, the sustainability information is
generally presented in the same report as the financial information, thus
consistency between the periods will be important. Further, we believe this would
be the case even if the period is different than a year to align with the requirement
that the sustainability reporting cover the same period as the financial statements.
Question SRG 3-10
What should an entity disclose in its sustainability reporting if the period covered
by the report changes?
PwC response
ESRS, the ISSB standards, and the SEC climate disclosure rules require
sustainability reporting to cover the same period as the financial statements. Thus,
a change in the financial reporting period would also result in a change to the
period covered in the entity’s sustainability reporting. IFRS S1 requires an entity to
make specific disclosures about a change in reporting period.
When an entity changes the end of its reporting period and provides sustainability-
related financial disclosures for a period longer or shorter than 12 months, it shall
disclose:
(a) the period covered by the sustainability-related financial disclosures;
(b) the reason for using a longer or shorter period; and
(c) the fact that the amounts disclosed in the sustainability-related financial
disclosures are not entirely comparable.
Although ESRS does not specify disclosures related to a change in reporting

period, we recommend that an entity provide disclosures similar to those included
in IFRS S1 paragraph 66 if the period covered by the sustainability reporting
changes. These disclosures provide transparency to the users of the sustainability
reporting and enhance connectivity to the related financial statements (because
similar disclosures would be expected in the financial statements). Further, these
disclosures contribute to the qualitative characteristics of useful sustainability-

related information by improving the understandability and potential effect on
comparability (see SRG 5.2).
Note that an entity applying the SEC climate disclosure rules would be providing
climate-related disclosures together with its financial statements. Therefore, no
specific sustainability-related disclosures would be required because any relevant
information would already be disclosed in the SEC filing or registration statement.
3.5.2 Subsequent events
ESRS 1 and IFRS S1 provide similar guidance on the consideration of events that
occur after the end of the reporting period but before the sustainability-related
disclosures are issued (that is, subsequent events). Consistent with financial
reporting, we use the terms ‘adjusting’ and ‘non-adjusting’ events to distinguish
between different types of events, as summarised in Figure SRG 3-7.
Figure SRG 3-7

Types of subsequent events
Type Description Disclosure consequences
Adjusting Provides evidence or insights Update estimates and

(recognised) about conditions that existed disclosures in light of the new
at the period end information 30
Non- Provides evidence or insights Provide narrative disclosure

adjusting about events and conditions indicating “existence, nature
(not that arise after the reporting and potential consequences of
recognised) date these post year-end events” 31
IFRS S1 provides further guidance that the disclosure of non-adjusting

subsequent events is only required if non-disclosure “could reasonably be
expected to influence decisions that primary users of general purpose financial
reports make on the basis of those reports”. 32 An entity reporting under ESRS will
need to consider whether information about a non-adjusting event should be
disclosed, taking into account the requirements around materiality of information
under ESRS.
In addition, there may be situations when judgement is required to determine

whether a subsequent event should be recognised in an entity’s sustainability
reporting. Figure SRG 3-7 includes examples of sustainability-related subsequent
events and the potential effect on sustainability reporting.
Figure SRG 3-8

Examples of adjusting and non-adjusting subsequent events
Type Examples of subsequent events (note 1)
Adjusting □ Updated sustainability information for the reporting period is

provided by one of the reporting entity’s joint ventures
□ A new report is issued about groundwater pollution during
the reporting period at one of the reporting entity’s factories


Type Examples of subsequent events (note 1)
Non- □ An announcement about a change to the composition of a

adjusting reporting entity’s governance body
□ Completion of an acquisition or disposal that will affect the
entity’s reporting boundaries
□ The destruction of a major production plant due to a natural
disaster
□ The issuance of regulations imposing higher levies or taxes
on GHG emissions
□ New developments in technology that could affect the
entity’s future GHG emissions
Note 1: These are examples of subsequent events (that is, events that occur after the end
of the reporting period but before the statements are issued, or available to be issued).
Subsequent events identified in the financial reporting process should be

considered for their potential effect on the sustainability reporting. Given
differences in the types of information needed, entities should also establish
processes to capture other events (that is, events not considered as part of
financial reporting) after the period end date that should be considered for
Question SRG 3-11
How should subsequent events be evaluated for purposes of the SEC climate
disclosure rules?
PwC response
The SEC climate disclosure rules do not provide specific guidance on the effect of
subsequent events. Given that the disclosures are included in SEC filings that
also contain financial information, however, we would expect registrants to follow
the ‘adjusting’ and ‘non-adjusting’ framework outlined above, consistent with the
treatment of subsequent events for financial reporting.
3.5.3 Forward-looking information
Sustainability reporting requires disclosure of forward-looking information,

including the related time horizons. Disclosures that may include a timing element
include:
□ sustainability impacts, risks, and opportunities (as applicable)
□ anticipated financial effects
□ key actions planned by the reporting entity to prevent, mitigate, or remediate

sustainability-related impacts or risks (as applicable)
For more information regarding anticipated financial effects and key actions, see
SRG 6.4.2.4.
Given the importance of understanding the timing of forward-looking information,

standard setters and regulators provide definitions of future time horizons to
enhance comparability and the usefulness of reporting. Although the specific
definitions vary, ESRS, the ISSB standards, and the SEC climate disclosure rules
all generally require an entity to assess impacts, risks, and opportunities (as

applicable) over short-, medium-, and long-term time horizons. Figure SRG 3-8
summarises key references and considerations in establishing time horizons for
Figure SRG 3-9

Definitions of short-, medium-, and long-term time horizons for sustainability
reporting
ESRS ISSB standards SEC
Section SRG 3.5.3.1 SRG 3.5.3.2 SRG 3.5.3.3
Reference ESRS 1 paragraphs 77– IFRS S1 paragraph 31 Regulation S-K Item

81 1502(a)
Defined by Short-, medium-, and Short-, medium-, and Short- and long-term are
the standard long-term are required long-term are required defined
and defined but not defined
Short-term Reporting period used in Entity-specific Less than 12 months

the financial statements
Medium-term From the end of short- Entity-specific Not required in the SEC
term period to five years rules
(note 1)
Long-term More than five years (note Entity-specific More than 12 months
1)
Note 1: The topical ESRS may require use of different definitions of medium- or long-term
time horizons, in which case those definitions must be used. 33
ESRS 1 paragraph 77 explicitly states that time horizons are “as of the end of the
reporting period”. Although the other sustainability reporting standards and
regulations do not specifically address this, we would generally expect the same
approach.
The identified time horizons assist in defining policies, determining the timing of
future actions, and, as applicable, setting milestones or interim targets. As
summarised in Figure SRG 3-8, ESRS, the ISSB standards, and the SEC climate
disclosure rules all use different language to define the short-, medium-, and long-
term time horizons. In general, however, ‘short-term’ covers a year. In addition,
entities applying ESRS and the ISSB standards will have directionally similar
definitions of the medium- and long-term time horizons, while entities reporting
under the SEC rules would include anything beyond one year as part of the long-
term time horizon (although entities are not precluded from using medium-term in
certain circumstances, see SRG 3.4.3.3).
Further, notably, the sustainability reporting standards and regulations do not

provide an endpoint for the long-term time horizon. As a result, this period may
extend far into the future. For example, climate scenarios may cover time horizons
as far as the year 2100. See further considerations specific to the individual
frameworks in the following sections.

3.5.3.1 Defining time horizons — ESRS
ESRS 1 prescribes the time intervals to be used in preparing the sustainability

statement.
ESRS 1 paragraph 77
When preparing its sustainability statement, the undertaking shall adopt the
following time intervals as of the end of the reporting period:
(a) for the short-term time horizon: the period adopted by the undertaking as the
reporting period in its financial statements;
(b) for the medium-term time horizon: from the end of the short-term reporting
period defined in (a) up to 5 years; and
(c) for the long-term time horizon: more than 5 years.
If the topical ESRS require different definitions of medium- or long-term, those

definitions should be applied.
Further, ESRS 1 paragraph 78 requires an entity to provide additional breakdowns

of the information beyond 5 years if necessary to provide relevant information to
users of the sustainability statement. An entity may use different definitions of
medium- and long-term if the time horizons defined in ESRS 1 result in
information that is “non-relevant”. 34 For example, an entity may conclude that it is
appropriate to use different time horizons due to industry-specific characteristics,
such as cash flow and business cycles, or the expected duration of capital
investments. 35
If an entity does not follow the definitions of medium- and long-term specified by
ESRS 1, ESRS 2 paragraph 9 requires disclosure of the definitions used and the
reasons why the entity applied those definitions.
3.5.3.2 Defining time horizons — ISSB standards
The IFRS Sustainability Disclosure Standards do not prescribe the time horizons
to be used but instead allow each entity to determine the appropriate definitions
based on its own facts and circumstances.
Short-, medium- and long-term time horizons can vary between entities and
depend on many factors, including industry-specific characteristics, such as cash
flow, investment and business cycles, the planning horizons typically used in an
entity’s industry for strategic decision-making and capital allocation plans, and the
time horizons over which users of general purpose financial reports conduct their
assessments of entities in that industry.
An entity reporting in accordance with the ISSB standards is required to disclose

its definitions for short-, medium-, and long-term time horizons, as well as how the
definitions link to the planning horizons used for strategic decision-making. 36
The flexibility in establishing time horizons specific to the entity is unique to

sustainability reporting under the ISSB standards. IFRS S1 paragraph BC102
discusses the ISSB decision to allow entity-specific time horizons in lieu of

36 IFRS S1 paragraphs 30(b) and (c).

defining specific time periods, acknowledging that time horizons are defined in
some other jurisdictions. The ISSB focused on the dependency on factors
including industry, business, and investment cycles which may affect
management processes such as forecasts, budgets, and planning. Thus,
ultimately, the ISSB concluded that “relevant information about an entity’s
sustainability-related risks and opportunities is best understood in the context of
entity-specific assessments of short-, medium-, and long-term”.
3.5.3.3 Defining time horizons — SEC
The SEC prescribes the time spans to be used in preparing sustainability

reporting.
Excerpt from S-K Item 1502(a)
In describing these material risks, a registrant must describe whether such risks
are reasonably likely to manifest in the short-term (i.e., the next 12 months) and
separately in the long-term (i.e., beyond the next 12 months).
The adopting release highlights that these time horizons are generally consistent
with those applied in the ‘Management’s Discussion and Analysis of Financial
Condition and Results of Operations’ (MD&A) section in an annual report or
registration statement. 37 The adopting release further states that the SEC adopted
this approach “because the materiality determination … is the same as what is
generally required when preparing the MD&A section”. 38 It also highlights that a
registrant may break down its climate risks into medium- and long-term if that is
consistent with its assessment and management of the risks.
3.5.4 Identifying the baseline or base year
The concept of a base year and baseline amounts are used widely in
sustainability reporting as a reference point for disclosing progress against an
entity’s sustainability targets and goals. The base year and baseline amount
establishes a benchmark point from which progress is measured and compared
over time. Further, although ESRS, the IFRS Sustainability Disclosure Standards,
and the SEC climate disclosure rules require entities to disclose certain
information about targets and goals, they do not require entities to establish such
targets and goals. As a result, notwithstanding the potential importance and
relevance of base year or baseline information, the guidance on how an entity
should determine these amounts is limited. ESRS 1 defines a base year.
ESRS 1 paragraph 75
A base year is the historical reference date or period for which information is
available and against which subsequent information will be compared over time.
ESRS also refers to the ‘baseline’ value as the quantity in the base year against
which progress is measured. IFRS S1 refers to the ‘base period’ as the point of
comparison and the SEC climate disclosure rules refer to a ‘baseline’ and
‘baseline time period’. These terms are generally used interchangeably.
For discussion of the determination of the base year and baseline information
related to GHG emissions, see SRG 7.8.
37 SEC, Climate disclosure rules, pages 103–104.

38 SEC, Climate disclosure rules, page 104.

3.5.5 Comparative information
Comparative information refers to amounts and disclosures related to one or more

prior periods. It provides users with additional context and information to identify
trends and changes. ESRS, the ISSB standards, and the SEC climate disclosure
rules all generally provide relief from reporting comparative information in the first
year of application. 39 The SEC climate disclosure rules, however, do require
disclosure of prior period comparative information even in the first year of
application if the information has previously been disclosed in an SEC filing. 40 For
further information on the transitional provisions related to comparative
information, see SRG 3.8.
Figure SRG 3-9 summarises the general requirements related to comparative

information after the first year of application.
Figure SRG 3-10

Summary of requirements related to providing comparative information, after the
first year of application
Requirement ESRS ISSB standards SEC rules
Guidance ESRS 1 paragraphs 83 IFRS S1 paragraph 70 Regulation S-X Item 14-

and 86 01(d) and Regulation S-
K Item 1505(a)(1)
Comparative Required Required, unless a Required for disclosures

quantitative metrics topical standard permits in the financial
and monetary amounts otherwise statements and of GHG
for the preceding (if applicable)
period
Comparative Required Required, unless a Not applicable

information for topical standard permits
narrative disclosures, if otherwise
useful for
understanding
More than one If required by a topical If required by a topical Disclosures in the

comparative period standard standard financial statements and
of GHG (if applicable)
required for same fiscal
periods as financial
statements
Comparative information may be impacted by events including changes in

estimates, changes to the definition of a metric, or errors identified in a
subsequent reporting period. See SRG 3.7 [coming soon] for further discussion.
39 ESRS 1 paragraph 136; IFRS S1 paragraph E3; SEC, Climate disclosure rules,
Regulation S-X Item 14-01(d) and Regulation S-K Item 1505(a)(1).
40 SEC, Climate disclosure rules, Regulation S-X Item 14-01(d) and Regulation S-K Item
1505(a)(1).

Question SRG 3-12
May an entity voluntarily provide comparable prior period information in the first
year of application of ESRS or the IFRS Sustainability Disclosure Standards?
PwC response
ESRS and the IFRS Sustainability Disclosure Standards do not require prior
period comparative information in the first year of application (see SRG 3.8 for
transitional provisions for comparative information).
If an entity elects, however, to provide prior period information, we believe that

only information that is prepared in accordance with ESRS or the ISSB standards
(as applicable) may be labelled as comparative and disclosed side-by-side with
current year disclosures. That is, the information must be prepared on the same
basis as the current period disclosures to be presented as comparable, or
equivalent.
In addition, the entity should ensure any prior period disclosures meet the
qualitative characteristics of information required for sustainability reporting
(ESRS 1 Appendix B and IFRS S1 Appendix D, see SRG 5.2). We generally
believe prior period information may be provided on a case-by-case (metric-by-
metric) basis. If, however, an entity ‘picks and chooses’ among previously
provided sustainability information — that is, it provides certain metrics but
excludes others — it should evaluate whether the disclosures meet the criteria of
‘faithful presentation’, and ‘without bias in its selection or disclosure of
information’.
Note that the SEC rules require registrants to include comparative climate-related
information that was previously reported in an SEC filing, even in the first year of
application. If an SEC registrant, however, elects to voluntarily provide prior period
disclosures, it should consider the same factors outlined above.
Question SRG 3-13
May an entity voluntarily provide prior period information that is not comparable to
the current year presentation in the first year of application of ESRS or the IFRS
Sustainability Disclosure Standards?
PwC response
It depends. Many entities have previously provided voluntary sustainability
reporting. This information may have been prepared following another
sustainability framework (for example, in accordance with the Global Reporting
Initiative (GRI)) or an entity may have developed alternative, tailored disclosures.
An entity may elect to adjust the previously disclosed information such that it is
comparable with ESRS or the IFRS Sustainability Disclosure Standards (as
applicable) and thus may be presented on a side-by-side basis with the current
period disclosures. See considerations for disclosure of comparable information in
Question SRG 3-12.
Alternatively, we believe an entity may include prior year information that is not
comparable if all of the following conditions are met:
□ ‘Additional information’ under ESRS

For purposes of inclusion in sustainability reporting prepared in accordance
with ESRS, the information must be either prepared in accordance with ESRS
(including entity-specific disclosures) or meet the criteria for ‘additional
information’. ESRS 1 paragraph 114 limits additional information to
disclosures that stem from:

o other legislation which requires the entity to disclose sustainability
information
o other generally accepted sustainability reporting standards and

frameworks
For example, previously reported information prepared in accordance with

GRI may qualify as additional information if the alternative metric it is labelled
with lists the source and the disclosure meets the qualitative characteristics of
information (see following point). See SRG 5.6.2.2 for more information on the
disclosure requirements for additional information. Note that this condition is
not directly applicable to an entity reporting in accordance with the ISSB
standards, although the source of the prior year metric may be a factor in
assessing whether the qualitative characteristics of information are met.
□ Qualitative characteristics of information

The prior year disclosures must meet the qualitative characteristics of
information for sustainability reporting (ESRS 1 Appendix B and IFRS S1
Appendix D, see SRG 5.2). As discussed in Question SRG 3-12, if an entity
‘picks and chooses’ among previously provided sustainability information —
that is, it provides certain metrics but excludes others — it should particularly
focus on evaluating whether the disclosures meet the criteria of ‘faithful
presentation’, and ‘without bias in its selection or disclosure of information’.
□ Clearly labelled and not presented as comparative

Prior year information that is not comparable should not be presented side-by-
side or together with similar metrics or information prepared in accordance
with ESRS or the IFRS Sustainability Disclosure Standards (as applicable).
Further, the information should be labelled as to the source of the metric and
the entity should provide sufficient, transparent disclosure such that it is clear
that the information is not comparable.
In addition, a reporting entity should ensure that the prior period information does
not obscure material information as discussed in ESRS 1 QC 17 and IFRS S1
paragraph B27. This may be the case for example when there are significant
differences between the definition of, or measurement approach used to
determine, the prior period information compared to the current year.
3.6 Effect of changes in the entity structure

In preparing sustainability disclosures, a reporting entity may need to consider the
effect of acquiring or disposing of an entity, asset, or operation (collectively
referred to as an ‘acquisition’ or ‘disposal’, as applicable) during the reporting
period. For example, the acquisition of a new consolidated subsidiary would
expand the reporting boundary, while the sale of an asset may reduce or eliminate
the reporting entity’s exposure to a specific sustainability-related impact, risk, or
opportunity (as applicable). In addition, both acquisitions and disposals may affect
the comparability and relevance of base year amounts and prior period
information.
This section discusses how to report an acquisition or disposal in the current

period. There are also specific considerations for reflecting a change in entity
structure in greenhouse gas emissions reporting in accordance with the GHG
Protocol as discussed in SRG 7.10.7.1.

3.6.1 Effect on current period information
The sustainability reporting standards and regulations do not specifically address

the effect of an acquisition or disposal on current period sustainability reporting,
except for limited guidance related to GHG emissions (see SRG 7.8.2).
The sustainability standards and rules do specify, however, that a reporting entity
should apply the same reporting boundary (see SRG 3.2) and reporting period
(see SRG 3.5.1) as used for financial reporting purposes. Thus, an acquisition or
disposal would align with the treatment for financial reporting — that is, the entity,
asset, or operation would be included in the impacts, risks, and opportunities (as
applicable) for the period it is owned by the reporting entity. Following the financial
statement model, the effect of an acquisition or disposal on sustainability reporting
is summarised in Figure SRG 3-10.
Figure SRG 3-11

Effect of acquisitions and disposals in the current period on sustainability reporting
Policies, actions, and

Materiality assessment targets Metrics
Acquisition Incorporate and disclose Incorporate and disclose Include in metrics for the
the effect of the the effect of the period from the
acquisition in the acquisition on policies, acquisition date through
evaluation of impacts, actions, and targets the end of the reporting
risks, and opportunities period
(as applicable)
Include in metrics
reported as of year end
Disposal Disclose the effect of the Disclose the effect of the Include in metrics for the
disposal, including how it disposal, including its period from the
may affect impacts, effect on policies, beginning of the
risks, and opportunities actions, and targets reporting period through
(as applicable) the disposal date
Exclude from metrics
reported as of year end
An approach that incorporates the effect of both acquisitions and disposals in the
materiality assessment, policies, actions, and targets and metrics during the
period the entity, asset, or operation is owned by the reporting entity results in
connected information between sustainability and financial reporting. This
approach also ensures that the information used in metrics that combine
sustainability and financial information — such as intensity metrics — are
calculated on a consistent basis.
The alignment of sustainability reporting with consolidation under financial

reporting is also supported by the discussion of the “Transition Implementation
Group on IFRS S1 and IFRS S2” (TIG) at their meeting on 13 June 2024. As
highlighted in the meeting summary, the TIG concluded that for purposes of
sustainability reporting, the reporting entity should align with financial reporting
when assessing the impact of an acquisition or disposal. 41 Although the TIG issue
was specific to GHG emissions, their conclusion provides additional support for
the approach outlined above. See SRG 7.10.7 for further information on the GHG-
specific considerations.
41 Transition Implementation Group on IFRS S1 and IFRS S2, ‘Summary of Transition
Implementation Group on IFRS S1 and IFRS S2 meeting held on 13 June 2024’ (TIG June
Meeting Summary), paragraph 23(a), page 10.

3.6.1.1 Change in entity structure — disclosures
The reporting entity should provide narrative disclosures about material

acquisitions or disposals, including the transaction date and its effect. We believe
the extent of disclosure may depend on various factors, including the following:
□ Materiality of the acquisition or disposal

To ensure that the disclosures are not misleading, more extensive disclosures
may be appropriate for an acquisition or disposal that is material from a
sustainability perspective. Further, a reporting entity should consider whether
the understandability of the information would be enhanced by providing more
disclosure in the sustainability reporting related to an acquisition or disposal
that is material to the financial statements.
□ Level of aggregation and disaggregation

Both ESRS and the IFRS Sustainability Disclosure Standards require an entity
to consider the aggregation and disaggregation of information “when needed
for a proper understanding of its material impacts, risks and
opportunities”. 42 Consistent with the guidance, an entity may need to
disaggregate its sustainability disclosures to ensure users understand the
effect of an acquisition or disposal. For further information on aggregation and
disaggregation of disclosures, see SRG 4.3.4.4 for ESRS considerations, and
SRG 4.4.2.3 for requirements when reporting in accordance with the IFRS
Sustainability Disclosure Standards.
□ Nature of the entity acquired or disposed

The nature of the underlying business of the acquisition or disposal may also
affect the extent of disclosure. It may be appropriate to provide supplementary
disclosure, for example, of a strategic acquisition made to advance the entity’s
sustainability objectives.
In preparing the disclosures, the reporting entity should ensure that they meet the
qualitative characteristics of information for sustainability reporting (see SRG 5.2).
For an illustration of metrics disclosures related to changes in an entity’s structure,

see Example SRG 3-1.
Question SRG 3-14
Is there an effect on sustainability reporting if a reporting entity has plans to

dispose of an entity, asset, or operation but the disposal is not completed during
the period?
PwC response
A reporting entity’s plan to dispose of an entity, asset, or operation in the future
does not directly affect its current period sustainability reporting. The entity, asset,
or operation must be included in the entity’s materiality assessment process and
in its determination of impacts, risks, and opportunities (as applicable) until the
disposal is completed. Further, the entity, asset, or operations would still be
included in the reporting entity’s sustainability disclosures.
The reporting entity should assess, however, whether disaggregated disclosure is

required by ESRS or the ISSB standards (as applicable) or appropriate in the
circumstances. Whether disaggregated disclosure is required may depend on the
stage in the disposal process, the materiality of the entity, asset, or operations
from a sustainability perspective, and other factors, such as whether the planned
disposal is part of the reporting entity’s plan to meet a sustainability target or goal.
42 ESRS 1 paragraph 54; IFRS S1 paragraphs B29–B30 also discuss similar concepts.

The reporting entity should also consider if the disaggregated disclosures meet
the qualitative characteristics of information, including faithful representation,
verifiability, and neutrality (see SRG 5.2). The reporting entity should clearly label
the information and explain why it is disclosed.
Question SRG 3-15
Is there an effect on sustainability reporting if a reporting entity accounts for a

disposal as a discontinued operation for financial reporting purposes?
PwC response
Discontinued operations refer to distinct major business lines or operational
regions that are no longer part of the ongoing operations. 43 The post-tax profit or
loss from discontinued operations is disclosed separately in the consolidated
statement of profit or loss and other comprehensive income. 44
An entity should consider whether it should provide disaggregated information

related to a disposal, as discussed in Question SRG 3-14. ESRS E1 paragraphs
54 and 55 indicate that information should be disaggregated if there are different
material impacts, risks, or opportunities across countries, sites, or subsidiaries.
Because a discontinued operation relates to a distinct major business line or
operational region, the accounting treatment as a discontinued operation is an
indicator that disaggregated information is needed to enable the user’s
understanding of the effect on the continuing operations. Other factors to consider
in assessing whether disaggregation is required include the nature of the
business, the materiality of the entity, asset, or operations from a sustainability
perspective, and other factors, such as whether the planned disposal is part of the
reporting entity’s plan to meet a sustainability target or goal.
The reporting entity should also consider if the disaggregated disclosures meet
the qualitative characteristics of information, including faithful representation,
verifiability, and neutrality (see SRG 5.2). In addition, the entity should clearly
label the information and explain why it is disclosed.
Example SRG 3-1

Disclosing metrics related to changes in entity structure
HoldCo is a calendar year end reporting company that manufactures construction

materials out of recycled plastic. HoldCo has identified water consumption as a
material impact. As a result, management has determined that its required
disclosures include ‘total water consumption in m3’ and ‘total water consumption
in m3 in areas at water risk, including areas of high-water stress’ (ESRS E3
paragraphs 28(a) and 28(b)). For purposes of this example, assume that HoldCo
itself does not use any water.
HoldCo has two subsidiaries, Black Forest Co (BFC) and Main Manufacturing Inc.
(MMI), which both use water in their operations. In addition, BFC’s activities are
located in an area of abundant water, however, MMI’s activities, including its
factory, are located in an area of high-water stress. On 30 April 20X1, HoldCo
acquires Eucalyptus Partners (EP), an entity that constructs low-income housing.
In addition, on 1 November 20X1, HoldCo disposes of MMI. MMI’s operations are
located in the only area of water risk that HoldCo has identified as material.
43 IFRS 5 Non-current Assets Held for Sale and Discontinued Operations; ASC 205-20
Presentation of Financial Statements: Discontinued Operations.

44 IFRS 5 paragraph 33; ASC 205-20-45-3A.

What is HoldCo’s consolidated ‘total water consumption in m3’ and ‘total water
consumption in m3 in areas at water risk, including areas of high-water stress’ for
20X1?
Analysis
HoldCo obtains and prepares ’total water consumption in m3’ for each of its
subsidiaries in 20X1 as follows:
(Water in m3) BFC MMI EP
January 4,600 6,440
February 4,200 5,880
March 4,200 5,880
April 4,400 6,160
May 4,600 6,440 2,760
June 4,000 5,600 2,400
July 4,600 6,440 2,760
August 4,400 6,160 2,640
September 4,200 5,880 2,520
October 4,600 6,440 2,760
November 4,200 2,520
December 4,400 2,640
Total 52,400 61,320 21,000
Consolidated 134,720
Based on this information, HoldCo would prepare its disclosures as follows:
□ ‘Total water consumption in m3’

Total water consumption in m3 is equal to 134,720. Total water consumption
only includes activity at MMI and EP for the period during which they were
part of the consolidated group.
□ ‘Total water consumption in m3 in areas at water risk, including areas of high-

water stress’
ESRS E3 AR 28 provides guidance that the disclosure related to areas of
high-water stress should only include those areas identified as material.
Because MMI is the only material location, this disclosure relates only to its
information. As such, HoldCo would determine that its ‘total water
consumption in m3 in areas at water risk, including areas of high-water stress’
is 61,320 in m3.
For more information regarding water-related disclosures, see SRG 10, Water
[coming soon].

3.7 Changes to prior period information
[coming soon]
3.8 Transitional provisions

The sustainability reporting standards and regulations provide transitional reliefs
for certain disclosure requirements to facilitate the initial periods of reporting. The
amount of relief provided varies by provision but is typically available for one to
three years.
ESRS, the ISSB standards, and the SEC climate disclosure rules generally allow
an entity to omit comparative information in the first year of application. The other
reliefs provided, however, vary by framework. The following sections discuss the
transitional provisions provided by ESRS (see SRG 3.8.1), the IFRS Sustainability
Disclosure Standards (see SRG 3.8.2), and the SEC climate disclosure rules (see
SRG 3.8.3).
3.8.1 Transitional provisions — ESRS
The ESRS transitional provisions are described in ESRS 1. 45 The transitional

provisions do not always allow an entity to omit the information. In some cases,
the provision provides flexibility in how data can be calculated or permits omission
only if certain criteria are met. Figure SRG 3-11 summarises the transitional
provisions provided by ESRS.
Figure SRG 3-12

Summary of ESRS transitional provisions
Topic Transitional period Transitional provision
Entity-specific First three years May, as a priority:

disclosures
□ include entity-specific disclosures reported in prior
(see SRG 3.8.1.1) periods if the information meets qualitative
characteristics under ESRS; and
□ include supplementary disclosures to cover
sustainability matters that are material to the entity’s
sectors using available best practice or other
frameworks such as SASB Standards or GRI Sector
Standards
Value chain First three years □ If not all necessary information is available,
specified disclosures are required (note 1)
(see SRG 3.8.1.2)
□ May limit value chain information in the disclosure of
policies, actions, and targets to information available
in-house
□ May omit value chain information from metrics,
except for datapoints derived from other EU
legislation, as listed in ESRS 2 Appendix B
Comparative First year the □ May omit comparative information in the first year of
information disclosure is required required disclosure, including the disclosures in
ESRS 1 Appendix C which are not required in the
(see SRG 3.8.1.3)
first one to three years of reporting
45 ESRS 1 paragraphs 130–137.

Topic Transitional period Transitional provision
Phased-in Varies by □ Varies by disclosure; while some are broadly

disclosure disclosures, but applicable, others can only be applied by entities
requirements generally one to three with 750 or fewer average employees
years
(see SRG 3.8.1.4)
Note 1: The transitional provisions for value chain information relate to qualitative and
quantitative data gathering, and disclosure of policies, actions, targets and metrics; an
entity is still required to consider the value chain in its materiality assessment. See SRG
4.3.2.2 for more information about considering the value chain in the materiality
assessment.
Each of these transitional provisions is explained in more detail in the following

sections.
3.8.1.1 ESRS transitional provisions — Entity-specific disclosures
ESRS 1 paragraph 11 requires a reporting entity to develop entity-specific

disclosures to the extent ESRS do not address or do not sufficiently address a
material impact, risk, or opportunity. ESRS 1 paragraph 131 provides entities with
some flexibility in the source of entity-specific information provided during a three-
year transition period.
ESRS 1 paragraph 131
When defining its entity-specific disclosures, the undertaking may adopt

transitional measures for their preparation in the first three annual sustainability
statements under which it may as a priority:
(a) introduce in its reporting those entity-specific disclosures that it reported in
prior periods, if these disclosures meet or are adapted to meet the qualitative
characteristics of information referred to under chapter 2 of this Standard; and
(b) complement its disclosures prepared on the basis of the topical ESRS with an
appropriate set of additional disclosures to cover sustainability matters that
are material for the undertaking in its sector(s), using available best practice
and/or available frameworks or reporting standards, such as IFRS industry-
based guidance and GRI Sector Standards.
EFRAG IG 2 paragraph 90, page 23, further explains the nature of this relief
stating, “The provision of entity-specific disclosure under ESRS 1 paragraph 11 is
not optional in the first three annual sustainability statements. It is mandatory.”
ESRS 1 paragraph 131 is an example of a transitional provision that impacts the

nature of a disclosure but does not provide the right to omit the disclosure entirely.
3.8.1.2 ESRS transitional provisions — Value chain
ESRS 1 paragraphs 132 and 133 provide transitional provisions to lessen the
burden of the value chain reporting requirements in the first three years of
application. Although some of these provisions reference small- and medium-size
undertakings (SMEs), the reliefs are available regardless of whether the entities in
the value chain are SMEs. 46 After the expiration of the three-year transitional
period, all relevant disclosures will need to consider the upstream and
downstream value chain. A reporting entity is not, however, required to obtain

information from a SME in its value chain that exceeds the information the SME is
required to provide by the future ESRS for SMEs. 47
The effect of the value chain transitional provisions on various aspects of reporting
are discussed below.
Materiality assessment
ESRS 1 paragraph 132 requires an entity to provide certain minimum disclosures

if not all information about its value chain is available, including its efforts to obtain
that information and the reasons why it is not available.
For the first 3 years of the undertaking’s sustainability reporting under the ESRS,
in the event that not all the necessary information regarding its upstream and
downstream value chain is available, the undertaking shall explain the efforts
made to obtain the necessary information about its upstream and downstream
value chain, the reasons why not all of the necessary information could be
obtained, and its plans to obtain the necessary information in the future.
EFRAG IG 2 paragraph 82, page 22 clarifies that the value chain transitional
provisions provide a “temporary limit for the information on the [value chain] to be
reported during the first three years of reporting”. This limit, however, is with
respect to qualitative and quantitative data gathering; an entity is still required to
consider the value chain in its materiality assessment.
For more information regarding the materiality assessment, including

consideration of the value chain, see SRG 4.3.
Policies, actions, and targets
The transitional provisions in ESRS 1 paragraph 133 limit disclosures on reporting

policies, actions, and targets to information available ‘in-house’.
ESRS 1 paragraph 133(a)
For the first 3 years of its sustainability reporting under the ESRS, in order to take
account of the difficulties that undertakings may encounter in gathering
information from actors throughout their value chain and in order to limit the
burden for [small and medium entities (SMEs)] in the value chain:
(a) when disclosing information on policies, actions and targets in accordance
with ESRS 2 and other ESRS, the undertaking may limit upstream and
downstream value chain information to information available in-house, such
as data already available to the undertaking and publicly available information.
Policies, actions, and targets are not required to be disclosed unless the reporting
entity has adopted them (see SRG 6.5.2, SRG 6.5.3, and SRG 6.6.2,
respectively). Further, we would expect that entities that have adopted policies,
actions, and targets would have the necessary information for disclosures
‘available in-house’.

Metrics
There are specific transitional reliefs for the reporting of metrics, with limited
exceptions.
Excerpt from ESRS 1 paragraph 133
For the first 3 years of its sustainability reporting under the ESRS, in order to take
account of the difficulties that undertakings may encounter in gathering
information from actors throughout their value chain and in order to limit the
burden for [small and medium entities (SMEs)] in the value chain: …
(b) when disclosing metrics, the undertaking is not required to include upstream
and downstream value chain information, except for datapoints derived from
other EU legislation, as listed in ESRS 2 Appendix B.
The transitional provisions in ESRS 1 paragraph 133(b) allow an entity to exclude

upstream and downstream value chain information when preparing its disclosure
of metrics for the first three years of application, although this relief does not apply
to metrics derived from other EU regulations, as listed in ESRS 2 Appendix B.
3.8.1.3 ESRS transitional provisions — Comparative information
Comparative information is not required in the first year of application of ESRS.

Further, ESRS 1 paragraph 136 expressly notes that the relief from providing
comparative information is applicable the first time a disclosure is required.
For disclosure requirements listed in Appendix C List of phased-in Disclosure

Requirements, this transitional provision applies with reference to the first year of
mandatory application of the phased-in disclosure requirement.
This means, for example, that if in accordance with the phase-in provision, a
disclosure can be omitted in a reporting entity’s first sustainability statement,
comparative information is not required for that specific disclosure when it is
reported for the first time.
See SRG 3.8.1.4 for discussion of the phased-in disclosures discussed in ESRS 1
Appendix C.
3.8.1.4 ESRS transitional provisions— Phased-in disclosures
ESRS 1 Appendix C details disclosure requirements subject to a phase-in period.

In some cases, only reporting entities with an average of 750 or fewer employees
are eligible for the phased-in disclosures while others are available to all entities.
Phased-in provisions applicable to all entities
Certain of the phased-in disclosure requirements are available to any entity,

regardless of size. Figure SRG 3-12 summarises the phased-in disclosure
requirements for the general disclosures in ESRS 2.

Figure SRG 3-13
Summary of phased-in general disclosure requirements
Topic Transitional period Transitional provisions
Information Until the first year of May omit:

regarding significant application of sector
□ the breakdown of total revenue by significant ESRS
sectors required by specific ESRS
sectors
ESRS 2 SBM-1
paragraphs 40(b) □ the list of additional significant ESRS sectors
and (c)
Anticipated financial First three years □ First year — may omit information related to
effects disclosures anticipated financial effects
in ESRS 2 SBM-3
□ First three years — may disclose qualitative
paragraph 48(e)
disclosures related to anticipated financial effects, if
it is impractical to prepare quantitative disclosures
In addition, ESRS 1 Appendix C lists specific individual disclosure requirements

from the topical standards that are eligible for phase-in. The phased-in provisions
may apply to all information required by a given disclosure requirement or only
certain elements. Examples of omissions of a full disclosure requirement or only
certain elements are as follows:
□ Full omission of disclosure requirement in the first year —the disclosures

required by ESRS E3-5 Anticipated financial effects from material water and
marine sources-related risks and opportunities
□ Omission of only certain elements of the disclosure requirement in the first

year — reporting entities may omit reporting on non-employees, but are
otherwise still required to report information about employees under ESRS S1
-14 Health and safety metrics.
ESRS also provides a three-year phase in period related to the requirement to

provide information about the anticipated financial effects of material risks and
opportunities in the environmental topical standards. With one exception, in the
first three years of application, an entity may meet these requirements by
providing only qualitative information. This transition relief, however, does not
extend to the requirement in ESRS E2 paragraph 40(b) to disclose “the operating
and capital expenditures incurred in the reporting period in conjunction with major
incidents and deposits”. See SRG 9, Pollution [coming soon], for more
information on this requirement.
Further, note that this phased-in provision does not preclude an entity from fully
omitting the information about anticipated financial effects in the first year of
application.
Phased-in provisions restricted by average number of employees
Figure SRG 3-13 summarises the phased-in provisions available only to reporting
entities that do not exceed an average of 750 employees during the financial year
(on a consolidated basis where applicable).

Figure SRG 3-14
Phased-in disclosures for entities that do not exceed an average of 750
employees during the financial year
May be omitted
Disclosure Description First year First two

requirements years
ESRS E1-6 Scope 3 and total GHG emissions 

ESRS E4 (all) Biodiversity and ecosystems 
ESRS S1 (all) Own workforce 
ESRS S2 (all) Workers in the value chain 
ESRS S3 (all) Affected communities 
ESRS S4 (all) Consumers and end-users 
An eligible reporting entity that chooses to omit all disclosures under topical
standards ESRS E4 Biodiversity and ecosystems, ESRS S1 Own workforce,
ESRS S2 Workers in the value chain, ESRS S3 Affected communities, or ESRS
S4 Consumers and end-users is still required to assess the topics and provide
certain disclosures if the topics are material. 48 ESRS 2 paragraph 17 provides that
for each material topic, the entity is required to:
□ disclose the list of matters, which may be at the level of topic, sub-topic, or
sub-subtopic level in ESRS 1 AR 16
□ briefly describe its business model and strategy taking into account the
impacts
□ briefly describe time bound targets and the related progress
□ if targets relate to biodiversity and ecosystems, state whether those targets

are based on conclusive scientific evidence
□ briefly describe its policies
□ briefly describe its actions taken to “identify, monitor, prevent, mitigate,

remediate, or bring an end to actual or potential adverse impacts …, and the
results of such actions”
□ disclose metrics
These disclosures are considered ‘de minimis’ since they are not meant to meet
the minimum disclosure requirements in ESRS 2. In addition, although the entity is
required to assess whether each topic is material, EFRAG ESRS Q&A
Compilation of Explanations, Question ID 58 clarifies that separate disclosure of
material impacts, risks, and opportunities is not required. 49
See SRG 4.3 for discussion of the materiality assessment under ESRS.


Question SRG 3-16
What does it mean to “disclose metrics relevant to the matters in question” as

stated in ESRS 2 paragraph 17(e) when applying the phased-in provisions in
ESRS 1 Appendix C?
PwC response
EFRAG ESRS Q&A Compilation of Explanations, Question ID 58 clarifies that the
requirements in ESRS 2 paragraph 17 are intended to provide “a certain level of
‘minimal disclosures’ that are required regardless of whether the undertaking
chooses to apply the transitional provisions”. It indicates that an entity should
apply judgement in disclosing metrics related to: 50
□ number and nature of metrics disclosed — a reduced number of metrics and

not all the metrics that are material
□ level of granularity of the metric — for example, the metric may be presented
at a global level without breakdowns
Thus, an entity applying the transitional provisions may disclose the metrics at a
more aggregated level compared to what the topical standards require (for
example, excluding details on specific geographies or products/lines of service).
Question SRG 3-17
How do the value chain transitional provisions and phase-in transitional provisions
interact?
PwC response
An entity may be eligible to apply more than one transitional provision to a specific
disclosure requirement. We believe entities have flexibility in which provisions to
apply when more than one is available. We recommend, however, that entities
follow a step approach and apply them sequentially in the order outlined below:
□ Phased-in provisions in ESRS 1 Appendix C

An entity is permitted to omit information related to certain disclosure
requirements (or elements of disclosure requirements) but, if the topic is
material, the entity is required to report certain de minimis disclosures in
accordance with ESRS 2 paragraph 17. Some of these phased-in provisions
are only available to entities that do not exceed an average of 750 employees
during the financial year.
□ Transitional provisions in ESRS 1 paragraphs 132 and 133

These provisions reduce the burden of value chain reporting in the first three
years. Although an entity is still required to consider the value chain in its
materiality assessment, its disclosure of policies, actions, and targets may be
limited to information available in-house and that which is publicly available. In
addition, an entity is not required to disclose value chain information in its
disclosure of metrics and targets, except those listed in ESRS 2 Appendix B.
In addition, the entity can use estimation in developing information about the value
chain as discussed in SRG 5.4.4.

3.8.2 Transition provisions — ISSB standards
The transition provisions in IFRS S1 Appendix E apply to the first annual reporting
period in which an entity applies the IFRS Sustainability Disclosure Standards. 51
Figure SRG 3-14 summarises these provisions.
Figure SRG 3-15

Transition provisions included in the IFRS Sustainability Disclosure Standards
Topic Transition provision
Comparative information Not required in the first reporting period 52
Timing of issuance of Allows a delay in publishing first sustainability

sustainability information disclosures (see SRG 3.8.2.1)
Scope of reporting Permits sustainability reporting to only address

climate-related risks and opportunities in the first
year of application, including certain relief for
GHG emissions reporting (in accordance with
IFRS S2)
Although these transition provisions are included in the standards, individual

countries or regulators may adopt a different transition approach. As such, a
reporting entity preparing sustainability reporting to comply with country-specific
— or other regulatory — reporting requirements should ensure that it considers
any applicable additional or modified transition provisions.
See discussion of the transition provisions included in IFRS S1 below. See also
discussion of specific transition provisions related to climate reported in SRG 7.11.
3.8.2.1 Transition provisions — ISSB standards — timing of issuance
IFRS S1 requires an entity to publish its sustainability disclosures and annual

financial statements at the same time (see SRG 2.3.2 for more information). The
standard provides relief, however, in the first year of application, allowing an entity
to provide its sustainability disclosures later than the financial statements. The
amount of time allowed by IFRS S1 paragraph E4 varies by type of reporter as
summarised in Figure SRG 3-15.
Figure SRG 3-16

Timing of issuance of reporting in the first year of application of the ISSB
standards
Financial reporting Sustainability reporting
Reporting entity is required to publish Publish year end sustainability report together with the
a second quarter or half-year interim second quarter or half-year interim financial report
financial report
Reporting entity voluntarily publishes Publish year end sustainability report together with the
interim financial statements second quarter or half-year interim financial report, but
within 9 months after the reporting period date
51 IFRS S1 paragraphs E3–E6.

52 IFRS S1 paragraph E3.

Financial reporting Sustainability reporting
Reporting entity is not required to, Publish year end sustainability report within 9 months
and does not voluntarily, publish after the reporting period date
interim financial statements
A reporting entity should also consider any country-specific requirements for first
time application.
3.8.2.2 Transition provisions — ISSB standards — year one disclosure

requirements
In general, a report prepared in accordance with the IFRS Sustainability

Disclosure Standards requires an entity to consider “all sustainability-related risks
and opportunities” that could reasonably be expected to affect the entity’s
prospects. 53 In the first year of application, however, IFRS S1 paragraph E5
permits an entity to disclose information only on climate-related risks and
opportunities (in accordance with IFRS S2). The entity would also be required to
apply IFRS S1 to the extent that its requirements relate to the disclosure of
climate-related information.
In the second year of reporting, comparative prior year information would only be
required with respect to information disclosed in accordance with IFRS S2. 54 The
disclosures required in the first three years of application are illustrated in Figure
SRG 3-16.
Figure SRG 3-17

IFRS Sustainability Disclosure Standards in the first three years
Disclosure requirement Year 1 Year 2 Year 3
IFRS S2 — all except scope 3 Current year Comparative Comparative

required required required
IFRS S2 — scope 3 GHG Transition Current year Comparative

emissions relief available required required
Other sustainability risks and Transition Current year Comparative

opportunities relief available required required
The entity would need to disclose if transition reliefs are applied. There is also
additional relief available in IFRS S2 with respect to the methodology used to
measure greenhouse gas emissions in the first year of application. See discussion
in SRG 7.11.
3.8.3 Securities and Exchange Commission
The SEC climate disclosure rules do not provide transitional provisions other than
a phased compliance date based on the classification of the reporting entity and
delayed reporting of GHG emissions and certain disclosures related to estimates
and assumption (see Figure SRG 2-6 in SRG 2.4.1.3).
54 IFRS S1 paragraph E6.

Note that the SEC climate disclosure rules require disclosure of prior period
comparative information even in the year of first time application if the information
has previously been disclosed in an SEC filing. 55
Acknowledgements
Peter Flick
Heather Horn
Andreas Ohl
Dara Sarasati
Nina Schäfer
Olivier Scherer
Diana Stoltzfus
Hugo van den Ende
Valerie Wieman
Jan-Ben Wiese
Katie Woods
55SEC, Climate disclosure rules, Regulation S-X Item 14-01(d) and Regulation S-K Item
1505a(1).

Chapter 4:
Materiality for sustainability
reporting
4.1 Materiality for sustainability reporting –
chapter overview
Materiality is the key concept that determines what information should be included
in an entity’s sustainability reporting. This chapter discusses the materiality
assessment under the following sustainability reporting frameworks:

European Commission for purposes of compliance with the Corporate
Sustainability Reporting Directive (CSRD) in the European Union

Exchange Commission 1
See SRG 2, Applicability of sustainability reporting, for a discussion of the entities

subject to each of these reporting regimes.
This chapter is organised in the following sections:
□ Core materiality characteristics in each sustainability reporting framework

(SRG 4.2)
□ Materiality assessment under each framework
o ESRS materiality approach (SRG 4.3)
o ISSB standards materiality approach (SRG 4.4)
o SEC’s materiality approach (SRG 4.5)
This chapter also addresses frequently asked questions about materiality that
apply to multiple frameworks (SRG 4.6).



PwC | Materiality for sustainability reporting (as of 30 June 2024) 4-1


opportunities
to ESRS.
ESRS.





Meeting minutes of the Transition Implementation Group on IFRS S1 and IFRS
S2 (TIG) set forth the results of their discussions. Although non-authoritative, this
standards.
4.2 Core materiality characteristics in each

framework
A materiality assessment forms the basis for sustainability reporting by identifying
those impacts, risks, and opportunities (as applicable) that are material.
A sustainability-related impact is the effect an entity has on people and the

environment. Examples include an entity’s emission of greenhouse gases into the
atmosphere, discharge of pollutants into a river, gender pay disparity among an
entity’s employees, or human rights abuses in its value chain. Understanding
impacts on the environment and human wellbeing is based on, among other
things, scientific research and society’s view of acceptable and unacceptable
practices. Consequently, the understanding of impacts may evolve and change
over time.
Sustainability-related risks and opportunities relate to the financial effect that

sustainability matters have on an entity, such as its ability to generate cash flows
and create value in the short-, medium-, and long-term. These risks and
opportunities generally arise from the entity’s impacts on environmental, social,
and governance matters, or from its dependencies on the natural environment
and society. ESRS, the ISSB standards, and the SEC climate disclosure rules all
require an entity to identify and report material sustainability information.
Figure SRG 4-1 provides an overview of the core materiality characteristics for
these sustainability reporting frameworks.
5 July 2024.
2024.

Figure SRG 4-1
Core materiality characteristics by framework
IFRS Sustainability SEC climate disclosure

ESRS Disclosure Standards rules
Matters Sustainability-related Sustainability-related risks Climate-related risks

covered impacts, risks, and and opportunities
opportunities
Engagement ‘Central’ to the materiality Not mentioned Not mentioned

with affected assessment, especially for
stakeholders impacts 4
Materiality of Based on: Based on the decision- Investor focused

information making needs of primary
□ The significance of the
users
information
□ The decision-making
needs of the primary
users
□ The decision-making
needs of users whose
principal interest it
impacts
Users Primary users of general- Primary users of general- Investors

purpose financial reporting, purpose financial reports
and other users 5
This section highlights the definition of materiality under each framework and the
remainder of the chapter covers the requirements related to the materiality
assessment process by framework and addresses frequently asked questions.
Interoperability
Some entities may be required to — or choose to — report under multiple

sustainability reporting frameworks. Entities reporting under multiple frameworks
may want to design their materiality assessment process in a way that is
interoperable — that is, using an approach in which the materiality assessment
and the results may be used as the basis for reporting under multiple reporting
frameworks.
Each framework has its own definition of materiality that must be applied to
information; however, some of these definitions are aligned. For example,
information about a sustainability-related risk or opportunity that is material under
the ISSB standards will be aligned with information that is material from a financial
materiality point of view under ESRS. 6
This alignment is supported by the fact that ESRS and the ISSB standards use
the same wording to describe material information that is relevant to primary
users; that is, information is material for both frameworks if omitting, misstating, or
obscuring that information could reasonably be expected to influence decisions
that primary users of general purpose financial reports make on the basis of those
4 ESRS 1 General requirements, paragraph 24.

5 See SRG 4.3.2.1 for the definition of 'users’ under ESRS.
6 ESRS-ISSB Standards: Interoperability Guidance, Section 1.1, page 4.

reports. 7 ESRS and the ISSB standards also use the same definition for primary
users: existing and potential investors, lenders, and other creditors. 8
The SEC climate disclosure rules rely on the existing concept of materiality under
the US federal securities laws. There is no additional guidance in the rules related
to materiality. An entity that is reporting under the SEC rules and either ESRS or
the IFRS Sustainability Disclosure Standards could leverage the identified risks
under ESRS or the ISSB standards and then identify the specific risks which also
meet the definition of a climate-related risk under the SEC rules.
Throughout this chapter, we identify and describe the specific requirements

applicable to each reporting framework, and identify areas where there are
commonalities between ESRS and the ISSB standards.
4.2.1.1 ESRS materiality definitions
ESRS use a ‘double materiality’ approach to identify the sustainability-related

impacts, risks, and opportunities (IROs) that are relevant for reporting. An IRO is
relevant for reporting if it is material and relates to a sustainability matter. Double
materiality refers to the concept of having two perspectives, an impact materiality
perspective (inside-out), and a financial materiality perspective (outside-in).
□ Impact materiality assesses how an entity impacts people or the environment.

The impact materiality perspective is used to identify material impacts related
to a sustainability matter. 9
□ Financial materiality considers how people and the environment affect an

entity financially. The financial materiality perspective is used to identify
material risks and opportunities related to a sustainability matter. 10
ESRS suggest that the starting point for identifying material IROs is to identify and
assess impacts. 11
Once an entity has identified its material IROs following the double materiality
approach, an entity needs to map each IRO to the relevant matter.
‘Sustainability matters’ in ESRS are environmental, social, and governance

factors, including respect for human rights, anti-corruption, and anti-bribery
matters. 12 Some sustainability matters may have more than one material IRO
associated with it. A sustainability matter does not need to meet both the impact
and financial materiality perspectives to be material. A matter is material if it
meets either one or both perspectives.
Once the entity has identified material IROs and mapped them to material
sustainability matters, the reporting entity then determines the material information
that should be disclosed. ESRS define materiality of information using two
perspectives, the capacity of the information to meet the users’ decision-making
needs and the significance of the information. 13 The information’s significance is
determined in relation to the matter it depicts or explains.
7 ESRS 1 paragraph 48; IFRS S1 General Requirements for Disclosure of Sustainability-
related Financial Information, paragraph 18.

8 Commission Delegated Regulation (EU) 2023/2772, Annex II Table 2 ‘Terms defined in
ESRS’; IFRS S1 Appendix A.

12 Commission Delegated Regulation (EU) 2023/2772, Annex II.

4.2.1.2 IFRS Sustainability Disclosure Standards materiality definition
The IFRS Sustainability Disclosure Standards require the disclosure of material

information about sustainability-related risks and opportunities that could
reasonably be expected to affect an entity’s prospects. The scope of the
standards includes risks and opportunities that arise out of the interactions
between an entity and its stakeholders, society, the economy, and the natural
environment (that is, risks and opportunities that come from an entity’s impacts
and dependencies). 14
The term ‘materiality’ is used in the ISSB standards in the context of information
about sustainability-related risks and opportunities. Information is material if
omitting, misstating, or obscuring that information could reasonably be expected
to influence the decisions of primary users of general purpose financial reports. 15
An entity reporting in accordance with the IFRS Sustainability Disclosure

Standards needs to identify sustainability-related risks and opportunities that
could reasonably be expected to affect its prospects, and then report material
information about those risks and opportunities. The ISSB standards contain
specific sources of guidance that an entity should use when identifying material
information about its sustainability-related risks and opportunities. See section
SRG 4.4.3 for information about sources of guidance.
4.2.1.3 SEC materiality definition
The SEC climate disclosure rules require entities to provide disclosures about
climate-related risks in their SEC filings. The required disclosures cover strategy,
governance, risk management, targets and goals, greenhouse gas emissions, and
financial statements effects. The SEC rules address climate-related risks but do
not require disclosure of climate-related opportunities or impacts.
Consistent with other SEC rules and regulations, materiality is evaluated using the
existing US securities laws framework. The US Supreme Court has stated that a
fact is material if there is a “substantial likelihood that a reasonable investor would
consider it important” in making a voting or investment decision or if it would have
“significantly altered the ‘total mix’ of information made available”. 16 Determining
whether a matter is material requires an objective analysis of both quantitative
and qualitative factors.
4.3 ESRS materiality approach

The materiality assessment “is the starting point for sustainability reporting under
ESRS”. 17 ESRS do not prescribe an entity’s materiality assessment process but
instead provide a framework and certain requirements to assist entities in
developing a process.
An entity needs to perform a materiality assessment to determine what

information to include in its sustainability reporting. The decisions and judgements
made in that assessment will result in sustainability reporting tailored to an entity’s
impacts, risks, and opportunities. Fundamentally, an entity’s materiality
assessment process should result in a complete identification of all material
sustainability-related IROs, and disclosure in the sustainability reporting of
material information about those sustainability-related IROs. The ESRS double
14 IFRS S1 paragraph B2.

16 17 CFR 230.405 (definition of “material”); 17 CFR 240.12b-2 (definition of “material”).
See also Basic Inc. v. Levinson, 485 U.S. 224, 231, 232, and 240 (1988) and TSC
Industries, Inc. v. Northway, Inc., 426 U. S. 438, 449 (1977).

materiality approach can be divided into three main steps, as illustrated in Figure
SRG 4-2.
Figure SRG 4-2

ESRS materiality approach - overview
The materiality assessment process an entity follows is based on its individual

facts and circumstances. ESRS 2 includes disclosure requirements related to both
the materiality assessment process and its results, and certain topical ESRS
contain requirements to disclose the process that an entity applied even if there is
no material IRO identified for that topic.
The sections that follow provide a discussion of the basis for a double materiality
approach, and the process an entity could follow to perform a materiality
assessment that meets the requirements of ESRS.
4.3.1 Basis of double materiality
The following are the areas covered in this section.
□ Double materiality — definition (SRG 4.3.1.1)
□ Time horizons (SRG 4.3.1.2)
□ Relationships between IROs (SRG 4.3.1.3)
In each of the sections, we identify areas where there are common concepts
between ESRS and the ISSB standards.
4.3.1.1 Double materiality — definition
As the name implies, the double materiality approach has two dimensions: impact
materiality and financial materiality.
Impact materiality assesses how an entity impacts people and the environment.
The impact materiality perspective is used to identify material impacts related to a
sustainability matter.
Excerpt from ESRS 1 General requirements, paragraph 43
A sustainability matter is material from an impact perspective when it pertains to

the undertaking’s material actual or potential, positive or negative impacts on
people or the environment over the short-, medium- or long-term. Impacts include
those connected with the undertaking’s own operations and upstream and
downstream value chain, including through its products and services, as well as
through its business relationships.
Financial materiality considers how people and the environment financially affect
an entity. The scope of financial materiality for sustainability reporting is an
expansion of the scope of materiality applied to determine information to be

included in financial reporting. 18 The financial materiality perspective is used to
identify material risks and opportunities related to a sustainability matter.
A sustainability matter is material from a financial perspective if it triggers or could

reasonably be expected to trigger material financial effects on the undertaking.
This is the case when a sustainability matter generates risks or opportunities that
have a material influence, or could reasonably be expected to have a material
influence, on the undertaking’s development, financial position, financial
performance, cash flows, access to finance or cost of capital over the short-,
medium- or long-term.
The materiality assessment covers sustainability-related IROs “connected with the

undertaking through its direct and indirect business relationships in the upstream
and/or downstream value chain”. 19 See SRG 3.4.1 for information on the definition
of the value chain, and SRG 4.4.2 for detail on the ways in which IROs can arise
in the upstream and/or downstream value chain.
A sustainability matter is considered ‘material’ when it meets the criteria for impact
materiality, financial materiality, or both. 20 When identifying sustainability-related
IROs, an entity is required to consider the list of matters in ESRS 1 AR 16, as well
as identify any entity-specific sustainability matters.
Sustainability matters may have both impacts and risks associated with them and,
as illustrated in Figure SRG 4-3, may be material from both perspectives.
Figure SRG 4-3

Double materiality approach
4.3.1.2 Time horizons
The double materiality approach applies to sustainability-related IROs resulting

from events that occurred in the past and events that may occur in the future. As
such, consideration of time horizons is an essential aspect of an entity’s
materiality assessment. ESRS 1 requires the reporting period for sustainability
reporting to be consistent with that of the entity’s financial statements. The
materiality assessment, however, goes further back in time than the current


reporting period. Actual sustainability-related impacts may have happened in
either:
□ the current reporting period
□ previous reporting periods and are still impacting people or the environment
(for example, an oil spill that happened in a previous period that is still
negatively affecting a coastal ecosystem in the current reporting period)
Risks and opportunities may derive from past or future events. 21
Potential impacts as well as risks and opportunities require consideration of the

future in order to assess whether they are material. An entity assesses the
likelihood of occurrence of the impact and of the financial effect in the short-,
medium-, or long-term future.
It is important to note that the long-term time horizon is not limited; this results in
the need to consider potential impacts and risks and opportunities over longer
periods of time than typically used in financial statements. See SRG 3.5.3 for
information on the definition of the time horizon. Example SRG 4-1 illustrates the
assessment of a long-term cumulative impact.
Example SRG 4-1

Environmental impact in the entity’s own operations – cumulative impact in long
term
Farm Company operates several large farms that grow crops and use a large
amount of chemical fertiliser. The fertiliser has a low effect on the local ecosystem
in the short-term. If the entity continues to use the same amount of fertiliser every
year over the next several years, this will have a severe negative effect on local
biodiversity in the long-term. This effect will continue after the use of the fertiliser
has ceased.
Should Farm Company identify an impact associated with the use of fertiliser?
Analysis
Yes. While the current impact of the fertiliser use may be minimal, Farm Company
would need to evaluate the severity of the impact over the medium- and long-term
as well. The cumulative impact on the local ecosystem from years of fertiliser use
would need to be assessed to determine if it may cause a material impact.
For more information on how to consider long-term time horizons in the

assessment of sustainability-related risks, see Question SRG 4-12 and Example
SRG 4-10.
Commonalities and differences with the ISSB standards — time horizons
Both reporting regimes require entities to identify risk and opportunities over the
short-, medium-, and long-term. Although ESRS defines these periods and the
ISSB standards require an entity to define them (see SRG 3.5.3), we believe that
the risks and opportunities identified over the short-, medium-, and long-term time
horizons would be similar under both sets of standards. See SRG 4.4.1.3 for more
information about the consideration of time horizons in the ISSB standards.

4.3.1.3 Relationship between IROs
Impact and financial materiality are not mutually exclusive and are often
interrelated. Risks and opportunities are generally derived from either an entity’s
impacts or dependencies on natural, human, and social resources. In some
cases, risks and opportunities may derive from factors that appear to be unrelated
to an entity’s direct operations such as the consequences of climate change or
regulatory developments.
ESRS 1 paragraph 50
Dependencies on natural, human, and social resources can be sources of

financial risks or opportunities. Dependencies may trigger effects in two possible
ways:
(a) they may influence the undertaking’s ability to continue to use or obtain the
resources needed in its business processes, as well as the quality and pricing
of those resources; and
(b) they may affect the undertaking’s ability to rely on relationships needed in its
business processes on acceptable terms.
Sustainability-related IROs may also arise from an entity’s actions to address

another sustainability matter. 22 When performing the materiality assessment, an
entity must consider this interrelation; for example, whether its actions to pursue a
sustainability opportunity may lead to a material sustainability impact.
Figure SRG 4-4 provides simplified examples of sources from which

sustainability-related IROs may arise.
Figure SRG 4-4

Examples of sources of IROs
IRO Source Description
Oil spill Risk resulting from The entity causes an oil spill which damages the
entity’s impact environment (the actual impact) and harms the entity’s
reputation. This reputational damage could lead to financial
effects, such as reduced sales, and difficulties recruiting
new employees, and therefore may generate a material
financial risk for the entity.
Polluted water Risk resulting from An entity is dependent on a source of fresh water for its
entity’s production of soft drinks which becomes polluted. Fresh
dependency water in the area is scarce. The scarcity creates a risk for
the entity as it may lead to financial effects such as
increased costs to source unpolluted fresh water or to
clean up the pollution.
Social impacts of Impact arising An entity decides to close an operation that generates high
transition from actions to amounts of greenhouse gas emissions as part of its
address risks strategy to address its transition risks. Closing the
operation may have a negative impact on the entity’s own
workforce and the local community due to lost jobs.

IRO Source Description
Mining damage Impacts arising A car manufacturer switches from producing fossil fuel
from pursuit of powered vehicles to electric vehicles based on consumer
opportunities preferences. The batteries used in the electric vehicles
require rare minerals and the mining of the rare minerals
creates negative impacts on the environment.
Coastal erosion Risk unrelated to An entity with a factory running on renewable energy and
entity’s impacts producing low greenhouse gas emissions is located in a
coastal erosion area and is exposed to climate-related
physical risks, such as flooding or extreme weather.
See also Example SRG 4-9 for an example of a risk arising from an entity’s
dependency on a natural resource.
Many sustainability matters will have both impacts and risks associated with them.
A single sustainability matter (such as water consumption) may need to be
assessed for materiality under both approaches if it has both impacts and risks
associated with it. In this situation, a separate materiality assessment is required
for (1) impacts and (2) risks and opportunities. The materiality assessment of a
sustainability matter is not complete until all impacts, risks, and opportunities
associated with it have been evaluated through the impact and financial
materiality assessment, as applicable.
The factors considered in assessing an impact for materiality are not the same as
the factors considered when assessing risks and opportunities for materiality. See
SRG 4.3.2.4 and SRG 4.3.2.6 for detail on the factors considered in each
assessment.
Commonalities with the ISSB standards — identifying risks and

opportunities
Both ESRS and the ISSB standards refer to the concept of interconnectivity
between impacts, risks, and opportunities, as well as the way in which risks and
opportunities can arise from an entity’s interactions with natural, human, and
social resources. See SRG 4.4.1.1 for detail on how the ISSB standards describe
the connections between sustainability-related risks and opportunities and an
entity’s impacts and dependencies.
4.3.2 Step 1 — determine material IROs and related material sustainability

matters
The first step in the materiality assessment is to identify material sustainability-

related IROs and the related material sustainability matters. While ESRS do not
mandate a specific process for the identification of material IROs, the ESRS
specify three phases an entity needs to consider in this step, as outlined in Figure
SRG 4-5. 23
23 ESRS 1 AR 9.

Figure SRG 4-5
Three phases of step 1 – Process for determining material IROs and related
material sustainability matters – Phase 1 24
An outline of the topics covered in this section, following each of the three phases
that comprise the process for determining material IROs under ESRS, is as
follows:
□ Phase 1 — Understanding the context (SRG 4.3.2.1)
o Stakeholders
□ Phase 2 — Identification of the IROs (SRG 4.3.2.2)
o List of sustainability matters in ESRS 1 AR 16
o Due diligence
o Identification of IROs in the value chain
o Disaggregation of IROs
□ Phase 3 — Assessment and determination of material IROs (SRG 4.3.2.3)
o Impact materiality assessment (SRG 4.3.2.4)
o Impact materiality assessment – mitigation and remediation (SRG 4.3.2.5)
o Financial materiality assessment (SRG 4.3.2.6)
o Financial materiality assessment – mitigation and remediation (SRG

4.3.2.7)
o Groups (SRG 4.3.2.8)
o Scoring and thresholds (SRG 4.3.2.9)
Within this discussion, we identify areas where there are common concepts
between ESRS and the IFRS Sustainability Disclosure Standards. In the relevant
24 Based on EFRAG IG 1 Materiality Assessment, Figure 3, page 20.

sections, a cross reference is provided to the section where these concepts are
covered by the IFRS Sustainability Disclosure Standards.
Reassessment of material IROs
The process of identifying and assessing sustainability-related IROs is a dynamic

and iterative process, and not an activity that only takes place once. In order for
an entity to prepare its sustainability reporting, an entity is required to report on its
material sustainability-related IROs for each reporting period.
EFRAG IG 1 notes that an entity may conclude that the outcome of the materiality
assessment of the prior reporting period is still relevant and can be used as the
basis for sustainability reporting in subsequent years.
EFRAG IG 1 provides the following examples of changes or events that would

indicate that an entity’s previous assessment of its material IROs is no longer
relevant: mergers and acquisitions, change of key suppliers, a global event such
as a pandemic, entering a new market, a shift in social conventions, and changes
to scientific evidence or users’ needs. 25 In these cases, an entity is expected to
reperform the materiality assessment to ensure that its sustainability reporting
includes disclosure of all material information about its material sustainability-
related IROs.
4.3.2.1 Phase 1 — understanding the context
An entity’s sustainability-related IROs arise out of the interactions between an

entity and the economy, society, its stakeholders, and the natural environment
throughout an entity’s value chain. An entity’s identification of its material IROs
starts by establishing an overview of its activities and business relationships along
its value chain, including its key affected stakeholders. The understanding of an
entity’s context is a vital part of the overall materiality assessment process as
similar activities may generate different IROs depending on the context in which
those activities occur.
Management may take the following steps to understand the sustainability-related

aspects of an entity’s business activities and context: 26
□ Analyse an entity’s business plan, strategy, financial statements and other

information provided to investors and other stakeholders
□ Understand an entity’s activities, products, and/or services, and the

geographic locations of these activities
□ Map an entity’s business relationships and upstream/downstream value

chain, including type and nature of business relationships
□ Understand the relevant legal and regulatory landscape
□ Review externally published documentation such as media reports, analysis

of peers, existing sector-specific benchmarks, or general sustainability trends
and scientific articles
See Question SRG 4-11 regarding understanding an entity’s regulatory

landscape.
Commonalities with the ISSB standards — understanding the entity’s context
Under any sustainability reporting framework, gaining an understanding of the

entity, its context, operations, value chain, relevant laws and regulations, and
26 EFRAG IG 1 paragraphs 69-70, pages 20-21.

dependencies is important and could be leveraged across frameworks. See SRG
4.4.1.6 for more information about considerations for understanding an entity’s
context under the ISSB standards.
Stakeholders
The double materiality approach considers a broad range of stakeholders.

“Stakeholders are those who can affect or be affected by the undertaking.” 27
ESRS identifies two main groups of stakeholders — affected stakeholders and
users of sustainability reporting: 28
□ Affected stakeholders: individuals or groups whose interests are affected or

could be affected by an entity’s activities and its direct or indirect business
relationships across its value chain
□ Users of sustainability reporting: primary users of general-purpose financial

reporting and other users of sustainability reporting
Affected stakeholders may include employees and local communities, customers,

suppliers, and public authorities. The environment – including local and global
environmental systems and animal and plant species – may also be an affected
stakeholder and is often referred to as a “silent stakeholder”. 29
Stakeholders who can affect an entity include the ‘users’ of sustainability reporting
and may comprise investors and lenders, business partners and labour unions,
and public authorities.
Users of the sustainability reporting can affect an entity by their decisions to

provide resources to an entity and their interactions with an entity. ESRS include a
broad range of users for an entity’s sustainability reporting that it separates into
two groups. The first group of users includes the primary users of general purpose
financial reporting, comprising existing and potential investors, lenders, and other
creditors, including asset managers, credit institutions, and insurance
undertakings. The second group of users, referred to as “other users”, includes
the entity’s business partners; trade unions and social partners; civil society and
non-government organisations; governments; analysts; and academics. 30
Some stakeholders may be both a user of the sustainability reporting and affected
by an entity — for example, employees or business partners.
ESRS state that engagement with affected stakeholders is central to the

materiality assessment. 31 Engagement and dialogue with an entity’s key
stakeholders are useful tools for understanding an entity and its context. While
obtaining the views and interests of stakeholders, an entity might identify relevant
interactions and dependencies that could give rise to sustainability-related IROs.
ESRS do not explicitly require whether, when, or how to engage with

stakeholders, rather, ESRS note that “materiality assessment is informed by
dialogue with affected stakeholders”. 32 Therefore, an entity may engage with
affected stakeholders or their representatives, along with users of sustainability
reporting and other experts, to provide input or feedback on its materiality
assessment. An entity should apply judgement to determine the most effective
way in which to engage. ESRS 2 SBM-2 requires disclosure on whether

29 ESRS 1 AR 6 to AR 7.
30 ESRS 1 paragraph 22(b).
32 ESRS 1 AR 8.

engagement with stakeholders took place, and if so, how. See SRG 6.4.3 for
information on this disclosure requirement.
Engagement with stakeholders could include stakeholders related to an entity’s

own operations as well as stakeholders across an entity’s upstream and
downstream value chain. Which stakeholders are considered as part of an entity’s
process for identifying sustainability-related IROs will depend on an entity’s
specific facts and circumstances. An entity should consider who is affected by its
activities, who its sustainability reporting users are, and who will provide relevant
input to inform the materiality assessment.
EFRAG IG 1 suggests processes for how key affected stakeholders may be

identified.
(a) analysis of existing stakeholder engagement initiatives (such as via

communications, investor relations, business management, sales, and
procurement teams); and
(b) mapping affected stakeholders across the entity’s activities and business
relationships. Separate groups of affected stakeholders may be identified per
activity, product or service and are to be prioritised for a particular sustainability
matter.
It is important to find the individuals or groups whose perspectives would be most

useful when determining the materiality of a sustainability matter. This could
include working with investor relations to determine which stakeholders have
requested information on particular sustainability matters.
Engagement with stakeholders in ESRS is referred to as ‘dialogue’. 33 While this

may be a face-to-face conversation, we believe other ways to obtain the views
and interests of stakeholders include surveys or desk-top research. In practice,
some entities may use internal proxies with expertise on particular subjects or
who engage with stakeholders on a regular basis. 34
Some of an entity’s stakeholders may be ‘silent’ stakeholders, for example,

nature. An entity may consider other ways to ensure that the interests and views
of these stakeholders are built into the materiality assessment. These other
methods may include reviewing scientific papers and reports or engaging with
charities or NGOs as representatives of these silent stakeholders. 35
An entity may engage with stakeholders at any point in the materiality assessment
process. Entities can consider when it is most beneficial to engage with the
stakeholders.
33 ESRS 1 AR 8.
34 ESRS 1 AR 8.
35 EFRAG IG 1, paragraph 206, page 47.

Question SRG 4-1
Do ESRS require an entity to engage in an active dialogue with affected

stakeholders as part of the materiality assessment?
PwC response
ESRS 1 paragraph 24 states that engagement with affected stakeholders is
‘central’ to the materiality assessment; however, the ESRS do not mandate
specific behaviour with respect to stakeholder engagement. 36
The answer to FAQ 15 in EFRAG IG 1 addresses this question.
Excerpts from EFRAG IG 1, paragraph 198 and 199
198. Engagement with affected stakeholders is a tool that supports the

undertaking’s business processes (for example, due diligence) as well as the
management of sustainability matters. The undertaking, when preparing its
sustainability statement, can leverage its engagement with affected
stakeholders per its due diligence process, if applicable.
199. Stakeholder engagement informs the identification and assessment of
material impacts. This can help the assessment of severity, likelihood and
time horizons and also ensure the completeness of the material impacts
identified.
ESRS require an entity to perform a materiality assessment and to disclose its

material IROs. ESRS 2 contains specific disclosure requirements about the
process an entity undertook, whether and how an entity engaged with
stakeholders, and the outcome of the materiality assessment.
Commonalities with the ISSB standards — stakeholders
The ISSB standards do not require engagement with stakeholders as part of the
process to identify sustainability-related risks and opportunities. Engagement
may, however, be useful for an entity reporting under ISSB standards. See
Question SRG 4-8 for more information.
4.3.2.2 Phase 2 — identification of the IROs
Once an entity has an understanding of its context, the next phase is for an entity
to identify sustainability-related IROs relating to sustainability matters in its own
operations and across its upstream and downstream value chain. The result of
this phase will be a ‘long list’ of IROs needing further assessment. 37 This is the
second of the three phases specified by ESRS in the materiality assessment
process. 38

38 ESRS 1 AR 9.

Figure SRG 4-6
Three phases of Step 1 – Process for determining material IROs and related
material sustainability matters – Phase 2
The identification of the ‘long list’ of sustainability-related IROs should be

sufficiently granular to allow a materiality assessment to be carried out at the
individual IRO level. A sustainability-related IRO may arise at one or more
locations, sites, or operations. An appropriate level of detail of the sustainability-
related IROs will be needed to perform the materiality assessment. The long list
should identify to which of the entity's operations the IRO relates, as ESRS
require entities to disclose where in its own operations or its upstream and
downstream value chain the IRO arises. 39
ESRS suggest that the starting point for identifying sustainability-related IROs is
to identify impacts. 40 Under ESRS, impacts are either positive or negative, may be
either actual impacts or potential future impacts in the short-, medium-, or long-
term. 41
This section covers the Phase 2 — identification of the IROs — divided into the
following topics:
□ The list of sustainability matters in ESRS 1 AR 16
□ Due diligence
□ Identifying IROs in the value chain
□ Disaggregation of IROs
Commonalities of each topic with the ISSB standards is included in each section.
List of sustainability matters in ESRS 1 AR 16
One key step in the process of identifying IROs is the requirement for an entity to
consider the ESRS list of sustainability matters in ESRS 1 AR 16. 42 That list
divides sustainability matters into topics, sub-topics, and sub-sub-topics and maps
those different matters to the relevant topical ESRS. 43 Consideration of this list
supports an entity in identifying a complete list of material IROs.
39 ESRS 2 General disclosures, paragraph 48(a).

41 ESRS 1 paragraph 14(a).
42 ESRS 1 AR 16.

ESRS include sector-agnostic, sector-specific, and entity-specific sustainability
matters in its scope. 44 Currently, no sector-specific ESRS have been issued, and
so at the time of writing an entity must consider both the sector-agnostic
sustainability matters described in ESRS 1 AR 16 and entity-specific matters.
Identifying entity-specific sustainability matters is of equal importance to the

completeness of IROs in an entity’s sustainability reporting. The identification of
sustainability-related IROs cannot be solely based on the list of sustainability
topics in ESRS 1 AR 16.
Although there are no specific requirements for how to identify the long list of
IROs, the most common approaches are starting from the list of relevant matters
in ESRS 1 AR 16 and then identifying IROs, or the other way around.
Figure SRG 4-7

Approaches to identification of IROs
The first approach follows the process from sustainability matters to IROs, with an
entity starting by screening the list of matters summarised in ESRS 1 AR 16. The
process would then be completed by considering additional entity-specific
The second approach follows the process from IROs to sustainability matters, with
an entity starting by producing a list of IROs informed by existing processes (for
example, current sustainability reporting or internal processes such as due
diligence, grievance mechanisms, and risk management) and aggregating the
identified IROs based on the sustainability matters in ESRS 1 AR 16, which would
then be considered to determine the completeness of the long list of IROs. 45
Current sustainability reporting regimes and other reporting standards, such as

the industry-based guidance in the Sustainable Accounting Standards Board
(SASB) standards and Global Reporting Initiative (GRI) Sector Standards, are
possible sources an entity may use to facilitate the identification of entity-specific
sustainability matters. 46
For example, an entity engaged in oil exploration activities might use the GRI
Sector Standard for Oil and Gas and the SASB standard for Oil & Gas —
Exploration & Production as sources to facilitate the identification of entity-specific


ESRS 1 paragraph 130 states that the extent to which sustainability matters are
covered by ESRS are expected to evolve — in particular as a result of the future
adoption of sector-specific standards — and thus the need for entity-specific
disclosures related to entity-specific matters is expected to decrease over time. 47
Sector-specific standards are standards applicable to entities operating in a
particular sector and will address IROs that are likely to be material for entities in
those sectors. 48 EFRAG’s mandate includes the development of sector-specific
ESRS, expected to be released in June 2026. 49
Commonalities with the ISSB standards — list of sustainability matters
The ISSB standards have specific guidance about the sources that an entity is
required to consider and permitted to be considered when identifying its
sustainability-related risks and opportunities. See SRG 4.4.3 for more detail.
Due diligence
ESRS do not require an entity to undertake a due diligence process; however, if

an entity does have a due diligence process, the outcome of this process informs
the materiality assessment. 50
Due diligence is the process by which undertakings identify, prevent, mitigate and
account for how they address the actual and potential negative impacts on the
environment and people connected with their business. These include negative
impacts connected with the undertaking’s own operations and its upstream and
downstream value chain, including through its products or services, as well as
through its business relationship. Due diligence is an on-going practice that
responds to and may trigger changes in the undertaking's strategy, business
model, activities, business relationships, operating, sourcing and selling contexts.
This process is described in the international instruments of the UN Guiding
Principles on Business and Human Rights and the OECD Guidelines for
Multinational Enterprises.
The due diligence process can help with identifying negative impacts and
assessing their materiality. The due diligence process may also help an entity
prioritise negative impacts for management purposes, although prioritisation for
management purposes cannot be used as a rational for excluding material IROs
from the sustainability reporting. 51 An entity may also consider whether there are
sustainability-related risks or opportunities connected to impacts identified through
the due diligence process.
Commonalities with the ISSB standards — due diligence
The ISSB standards have specific guidance about the sources that an entity is
required to consider and those permitted to be considered when identifying its
sustainability-related risks and opportunities. See SRG 4.4.3 for more detail.
Identification of the IROs in the value chain
The materiality assessment also covers sustainability-related IROs in the value

chain that are connected to the entity. ESRS use the term ‘value chain’ in the

49 On 29 April 2024, the European Council approved a delay of the deadline for adoption of
certain sector-specific and non-EU European Sustainability Reporting Standards.


singular; however, entities may have multiple value chains. 52 See SRG 3.4.1 for
more information on the definition of the value chain.
Impacts
The connection to impacts that arise in the value chain is not limited to direct
contractual relationships between an entity and its value chain partners
(sometimes referred to as the ‘first tier’). It could also be indirectly connected
through business relationships in the value chain. 53
EFRAG IG 1 explains that an entity may be connected to an impact in several

ways.
Figure SRG 4-8

Types of connection of impacts through the value chain 54
Type of connection Description
The impact is directly An impact is directly caused by the entity when the entity is solely responsible for
caused by the entity impacts that directly result from its operations, products, or services.
The entity contributed The entity contributes to an impact when the impact is not single-handedly
to the impact caused by the entity’s actions or omissions, but the impact is generated together
with the actions or omissions of a third party.
An entity may also contribute to the impact by facilitating or incentivising another
party to cause or contribute to an impact. For example, an entity may be
indirectly pressuring suppliers to breach labour standards by imposing stringent
production deadlines and prices.
The impact is directly The entity did not cause or contribute to the impact, but the impact is linked to
linked to the entity the entity’s operations, products, or services through a business relationship.
Business relationships are not limited to contractual relationships but also
include actors across the entire upstream and downstream value chain (that is,
beyond the ‘first tier’).
Refer to Example SRG 4-2
An impact directly linked to an entity is not necessarily less severe than an impact
caused or contributed to by an entity. 55 The materiality assessment of impacts
begins by evaluating the severity of the impacts on the affected stakeholders,
which remains the same irrespective of the nature of the connection between an
entity and the impact.
Whether an entity has caused, contributed to, or is directly linked to an impact is

important when understanding how an entity may address the impact through its
policies, actions, or targets. When an entity is less directly involved with an
impact, it may not be able to influence the actors in its value chain to change their
behaviour. In these situations, an entity’s strategy to manage the impact may rely
on its business relationships, such as changing existing distributors or suppliers if
those value chain actors do not operate in a manner that is consistent with an
entity’s sustainability policies and strategies.
As noted above, the impact materiality assessment is based on the severity of the
impact on the affected stakeholders. An entity’s lack of control or influence on
52 EFRAG IG 2 Value chain, paragraph 24, page 10.


actors in the value chain is not a factor when assessing the severity of an impact
or its materiality. 56
Risks and opportunities
Material risks and opportunities might arise in an entity’s value chain. This may
occur as a result of dependencies an entity has in its value chain, or risks or
opportunities that relate to impacts in its value chain.
Value chains also include financial relationships. ESRS clarify that, as an

example, a sustainability-related IRO can also be connected to an entity through a
financial loan.
Excerpt from ESRS 1 AR 12(b)
If the undertaking provides financial loans to an enterprise for business activities

that, in breach of agreed standards, result in the contamination of water and land
surrounding the operations, this negative impact is connected with the
undertaking through its relationship with the enterprise it provides the loans to.
Therefore, when considering IROs that arise in the value chain, an entity should
also consider IROs that might result from the business relationships it has in
relation to financing and investment.
Entities operating in the same sector may not identify the same material
sustainability-related IROs, as they may have different value chains. This could be
the case even for entities that have the same value chain(s), as an entity’s IROs
depend on the business model it has implemented. Different actors in the value
chain may generate different sustainability related IROs. Therefore, obtaining an
understanding of an entity’s specific value chain(s) is necessary to identify an
entity’s material IROs.
The process of understanding an entity’s value chain may include obtaining

information about the following: 57
□ location and characteristics of the suppliers (not constrained to direct

contractual relationships)
□ users of the entity’s services and goods
□ how the entity’s goods are treated in terms of waste at the end of their life
□ who may be affected by the entity’s services or goods
An entity’s value chain can be extensive; however, ESRS do not require

information on “each and every actor in the value chain”. 58 The materiality
assessment should focus on understanding areas where material IROs are
“deemed likely to arise, based on the nature of the activities, business
relationships, geographies, or other factors concerned”. 59

57 EFRAG IG 2 paragraph 97, pages 24-25.

EFRAG IG 2 includes the following examples of relationships where material IROs
are likely to arise: 60
□ actors associated with ‘hot spots’ in the value chain who are likely to expose
to actual or potential impacts
□ actors showing key dependencies in terms of products or services
See also Figure SRG 4-19 in SRG 4.4.1.7 for considerations that we believe may
assist an entity in identifying where sustainability-related risks and opportunities
arise in the value chain. An entity is required to make reasonable efforts to obtain
necessary information about its value chain. 61 A lack of primary data from the
value chain does not permit an entity to not perform the assessment to identify
material sustainability-related IROs. In the absence of primary data, an entity must
use available secondary data for its identification of material IROs. This may
include different sources such as publicly available reports and studies as well as
sector proxies to identify and assess material IROs in the value chain. 62 See SRG
5.4.2 for discussion of primary and secondary data.
For example, if the entity cannot track the origin of the components used in its
products, the entity may consider the sustainability-related IROs associated with
global value chains for similar types of components to identify its IROs. The
assessment of identified IROs may rely on studies that are publicly available, such
as studies on the use of child labour or deforestation in the agricultural sector.
Example SRG 4-2

Social impact and risk connected to an entity through an indirect business
relationship in the upstream value chain
Fabrics Corp is a fashion retailer. Fabrics Corp purchases clothing from a number
of global suppliers. Connections Ltd is Fabrics Corp’s most significant supplier.
Connections Ltd purchases clothing from Fabric Manufacture Ltd, which produces
the majority of clothing sold in Fabrics Corp’s retail outlets.
The labour conditions in Fabric Manufacture Ltd’s production facility do not meet
international standards. Stakeholder groups have raised awareness about the
conditions at Fabric Manufacture Ltd, which has resulted in negative press
attention for Fabrics Corp. While this negative press has not resulted in a material
drop in revenue in the current period, the damage to Fabric Corp’s brand is
reasonably expected to have a significant effect on future revenues in the medium
to long term.
Should Fabrics Corp identify possible impacts and risks associated with the labour
conditions at Fabric Manufacture Ltd?
Analysis
Yes. The impact of the labour conditions at Fabric Manufacture Ltd is connected
to Fabrics Corp because the impact is directly linked to Fabrics Corp’s products
through its indirect business relationship with Fabric Manufacture Ltd through
Connections Ltd. In identifying possible impacts and risks in the value chain,
Fabrics Corp would consider that Connections Ltd is relying on Fabric
Manufacture Ltd, an entity engaging in poor labour practices. This can generate
actual and potential impacts on workers in the value chain. Fabrics Corp would
need to assess these impacts for materiality.


Fabrics Corp is also exposed to financial risk (for example, expected financial
effect on future revenue, or increasing costs from changing suppliers) and should
assess that risk for materiality as well.
Commonalities with the ISSB standards — Value chain
Both ESRS and the ISSB standards require consideration of risk and
opportunities that arise in an entity’s upstream and downstream value chain. We
believe that the definition of the value chain would be analogous between the
reporting standards, as discussed in SRG 3.3.
See SRG 3.4 for more information on the definition of the value chain, and SRG
4.4.1.7 for more information on the consideration of the value chain in the ISSB
standards.
Disaggregation of IROs
During the process of identifying sustainability-related IROs, an entity should

ensure that IROs of a dissimilar nature are not aggregated. Impacts cannot be
aggregated with risks or opportunities as the assessment process is distinct for
impacts and for risks and opportunities. In addition, positive impacts should not be
aggregated (netted against) negative impacts, and risks and opportunities should
not be aggregated (netted against each other). 63
Aggregation and disaggregation of sustainability-related IROs should be driven by

a proper analysis of the nature and characteristics of sustainability matters to be
disclosed and by an understanding of the information needs of stakeholders. The
list of material IROs resulting from this process should be at a sufficient level of
detail to provide all material information about those IROs. 64
Aggregation may be relevant when the IRO has a uniform effect across
geographies and sectors. For example, if an entity identifies an impact related to
greenhouse gas emissions, that impact might be aggregated across all its emitting
sites. 65 An entity should ensure that aggregation does not obscure the specificity
and context necessary to interpret information about the IRO. 66
For information on disaggregation of information, see section SRG 4.3.4.4.
4.3.2.3 Phase 3 — assessment and determination of material IROs
Once the ‘long list’ of sustainability-related IROs has been identified, an entity
should assess the list to determine which IROs are material. This is the third of
the three phases specified by ESRS in the first step of the materiality assessment
process. 67

67 ESRS 1 AR 9.

Figure SRG 4-9
Three phases of Step 1 – Process for determining material IROs and related
material sustainability matters – Phase 3
This section will cover the third phase — assessment and determination of
material IROs — divided into the following topics:
□ Impact materiality assessment (SRG 4.3.2.4)
o Actual negative impacts
o Potential negative impacts
o Positive impacts
□ Impact materiality assessment – mitigation and remediation (SRG 4.3.2.5)
□ Financial materiality assessment (SRG 4.3.2.6)
□ Financial materiality assessment – mitigation and remediation (SRG 4.3.2.7)
□ Groups (SRG 4.3.2.8)
□ Scoring and thresholds (SRG 4.3.2.9)
Most sections include identified areas where there are common concepts between
ESRS and the IFRS Sustainability Disclosure Standards. Note that the sections
on impact materiality do not have direct commonalities to the ISSB standards. In
the sections on financial materiality, a cross reference is provided to the section
where similar concepts are covered by the ISSB standards.
The materiality assessment of sustainability-related IROs is based on quantitative

or qualitative information, or a combination of both. While qualitative information
may provide context, EFRAG IG 1 emphasises that “quantitative measures of
IROs are objective evidence of their materiality” and should be used in the
assessment where possible. Quantitative information could corroborate the
conclusion where qualitative information led to diverse views on a matter, or the
matter was close to the threshold of being material or not material. 68
68 EFRAG IG 1 paragraphs 179 and 182, pages 43-44.

4.3.2.4 Phase 3 — assessment and determination of material IROs — impact
materiality assessment
The process for assessing the materiality of an impact depends on whether the
identified impact is actual or potential, positive or negative. Figure SRG 4-10
illustrates the factors to consider in the assessment of impacts.
Figure SRG 4-10

Assessing materiality of impacts
Actual negative impacts
Actual negative impacts are assessed for materiality based on their severity. The
severity of an impact should be understood and assessed in relation to the
affected stakeholders (that is, impacted people and environment), not in relation
to the reporting entity. The size of the reporting entity does not factor into the
assessment.
Severity is comprised of three factors: 69
□ Scale
How grave the impact is, how important or significant the impact is to those
affected by it (people and the environment).
□ Scope
How widespread the impact is, for example, in terms of environmental
damage, geographical spread or the number of affected individuals.
□ Irremediable character
whether the impact can be remediated, and if so to what extent it can be
remediated (for example, restoring the environment or affected people to their
prior state). For example, the extinction of a native species of fish due to the
pollutants emitted into a lake is clearly irremediable. If instead, the pollutants
have caused only the reduction of the population of fish, the impact might be
able to be remediated. The irremediable character is an inherent
characteristic of a negative impact only. If it is very difficult or not possible to
remediate the impact, this would increase the severity of the impact.
Any of the factors can make an impact severe, but often they are interdependent
and interrelated. 70 For example, the irremediable character of an impact may be
69 ESRS 1 paragraph 45 and ESRS 1 AR 10.

70 ESRS 1 AR 11.

affected by its scale and scope and the scale of an impact may depend on its
irremediable character.
Potential negative impacts
Potential negative impacts are assessed for materiality based on their severity
and their likelihood of occurring. 71 When assessing the severity of a potential
impact, the assessment of scale and scope should incorporate the cumulative
effect of the impact over the short-, medium-, and long-term time horizons.
ESRS specify that for potential negative human rights impacts, the severity of the
impact takes precedence over its likelihood. 72 For all other types of potential
negative impacts, severity and likelihood should be considered together when
determining the materiality of the potential negative impact.
Likelihood may be evaluated quantitatively or qualitatively, depending on the

information available. 73 The lack of quantitative information about the likelihood of
an impact does not exempt an entity from assessing the materiality of that impact.
The assessment of likelihood of a potential impact occurring would incorporate an

entity’s history, as past incidents may be indicative of a higher likelihood of a
similar incident occurring in the future. Actual impacts that have occurred may
have possible future potential impacts associated with them. An entity may also
consider prevalence of similar incidents in the industry.
Positive impacts
Actual positive impacts are assessed for materiality based on their scale and
scope. 74 As with actual negative impacts, the scope of an actual positive impact
can be understood as the extent of the effect – either geographically or
numerically – and the scale of the impact can be understood as its significance or
importance to the affected stakeholder.
Potential positive impacts are assessed for materiality based on their scale and
scope, and their likelihood of occurrence. 75
Question SRG 4-2
What is a positive impact?
PwC response
ESRS do not provide a specific definition for positive impacts. We believe that
using the definition in the “Positive Impact Manifesto from the UN Finance UNEP
Initiative (2017)” may be helpful for entities when determining whether a specific
action is a positive impact. According to this manifesto, a positive impact may
exist only once any potential negative impacts to any of the sustainability matters
“have been duly identified and mitigated”. 76
Using this definition, positive impacts should be clearly distinguished from actions
to mitigate negative impacts. Therefore, when considering positive impacts, we
believe entities should carefully assess whether the activity results in a positive
impact or is an action to remediate or mitigate a negative impact.

72 ESRS 1 AR 11.
76 UNEP Finance Initiative, “Positive Impact Manifesto”, page 2

For example, the process of reducing greenhouse gas emissions would be
considered an action to address a negative impact, not a positive impact in its
own right.
4.3.2.5 Phase 3 — assessment and determination of material IROs — impact

materiality assessment — mitigation and remediation
An entity may have measures in place to address a negative impact. ESRS

contain no specific requirements on how to consider mitigation or prevention
actions when evaluating negative impacts. EFRAG IG 1 FAQ 23 outlines a
general principle which states that an entity should assess environmental impacts
before any mitigating actions. 77 The principle is linked with the general objective in
ESRS, which directs an entity to provide information on how it manages its
material impacts over time.
When applying the principle outlined by EFRAG IG 1 FAQ 23, we believe it is

reasonable to make a distinction between future actions that an entity takes to
manage, mitigate, or remediate its impacts (which should not be considered in the
materiality assessment), and the inherent design of an entity’s operations.
The design or attributes of an entity’s operations may prevent or mitigate impacts

from occurring. These inherent attributes do not require actions on behalf of an
entity but are existing attributes of an entity’s operations.
We believe examples of these types of inherent attributes could include:
□ a flood wall built around a manufacturing facility
□ installed employee safety equipment preventing access to dangerous

machinery
□ coding of the IT system to require two employees to approve payments
Future actions to mitigate impacts, or future plans to change an entity’s facilities or

operations are not to be considered inherent attributes.
Although not explicitly mentioned in EFRAG IG 1 FAQ 23, we expect an entity to

consider the inherent design or attributes of its operations when assessing the
materiality of impacts. For example, if an entity has installed a new piece of
production machinery that uses significantly less water than the previous
machinery, the entity should consider the water usage of its new machinery when
assessing its water consumption impacts.
Actual impacts
Based on the principle described in EFRAG IG 1 FAQ 23, actual impacts are
assessed for severity based on the impact that has occurred in the reporting
period or a prior period. Successful prevention or mitigation actions an entity had
in place prior to the actual impact occurring may have decreased the severity of
the actual event as they may have influenced the severity of the actual impact that
occurred. 78
Any remediation, restoration, and compensation activities performed after the

event are not taken into account when assessing the scale and scope of the
actual impact in the reporting period in which the actual impact occurs. 79
77 EFRAG IG 1 paragraphs 228–233, pages 53-54.

78 EFRAG IG 1 paragraph 230, pages 53-54.
79 EFRAG IG 1 paragraph 230(a), page 53.

When assessing the irremediable character of the actual impact, an entity will
consider whether it is possible to remediate the impact. The irremediable
character of the impact is an inherent characteristic of the impact itself and is not
influenced by whether or not an entity has taken any remediation action after the
impact occurred. Example SRG 4-3 illustrates how to consider remediation
actions in the assessment of materiality.
Some actual impacts may last for several years and span multiple reporting
periods. If an actual impact spans multiple reporting periods, an updated
materiality assessment should be performed based on the severity of the actual
impact in each reporting period. 80 Ongoing remediation, restoration, and
compensation activities in a reporting period are indicators that an actual impact
still exists.
The reassessment of severity of actual impacts spanning multiple years should be

done consistently with the assessment of actual impacts that have occurred
during the current year; that is, it should be consistent with the principle described
by EFRAG IG 1 FAQ 23.
We believe a reasonable approach to assessing the materiality of an actual

impact in the current period deriving from an event that occurred in a previous
period is to take into account the remediation, restoration, and compensation
actions that have been completed in previous periods if these actions have
reduced the scale or scope of the actual impact (see Example SRG 4-4). We do
not believe an entity should consider the remediation or mitigation actions that
took place during the current reporting period – similar to the approach used for
actual impacts that relate to events that occur in the current reporting period.
Example SRG 4-3

Assessing materiality of actual negative impacts when remediation actions have
been implemented
In March 20X1, measures implemented by Gray PLC to prevent pollution from

entering a local river failed and pollution entered the waterways contaminating a
local aquifer. The pollution event produced more than one negative impact, as it
contaminated soil and water and impacted biodiversity and local communities
using the aquifer for domestic purposes.
Gray PLC has immediately taken actions to remediate, cleaning the soil and the
aquifer. Gray PLC has also publicly announced a plan to restore the area where
the contamination occurred.
How should remediation actions be considered in the assessment of the actual

impact in Gray PLC‘s 20X1 sustainability reporting?
Analysis
When assessing the severity of the event, Gray PLC should assess the scale,
scope, and irremediable character of the actual impacts produced by the pollution
on the environment and local community. The fact that Gray PLC has taken
actions to remediate the negative impacts produced by the pollution and has
plans to restore the damaged area does not change the severity of the event itself
in the current period. Gray PLC should assess the materiality of the impacts
without considering the actions taken in response to the incident.
80 EFRAG IG 1 paragraph 230(b), page 54.

Potential impacts
For potential impacts, EFRAG IG 1 FAQ 23 notes that an entity has to assess
potential impacts that relate both to its existing and planned operations. EFRAG
IG 1 FAQ 23 provides an example of a future planned operation and states that at
the time of performing the materiality assessment, an entity cannot take into
account mitigation or remediation techniques that do not yet exist. 81 No further
guidance on the assessment of potential impacts is provided.
In the absence of specific guidance, we believe a reasonable approach should be

taken to assess the materiality of potential impacts. For potential impacts that
relate to an entity’s existing operations, we believe applying the principle
described for assessing actual impacts would be a reasonable approach — that
is, not considering possible future mitigating or remediation actions when
assessing the scale and scope of a potential impact.
We believe that it would be appropriate to consider the inherent attributes of an

entity’s operations when assessing the likelihood and magnitude of potential
impacts.
For example, when assessing the potential impact associated with an oil spill, the
entity should consider the inherent design of its production processes and
pipelines, including past incidents of oil spills. Example SRG 4-4 illustrates these
considerations.
EFRAG IG 1 FAQ 23 mentions that a similar concept to the principle outlined for
environmental impacts also apply to social impacts. 82 Although not explicitly
mentioned in EFRAG IG 1 FAQ 23, we believe similar principles could also
provide a reasonable approach for assessing governance impacts.
Example SRG 4-4

Links between actual impacts, ongoing remediation activities, and potential
impacts – oil spill
Sea Corp PLC is an oil and gas company that drills for and produces oil offshore.
In the reporting period 20X0, one of Sea Corp PLC’s underwater pipelines
developed a serious fault resulting in a large oil spill.
In the subsequent year, 20X1, Sea Corp PLC placed a cap on the faulty pipeline
to prevent further oil from spilling and initiated a multi-year clean-up effort to
restore the areas affected by the oil spill.
In 20X4, Sea Corp PLC has determined its clean-up efforts are complete based
on independent scientific surveys of the area, and as such plans no further
remediation work. The timeline is illustrated as follows.
How should Sea Corp PLC assess actual and potential impacts as a result of the
oil spill in its sustainability reporting for 20X0 through 20X4?
81 EFRAG IG 1 paragraphs 231-232, page 54.


Analysis
Sea Corp PLC would assess the actual and potential impacts as follows.
20X0 20X1 to 20X3 20X4
Actual impact The oil spill Sea Corp PLC still When clean-up
results in actual has an actual impact activities are
impacts that from the 20X0 oil spill complete, Sea Corp
should be which should be PLC would re-assess
assessed for assessed for the severity of the
materiality in the materiality. actual impact
reporting period. associated with the
The severity of the
20X0 oil spill and may
actual impact in
determine that the
subsequent years
actual impact is no
may decrease as
longer material.
clean-up efforts
progress.
Potential The oil spill in The oil spill in 20X0 may be an indicator of a higher likelihood of
impact – 20X0 may be an failure in the pipeline. In addition, Sea Corp PLC would assess a
original indicator of a potential impact associated with the likelihood that the cap installed
pipeline higher likelihood on the pipeline (an inherent attribute of the operations) fails in the
of failure in the future.
pipeline in the
future.
Potential impact – other pipelines Sea Corp PLC would assess the potential impact of an oil spill
occurring in its other pipelines, taking into account the inherent
characteristics of its other pipelines and considering that the failure
of one pipeline might indicate a higher likelihood of failure in
pipelines with similar characteristics.
4.3.2.6 Phase 3 — assessment and determination of material IROs —

financial materiality assessment
Sustainability-related risks and opportunities are assessed based on their

likelihood of occurrence and the potential magnitude of their financial effect. 83
Financial effects are defined as the effects from risks and opportunities that affect
an entity’s financial position, financial performance and cash flows, access to
finance, or cost of capital over the short-, medium-, or long-term. 84
83 ESRS 1 paragraph 51 and ESRS 1 AR 15.


Figure SRG 4-11
Assessing risks and opportunities for financial materiality
Entities should develop a methodology for assessing and determining material

risks and opportunities.
Financial materiality for the sustainability reporting is an expansion of the

materiality concept under the financial statements; however, differences are
expected to arise between information that is financially material for the financial
statements and information that is financially material for the sustainability
reporting.
The EFRAG IG 1 specifically notes that differences may arise due to the
sustainability reporting’s inclusion of risks and opportunities arising in the value
chain, the general focus of the sustainability reporting on events occurring in the
future and on a long-term horizon, and the effect of risks which might not yet be
captured in the financial statements. 85 For example, if an entity engages in
unsustainable practices and is a target of significant pressure from activist groups,
this may result in a reduction in cash inflows caused by the damage to an entity’s
brand. Even though the brand is not recorded as an asset in the financial
statements, the risk could still affect its future cash flows.
In assessing whether a risk or opportunity is financially material, an entity should

determine if it is likely that the risk or opportunity will affect the entity’s business,
cash flows, access to finance, or cost of capital.
Excerpt from ESRS 1 AR 14
In this context, the undertaking shall consider:

(a) the existence of dependencies on natural and social resources as sources of
financial effects (see paragraph 50);
(b) their classification as sources of:
i. risks (contributing to negative deviation in future expected cash inflows or
increase in deviation in future expected cash outflows and/or negative
deviation from an expected change in capitals not recognised in the financial
statements); or
ii. opportunities (contributing to positive deviation in future expected cash
inflows or decrease in deviation in future cash outflows and/or positive
deviation from expected change in capitals not recognised in financial
statements).
The inclusion of access to finance and cost of capital in the financial materiality
assessment brings in an assessment of how other market participants (for
example, finance providers and investors) may interact with an entity in the future
as a result of its actions related to sustainability.
85 EFRAG IG 1 paragraph 166–167, pages 39-40.

The assessment of material risks and opportunities should be based on
quantitative and qualitative factors. The effect of a risk or opportunity on an entity
does not need to be quantified. ESRS do not restrict the assessment of material
risks and opportunities to those that can have their expected effects reliably
measured. The materiality assessment may rely on a qualitative approach and
consider ranges of possible financial effects (for example, high, medium, or low). 86
The financial materiality assessment of risks and opportunities will inherently take
into consideration the size of a reporting entity, and the extent of the financial
effect in relation to the reporting entity, because the magnitude of the financial
effects is determined by reference to the entity itself. This is in contrast to the
assessment of impacts as the assessment of severity of an impact is based on
the effect on the stakeholder.
Example SRG 4-5 illustrates the assessment of potential magnitude of financial

effects.
Example SRG 4-5

Assessing potential magnitude of financial effects of a risk
Robin PLC is an oil production entity. Robin PLC relies on financing arrangements
with Lending Bank Ltd to manage its cash flow and fund future oil production
projects. Due to global climate change mitigation efforts, Lending Bank Ltd is
under increasing pressure to reduce its lending to oil production companies. If
Lending Bank Ltd were to stop lending to Robin PLC, Robin PLC would need to
find new sources of financing or reduce its planned development projects.
Robin PLC knows that in the short-term there will be no change to its financing
arrangements because Lending Bank Ltd is expected to honour its current lending
agreements.
How might Robin PLC assess the potential magnitude of the financial effects
associated with the foreseeable decision of Lending Bank Ltd to stop funding
future oil production projects?
Analysis
Robin PLC will need to assess the risk that it will lose its access to future
financing from Lending Bank Ltd when its current lending agreement expires, due
to the increased pressure on Lending Bank Ltd to divest from fossil fuel activities.
Robin PLC should consider the reasonably possible scenarios once the current
lending agreement expires. Two of the scenarios Robin PLC might consider when
determining if there is a financial effect are:
□ Lending Bank Ltd refusing to enter into a new lending contract with Robin
PLC; and
□ Lending Bank Ltd increasing the interest rate on the lending facilities to
compensate for the increased risk perceived by Lending Bank Ltd.
In the first scenario, if Lending Bank Ltd refuses to continue to engage with Robin
PLC, Robin PLC will need to find a new source of financing and due to pressure
on the banking industry to divest from fossil fuels, the market for funds at
competitive rates may be limited. Robin PLC would also consider the qualitative
information it gathers about the likelihood of established lenders no longer
providing new lending to fossil fuel activities. This potential limitation on access to
finance may affect Robin PLC’s future cash flows.

If Lending Bank Ltd were to increase the interest rate on the lending facility, Robin
PLC may be unable to specifically quantify the potential financial effect as it does
not know the specific interest rate it may be subject to in the long term. To
determine the potential effect, Robin PLC may use industry data and averages to
generate a possible range of future interest rate spreads.
Robin PLC may consider various scenarios when assessing the magnitude of the
risk and determine the materiality of the risk by considering multiple scenarios and
should apply reasonable judgements.
Commonalities with the ISSB standards — financial materiality assessment
The ISSB standards bring sustainability-related risks and opportunities into scope
if they would “reasonably be expected to affect the entity’s cash flows, access to
finance or cost of capital over the short-, medium-, and long-term”. 87 While the
ISSB standards do not require an assessment based on likelihood and magnitude
of potential financial effects, an entity may consider these factors when
determining whether the sustainability-related risk or opportunity is in scope for
reporting under the ISSB standards.
Both ESRS and the ISSB standards refer to risks and opportunities that have an
effect on cash flows, access to finance, and cost of capital. The description in the
ESRS, however, goes on to include the effects on financial position, financial
performance, or development. In practice, we believe it would be unlikely that a
risk or opportunity would be identified that has an effect on an entity’s financial
position, financial performance, or development (under ESRS) that did not also
affect the entity’s cash flows, access to finance, or cost of capital. The timing of
the effect might differ, but the risk or opportunity would still be captured under the
ISSB standards. See SRG 4.4.1.4 for more information on the scope of the ISSB
standards.
4.3.2.7 Phase 3 — assessment and determination of material IROs —

financial materiality assessment - mitigation and remediation
ESRS 1 does not contain explicit guidance about how actions an entity has taken
to avoid or prevent a risk should be considered in the materiality assessment.
Specifically in relation to climate-related risks, the term ‘gross risk’ is used in

ESRS E1 paragraphs 20(b) and 20(c), and the EFRAG Q&A Compilation of
Explanations clarifies that an assessment of climate-related risks should be on a
‘gross’ basis, stating that the materiality assessment should not consider the
“effects of actions and resources to mitigate the material risk”. 88
Therefore, we believe that when assessing climate-related risks for materiality,

mitigation or prevention actions which do not exist at the reporting date should not
be considered as part of the materiality assessment of the risk. Although
EFRAG’s response to the question only addresses climate-related risks, we
believe this approach may also be applied when assessing risks related to other
The EFRAG ESRS Q&A Compilation of Explanations response does not provide
clear guidance on mitigation actions that an entity has taken in the past. In the
absence of clear guidance, we believe that an entity should develop an approach
that follows the principle of assessing risks before mitigating actions.
87IFRS S1 paragraph 3.
88EFRAG, ESRS Implementation Q&A Platform, Compilation of Explanations January -
July 2024, Question ID 350, pages 80-81.

We believe that a reasonable approach would be to consider the inherent design
attributes of an entity’s operations that exist at the reporting date when assessing
the materiality of risks. For example, an entity has built physical flood defences in
previous years. These defences do not rely on future actions to be effective, and
they already exist at the reporting date. When assessing the risk associated with
flooding, the entity would consider the effectiveness of its existing flood defences
(including for example whether the height is sufficient and the possibility of
failure), but would not consider any future planned actions to, for example, expand
or reinforce the wall.
When assessing the potential magnitude of the risk, the entity should consider the
financial effects that are reasonably likely to occur if the risk crystalises. In
assessing the magnitude of the financial effect the reporting entity must include
the costs to remediate or clean up an incident, reputational damage caused by an
incident, and fines and penalties levied by regulators or a government agency.
Plans for future mitigation actions or plans to put in place new procedures which
may reduce the likelihood or magnitude of the effect of a risk in future reporting
periods may form part of the entity’s disclosures about its policies and actions but
should not be considered in the materiality assessment of the risk in the current
period.
Commonalities with the ISSB standards - mitigation plans and plans to

remediate
The ISSB standards do not have specific guidance about how to consider
mitigation actions when assessing whether a sustainability-related risk is in scope
for sustainability reporting. We believe the approach described above under
ESRS would be a reasonable approach under the ISSB standards. See SRG
4.4.1.8.
4.3.2.8 Phase 3 — assessment and determination of material IROs — groups
Consolidated sustainability reporting “shall ensure that all subsidiaries are

covered in a way that allows for unbiased identification of material impacts, risks
and opportunities”. 89
The process of performing a materiality assessment for a group may be based on

one of the following: 90
□ a top-down approach, where the assessment is performed at group level
□ a bottom-up approach, where the assessment is performed at subsidiary

level, and the results are consolidated by the group
□ a hybrid of the two approaches, where common IROs are considered top-
down, and IROs specific to one or more subsidiaries are identified based on a
bottom-up approach
When identifying material sustainability-related IROs at the group level, the group
considers the appropriate level of aggregation and disaggregation of the IROs. At
a group level, a matter might be assessed as material as a result of aggregating
IROs arising in different subsidiaries, even if the separate IROs are not
individually material. IROs should only be aggregated if they are of a similar
nature. 91

90 EFRAG IG 1 paragraphs 125 and 191, pages 31 and 45.

For example, a group operates two sites that are located in the same
geographical area and discharge the same types of pollutants into the same
waterway. The impact of water pollution between the two sites might be
aggregated because of the similar nature of the impact. However, a group that
operates two sites on different continents which emit different pollutants into
different waterways would not aggregate the impacts of the two sites because of
the dissimilar nature of the impacts.
ESRS 1 paragraph 102 states that where an entity reports on a consolidated

basis, the assessment of material sustainability-related IROs should be performed
for the entire group, noting that the assessment should cover all subsidiaries in a
way that “allows for the unbiased identification” of material IROs. The legal
structure of an entity or group should not influence the identification of IROs and
all subsidiaries should be included in the process of identifying material IROs for
the consolidated group (see Question SRG 3-3 in SRG 3.3.1).
ESRS 1 paragraph 103 states that when there are “significant differences”
between the material IROs at a group level and material IROs at one or more of
the group’s subsidiaries, an entity shall provide an adequate description of the
IROs of the subsidiaries concerned.
Commonalities with the ISSB standards — groups
The ISSB standards do not contain specific guidance for identifying sustainability-
related risks and opportunities in a group scenario. The top-down, bottom-up and
hybrid approaches described above may also be relevant for groups reporting
under the ISSB standards.
4.3.2.9 Phase 3 — assessment and determination of material IROs — scoring

and thresholds
Management applies quantitative and/or qualitative thresholds to determine which

IROs and sustainability matters are material for reporting purposes. 92 There is no
methodology or criteria mandated by ESRS on how to set appropriate thresholds;
this process will require judgement on an entity- and topic-specific basis. An entity
may use techniques such as scoring each sustainability-related IRO and then
applying thresholds to determine which IROs are material. The techniques used
for assessing the materiality of impacts, risks, and opportunities may vary by
entity.
When assessing the materiality of impacts, the assessment of severity could be

performed in different ways. One possible approach is separately scoring the
scale, scope, and, for negative impacts only, irremediable character, of each
impact. Severity could be measured as the average of the scores attributed to
each component or each component could be weighted differently. In general,
entities assign the same weight to scale, scope, and irremediable character (for
negative impacts). However, any of the three characteristics of severity can make
an impact severe. 93 Depending on the nature of a specific impact or on other facts
and circumstances, the components of severity may be weighted differently. For
example, a higher weight may be attributed to the irremediable character of
certain negative impacts (for example, the impact on nature in an area with a high
number of endangered species).
EFRAG IG 1 notes that “impacts with very low probability may or may not be
material depending on their severity if they occur”. 94 For example, a potential


negative impact could be so severe that even with a very low likelihood it may be
material (an impact that could lead to catastrophic environmental damages).
A thorough analysis of each criterion of severity to determine whether an impact is

material may not be necessary. For example, if there is established scientific
consensus about the severity of a particular environmental impact, an entity may
use this information to support its materiality assessment without further in-depth
analysis. 95
To assess the materiality of potential impacts, an entity may follow the approach
illustrated in Figure SRG 4-12, which consists of using a matrix to visualise the
combination of severity and likelihood that characterise each identified potential
impact. Moving from left to right and from the bottom to the top of the matrix,
potential impacts progress from not being material to being increasingly material.
Figure SRG 4-12

Example of visualisation of the assessment outcome of materiality assessment of
potential impacts 96
A similar approach may be taken in relation to risks and opportunities. A reporting

entity could use a matrix to plot the expected magnitude and likelihood of financial
effects and a threshold could be set based on the combination of the two
characteristics. A matrix that plots the scores given to scale, scope, and
irremediable character may be useful in visualising the outcome of the impact
materiality assessment.
Commonalities with the ISSB standards — thresholds
The ISSB standards do not contain guidance about setting thresholds. The
determination of what information is included in the sustainability reporting under
the ISSB standards is based on the decision-making needs of primary users. See
SRG 4.4.2.1
4.3.3 Step 2 — map material IROs to the topical reporting requirements
Once the list of material sustainability-related IROs has been derived, an entity
should determine which topical standard is relevant to each material IRO. This is
the second step of the three-step process for the ESRS materiality assessment
described in SRG 4.3.

96 EFRAG IG 1 figure 5, page 31.

Figure SRG 4-13
ESRS materiality approach - step 2
Mapping material IROs to topical reporting requirements facilitates the

identification of the disclosure requirements that are related to the IRO. 97 At step 3
of the process, materiality of information is then applied to the disclosure
requirements (see SRG 4.3.4). These disclosure requirements may include one or
more datapoints. This mapping is illustrated in Figure SRG 4-14.
Figure SRG 4-14

Mapping material IROs to reporting requirements
The material IROs determined by an entity are the starting point to determine the
disclosures that need to be included in the sustainability reporting. An entity’s
mapping of the material IROs to the related topics, sub-topics, and sub-sub-topics
in ESRS 1 AR 16 determines which ESRS topical standard an entity should apply.
When a material IRO relates to only a sub-topic or sub-sub-topic of one of the
sustainability matters, then an entity may find that only specific parts of the topical
standard are relevant for reporting.
Example SRG 4-6 illustrates the process of mapping a material sustainability-

related IRO to topical reporting requirements.
Example SRG 4-6

Mapping material sustainability-related IROs to reporting requirements
Goat Products PLC produces various dairy products, including cheese and
yoghurt. Goat Products PLC has determined that it has a material negative impact
on water due to the significant amounts of water needed to manufacture its
products.
How should Goat Products PLC map its material negative impact on water to
reporting requirements?

Analysis
Goat Products PLC would consider the list provided by ESRS 1 AR 16 to map its
material negative impact on water to the sub-sub-topics ‘Water consumption’, and
‘Water withdrawals’.
These sub-sub-topics determine that ESRS E3 Water and marine resources

should be applied. Therefore, Goat Products PLC would apply the disclosure
requirements related to ‘Water consumption’, and ‘Water withdrawals’ included in
this topical standard. Milk Products PLC would not apply the disclosure
requirements of ESRS E3 related to ‘marine resources’ as it does not have a
material IRO mapped to this sub-topic.
The material water-related IRO would lead to the following disclosure

requirements in ESRS E3 via the sub-sub-topics:
□ E3-1, Policies related to water and marine resources
□ E3-2, Actions and resources related to water and marine resources policies
□ E3-3, Targets related to water and marine resources
□ E3-4, Water consumption
Goat Products PLC would therefore comply with these disclosure requirements,
including the metrics required in E3-4 on water consumption and recycling of
water.
As Goat Products PLC as only identified a material impact related to water, and
no material risks or opportunities, E3-5, Anticipated financial effects from material
water and marine-resources-related risks and opportunities, is not a relevant
disclosure requirement.
If an entity has identified material IROs that relate to a matter not covered by a
topical standard, or that is covered with insufficient granularity, an entity will need
to apply the entity-specific disclosure requirements to that material IRO. See SRG
4.3.4.3 for information about identifying entity-specific disclosures, and the future
applicability of sector-specific standards.
Once all material IROs have been mapped to sustainability matters and the
related disclosure requirements (defined by topical ESRS or entity-specific), an
entity needs to identify the material information to be disclosed.
Commonalities with the ISSB standards — topical requirements
The ISSB standards have specific guidance about how to determine the material
information related to sustainability-related risks and opportunities. See SRG
4.4.3.
4.3.4 Step 3 — identify the material information to be reported
In the final step of the three-step materiality assessment process, an entity

identifies the material information to be reported about its material sustainability-
related IROs.

Figure SRG 4-15
ESRS materiality approach - step 3
All the requirements in ESRS 2 are mandatory for reporting. This includes the
disclosures required by ESRS 2 Disclosure Requirement IRO-1 Description of the
process to identify and assess material impacts, risks and opportunities with
respect to the topical standards listed in ESRS 2 Appendix C. 98
All other disclosures in the topical standards are required only if they relate to a
material sustainability matter and are subject to an assessment of ‘materiality of
information’. When determining material information, an entity needs to consider
separately:
□ policies, actions and targets
□ metrics
Figure SRG 4-16

Materiality of information in relation to policies, actions, targets, and metrics
With respect to policies, actions, and targets, disclosure is always required if

related to a material sustainability matter, but the level of detail is driven by
materiality of information (see SRG 4.3.4.1).
With respect to metrics, the assessment of materiality of information might lead an

entity to omit a metric from its sustainability reporting based on the conclusion that
the metric is not material (see SRG. 4.3.4.2).
An entity is only permitted to omit material information in very specific

circumstances. See SRG 5.5 for information about omitting material information.
For policies, actions, and targets as well as for metrics, materiality of information
is assessed based on relevance.
98 ESRS 2 General disclosures, paragraph 2.

Materiality of information — relevance
According to ESRS 1 paragraph 31, information is material when it is relevant.

Relevance has two perspectives.
The applicable information prescribed within a disclosure requirement, including

its datapoints, or an entity-specific disclosure, shall be disclosed when the
undertaking assesses as part of its assessment of material information, that the
information is relevant from one or more of the following perspectives:
(a) The significance of the information in relation to the matter it purports to depict
or explain; or
(b) The capacity of such information to meet the users’ decision-making needs,
including the needs of primary users of general-purpose financial reporting
described in paragraph 48 and/or the needs of users whose principal interest is in
information about the undertaking’s impacts
Information is material if it is relevant from the perspective of significance, from

the perspective of meeting decision-making needs of users, or both. An entity’s
determination of materiality is based on its specific facts and circumstances.
Information can be qualitatively or quantitatively significant. For example, an entity

has identified a material potential impact related to pollution of local waterways
but has had no instances of pollution in the reporting period. While the number of
pollution incidents (zero) may appear to be insignificant from a quantitative
perspective, it is likely to still be significant from a qualitative perspective as
reporting zero incidents of pollution helps to explain or depict how the entity
manages the material pollution matter.
See Question SRG 4-14 for detail on qualitative factors that might result in
information being assessed as material.
The second characteristic of relevance is connected to the decision-making needs

of the users of the sustainability reporting.
ESRS Annex II Table 2 ‘Terms defined in the ESRS’ 99
Users: Users of the sustainability statements are primary users of the general-
purpose financial reporting (existing and potential investors, lenders and other
creditors including asset managers, credit institutions, insurance undertakings) as
well as other users including the undertaking’s business partners, trade unions
and social partners, civil society, and non-governmental organisations,
governances, analysts and academics.
When considering the capacity of the information to meet users’ decision-making

needs, an entity must consider its two groups of users: its primary users and other
users whose principal interest is information about impacts. ESRS 1 describes
what makes information material from the perspective of primary users.

In particular, information is considered material for primary users of general-

purpose financial reports if omitting, misstating or obscuring that information could
reasonably be expected to influence decisions that they make on the basis of the
undertaking’s sustainability statement.
Although ESRS do not provide specific guidance for the needs of other users,
their needs should be considered. Further, the two groups of users may deem
different information to be relevant to their needs, so consideration must be given
to the needs of each group as part of the materiality assessment.
Considerations related to materiality in specific situations are provided in ESRS 1:
□ Uncertain future events

Some ESRS require entities to disclose information about uncertain future
events. When assessing the materiality of information about such possible
future events, entities should consider their potential financial effects, the
severity and likelihood of impacts they may cause, and the full range of their
possible outcomes, including low-probability and high-impact outcomes that
could become material when aggregated. 100
□ Opportunities
When entities disclose opportunities, they should assess the materiality of the
information considering whether such opportunities are general or specifically
related to the strategy the entity is pursuing. Entities should also determine
whether it is appropriate to include quantitative measures of expected
financial effects related to opportunities. This assessment should consider the
assumptions that estimating expected financial effects requires, and the
resulting uncertainty. 101
Commonalities with the ISSB standards — materiality of information
Information about a sustainability-related risk or opportunity that is material under

the ISSB standards will be aligned with information that is material from a financial
materiality point of view under ESRS. 102
This alignment is supported by the fact that both ISSB standards and ESRS use
reports. 103 The ISSB standards and ESRS also use the same definition for primary
users. 104
See SRG 4.4.2 for more information on assessing materiality of information under
the ISSB standards.
4.3.4.1 Policies, actions, and targets
Once an entity has identified a matter as material, it should include all of the
disclosure requirements related to policies, actions, and targets from the relevant
100 ESRS 1 paragraphs 91-92.

104 Commission Delegated Regulation (EU) 2023/2772, Annex II; IFRS S1 Appendix A.

topical ESRS related to that matter, as well as the minimum disclosure
requirements in ESRS 2 on policies, actions, and targets.
The concept of materiality of information is relevant for disclosures on policies,

actions, and targets as it determines the level of granularity required for the
disclosures. It is not possible to omit disclosure requirements on policies, actions,
and targets for a material sustainability matter. If an entity has not adopted related
policies or actions or set the related targets with respect to a material
sustainability matter, an entity is required to disclose this fact and the related
reasons for not having a policy, action, or target, and may report a timeframe in
which it aims to have these in place. 105 See SRG 6.5.2, SRG 6.5.3, and SRG
6.6.2 for more detail on these disclosure requirements.
4.3.4.2 Metrics
In relation to metrics, all information prescribed by the disclosure requirements

and datapoints in the relevant standards need to be disclosed if they are
assessed to be material. The reporting entity must review all metrics included in
the disclosure requirement to determine whether they are material.
As described in SRG 4.3.4., information is material when it is relevant. An entity

should establish how it applies the qualitative characteristic of relevance and
determines the materiality of information related to metrics. This is a largely
principles-based determination and is based on an entity’s specific facts and
circumstances. Some questions an entity may consider when determining
materiality of information are included in Figure SRG 4-17.
Figure SRG 4-17

ESRS Materiality of information - possible considerations
Characteristic of
relevance Possible considerations for an entity when determining if a datapoint or
(ESRS 1 paragraph 31) disclosure requirement is material
Significance of the Is it difficult or impossible to understand or assess the extent of a material IRO
information in relation without the metric?
to the matter
Decision-usefulness Is the metric of strategic relevance (for example, used as part of ongoing
for primary users management of the entity, or connected to executive remuneration)?
Is the metric, or a similar metric, part of the entity’s sustainability strategy?
Is it part of investor presentations?
Does the metric affect the entity’s access to funding or finance?
Decision-usefulness Was the metric – or a similar metric – requested in the context of supplier
for other users selection decisions?
Was the metric – or a similar metric – requested by trade unions?
Would the metric affect customers’ selection of goods or services that the entity
sells?
If information about a metric is assessed to be not material, the entity may omit
either:
105 ESRS 1 paragraph 33, ESRS 2 paragraphs 62 and 81.

□ the entire disclosure requirement
□ one or more datapoint(s), although in this case the entity needs to conclude,
in addition to the conclusion that the datapoint(s) are not material, that the
information is not needed to meet the objective of the disclosure
requirement 106
Example SRG 4-7 illustrates how to assess the materiality of information for a
metric.
Example SRG 4-7

Disclosing quantitative information on a metric
Yerba Company PLC assesses materiality of information for the metric G1-4,
Incidents of corruption, which includes two quantitative datapoints: (i) the number
of convictions and (ii) the amount of fines for violating anti-corruption laws.
Yerba Company PLC had 2 convictions during the reporting period, one severe
conviction with a fine of €10 million and one smaller conviction with a fine of
€30,000. The two datapoints related to G1-4 are:
□ Number of convictions: 2
□ Amount of fines: €10,030,000
Analysis
Assuming Yerba Company PLC assesses the datapoints as being material, then
all information relevant to that datapoint would be included in the reporting; that is,
both convictions would need to be included. It is not possible to omit information
related to the metric at the level of the individual conviction, or, for example, by
only reporting the severe conviction and omitting the smaller conviction.
4.3.4.3 Entity-specific disclosures
An entity is required to provide entity-specific disclosures when it concludes that a

material impact, risk, or opportunity is not covered, or not covered with sufficient
granularity by an ESRS. 107 This may include situations when the sector-agnostic
ESRS do not define metrics related to a sustainability matter. This requirement
may lead to the inclusion of further information, which is not required by a specific
datapoint in ESRS, or for a matter which is not covered by ESRS.
Entity-specific disclosures are not just limited to metrics. Where applicable, entity-
specific disclosures should include all material information related to governance,
strategy, IRO management, and metrics and targets. 108 When developing entity-
specific disclosures, an entity must ensure that the disclosures meet the
qualitative characteristics of information. See SRG 5.2 for more information on the
qualitative characteristics.
Specific considerations may include:
□ Comparability
Entities should consider both comparability between entities and
comparability over time. To enhance comparability, ESRS 1 states that an
entity shall consider other relevant sustainability reporting frameworks and
reporting standards when developing entity-specific disclosures. Using a

108 ESRS 1 AR 2(b).

disclosure requirement that is already defined in an alternative reporting
framework as the basis for the entity-specific disclosure helps improve
comparability across entities and may also help improve interoperability when
reporting under different frameworks. 109 As well as looking to other
sustainability reporting frameworks, an entity may also consider disclosure
requirements within a topical ESRS that address similar or related IROs, and
consider whether entity-specific disclosures can be developed from these
disclosure requirements. 110
□ Consistency
Entities should consider consistency of methodology in developing
disclosures as well as in the disclosures provided. ESRS 1 notes that
consistency is a key way to achieve comparability over time.
In addition, an entity is required to consider the factors listed in ESRS 1 AR 3 in

developing entity-specific metrics.
The undertaking shall consider whether:

(a) Its chosen performance metrics provide insight into:
(i) How effective its practices are in reducing negative outcomes and/or
increasing positive outcomes for people and the environment (for impacts);
and/or
(ii) The likelihood that its practices result in financial effects on the undertaking
(for risks and opportunities);
(b) The measured outcomes are sufficiently reliable, meaning that they do not
involve an excessive number of assumptions and unknowns that would
render the metrics too arbitrary to provide a faithful representation; and
(c) It has provided sufficient contextual information to interpret performance
metrics appropriate, and whether variations in such contextual information
may impact the comparability of metrics over time.
ESRS 1 paragraph 130 states that the extent to which sustainability matters are
covered by ESRS are expected to evolve over time — in particular as a result of
the future adoption of sector-specific standards — and thus the need for entity-
specific disclosures related to entity-specific matters is expected to decrease over
time. 111 Sector-specific standards are standards that are applicable to entities
operating in a particular sector and address IROs that are likely to be material for
entities in those sectors. 112 The EFRAG’s mandate includes the development of
sector-specific ESRS, expected to be released by June 2026. 113
In the absence of sector-specific standards, an entity may use sources such as

the IFRS industry-based guidance (including SASB) and GRI sector standards to
cover sustainability matters that are material to the entity in its sector to develop
entity-specific disclosures. 114
See SRG 3.8.1.1 for information on transitional provisions related to entity-specific

disclosures.
109 ESRS 1 AR 2(a) and AR 4.

110 ESRS 1 AR 5.
113 On 29 April 2024, the European Council approved a delay of the deadline for adoption
of certain sector-specific and non-EU European Sustainability Reporting Standards.


Commonalities with the ISSB standards — entity-specific disclosures
As noted above, an entity applying ESRS is also permitted to refer to and

consider the ISSB standards when developing its entity-specific disclosures. 115
Particularly in the case of sector-specific information, prior to the issuance of
sector-specific ESRS, entity-specific disclosures will also need to cover sector-
specific information. ESRS 1 permits an entity to refer to the IFRS industry based
guidance (which includes the Industry-based Guidance on Implementing IFRS S2
and the SASB standards 116) and the GRI standards in identifying this
information. 117
Under the ISSB standards, ESRS are listed as a source of guidance that an entity
applying the ISSB standards may choose to use to identify disclosure
requirements about sustainability-related risks and opportunities that would be
material to primary users of general purpose financial reports. 118
See SRG 4.4.2 for more information on identifying material information under the
ISSB standards.
4.3.4.4 Disaggregation of material information
In certain circumstances, entities will be required to report information on a

disaggregated basis to ensure a proper understanding of an entity’s material
IROs. The principle is to avoid obscuring the specificity and context necessary to
interpret the information and to avoid aggregating material items that have a
different nature. 119 When determining how to disaggregate information, an entity
should consider the characteristics of relevance as described in SRG 4.3.4.
Specifically, ESRS 1 paragraph 54 requires that if necessary for the user to obtain
a proper understanding of the entity’s material IROs, an entity may be required to
disaggregate based on the following: 120
□ By country — Disaggregation by country is required if there are variations of

material impacts, risks, or opportunities across countries.
□ By significant site or asset — Disaggregation by significant site or asset is

required when one or more material impacts, risks, or opportunities is highly
dependent on such site or asset.
We believe that entities may also consider whether disaggregation of information

by sector would enhance the relevance to the users. ESRS 1 paragraph 57 states
that if information is disaggregated by sector, it should be classified by the ESRS
sectors identified in the ESRS sector-specific standards once they are developed.
By analogy to Question ID 39 from the EFRAG Q&A Compilation of Explanations,
an entity does not need to classify sectors based on the ESRS sectors until such
time as the sector-specific ESRS are adopted. 121
Disaggregation by subsidiary might be relevant in certain facts and

circumstances. 122 ESRS 1 paragraph 103 requires that if an entity determines that
there are significant differences between material impacts, risks, or opportunities
115 ESRS 1 AR 4.
116 ESRS-ISSB Standards: Interoperability Guidance, Section 1.3, pages 5-6.
117 ESRS 1 paragraph 131(b); EFRAG IG 1 paragraph 74, pages 21-22.
121 EFRAG ESRA Implementation Q&A Platform, Question ID 39, pages 65-66.

at group level and those of its subsidiary, the entity must provide an adequate
description of the impacts, risks and opportunities of the subsidiary. 123
Example SRG 4-8 provides an illustration of disaggregation by site. In addition,

the disaggregation of information in a sustainability report may be on a different
basis than the disaggregation of information in the entity’s financial statements.
See Question SRG 4-13.
Example SRG 4-8

Disaggregation of information by significant site
Rectangle Corp manufactures a variety of products at two manufacturing sites:

Red Site and White Site. Red Site and White Site are in different countries.
Rectangle Corp identifies material impacts associated with the use of substances
of concern and substances of very high concern at both of its sites. Both Red Site
and White Site use about equal amounts of substances of concern, but White Site
uses 90% of the total substances of very high concern.
Rectangle Corp determines that the metrics described by E2-5, Substances of

concern and substances of very high concern are relevant because they are
significant to the material impact.
How should the metrics be presented to best reflect the risk?
Analysis
Rectangle Corp would likely conclude that it needs to provide the information
required by E2-5 about the substances of concern and substances of very high
concern and disaggregated by site – showing the amount of substances used at
each site and the total amount. This is because the impact associated with
substances of very high concern is highly dependent on White Site and
disaggregating by site improves the relevance of the information.
Commonalities with the ISSB standards — disaggregation of information
Both ESRS and the ISSB standards require disaggregation of information and
provide similar examples on potential ways that information could be
disaggregated to provide users with the necessary level of detail. See SRG
4.4.2.3 for more information about disaggregation of information under the ISSB
standards.
4.3.4.5 Additional information
As a general principle, sustainability reporting is required to include only material

information related to material sustainability-related IROs. ESRS permit entities to
include ‘additional information’ in their sustainability reporting, but only if specific
requirements are met.
‘Additional information’ is information that is derived from either (1) other

legislative requirements the entity is subject to or (2) other sustainability reporting
standards or frameworks published by other standard setting bodies such as
standards issued by the ISSB or the Global Reporting Initiative (GRI). 124 EFRAG
IG 1 notes that this additional information might include information that is
requested by stakeholders of the entity. 125


If an entity includes additional information stemming from legislative requirements
or other sustainability reporting frameworks in its sustainability reporting, it must
clearly identify that this is additional information and the source from which the
information is derived, with a precise reference to the paragraph in the related
standard or framework. 126
When the undertaking includes in its sustainability statement additional

disclosures stemming from (i) other legislation which requires the undertaking to
disclose sustainability information, or (ii) generally accepted sustainability
reporting standards and frameworks, including non-mandatory guidance and
sector-specific guidance, published by other standard setting bodies (such as
technical material issued by the International Sustainability Standards Board or
the Global Reporting Initiative), such disclosures shall:
(a) be clearly identified with an appropriate reference to the related legislation,
standard or framework (see ESRS 2 BP-2, paragraph 15;
(b) meet the requirements for qualitative characteristics of information specified in
chapter 2 and Appendix B of this standard.
The additional information must also meet the qualitative characteristics of

information described in ESRS 1 Appendix B, which include relevance, faithful
representation, comparability, verifiability, and understandability. See SRG 5.2 for
information on the qualitative characteristics of information under ESRS.
Question SRG 4-3
Can sustainability-related information that an entity reported prior to the first year
of application of ESRS continue to be disclosed in the sustainability reporting?
PwC response
ESRS require disclosure of material information – information that has been
identified as being relevant to a material IRO – and permits the disclosure of
‘additional information’ derived from other legislation or other sustainability
frameworks if it is clearly identified as additional information with reference to
where it is derived, and the information meets the qualitative characteristics of
information.
If an entity has been previously reporting sustainability-related information, the

entity could continue to report such information in its current year sustainability
reporting if it is determined to be material information related to a material IRO, or
if it meets the requirements of additional information under ESRS 1 paragraph
114. The sustainability reporting should not contain information which is not
material or does not meet the requirements of additional information.
If an entity identifies information that it considers to be material (for example,

because it believes such information is relevant to the decision-making needs of
its users) but is not related to a material IRO, this is a possible indication that the
assessment of material IROs was incomplete, and the entity should consider
reassessing to ensure all material IROs have been identified.
126 ESRS 1 paragraph 114; ESRS 2 paragraph 15.

4.4 ISSB standards materiality approach
The ISSB standards require an entity to disclose material information about
sustainability-related risks and opportunities that could reasonably be expected to
affect an entity’s cash flows, access to finance or cost of capital over the short-,
medium-, or long-term (together referred to in IFRS S1 General Requirements for
Disclosure of Sustainability-related Financial Information as an entity’s
‘prospects’). 127 Information is material when it is useful to the decision-making of
the primary users. Primary users are defined as existing and potential investors,
lenders, and other creditors of an entity. 128
The process of identifying and disclosing material information about sustainability-

related risks and opportunities that could reasonably be expected to affect an
entity’s prospects could be performed in two steps:
□ Step 1: Identify sustainability-related risks and opportunities that could affect

an entity’s prospects over the short-, medium-, and long-term
□ Step 2: Identify material information — determine which disclosures to provide

in relation to the sustainability-related risks and opportunities
In making this assessment an entity must consider its own activities and activities
in its value chain. The ISSB standards note that the process for preparing
sustainability-related financial disclosures requires judgement. 129
4.4.1 Step 1 — identify sustainability-related risks and opportunities —

overview
The following provides an outline of step 1 of the materiality assessment process

covered in the following sections.
□ Identify risks and opportunities (SRG 4.4.1.1)
□ Reassess risks and opportunities (SRG 4.4.1.2)
□ Time horizons (SRG 4.4.1.3)
□ Cash flows, access to finance, cost of capital (SRG 4.4.1.4))
□ Reasonable and supportable information (SRG 4.4.1.5)
□ Understand the entity’s context (SRG 4.4.1.6)
□ Value chain (SRG 4.4.1.7)
□ Mitigation actions and plans to remediate (SRG 4.4.1.8)
In each section, we identify areas where there are common concepts between
ESRS and the ISSB standards.
4.4.1.1 Identify risks and opportunities
To effectively identify sustainability-related risks and opportunities, an entity would

benefit from having an understanding of the resources that it relies on, and
relationships along its value chain.
IFRS S1 paragraph 2 states that an entity and the resources and relationships
throughout its value chain form an interdependent system in which the entity
128 IFRS S1 Appendix A.

operates. The application guidance of IFRS S1 further explains that an entity’s
relationships and interactions with stakeholders, society, the economy, and the
natural environment throughout its value chain are connected to the ability of an
entity to generate cash flows over the short-, medium-, and long-term. 130
An entity’s sustainability-related risks and opportunities arise out of interactions

between the entity and its stakeholders, society, the economy and the natural
environment. These interactions—which can be direct and indirect—result from
operating an entity’s business model in pursuit of the entity’s strategic purposes
and from the external environment in which the entity operates. These interactions
take place within an interdependent system in which an entity both depends on
resources and relationships throughout its value chain to generate cash flows and
affects those resources and relationships through its activities and outputs—
contributing to the preservation, regeneration and development of those resources
and relationships or to their degradation and depletion. These dependencies and
impacts might give rise to sustainability-related risks and opportunities that could
reasonably be expected to affect an entity’s cash flows, its access to finance and
cost of capital over the short, medium and long term.
IFRS S1 paragraph B3 provides an example of this connection. If an entity’s

business model — its ability to generate cash flows — is dependent on a source
of clean water, then degradation of that resource (including degradation caused
by the entity’s own activities) can generate a risk to the entity and jeopardise its
ability to generate cash flows in the future. 131
The IFRS S1 application guidance explains that the resources that an entity
depends on can take various forms. These resources include, but are not limited
to, financial, manufactured, intellectual, human, relationship, and natural. 132
These resources are similar to the ‘capitals’ described in the Integrated Reporting
Framework (IRF). 133 IFRS S1 Basis for Conclusion, paragraph BC41 clarifies that
even though IFRS S1 and the IRF do not use identical terms, IFRS S1 builds on
the IRF. 134 Understanding the concept of ‘value’ as explained in the IRF could
facilitate the process of identifying sustainability-related risks and opportunities
under IFRS S1 by helping an entity focus on the areas of the business and its
value chain which lead to value preservation, regeneration, development, or
deterioration and depletion – and thus the areas where risks and opportunities are
likely to arise.
We believe that this understanding of how an entity is connected to the resources

and relationships that it depends on, should not be interpreted as a reference to
‘impact materiality’ as defined in ESRS. Instead, it highlights the connectivity
between how an entity affects other parties and how it generates value for itself. It
also demonstrates how an entity’s action that result in an ‘impact’ as defined
under ESRS might also generate a sustainability-related risk. This is illustrated in
Example SRG 4-9. In addition, Figure SRG 4-4 in SRG 4.3.1.3 contains additional
simplified examples of connections between impacts, dependencies and risks.

133 Integrated Reporting Framework, FAQs, webpage.
134 IFRS S1 Basis for Conclusions, paragraph BC41.

Example SRG 4-9
Simplified example of risks arising from the relationship between the entity and
resources on which it depends
Farm Corp operates in the agriculture sector and uses pesticides to protect its
crops from disease. Scientific evidence suggests that the pesticides used have a
detrimental effect on pollinator species such as bees. Farm Corp is reliant on the
surrounding bee population to pollinate its crops, and thus the entity’s ability to
generate future cash flows from the sale of its crops is linked to the health of the
local bee population.
Would a risk be associated with Farm Corp’s use of pesticides?
Analysis
Yes. If the pesticides used by Farm Corp damage the health of the local bee
population, this could result in crops not being pollinated in the future or additional
costs to hire bees or other alternative methods of pollination. The entity’s current
use of pesticides therefore might affect the entity’s future crops or level of yield.
Consequently, the entity’s impacts on health of the bee population creates a risk
as it threatens the entity’s ability to generate value in the future.
Commonalities with ESRS — identifying risks and opportunities
Both ESRS and the ISSB standards include the concept of interconnectivity
between impacts, risks, and opportunities, as well as the way in which risks and
opportunities can arise from an entity’s interactions with natural, human, and
social resources. See SRG 4.3.1.3 for more detail on how ESRS describe the
connections between impacts, risks, and opportunities.
4.4.1.2 Reassessment of risks and opportunities
The process of identifying and assessing sustainability-related risks and

opportunities is not an activity that only takes place once.
An entity is required to reassess its risks and opportunities throughout its value
chain on the occurrence of a significant event or significant change.
Significant events or changes can occur because of action taken by an entity or

without an entity being involved in the event or change in circumstances.
Examples of significant events or changes are given in IFRS S1 paragraph B11
and include suppliers in the value chain making significant changes to their
operations, a merger or acquisition that changes the scope of an entity’s value
chain, or new regulation that had not been previously anticipated. 135 An entity
may, if it chooses to, reassess the scope of any risk or opportunity more
frequently than required. 136
Commonalities with ESRS — reassessment of risks and opportunities
Both ESRS and the ISSB standards require re-assessment of process to identify
sustainability-related risks and opportunities. Each set of standards has different
indicators that would potentially trigger re-assessment of sustainability-related
risks and opportunities. See SRG 4.3.2 for more detail on the ESRS requirements
around reassessing impacts, risks and opportunities. The indicators described
under each set of standards as possible triggers for a re-assessment could be


relevant indicators for re-assessment no matter which standard an entity reports
under.
An entity is required to identify the sustainability-related risks and opportunities

that could reasonably be expected to affect its prospects (that is, its cash flows,
access to finance and cost of capital) over the short-, medium-, and long-term.
The ISSB standards do not restrict the assessment of risks and opportunities to
those that can be measured. The assessment of risks and opportunities should
consider both quantitative and qualitative factors. It is possible to have a
reasonable expectation that an effect will occur without having a precise
measurement of the effect. For risks and opportunities that manifest over a long-
term time horizon, it may be more difficult to quantify the financial effect.
Some risks may be relevant over a long period of time, with a cumulative effect
over many years, or may only be expected to crystallise at a single point in the
future. Even if a risk is only expected to have an effect in the long term, the risk
may be relevant for sustainability reporting in the current reporting period.
For more information on how to consider the long-term time horizon, see Question
SRG 4-12. Example SRG 4-10 illustrates a physical risk with a long-term time
horizon.
Example SRG 4-10

Climate-related physical risk in an entity’s own operations arising from a
dependency — long-term time horizon
Seaside PLC runs a large manufacturing plant located in an area that has not had
a history of flooding but based on scientific consensus, is predicted to suffer from
increasing flood risk over the long-term. It may be many years before the flooding
affects Seaside PLC’s operations.
Should Seaside PLC identify a sustainability-related risk associated with

flooding?
Analysis
Yes. The assessment of risk needs to consider what may happen over the long-
term. Flooding of the manufacturing plant could result in significant costs to
remediate flood damage, impairment of the plant, or an acceleration to
depreciation.
Since it is not clear whether and when the flooding may happen and what the
consequences may be, the exact financial effects may not be known. However,
quantitative analysis is not required to identify risks; the assessment can be based
on qualitative factors.
Commonalities with ESRS — time horizons
Both sets of standards require entities to identify risk and opportunities over the
short-, medium-, and long-term. Although ESRS and the ISSB standards have
different definitions of time horizons (see SRG 3.5.3 for more detail), we believe
many of the considerations related to identification of risks and opportunities over
the short-, medium-, and long-term time horizons would be similar under both sets
of standards. See SRG 4.3.1.2 for more information about the consideration of
time horizons in the ESRS materiality assessment.

4.4.1.4 Cash flows, access to finance, cost of capital
A risk or opportunity is in scope for reporting if it could reasonably be expected to

affect an entity’s cash flows, access to finance, or cost of capital. 137 The financial
effect of a risk or opportunity may emerge in more than one of these areas
because of their interconnected nature.
The consideration of access to finance and cost of capital brings in an

assessment of how other market participants (for example, finance providers and
investors) may interact with an entity in the future due to its actions related to
sustainability.
The effects of sustainability-related risks and opportunities on an entity’s cash

flows may relate to assets which do not meet the criteria for recognition in the
financial statements. For example, if an entity engages in unsustainable practices
and is a target of significant pressure from activist groups, this may result in a
reduction in cash inflows caused by the damage to an entity’s brand. Even though
the brand is not recorded as an asset, the risk could still affect its future cash
flows.
The ISSB standards, however, do not contain specific guidance on how an entity
should assess whether risks and opportunities could reasonably be expected to
affect an entity’s prospects. We believe one approach would be to identify
possible sustainability-related risks and consider (1) the likelihood of the risk or
opportunity occurring and (2) the possible magnitude of its effects. Another
method would be to start by identifying risks and opportunities that are relevant to
the industry in which an entity operates and assessing whether those risks and
opportunities are relevant to an entity’s business model. Other methods could also
be used.
See example SRG 4-5 in section 4.3.2 for an illustration of how a sustainability-
related risk may arise as a result of an entity’s finance providers’ reactions to an
entity’s activities.
Commonalities with ESRS — cash flows, access to finance, cost of capital
Both ESRS and the ISSB standards refer to risks and opportunities that have an
effect on cash flows, access to finance, and cost of capital. The description in
ESRS, however, goes on to include the effects on financial position, financial
performance, or development. In practice, we believe it would be unlikely that a
risk or opportunity would be identified that has an effect on an entity’s financial
position, financial performance, or development (under ESRS) that did not also
affect an entity’s cash flows, access to finance, or cost of capital. The timing of the
effect might differ, but the risk or opportunity would still be captured under the
ISSB standards. See SRG 4.3.2.6 for more information on the assessment of
financial effects under ESRS.
4.4.1.5 Reasonable and supportable information
An entity is not required to perform an exhaustive search to identify those

sustainability-related risks and opportunities that could affect an entity’s prospects
over the short-, medium-, or long-term. 138 Rather, an entity should use all
“reasonable and supportable information that is available to it without undue cost
or effort” when identifying sustainability-related risks and opportunities. 139


Excerpt from IFRS S1 paragraph B6
An entity shall use all reasonable and supportable information that is available to
the entity at the reporting date without undue cost or effort (see paragraphs B8–
B10):
(a) to identify the sustainability-related risks and opportunities that could
reasonably be expected to affect the entity’s prospects; and
(b) to determine the scope of its value chain, including its breadth and
composition, in relation to each of those sustainability-related risks and
opportunities.
The determination of what constitutes reasonable and supportable information

includes the conditions of the entity as well as general conditions in the external
environment. 140 This would include internal and external sources, such as: an
entity’s existing risk management and due diligence processes; industry and peer
group experience; and external ratings, reports, and statistics. 141
The effort associated with obtaining the information by an entity should be

compared to the benefits of the resulting information to the primary users. The
more useful the sustainability information is for users, the more effort an entity is
expected to put forth in obtaining that information. 142
Commonalities ESRS - reasonable and supportable
Relief is available in the ISSB standards for using reasonable and supportable
information without undue cost or effort to identify sustainability-related risks and
opportunities, and to determine the scope of its value chain. ESRS has no
equivalent language, and so an entity applying both sets of reporting standards
would need to ensure that it met the requirements of both sets of standards in this
area. We believe that, generally, information an entity has obtained as a result of
reporting under ESRS, would be considered to be available without undue cost or
effort when reporting under the ISSB standards.
4.4.1.6 Understand the entity’s context
In terms of sustainability reporting, we use the term ’context’ to refer to the

resources an entity relies on and the relationships throughout its value chain —
including its operations and its legal and regulatory landscape. Gaining an
understanding of an entity’s context is a useful step in identifying an entity’s
sustainability-related risks and opportunities as it helps to highlight the areas
where risks and opportunities may arise.
We believe that the guidance included in EFRAG IG 1 may be helpful to an entity

in identifying its risks and opportunities. Although the guidance relates to ESRS, it
outlines some specific steps an entity might take in order to obtain an
understanding of its context as it relates to sustainability. We believe that an entity
applying the ISSB standards would also benefit from using these steps to
understand its context. The steps outlined in EFRAG IG 1 are: 143


□ analyse the entity’s business plan, strategy, financial statements, and other
information provided to investors and other stakeholders
□ understand the entity’s activities, products and/or services, and the

geographic locations of these activities
□ map the entity’s business relationships and upstream/downstream value

chain, including type and nature of business relationship
□ understand the relevant legal and regulatory landscape (See Question SRG
4-11)
□ review externally published documentation such as media reports, analysis of

peers, existing sector-specific benchmarks or general sustainability trends
and scientific articles.
An entity may also consider if other sources or steps for understanding its context
are relevant in its circumstances.
Entities that engage in similar activities or operate in similar jurisdictions may have
similar sustainability-related risks and opportunities. The identification of risks and
opportunities, however, is a process that is specific to an entity as each entity has
a different context and different dependencies. Without an understanding of its
context, an entity might not identify the relevant sustainability-related risks and
opportunities. See Question SRG 4-11 regarding understanding an entity’s
regulatory landscape.
Commonalities with ESRS — understanding the entity’s context
Under any sustainability reporting regime, gaining an understanding of the entity,

its context, operations, value chain, relevant laws and regulations, and
dependencies is critical and could be leveraged across frameworks. See SRG
4.3.2.1 for more information about the process for understanding an entity’s
context under ESRS.
4.4.1.7 Value chain
To identify sustainability-related risks and opportunities that could reasonably be

expected to affect an entity’s prospects, an understanding of an entity’s value
chain is necessary. The value chain encompasses the full range of interactions,
resources, and relationships related to an entity’s business model and the
external environment in which it operates. 144
IFRS S1 defines the value chain and provides examples of the types of
relationships that may be relevant to consider when identifying sustainability-
related risks and opportunities.
Excerpt from IFRS S1 Appendix A
Value chain: A value chain encompasses the interactions, resources and

relationships an entity uses and depends on to create its products or services
from conception to delivery, consumption and end-of-life including interactions,
resources and relationships in the entity’s operations, such as human resources;
those along its supply, marketing and distribution channels such as materials and
service sourcing, and product and service sale and delivery, and the financing,
geographical, geopolitical and regulatory environments in which the entity
operates.

The IFRS S1 application guidance clarifies that an entity’s value chain also
includes its investments, including associates and joint ventures. 145 Understanding
the value chain is crucial because risks and opportunities may arise from activities
in the entity’s upstream or downstream value chain.
The concept of “reasonable and supportable information that is available without

undue cost or effort” applies to determining the scope of an entity’s value chain in
relation to sustainability-related risks and opportunities. 146 (See SRG 4.4.1.5 for
more information about reasonable and supportable information.)
An entity does not need to perform an exhaustive search for sustainability-related

risks and opportunities in its value chain. An entity may focus its efforts on the
areas of the value chain where sustainability-related risks and opportunities are
likely to emerge.
When identifying sustainability-related risks and opportunities that could arise in

the value chain, an entity should consider its resources, relationships, and
interdependencies with its upstream and downstream value chain.
Figure SRG 4-18 provides considerations that we believe may help to highlight
areas in the value chain where sustainability-related risks and opportunities may
arise.
Figure SRG 4-18

Value chain considerations
Area Value chain considerations
Critical resource □ What are the entity’s critical resource inputs?

inputs
□ Are the entity’s critical resource inputs subject to sustainability related risks
that would cause disruption to the entity’s ability to generate cash flows?
□ What are the sustainability-related risks facing the entity’s critical resource
inputs? For example, are there physical climate events causing disruption
to supply, or changing regulations in relevant markets?
□ How vulnerable is the entity to disruption in the supply of these critical
resource inputs? Would disruption be reasonably expected to affect the
entity’s prospects?
□ Do the providers of the entity’s critical resource inputs engage in
sustainability-related practices which could negatively affect the entity’s
brand or reputation? For example, are key suppliers engaged in
deforestation or unsafe labour practices?
□ Is the entity likely to experience disruption in supply of critical inputs due to
changing market dynamics around sustainability? For example, is there an
increased demand for ethically sourced raw materials?

146 IFRS S1 paragraph B6(b).

Area Value chain considerations
Key markets and □ What are the entity’s key markets and is the entity reliant on certain
customers customers or market segments?
□ Is the entity subject to changes in market trends and consumer preferences
due to changing perspectives on sustainable business activities? For
example, are consumers buying less single-use plastic or purchasing more
fair-trade certified products?
□ Is the entity selling to customers who engage in sustainability-related
practices that could negatively affect the entity’s brand or reputation? For
example, are companies in high-emission industries using the entity’s
products or services?
Distribution □ How does the entity distribute its product?

channels
□ Are the entity’s usual distribution channels subject to disruption from
climate-related or other environmental events? For example, are there
reduced water levels in key shipping routes?
□ Is the entity reliant on high-emitting modes of transportation which may be
subject to new regulations or changes in consumer preferences regarding
long-distance, high-emission transport?
Regulatory context □ What countries or regions do the entity’s upstream and downstream value
chain partners operate in?
□ Are the entity’s upstream and downstream value chain partners subject to
changing regulation that could affect entity’s own business model and
prospects? For example, are there changing regulation around production
of petrol-powered vehicles?
Example SRG 4-2 in section SRG 4.3.2.2 contains a simplified example of a way
in which a sustainability-related risk that results from activities in an entity’s value
chain might be relevant for the entity’s sustainability reporting.
In general, when identifying sustainability-related risks in the upstream and

downstream value chain, an entity should balance the consideration of the cost
and effort for the entity of obtaining the information with the benefits of that
information for primary users.
Commonalities with ESRS — value chain
Both ESRS and the ISSB standards require consideration of risk and
opportunities that arise in an entity’s upstream and downstream value chain. We
believe that the definition of the value chain would be analogous between the
reporting standards, as discussed in SRG 3.4.
See SRG 3.4.1 for more information on the definition of the value chain, and SRG
4.3.2.2 for more information on the consideration of the value chain in the ESRS
double materiality approach.
4.4.1.8 Mitigation actions and plans to remediate
IFRS S1 does not provide guidance on whether risks should be assessed before
or after an entity’s prevention and mitigation actions. In the absence of specific
guidance, entities should select a reasonable approach for considering prevention
and mitigation actions when assessing risks and apply that approach consistently.
The approach chosen should not result in omitting material information.

An entity’s assessment of risks and opportunities should result in material
information being provided to the primary users. When an entity has identified a
risk and has put in place extensive prevention or mitigation activities in the past,
information about these activities may be material information as they may
influence primary users’ decisions about the entity. An entity should still disclose
the risk and the related mitigation efforts if such information is material. 147
If an entity plans to take action in the future to remediate or address a risk once it
occurs, the financial effect of those plans should be considered as part of the
assessment of whether the risk would affect the entity’s prospects. Generally, a
plan to address a risk will generate a cash outflow which suggests the risk would
be expected to affect an entity’s prospects and thus would be relevant for the
entity. Material information about the risk would then be provided, including
information about an entity’s plan to respond to the risk. 148
Commonalities with ESRS — mitigation plans and plans to remediate
We believe one way an entity might consider prevention and mitigation actions
would be through assessing the magnitude and likelihood of the risk. SRG 4.3.2.7
covers an approach for considering prevention, remediation, and mitigation
activities in the materiality assessment that is aligned with ESRS and which may
also be a reasonable approach under the ISSB standards.
4.4.2 Step 2 — Identify material information
This section outlines the second step in the materiality assessment process —
identifying material information to report about the sustainability-related risks and
opportunities that could be reasonable expected to affect the entity’s prospects.
□ Materiality of information (4.4.2.1)
□ Obscuring material information (4.4.2.2)
□ Disaggregation of information (4.4.2.3)
In each of the following sections, we identify areas where there are common
concepts between ESRS and the ISSB standards.
4.4.2.1 Materiality of information
An entity is required to disclose material information about its sustainability-related

risks and opportunities. 149
In the context of sustainability-related financial disclosures, information is material

if omitting, misstating or obscuring that information could reasonably be expected
to influence decisions that primary users of general-purpose financial reports
make on the basis of those reports.
Materiality has both qualitative and quantitative characteristics. Information about

a sustainability-related risk or opportunity could be assessed as material based on
the magnitude or nature of the effect on the entity, or both. 150 See Question SRG
4-14 for more detail on qualitative factors that might result in information being
assessed as material. The assessment of whether specific information, either
147 IFRS S1 paragraph 33(a).

149 IFRS S1 paragraphs 17–19.

individually or in combination with other information, is material is made in the
context of an entity’s sustainability reporting as a whole.
An entity is required to reassess the judgements it has made in its materiality

assessment — that is, the judgements made when identifying material information
— at each reporting date. Changes to an entity’s circumstances or its external
environment might change what information about its sustainability-related risks
and opportunities is and is not material. 151
Information needs of primary users
Whether information could be reasonably expected to affect the decision making

of the primary users — and thus is material — will require consideration of an
entity’s own circumstances and the characteristics of its primary users. 152
Materiality under IFRS S1 is specifically described in relation to the decisions of

the primary users. Primary users are defined as “existing and potential investors,
lenders and other creditors”. 153 This definition is consistent with the definition of
primary users in IAS 1 Presentation of Financial Statements. Materiality is
assessed against the decision making of reasonably knowledgeable individuals
who review and analyse information diligently. 154
Examples of decisions that the primary users would make about providing
resources to an entity would include investing or selling equity or debt in an entity,
exercising voting rights, or providing forms of credit. 155 These decisions depend
both on the primary users assessment of the future cash flows of an entity, and on
the user’s assessment of the “stewardship of the entity’s economic resources by
the entity’s management and its governing body(s) or individual(s)”. 156
Question SRG 4-4
If an individual investor requests a specific piece of sustainability information,

should that information be assessed as material?
PwC response
An entity makes its materiality assessments based on the decision-making needs
of primary users. When making this assessment, an entity should consider the
common information needs of primary users. 157
Individual investors, creditors, or lenders might ask an entity for specific pieces of
sustainability information for their specific individual needs. Individual needs of
specific primary users may at times come into conflict. An entity’s materiality
assessment should focus on the common information needs, so a specific request
by a specific investor will not on its own result in the information being assessed
as material. 158


Uncertain future outcomes
In some cases, the ISSB standards require disclosure of information about

possible future events with uncertain outcomes. In determining whether the
information is material, an entity should consider:
□ The potential effects of the events on the amount, timing, and uncertainty of
the entity’s future cash flows over the short-, medium-, and long-term, and
□ The range of possible outcomes and likelihood of the range of outcomes. 159
An entity should consider whether information about low-probability and high

magnitude outcomes may be material individually or in the aggregate. 160
For example, an entity might be exposed to several sustainability-related risks,

each of which could cause the same type of disruption—such as disruption to the
entity’s supply chain. Information about an individual source of risk might not be
material if disruption from that source is highly unlikely to occur. However,
information about the aggregate risk—the risk of supply chain disruption from all
sources—might be material.
For more information about assessing risks that arise over a long-time horizon,
see Question SRG 4-12.
Connection to IFRS financial reporting
The definition of materiality in IFRS S1 is consistent with the definition of

materiality in the IFRS Conceptual Framework and IAS 1 Presentation of
Financial Statements.
Although the definition of materiality is the same, information may be deemed

material in the context of a sustainability reporting even if such information would
not be material to the financial statements.
This is due to the fundamentally different scope of the sustainability reporting

compared to the financial statements, in particular due to the inclusion of
information about risks and opportunities that arise in the value chain, the fact that
the time horizons used in sustainability reporting are generally longer than the
time horizons used in financial reporting, and that sustainability reporting includes
in its scope the effects of risks which might not yet be captured in the financial
statements.
Commonalities with ESRS — materiality of information
Information about a sustainability-related risk or opportunity which is material

under the ISSB standards will be aligned with information that is material from a
financial materiality point of view under ESRS. 161
This alignment is supported by the fact that both ISSB standards and ESRS use


reports. 162 The ISSB standards and ESRS also use the same definition for primary
users. 163
See SRG 4.3.4 for information on assessing materiality of information under

ESRS.
4.4.2.2 Obscuring material information
Only material information needs to be disclosed in sustainability reporting. If

excessive information that is not material is reported in the sustainability reporting,
this could interfere with the primary users’ decision-making as it may obscure
material information.
Examples of circumstances that might result in material information being

obscured include:
a. material information is not clearly distinguished from additional information
that is not material;
b. material information is disclosed in the sustainability-related financial
disclosures, but the language used is vague or unclear;
c. material information about a sustainability-related risk or opportunity is
scattered throughout the sustainability-related financial disclosures;
d. items of information that are dissimilar are inappropriately aggregated;
e. items of information that are similar are inappropriately disaggregated; and
f. the understandability of the sustainability-related financial disclosures is
reduced as a result of material information being hidden by immaterial
information to the extent that a primary user is unable to determine what
information is material.
An entity does not need to disclose information that is not material, even if that
information is described as a disclosure requirement by the IFRS Sustainability
Disclosure Standards. 164
Question SRG 4-5
Is it possible to identify a risk that is reasonably expected to affect an entity’s

prospects, and not identify any material information about that risk?
PwC response
IFRS S1 does not use the term ‘material’ when describing the risks and
opportunities that are relevant for inclusion in sustainability reporting. Rather, the
scope of the ISSB standards includes “sustainability-related risks and
opportunities that could reasonably be expected to affect the entity’s prospects”
and requires material information to be provided about those risks.
If a risk is reasonably expected to affect the entity’s prospects, but the expected
effect is so minimal that there is no material information about that risk (that is,
information about the risk would not change the decisions of the primary users),
no information about that risk would be required to be disclosed.

163 Commission Delegated Regulation (EU) 2023/2772, Annex II; IFRS S1 Appendix A.

On the other hand, if information has been identified which would change the
decisions of primary users (material information), this is indicative that the
information relates to a risk or opportunity that could reasonably be expected to
affect an entity’s prospects.
Question SRG 4-6
Can sustainability information that an entity publicly reported prior to the first year
of application of the ISSB standards continue to be reported in its ISSB
sustainability reporting?
PwC response
If an entity has been previously reporting on sustainability information, we believe
that the entity should review this reporting to determine whether it covers any
sustainability-related risks or opportunities that would be in scope for reporting
under the ISSB standards.
Any information which an entity had previously reported which is still assessed as
being material to the primary users of the general-purpose financial reports should
still be included in its sustainability reporting under the ISSB standards. An entity
should ensure that any immaterial information it includes in its sustainability
reporting does not obscure material information.
4.4.2.3 Disaggregation of information
When determining what information to provide about an entity’s sustainability-

related risks and opportunities, an entity must consider the level of disaggregation
necessary.
IFRS S1 explains that entities may consider disaggregation by location or

geopolitical environment. For example, an entity might disaggregate information
about its use of water between information related to water-stressed areas and
information related to water-abundant areas. 165 The basis on which the
sustainability information is disaggregated will depend on the specific facts and
circumstances of the risk or opportunity being described.
IFRS S1 specifically prohibits aggregation of information that either:
□ reduces the understandability of the information and obscures material

information with immaterial information
□ does not have shared characteristics or are not similar to each other 166
See Question SRG 4-13 for further information on disaggregation and financial
reporting segments.
Commonalities with ESRS — disaggregation of information
Both ESRS and the ISSB standards require disaggregation of information and
provide similar examples on potential ways that information could be
disaggregated to provide users with the necessary level of detail. See SRG
4.3.4.4 for more information about disaggregation of information under ESRS.

166 IFRS S1 paragraphs B29–B30.

4.4.3 Sources of guidance for identifying risks and opportunities and
identifying material information
IFRS S1 provides guidance on sources that an entity should and may use when
identifying risks and opportunities, as well as identifying material information about
those risks and opportunities to report.
Sources of guidance for step 1 — identify sustainability-related risks

and opportunities
When an entity is identifying sustainability-related risks and opportunities that

affect its prospects, it is required to apply the IFRS Sustainability Disclosure
Standards — IFRS S1 and any thematic standards issued by the ISSB. 167 At the
time of writing, only one thematic standard has been issued — IFRS S2 Climate-
Related Disclosures.
In addition to the IFRS Sustainability Disclosure Standards, an entity is required to

refer to and consider the applicability of the disclosure topics in the SASB
standards. 168
IFRS S1 indicates that an entity may also consider the following sources of
guidance to identify other sustainability-related risks and opportunities that could
affect an entity’s prospects over the short-, medium-, and long-term: 169
□ the Climate Disclosure Standards Board (CDSB) framework application

guidance for water- and biodiversity-related disclosures
□ the most recent pronouncements of other standard-setting bodies whose

requirements are designed to meet the needs of primary users
□ the sustainability-related risks and opportunities identified by entities that

operate in the same industries or geographies
While the sources listed above may provide guidance in identifying risks and
opportunities, they are not a substitute for gaining an understanding of an entity
and its value chain. Entities may find that they have risks and opportunities in their
business model and value chain which are not identified in any of the above
sources of guidance. These matters would nonetheless need to be considered as
possible risks and opportunities relevant for reporting.
Question SRG 4-7
For purposes of reporting in accordance with the ISSB standards, are entities
required to consider the SASB standards as part of their process of identifying
sustainability-related risks and opportunities?
PwC response
Yes. Based on IFRS S1 paragraphs 55(a) and 58(a), an entity “shall refer to and
consider” the disclosure topics in the SASB standards when identifying
sustainability-related risks and opportunities and when identifying applicable
disclosure requirements to report. Typically, ‘shall’ refers to a requirement and
there is no optionality available to the entity.
The SASB standards are industry-based (for example, oil and gas – exploration &
production, and commercial banking) and specify disclosure topics appropriate for
that industry (for example, water management), including a list of metrics within
each disclosure topic (for example, total water withdrawn, total water consumed,

169 IFRS S1 paragraph 55(b).

and the percentage of each in regions with high or extremely high baseline water
stress).
IFRS S1 Basis for Conclusion, paragraph BC131 clarifies that an entity is required
to consider the SASB standards in a systematic manner but is not required to
apply each of the individual provisions if such disclosures are not relevant to the
decision-making of users of general purpose financial reports and do not faithfully
represent sustainability-related risk or opportunity. IFRS S1 paragraphs 55(a) and
58(a) explicitly states that an entity might conclude that the disclosure topics, and
metrics, included in the SASB standards are not applicable to its circumstances.
Question SRG 4-8
Do the ISSB standards require engagement with stakeholders as part of their

materiality assessment?
PwC response
No. The ISSB standards do not require engagement with affected stakeholders as
part of the process of identifying risks and opportunities.
However, an entity may consider whether in addition to the above sources,

engagement with key stakeholders would also help the entity to identify relevant
sustainability-related risks and opportunities. Engagement with primary users may
provide insight into the risks and opportunities that those users are most
interested in, which may help to identify risks and opportunities that are
reasonably likely to affect the entity’s prospects.
Sources of guidance for step 2 — identify material information
When determining what information to provide about a sustainability-related risk

or opportunity, entities are required to apply the general requirements in IFRS S1
and the IFRS Sustainability Disclosure Standard that addresses that specific risk
or opportunity. 170
When an IFRS Sustainability Disclosure Standard does not specifically address a

sustainability-related risk or opportunity, an entity is required to apply judgement
to identify information that faithfully represents the specific risk or opportunity and
would be relevant to the decision-making needs of an entity’s primary users. 171
An entity should consider whether information beyond that required in the IFRS
Sustainability Disclosure Standards would be material to the primary users. If
such information would be material and omitting it would influence the decisions
made by the primary users, then such information should be disclosed. 172
In making this judgement, an entity must refer to and consider the applicability of
the metrics included within the disclosure topics in the industry-based SASB
standards; and may also consider, to the extent they do not conflict with an IFRS
Sustainability Disclosure Standard, all of the following: 173

171 IFRS S1 paragraphs 57 and C1.
173 IFRS S1 paragraphs 58 and C2.

□ the CDSB framework application guidance for water- and biodiversity-related
disclosures
□ the most recent pronouncements of other standard setting bodies whose

requirements are designed to meet the information needs of primary users
□ the information, including metrics, disclosed by entities in the same industry

(or industries) or geographical region(s)
□ the European Sustainability Reporting Standards (ESRS) and the Global

Reporting Initiative (GRI) standards
An entity should consider whether information beyond that required in the IFRS
Sustainability Disclosure Standards would be material to the primary users. If
such information would be material and omitting it would influence the decisions
made by the primary users, then such information should be disclosed. 174
The list of sources of guidance provided for identifying disclosure requirements to

report is very similar to the list of sources of guidance provided for identifying
sustainability-related risks and opportunities. The only difference in the list of
sources is the inclusion of the ESRS and GRI standards as a source for the
identification of information to disclose.
In relation to the use of the ESRS and GRI standards, IFRS S1 specifically states
that these sources may be used if they are used to assist an entity in meeting the
objective of IFRS S1 and do not conflict with the ISSB standards. An entity shall
not obscure material information required by the IFRS Sustainability Disclosure
standards in applying these sources of guidance. 175 See SRG 4.4.2.2 for more
detail on not obscuring material information.
An entity should disclose the specific standards, pronouncements, industry

practice, and other sources of guidance used to prepare its sustainability-related
financial disclosures. This includes identifying the disclosure topics in the SASB
Standards, if applicable, and any industry-specific standards or guidance used in
preparing its sustainability-related financial disclosures, including any applicable
metrics. 176
Question SRG 4-9
May entities refer to ESRS and GRI standards as sources of guidance in

identifying sustainability-related risks and opportunities under the ISSB
standards?
PwC response
The GRI standards and ESRS are designed to meet the information needs of a
broad range of users, rather than solely focusing on the primary users of general-
purpose financial reports. 177 ESRS and the standards issued by GRI are not
included in the list of sources of guidance to identify sustainability-related risks
and opportunities.
However, GRI and ESRS are included as sources an entity is permitted to use to
identify information to provide about its sustainability-related risks and
opportunities for related risk and opportunity disclosures. The Basis for
Conclusions for IFRS S1 clarifies the rationale for this difference:

175 IFRS S1 paragraphs C1–C3.

Excerpt from IFRS S1 Basis for Conclusions, paragraph BC137
The ISSB noted that the Exposure Draft only permitted an entity to refer to the
most recent pronouncements of other standard-setting bodies whose
requirements are designed to meet the needs of ‘primary users’ of general-
purpose financial reports. Therefore, the addition of references to the GRI
standards and ESRS would be necessary to permit an entity to refer to these
sources of guidance. Under the revised approach, an entity is permitted to refer to
the GRI standards and ESRS to identify information to provide once the entity has
identified sustainability-related risks and opportunities. Allowing these standards
to be referred to in identifying information to provide, but not to identify
sustainability-related risks or opportunities, is intended to ensure that any
information disclosed by entities relates to a topic that has been identified as of
interest to users of general purpose financial reports.
Commonalities with ESRS — sources of guidance
As noted above, ESRS are listed as a source of guidance that an entity applying
the ISSB standards may choose to use to identify disclosure requirements about
sustainability-related risks and opportunities that would be material to primary
users of general purpose financial reports. 178
An entity applying ESRS is also permitted to refer to and consider the ISSB
standards when developing its entity-specific disclosures. 179 Particularly in the
case of sector-specific information, prior to the issuance of sector-specific ESRS,
entity-specific disclosures will also need to cover sector-specific information and
ESRS 1 permits an entity to refer to the IFRS industry based guidance (which
includes the Industry-based Guidance on Implementing IFRS S2 and the SASB
standards 180) and the GRI standards in identifying this information. 181
See SRG 4.3.4.3 for more information on developing entity-specific disclosures

under ESRS.
4.5 SEC materiality approach

The SEC rules require an entity to identify climate-related risks that have
materially impacted or are reasonably likely to have a material impact on the
entity, including on its strategy, results of operations, or financial condition. 182
Once a material climate-related risk has been identified, the SEC rules require
specific disclosures related to the impact or the potential impact of the climate-
related risk to the entity’s business.
This section covers the following topics:
□ SEC rules - identify climate-related risks (SRG 4.5.1)
o Understand the entity’s context (SRG 4.5.1.1)
o Time horizons (SRG 4.5.1.2)
o Definition of physical risks (SRG 4.5.1.3)

179 ESRS 1 AR 4.
181 ESRS 1 paragraph 131(b); EFRAG IG 1 paragraph 74, pages 21-22.
182 The SEC rules use the term ‘registrant’ to refer to a company or entity that files with the
SEC. In our discussion of the rules, we use company or entity, which in this context, has
the same meaning as registrant.

o Definition of transition risks (SRG 4.5.1.4)
o Impacts of climate-related risks (SRG 4.5.1.5)
□ SEC rules - determine material climate-related risks (SRG 4.5.2)
o Reasonably likely (SRG 4.5.2.1)
In addition to the required disclosure of material climate-related risks, there are

disclosures that are required for entities if certain other climate-related
information, including greenhouse gas emissions, is assessed as material. See
SRG 7.2.4 for information on the greenhouse gas disclosure requirements in the
SEC rules.
The SEC rules also require financial statement footnote disclosures of the
financial effects of severe weather events and other natural conditions if certain
‘bright line’ thresholds are met (as defined in the rules). 183 There are other climate-
related financial statement footnote disclosures related to carbon credits and
renewable energy credits, and estimates and assumptions used in the preparation
of the financial statements that rely on the traditional concept of materiality. The
SEC climate disclosure rules are discussed in SRG 8, Climate [coming soon].
When disclosures are required based on materiality, the assessment is based on

the existing concept of materiality within US federal securities laws.
Excerpt from SEC adopting release 184
In those instances where the rules reference materiality – consistent with our
existing disclosure rules and market practices – materiality refers to the
importance of information to investment and voting decisions about a particular
company, not to the importance of information to climate-related issues outside of
those decisions.
While the term ‘impact’ is used in the SEC climate disclosure rules, it does not
have the same meaning as the use of the same term under ESRS. Under the
SEC climate disclosure rules, ‘impact’ is used in relation to the effect an identified
material climate-related risk has had or is reasonably like to have on the entity’s
business, results of operations, or financial condition. It is not meant to capture
the entity’s impact on the environment or people.
4.5.1 Identify climate-related risks
The SEC rules require an entity to describe any climate-related risks that have
materially impacted or are reasonable likely to have a material impact on the
entity, including on its strategy, results of operations, or financial condition. The
definition of climate-related risks categorises the risk as either a physical risk
(acute or chronic) or a transition risk. The definition of these risks includes the
types of events that could give rise to a risk, and companies may use these
definitions to help identify risks that could be material. Similarly, the types of
events discussed in the rules can help companies think about the types of risks
that could be required to be disclosed.
183 SEC, Climate disclosure rules, Regulation S-X Item 14–02(b)(1) and (2).
184 SEC, Final climate disclosure rules, pages 18–19. The SEC provides an adopting
release in conjunction with the issuance of any new rule. This is a narrative document that
explains the basis for the new rules, the SEC’s response to public comments, including
changes to the rules, explanation of the rules, and the economic analysis supporting the
costs and benefits of the new rules.

4.5.1.1 Understand the entity’s context
For an entity to perform an effective risk assessment, management needs to

understand the entity’s business and the markets in which it operates. The SEC
rules provide a non-exclusive list of potential areas that could be impacted by
climate-related risks: 185
□ business strategy
□ results of operations
□ financial condition
□ business operations, including the types and locations of its operations
□ products or services
□ suppliers, purchasers, or counterparties to material contracts
□ activities to mitigate or adapt to climate-related risks, including the adoption of

new technologies or processes
□ expenditures for research and development
□ financial planning
□ capital allocation
There could be other areas, not listed above, impacted by climate-related risks
that would need to be disclosed. If none of the listed types of impacts, or any
other impacts, are material, an entity does not need to disclose them.
The markets in which an entity operates could also impact an entity’s business
and could give rise to climate-related risks. These risks could arise from areas
such as potential changes to the regulatory landscape, technological changes that
could create new products or services or make existing products or services
obsolete, or changes in market demands including changing consumer behaviour,
expectations from business counterparties, and investor preferences.
See Question SRG 3-8 in SRG 3.4.1 for discussion of how an entity would
consider its value chain when identifying material climate-related risks under the
SEC rules.
An entity will need to identify climate-related risks that are reasonably likely to
manifest in the short-term (that is, the next 12 months) and separately in the long-
term (that is, beyond the next 12 months).
The concept of short-term and long-term is generally consistent with an existing

requirement in Item 303 of SEC Regulation S-K, Management’s Discussion and
Analysis (MD&A). The MD&A section specifically requires an entity to analyse its
ability to generate and obtain adequate amounts of cash to meet its requirements
and plans for cash in the short-term (the next 12 months from the most recent
fiscal period end required to be presented) and separately in the long-term
(beyond the next 12 months). 186
The existing MD&A section also generally requires that an entity “provide insight
into material opportunities, challenges and risks, such as those presented by
185 SEC, Climate disclosure rules, Regulation S-K Item 1502(a), (b), and (c).
186 SEC, Regulation S-K Item 303(b)(1).

known material trends and uncertainties, on which the entity’s executives are
most focused for both the short- and long-term, as well as the actions they are
taking to address these opportunities, challenges, and risks.” 187
4.5.1.3 Definition of physical risks
Physical climate-related risks may be classified as either acute or chronic.
Excerpt from S-K 1500
Climate-related risks means the actual or potential negative impacts of climate-

related conditions and events on a registrant’s business, results of operations, or
financial condition.
Climate-related risks include the following:
(1) Physical risks include both acute risks and chronic risks to the registrant’s
business operations.
(2) Acute risks are event-driven and may relate to shorter term severe weather
events, such as hurricanes, floods, tornadoes, and wildfires, among other
events.
(3) Chronic risks relate to longer term weather patterns, such as sustained higher
temperatures, sea level rise, and drought, as well as related effects such as
decreased arability of farmland, decreased habitability of land, and decreased
availability of fresh water.
An entity will need to identify, based on its facts and circumstances, if it has any
material climate-related physical risks that affect its strategy, results of operations,
or financial condition.
4.5.1.4 Definition of transition risks
Transition risks are risks related to the transition to a lower carbon economy. As
defined, transition risks can be wide ranging.
Excerpt from S-K 1500(4)
Transition risks are the actual or potential negative impacts on a registrant’s

business, results of operations, or financial condition attributable to regulatory,
technological, and market changes to address the mitigation of, or adaptation to,
climate-related risks
The definition includes some examples of transition risks, such as devaluation or

abandonment of assets as a result of decreased demand for carbon-intensive
products or changes in law or policy, risk of legal liability and litigation defence
costs, and reputation impacts, including those stemming from changes in
customer behaviour or business counterparties. Figure SRG 4-20 provides
additional examples of transition risks and physical risks.
See Question SRG 4-11 for discussion of the impact of changes in laws and
regulations on the identification of climate-related risks.
187SEC, Interpretive release: Commission Guidance Regarding Management’s Discussion

and Analysis of Financial Condition and Results of Operation, effective 29 December 2003.

4.5.1.5 Impacts of climate-related risks
The SEC provided examples of potential climate-related impacts in its 2010

interpretive release. 188 The SEC published this interpretive release to provide
guidance to public companies regarding the SEC’s existing disclosure
requirements and how they apply to climate change matters.
While not specifically discussed in the SEC’s climate disclosure rules, the
examples in the 2010 interpretive release (see Figure SRG 4-19) may help inform
an entity’s risk assessment process and identification of material climate-related
risks.
Figure SRG 4-19

Examples of climate-related events and impacts that could result in transition risks
or physical risks
Type of events Sample impacts on the business and its financial results
Transition risk - □ Costs to purchase, or profits from sales of, allowances, or credits under a
impact of legislation cap-and-trade system.
and regulation
□ Costs required to improve facilities and equipment to reduce emissions in
order to comply with regulatory limits or to mitigate the financial
consequences of a cap-and-trade regime.
□ Changes to profit or loss arising from increased or decreased demand for
goods and services produced by the registrant arising directly from
legislation or regulation, and indirectly from changes in costs of goods sold.
Transition risk - □ The impact of treaties or international accords relating to climate change, if
international material to the business (for example, the Kyoto Protocol, the European
accords Union Emissions Trading System).
Transition risk - □ Decreased demand for goods that produce significant greenhouse gas
indirect emissions.
consequences of
□ Increased demand for goods that result in lower emissions than competing
regulation or
products.
business trends
□ Increased competition to develop innovative new products.
□ Increased demand for generation and transmission of energy from
alternative energy sources.
□ Decreased demand for services related to carbon-based energy sources,
such as drilling services or equipment maintenance services.
188 SEC, Commission Guidance Regarding Disclosure Related to Climate Change.

Type of events Sample impacts on the business and its financial results
Physical risk - □ The effects of climate change on the severity of weather (for example,
physical impacts of floods or hurricanes), sea levels, the arability of farmland, and water
climate change availability and quality, have the potential to affect a registrant’s operations
and results.
□ Consequences of severe weather include:
o property damage and disruptions to operations concentrated on
coastlines, including manufacturing operations or the transport of
manufactured products
o indirect financial and operational impacts from disruptions to the
operations of major customers or suppliers from severe weather, such
as hurricanes or floods
o increased insurance claims and liabilities for insurance and reinsurance
companies
o decreased agricultural production capacity in areas affected by drought
or other weather-related changes
o increased insurance premiums and deductibles, or a decrease in the
availability of coverage, for registrants with plants or operations in
areas subject to severe weather
Figure SRG 4-20 is not an exhaustive list; entities will need to consider the ways
in which they could be impacted by climate-related risks, which may evolve over
time.
4.5.2 Determine material climate-related risks
When evaluating whether any climate-related risks have materially impacted or

are reasonably likely to have a material impact on the entity, including on its
business strategy, results of operations, or financial condition, companies should
rely on the traditional notions of materiality as considered in reporting other
information in SEC filings. As defined by the SEC and consistent with US
Supreme Court precedent, a matter is material if there is a substantial likelihood
that a reasonable investor would consider it important when determining whether
to buy or sell securities or how to vote or such as a reasonable investor would
view omission of the disclosure as having significantly altered the total mix of
information made available. 189
The materiality determination regarding climate-related risks under the SEC rules
is the same as that which is generally required when preparing the MD&A section
in a registration statement or periodic reports. The MD&A section requires an
entity to disclose material events and uncertainties known to management that
are reasonably likely to cause reported financial information not to be necessarily
indicative of future operating results or of future financial condition, including
descriptions and amounts of matters that have had a material impact on reported
operations as well as matters that are reasonably likely to have a material impact
on future operations. 190
The materiality determination is fact specific and one that requires both
quantitative and qualitative considerations. It also benefits from an informed and
deliberative process involving functions from across the organisation, including
189 See 17 CFR 230.405; 17 CFR 240.12b-2. See also Basic Inc. v. Levinson, 485 U.S.
224, 231, 232, and 240 (1988); and TSC Industries, Inc. v. Northway, Inc., 426 U. S. 438,
449 (1977).
190 SEC, Regulation S-K Item 303(a).

legal, finance, operations, and sustainability functions, as well as external legal
advice.
Question SRG 4-10
For purposes of applying the SEC climate disclosure rules, what are some
qualitative considerations that could influence an entity’s materiality
determination?
PwC response
We believe an entity can look to Staff Accounting Bulletin (SAB) No. 99 for
qualitative factors that could be considered as part of the materiality assessment
process for the SEC climate disclosure rules. 191 SAB No. 99 discusses the
importance of qualitative factors in assessing the materiality of misstatements. It
describes qualitative factors that could result in a quantitatively small
misstatement being material.
These considerations are described in the context of evaluating a misstatement,

but we believe that the substance of these considerations could be relevant in
assessing if climate-related information could be material for disclosure in an SEC
filing. Figure SRG 4-20 lists the general and SAB No. 99 qualitative factors to
consider when assessing materiality.
Figure SRG 4-20

Possible considerations when assessing materiality on a qualitative basis
SAB No. 99 qualitative consideration Qualitative consideration for climate-related information
Whether the misstatement arises from an What is the level of management confidence in the effect of the
item capable of precise measurement or climate-related risk or climate-related information?
whether it arises from an estimate and, if
so, the degree of imprecision inherent in
the estimate
Whether the misstatement masks a change Would the climate-related information affect future earnings,
in earnings or other trends strategy or business trends?
Whether the misstatement hides a failure to What are analysts’ expectations for the enterprise related to its
meet analysts' consensus expectations for transition to a lower carbon economy?
the enterprise
Do analysts have expectations related to the effect of climate-
related events or risks on the entity?
Whether the misstatement changes a loss Would the climate-related risk potentially affect the entity’s
into income or vice versa future income projections?
Whether the misstatement concerns a Is the climate-related information significant to a particular

segment or other portion of the registrant's segment or portion of the entity’s business, operations,
business that has been identified as playing geographic location, or profitability?
a significant role in the registrant's
operations or profitability
Whether the misstatement affects the Could the climate-related information affect the entity’s
registrant's compliance with regulatory compliance with regulatory requirements?
requirements
191 SEC, Staff Accounting Bulletin No. 99.

SAB No. 99 qualitative consideration Qualitative consideration for climate-related information
Whether the misstatement affects the Could the climate-related information affect the entity’s
registrant's compliance with loan covenants compliance with loan covenants or other contractual
or other contractual requirements requirements (such as supplier contracts)?
Whether the misstatement has the effect of Could the climate-related information affect any component of
increasing management's compensation – management compensation?
for example, by satisfying requirements for
the award of bonuses or other forms of
incentive compensation
Whether the misstatement involves Not applicable

concealment of an unlawful transaction
Additional questions we believe an entity could consider in assessing materiality

for the SEC climate disclosure rules could include:
□ Does compliance with other jurisdictions sustainability laws and regulations

have a material impact on the entity’s financial position through potential fines
or required changes to products or services?
□ If climate-related information is provided voluntarily outside of a SEC filing,

why is the information being provided? Was the information requested from
suppliers, customers, or investors?
□ Has the entity made any public commitments related to becoming net zero or
carbon neutral?
□ Does the information relate to a disclosed climate-related target, goal, or

transition plan?
□ Are those charged with governance or the executive management team

focused on the climate-related information? Is there regular monitoring or
reporting?
These are some potential considerations an entity could consider and is not an
exhaustive list.
4.5.2.1 Reasonably likely
The “reasonably likely” threshold in the SEC climate disclosure rules is the same
standard as in MD&A regarding known trends, events, and uncertainties and is
grounded in whether disclosure of the climate-related risk would be material to
investors and requires that management evaluate the consequences of the risk as
it would any known trend, demand, commitment, event, or uncertainty.
Accordingly, management should make an objective evaluation, based on
materiality, including where the fruition of future events is unknown.
Companies can look to the guidance in the 2020 MD&A adopting release
regarding application of the ‘reasonably likely’ standard when considering their
disclosure obligations.

2020 MD&A adopting release, pages 45-46 192
The “reasonably likely” threshold does not require disclosure of any event that is
known but for which fruition may be remote, nor does it set a bright-line
percentage threshold by which disclosure is triggered. Rather, this threshold
requires a thoughtful analysis that applies an objective assessment of the
likelihood that an event will occur balanced with a materiality analysis regarding
the need for disclosure regarding such event.
In connection with the adoption of the updates to MD&A in 2020, commentors had
expressed concern to the SEC that the application of the ‘reasonably likely’
threshold could result in disclosure of information that was not material, or that the
evaluation could be overly burdensome because it would require companies to
affirm the non-existence or non-occurrence of a material future event. In the 2020
MD&A adopting release, the SEC clarified that the rules were not intended to, nor
do they require, companies to affirm the non-existence or non-occurrence of a
material future event. The SEC further clarified that the rules were not intended to
apply a probability/magnitude test that could result in disclosure of issues that are
large in potential magnitude but low in probability.
4.6 Frequently asked questions

This section covers frequently asked questions related to the materiality
assessment that are relevant for more than one sustainability reporting
framework.
Question SRG 4-11
How should changes to laws and regulations be considered in the context of

sustainability reporting?
PwC response
New legislation or changes to existing legislation may affect an entity and the
impacts, risks, and opportunities disclosed in its sustainability reporting.
Since the assessment of risks and opportunities is forward looking, an entity’s

assessment cannot only consider existing laws and regulations. Instead, entities
need to monitor the legislative and regulatory landscape and developments in
jurisdictions that might affect the entity’s business, and the likelihood that changes
in laws and regulations will be enacted. For example, this could include changes
to tax incentives, laws prohibiting the use of specific products or processes, or
changes to regulations related to worker or customer protection.
As part of its assessment of legislative and regulatory developments, an entity

should consider what developments primary users and other stakeholders expect
are likely to occur as these expectations could influence the information needs of
primary users.
This consideration of possible new laws and regulations as part of identifying

sustainability-related risks and opportunities is different to the way changes to
laws and regulations are dealt with under financial accounting. Generally,
changes to laws and regulations are not accounted for in financial reporting until
they are enacted or substantively enacted.
SEC, Management’s Discussion and Analysis, Selected Financial Data, and

192
Supplementary Financial Information.

Question SRG 4-12
How should risks that arise over the long-term time horizon be assessed for
materiality?
PwC response
An entity should evaluate risks that emerge over the short-, medium-, and long-
term using the same materiality assessment process and should not minimise the
potential significance of long-term risks in that assessment. Whether the risk
emerges in the short-, medium-, or long-term is a characteristic of the risk; this
characteristic alone does not determine its materiality.
□ Uncertainty in relation to long-term risks

Risks that arise over the long-term may generally be more uncertain
compared to short-term risks. This uncertainty might arise in both uncertainty
about the exact amount of the financial effect of the risk, and the timing of
occurrence or likelihood of occurrence of the risk.
□ Uncertainty related to financial effect

It may be challenging for an entity to provide a precise quantitative
expectation of the financial effects for a risk that emerges in the long-term.
The further into the future the risk is expected to occur, it may be more likely
that a precise quantitative analysis of the future financial effects is not
possible. The use of qualitative analysis to assess the potential financial effect
is an integral part of the materiality assessment process. Information about a
risk may still be material to primary users even if the potential financial effect
of the risk cannot be quantified.
□ Uncertainty related to timing

There may be more uncertainty related to when risks are expected to arise in
the long-term compared to risks that are expected to arise in the short-term.
The likelihood that an event may occur might become more certain when
considering a longer time horizon, but the precise timing of the event may be
more uncertain.
□ Scenario analysis
Given the number of factors that could influence different future outcomes of a
risk that arises in the long-term, entities may need to perform scenario
analysis to evaluate a risk that arises in the long-term. An entity could
estimate different possible outcomes of a risk and weight each scenario
based on their likelihood to occur to assist in the materiality assessment
process.
For example, if an entity’s main production facility is located in an area where

tornadoes are frequent, the probability that the production facility will be hit by
a tornado may be higher over a long-time horizon than over a short period of
time. The entity may not be hit in the next year by a tornado, but over 5 or 10
or 15 years the risk that the facility will be hit by a tornado increases. The
entity may not be able to predict when the tornado will hit its production facility
and the amount of the damages that will be caused, but the potential
outcomes should be factored into the entity’s materiality assessment.
□ Material information about long-term risks

If a risk only arises in the long-term, and there is uncertainty about the timing
and magnitude of the financial effects of that risk, information about long-term
risks that an entity is monitoring or managing, including its policies regarding
those risks, may provide material information as it may highlight the long-term
sustainability of an entity’s business model and strategy.

Similarly, if an entity has identified a long-term risk that is reasonably
expected to affect its cost of capital, access to finance, or cash flows but the
entity does not have any policies to manage this risk, this may provide
material information to primary users about the long-term sustainability of the
entity’s strategy.
In some circumstances, the information is expected to influence user’s

decisions regardless of the timing of the future event or magnitude, such as a
highly scrutinised risk or opportunity, and the information could be material as
the assessment relies on the decisions made by the primary users of the
sustainability reporting. 193 Information about low-likelihood, but high-impact
outcomes of risks may be material to primary users, especially if
aggregated. 194 Thus, when considering the materiality of information about a
long-term risk, an entity needs to consider the decision-making needs of
users regardless of whether the risk is expected to arise in the short or long-
term.
□ Time value of money

A question then arises about whether entities should ‘discount’ financial
effects of long-term risks as part of the materiality assessment – similar to
how future cash flows are discounted when calculating a fair value for
financial reporting purposes.
None of the sustainability reporting regimes discuss the concept of

discounting, nor require it as part of the materiality assessment process.
Sustainability reporting provides material information about risks that arise in
the short-, medium-, and long-term, and material information about an entity’s
strategy to manage those risks. A risk that is expected to arise in the long-
term may still be material to the current period sustainability reporting when
considering the likelihood and potential financial effect of a risk irrespective of
time value of money.
Question SRG 4-13
Should an entity’s sustainability information be disaggregated on the same basis

as segment reporting in its financial statements?
PwC response
The sustainability reporting regimes contain specific requirements about
disaggregation of information in general, and topical standards may contain
disaggregation requirements for specific metrics.
In the absence of disaggregation criteria for a specific metric, the basis on which
sustainability information is disaggregated should be developed according to the
general guidance in the relevant sustainability reporting standard.
Neither the ISSB standards nor the ESRS refer to financial reporting segments as
an appropriate basis for disaggregating sustainability information. Sustainability
information would only be disaggregated by financial reporting segment if such a
disaggregation complies with the requirements of the sustainability reporting
regimes.
See sections SRG 4.3.4.4 and SRG 4.4.2.3, for more detail on the disaggregation
requirements in ESRS and the ISSB standards.

194 ESRS 1 paragraph 92; IFRS S1 paragraph B23.

Question SRG 4-14
What are examples of qualitative characteristics an entity might consider when

assessing whether information is material?
PwC response
IFRS S1 paragraph B21 states that when assessing whether information is
material, an entity should consider both quantitative and qualitative factors. ESRS
1 paragraph 42 requires an entity to consider qualitative thresholds when
determining which sustainability-related IROs are material. While ESRS do not
specifically mention qualitative factors in the assessment materiality of
information, we believe that information about a material sustainability-related IRO
could be assessed as material based on qualitative factors under ESRS.
Some characteristics that we believe an entity could consider when assessing

whether information about a sustainability-related risk or opportunity is material
from a qualitative perspective are:
□ the information affects future earnings, strategy or business trends,
□ the information affects analysts’ expectations for the entity’s sustainability

performance, considering analysts’ expectations about the industry the entity
operates in,
□ the information is related to a sustainability-related risk or opportunity that is

relevant for an industry the entity operates in,
□ the information about the risk or opportunity potentially affects the entity’s
future income projections,
□ the information is significant to a particular segment or portion of the entity’s

business, operations, geographic location, or profitability,
□ the information affects the entity’s compliance with sustainability-related

regulatory or legal requirements (for example, by confirming that an entity
either has or has not complied with the requirement),
□ the information affects the entity’s compliance with sustainability-related loan

covenants or other contractual requirements (for example, by confirming that
an entity has or has not complied with the requirement),
□ the information affects a component of management compensation,
□ the information relates to a disclosed target, goal, or transition plan, or
□ those charged with governance or the executive management team are

focused on the information
The above list is not exhaustive, and entities should consider the specific facts
and circumstances of the information when determining whether the information is
material either from a quantitative or qualitative point of view.

Acknowledgements
Katie DeKeizer
Peter Flick
Heather Horn
Lise Kuld
Andreas Ohl
Nina Schäfer
Olivier Scherer
Diana Stoltzfus
Matteo Strada
Hugo van den Ende
Valerie Wieman
Katie Woods

Chapter 5:
Foundations of sustainability
reporting
5.1 Foundations of sustainability reporting —
chapter overview
The sustainability reporting frameworks contain specific requirements related to
the basis of presentation for sustainability reporting and disclosures about some
of the processes used to prepare sustainability reporting. This chapter discusses
these and other concepts that support sustainability reporting for the following
reporting standards:


Exchange Commission 1
This chapter covers the common presentation and reporting concepts and related
provisions that are specific to the ESRS and the IFRS Sustainability Disclosure
Standards. The key topics discussed are organised as follows:
□ Qualitative characteristics of sustainability information (SRG 5.2)
□ Connected information (SRG 5.3)
□ Measurements in sustainability reporting (SRG 5.4)
□ Omission of material information (SRG 5.5)
□ ESRS — General requirements disclosures (SRG 5.6)
□ ISSB standards — General requirements disclosure (SRG 5.7)
This chapter also discusses some general concepts related to climate disclosure
rules issued by the United States (US) Securities and Exchange Commission
(SEC) as discussed in SRG 5.8. The SEC climate disclosure rules, however, do
not require broad-based disclosures outside of the detailed requirements about
climate risks. The disclosure requirements mandated by the SEC climate
disclosure rules are discussed in SRG 8, Climate [coming soon].
See SRG 2, Applicability of sustainability reporting, for a discussion of the entities

subject to each of these reporting regimes.


PwC | Foundations of sustainability reporting (as of 30 June 2024) 5-1



opportunities
to ESRS.
ESRS.




implementation guidance may be helpful to preparers in interpreting the standards
5.2 Qualitative characteristics of

sustainability information
When preparing its sustainability reporting, an entity is required to apply the
fundamental qualitative characteristics of information, which are relevance and
faithful representation. 4 An entity is also required to apply enhancing qualitative
characteristics, which are comparability, variability, understandability, and
timeliness. 5
These attributes are not unique to sustainability reporting. They are identified as
the fundamental qualitative characteristics of useful information in the IFRS
Conceptual Framework for Financial Reporting. An essential condition for
sustainability reporting is that all information presented meets these qualitative
characteristics, as summarised in Figure SRG 5-1.
5 July 2024.
2024.
4 ESRS 1 General requirements, paragraph 19; IFRS S1 General Requirements for
Disclosures of Sustainability-related Financial Information, paragraph 10.


Figure SRG 5-1
Summary of qualitative characteristics
Qualitative characteristics
Relevance
The information has the potential to make a difference in the decisions of users
Faithful representation
The information is complete, neutral, and accurate
Comparability
The information can be compared with information provided by the entity in
previous periods and by other entities with similar activities or operating within
the same industry
Verifiability
The information or the inputs used to derive it can be corroborated
Understandability
The information is clear and concise
Timeliness (note 1)
The information is available to users in time to influence their decisions
Note 1: ESRS do not have an equivalent characteristic of timeliness as the reporting dates
and timing are governed by other EU legislation.
5.2.1 Relevance
Sustainability information is considered relevant when it has the potential to make

a difference in the decisions of users. Sustainability information can affect user
decisions if it has predictive value, meaning it can be used to predict future
outcomes, or confirmatory value, providing feedback on previous evaluations.
Materiality is a specific aspect of relevance that is determined by the nature or

magnitude (or both) of the items to which the information relates. This assessment
is made in the context of the entity's sustainability reporting, taking into account
the specific facts and circumstances. 6
5.2.2 Faithful representation
Faithful representation requires information to be complete, neutral, and

accurate. 7
□ Completeness
Completeness means that the information includes all material details
necessary for users to understand the sustainability-related impact, risk, and
opportunities (as applicable) being depicted. This includes how an entity has
adapted its strategy, risk management, and governance in response to
material impacts, risks, or opportunities (as applicable), as well as the metrics
used to set targets and measure performance.
6 ESRS 1 paragraphs QC 1–QC 4; IFRS S1 paragraphs D4–D7.


□ Neutrality
Neutrality refers to the absence of bias in the selection or disclosure of
information. Information is neutral if it is not manipulated to influence users’
perception favourably or unfavourably. Neutral information is balanced,
covering both positive and negative aspects, and giving equal attention to
material positive and negative impacts, risks, and opportunities (as
applicable).
Neutrality is supported by prudence, which involves caution when making

judgements when there is uncertainty. Prudence ensures that opportunities
are not overstated and risks are not understated, and vice versa.
□ Accuracy
Accuracy does not require perfect precision but implies that an entity has
implemented processes and controls to avoid material errors or
misstatements. Estimates are presented with clear emphasis on their
limitations and associated uncertainty. Accuracy depends on the nature of the
information and the matters it addresses and requires that, for example,
factual information is free from material error, descriptions are precise, and
estimates, approximations, and forecasts are clearly identified as such.
5.2.3 Comparability
Sustainability information is comparable when it can be compared with information

provided by the entity in previous periods and can be compared with information
provided by other entities, in particular those with similar activities or operating
within the same industry. Consistency helps to achieve comparability and refers to
the use of the same approaches or methods for disclosures about the same
sustainability-related impact, risk, or opportunity (as applicable). 8
5.2.4 Verifiability
Sustainability information is verifiable if it is possible to corroborate the information

itself or the inputs used to derive it. Verifiability means that various knowledgeable
and independent observers could reach consensus, although not necessarily
complete agreement, that a particular depiction is a faithful representation. 9
5.2.5 Understandability
Sustainability information is understandable when it is clear and concise. This

includes the avoidance of generic ‘boilerplate’ information and unnecessary
duplication of information. 10
5.2.6 Timeliness
The ISSB standards also include the qualitative characteristic of timeliness.

Timeliness means that the information is available to users in time to influence
their decisions. Older information is generally less useful than newer information,
however, some information may continue to be important after the reporting
period because it may help users identify and assess trends. 11
ESRS do not have an equivalent characteristic of timeliness as the reporting

dates and timing are governed by other EU legislation. 12

11 IFRS S1 paragraph D25.
12 ESRS 1 (November 2022 draft) Basis for conclusions, paragraph BC39.

5.3 Connected information
The information disclosed within an entity’s sustainability reporting across
standards is often interconnected. The sustainability reporting frameworks also
promote connectivity with financial reporting. Specifically, there are instances
when the same information is addressed under both financial and sustainability
reporting. For example, an entity may need to explain the financial effect that its
sustainability strategy has or will have on its financial statements or to disclose a
metric that involves a component of financial amounts, such as an intensity
metric.
Disclosures about this connectivity and consistency are mandated by the

sustainability reporting frameworks to allow users to link sustainability information
to related information within the sustainability reporting and the financial
statements. 13
ESRS distinguish two types of connectivity between sustainability information and

financial statement information: 14
□ direct connectivity — monetary amounts or quantitative data is presented in

the sustainability statement as well as in the financial statements
□ indirect connectivity — monetary amounts or quantitative data is presented in

a different level of aggregation in the sustainability statement and the financial
statements
We believe the concepts of direct and indirect connectivity, although not

specifically referred to, are applicable for connected information in sustainability
reporting prepared under the ISSB standards given the principle requiring
information to be connected. In addition, significant data, assumptions, and
qualitative information should, to the extent possible, be consistent between the
sustainability reporting and the financial statements. 15
In summary, the foundational concept of connectivity of information is the same

under ESRS and IFRS and the purpose of the disclosures is aligned as shown in
Figure SRG 5-2.
Figure SRG 5-2

ESRS and ISSB standards — purpose of connected information disclosures
Purpose of disclosure ESRS ISSB
Provide understanding of connected information  

Allow ease of reference to financial statements  
Provide understanding of consistencies among  
connected information
Each reporting standard has its own requirements, which are detailed for ESRS 1
General Requirements in Figure SRG 5-3 and for IFRS S1 General Requirements
for Disclosure of Sustainability-related Financial Information in Figure SRG 5-4. It
may be helpful, however, to understand both sets of requirements when preparing
the disclosures.
13 ESRS 1 paragraphs 118 and 123; IFRS S1 paragraphs 21 and B39-B44.


Figure SRG 5-3
ESRS connected information requirements
Standard reference Requirement
ESRS 1 paragraph An entity shall describe the relationships between different pieces of
123 information.
ESRS 1 paragraph For monetary amounts or other quantitative data points presented in the
124 sustainability statement and the financial statements, an entity must include a
reference in the sustainability statement to the relevant paragraph of its
financial statements where the information can be found.
ESRS 1 paragraph The sustainability statement may include monetary amounts or other
125 quantitative datapoints that are either an aggregation of, or a part of, monetary
amounts or quantitative data presented in an entity’s financial statements.
If so, an entity must explain how these amounts or datapoints relate to the
relevant amounts in the financial statements.
The disclosure should reference the line item and/or relevant paragraphs of its
financial statements. Where appropriate, a reconciliation may be provided, and
it may be presented in a tabular form.
ESRS 1 paragraph An entity should explain the consistency of significant data, assumptions, and
126 qualitative information included in its sustainability statement with the
corresponding information in the financial statements.
ESRS 1 paragraph Consistency as required by paragraph 126 should be at the level of a single
127 datapoint and include a reference to the relevant line item or paragraph of
notes to the financial statements.
When significant data, assumptions and qualitative information are not
consistent, an entity should state that fact and explain the reason.
ESRS 1 paragraph 128 provides the following examples of situations where an

explanation about consistency between information in the sustainability statement,
and information in the financial statements would be required
□ a metric is reported in the financial statements for the reporting period, and a
forecast or target for the same metric is provided in the sustainability reporting
□ projections about an entity’s future cash flows are used to develop metrics in
the sustainability reporting, and also used in the estimation of the recoverable
amount of assets in the financial statements
Topical and sector-specific ESRS may include requirements to include

reconciliations or to illustrate consistency of data and assumptions for specific
disclosure requirements. In such cases, the requirements in those ESRS need to
be followed. 16

Figure SRG 5-4
ISSB standards connected information requirements
Standard reference Requirement
IFRS S1 paragraph An entity shall provide information that allows users to understand the following
21 connections:
□ Within sustainability related disclosures
□ Across its sustainability related disclosures and other general purpose
financial reports
IFRS S1 paragraph An entity shall identify the financial statements to which the sustainability related
22 disclosures relate.
IFRS S1 paragraph When currency is specified as the unit of measure in the sustainability-related
24 financial disclosures, an entity shall use the presentation currency of its related
financial statements.
IFRS S1 paragraph When an entity is making connections between disclosures, an entity should
B42 provide the necessary explanations and cross-references and use consistent
data, assumptions, and units of measure.
In providing connected information, an entity should:
□ explain connections between disclosures in a clear and concise manner
□ avoid unnecessary duplication if IFRS Sustainability Disclosure Standards
require the disclosure of common items of information
□ disclose information about significant differences between the data and
assumptions used in preparing the entity’s sustainability report and those
used in preparing the financial statements.
IFRS S1 paragraph B44 provides the following examples of situations when

disclosures about connections between disparate pieces of information within the
sustainability reporting may be relevant: 17
□ explaining how an entity’s strategy to manage its sustainability-related risks

and opportunities relate to the targets it has set and the metrics it uses to
measure progress against those targets
□ explaining how actions to address a sustainability-related risk or opportunity

(as applicable) might have an effect on a different sustainability-related risk or
opportunity — for example restructuring its operations to reduce emissions
might have an effect on the entity’s workforce — and how these ‘trade-offs’
have been considered when setting strategy and actions to manage
sustainability-related risks and opportunities
IFRS S1 paragraph B43 further provides examples of situations when disclosures

about connectivity between information in the sustainability reporting and the
financial statements might be relevant, including situations where an entity
discloses a strategy for managing sustainability-related risks that may also affect
amounts recorded in its financial statements and its forward financial planning,
such as the entity’s decision to invest in new assets or close a production plant.
We recommend that preparers of sustainability reporting work in collaboration with

the preparers of financial statements, if different, to ensure consistency across
reporting.

5.4 Measurements in sustainability reporting
Sustainability reporting will include disclosures of information that is not able to be
directly measured, or where an entity may not have access to the information on a
timely basis (for example, some value chain information). In these cases, an entity
will need to use estimates to develop the sustainability information.
The reporting frameworks use the term ‘estimate’ to refer to amounts that are
subject to measurement uncertainty. 18 The frameworks also acknowledge that the
use of reasonable estimates does not undermine the usefulness of the
sustainability information if those reasonable estimates are described and
explained. 19
When quantitative metrics and monetary amounts, including upstream and

downstream value chain information … cannot be measured directly and can
only be estimated, measurement uncertainty may arise.
The use of reasonable assumptions and estimates is an essential part of

preparing sustainability-related financial disclosures and does not undermine the
usefulness of the information if the estimates are accurately described and
explained. Even a high level of measurement uncertainty would not necessarily
prevent such an estimate from providing useful information.
ESRS and the ISSB standards use similar concepts in relation to the use of
estimates in sustainability reporting.
5.4.1 When estimates are needed
Estimates are typically needed when sustainability information, be that reporting

under ESRS or ISSB standards, has to be obtained from a third party, is related to
forward-looking information, or involves data limitations. Examples of each of
these scenarios are provided in Figure SRG 5-5.
Figure SRG 5-5

Types of sustainability information that may require estimates
Types of information Examples
Information obtained from a □ Data not available from the third party or not
third party available on a timely basis
□ Value chain actors providing data from
different underlying systems, causing a
difference in how the data is captured
and/or the level of detail of data
□ Data gathered on a sample basis


Types of information Examples
Forward looking information □ Determination of material impacts, risks,

and opportunities (as applicable) based on
medium-, and long-term time horizons
□ Scenario analysis
□ Sensitivity analysis
□ Anticipated financial effects from a risk or an
opportunity
Data limitations □ Decentralised nature of an organisation,

which may not have the same level and type
of data available from all parts of the entity
□ Delays in data availability
See SRG 5.6.2.2 for more information on disclosure requirements related to

estimates under ESRS, and SRG 5.7 for information on the disclosure
requirements under IFRS S1.
5.4.2 Sources of information for estimates
Data can generally be divided into two broad categories:
□ primary data — direct measurement, or data collected directly from the source
concerned
□ secondary data — indirect measurement, or data collected from sources that

do not directly relate to the source involved
5.4.2.1 Primary data
Primary data is typically easier to gather from an entity’s direct suppliers and/or
customers than from its indirect business relationships. For example, primary data
may include information such as suppliers’ policies to prevent child labour or data
about their use of water.
ESRS recognise that an entity's ability to obtain primary data may be limited. The
ability may depend on the contractual arrangements, the level of control that an
entity exercises on the operations, and its buying power. When an entity does not
have the ability to control the activities of its upstream and/or downstream value
chain and its business relationships, obtaining value chain information may be
more challenging.
5.4.2.2 Secondary data
Secondary data includes, but is not limited to, internal and external information
such as data from indirect sources, sector-average data, sample analyses, market
and peer groups data, or other proxies and spend-based data.
EFRAG IG 2 contains a useful list of examples of secondary data sources.

Excerpt from EFRAG IG 2
173. Secondary data include data from indirect sources, sector-average data,
sample analyses, market and peer groups data, other proxies and spend-based
data.
174. The adjacent text box lists some

Examples of external data sources
sources of such data. Some of these
• Academic institutions such as the require a fee and are provided as
Environmental Performance Index examples, but ESRS do not require
• Government bodies such as the the use of fee-based external sources.
European Social Progress Index of These are examples of external
the European Commission and the
sources that help address
US Department of State’s Social
Progress Index environmental, social and human
• [International Labour Organization] rights as well as corruption matters.
social protection by country
• Non-profit organisations such as the
World Justice Project and other
NGOs
Although these examples are provided in EFRAG IG 2, we believe the guidance

could be useful to consider across other sustainability reporting frameworks.
As noted in EFRAG IG 2 paragraph 174, the standards do not require entities to

use fee-based external sources, but an entity is also not precluded from using fee-
based sources of information. We believe the same is true for entities reporting
under ISSB standards. In summary, we believe an entity may choose to use fee-
based external sources, but may also estimate data based on alternative, freely
available, sources.
Some estimates might use both primary and secondary data. For example, when
calculating an entity’s percentage of biological materials used to manufacture
products that is sustainably sourced, direct measurement may be used for the
entity’s own materials (primary data) while a sample may be used to calculate the
amount of the materials contributed by a supplier (secondary data).
There may also be instances when primary data is not available at all, and an
entity has to rely entirely on secondary data to generate an estimate. This might
be the case when an entity is reporting metrics related to its value chain, and it is
unable to obtain primary data from its value chain partners.
5.4.3 Reasonable assumptions and estimates
ESRS and the ISSB standards acknowledge that the use of reasonable estimates
does not undermine the usefulness of the sustainability information if those
reasonable estimates are described and explained. 20 When determining whether
an assumption or an estimate is reasonable, it would be relevant for an entity to
consider the qualitative characteristics in the sustainability reporting frameworks
— in particular, we believe the characteristic of ‘faithful representation’ is helpful in
determining whether an estimate is reasonable or not.
When developing an assumption or an estimate that faithfully represents the

sustainability information it purports to depict — whether that is a metric related to

the current period or an assumption about the future — an entity should ensure
that the estimates are neutral and accurate. 21
Ensuring that an assumption or estimate is neutral will require exercising

prudence, meaning that positive information should not be overstated and
negative information not understated.
As discussed in SRG 5.2.2, accuracy does not mean perfectly precise in all
respects; rather, the assertions an entity makes and the inputs it uses in
developing estimates should be reasonable and based on information of sufficient
quality and quantity. 22 Assumptions and estimates that pertain to forward looking
information, or information about the future, should faithfully reflect the information
on which they are based. 23
An entity should also consider consistency between the inputs and assumptions
used in developing estimates for sustainability reporting, and inputs and
assumptions used in the corresponding financial statements. To the extent
possible, inputs and assumptions used to develop estimates should be consistent
with those in the corresponding financial statements. 24
5.4.4 Estimates in the value chain
An entity is required to include value chain information in its sustainability

reporting if such information is material. ESRS 1 paragraph 65 specifically
requires an entity to include value chain information if that information provides an
understanding of the entity’s material impacts, risks, and opportunities, and if the
information is necessary for the related disclosures to meet the qualitative
characteristics of information.
An entity may need to estimate upstream and downstream value chain

sustainability information if it cannot directly obtain such information. See SRG 3.4
for the information on determining the value chain.
An entity reporting under ESRS is required to make reasonable efforts to collect

value chain information before generating an estimate. This is explicitly stated in
ESRS 1 AR 17. The IFRS Sustainability Disclosure Standards do not have an
equivalent requirement before an entity decides to make an estimate.
When the undertaking cannot collect upstream and downstream value chain
information as required by paragraph 63 after making reasonable efforts to do so,
it shall estimate the information to be reported using all reasonable and
supportable information that is available to the undertaking at the reporting date
without undue cost or effort.
If an entity reporting under ESRS is unable to collect primary data after making
reasonable efforts to do so, the necessary value chain information needs to be
estimated using all reasonable and supportable information available at the
reporting date without undue cost or effort.
ESRS are silent on the explanation of what constitutes ‘reasonable efforts’ or

‘undue cost or effort’. EFRAG IG 2 clarifies that the determination depends on the
facts and circumstances of the entity.
21 ESRS 1 paragraph QC 5; IFRS S1 paragraph D10.

22 ESRS 1 paragraph QC 9(e); IFRS S1 paragraph D15(e).
23 ESRS 1 paragraph QC 9(f); IFRS S1 paragraph D15(f).

In determining whether an action is beyond ‘reasonable effort’ and/or beyond

‘undue cost and effort’, the undertaking shall balance the reporting burden of
obtaining direct data and the potential lower quality of the information resulting
from not undertaking that action.
For example, if an entity is a major customer for its suppliers, and has a small
number of key suppliers, it may be possible that reasonable effort allows the entity
to collect primary data from its key suppliers. The entity may not be able to collect
primary data, however, if, for example, the entity has hundreds of small suppliers
that do not track the data the entity requires for its sustainability reporting. In this
case, the entity may estimate the data needed using the information that it is able
to obtain.
EFRAG IG 2 also provides examples of secondary data sources that we believe

an entity reporting under any framework may consider in developing estimates
related to upstream and downstream value chain information. See SRG 5.4.2 for
detailed examples of secondary data sources listed in EFRAG IG 2.
Although discussed in EFRAG IG 2, we believe the examples of secondary data

sources could be useful to consider across other sustainability reporting
frameworks. We expect that as the sustainability reporting landscape matures,
more primary data will become readily available, and so we would expect an entity
to reassess at each reporting date what information it can collect using
reasonable efforts to ensure that its estimates are complete, neutral, and
accurate.
5.5 Omission of material information —

commercially sensitive, classified, and
prohibited information
An entity is required to disclose material information in its sustainability reporting.
See SRG 4.3.4 and SRG 4.4.2 for more information about materiality of
information under ESRS and the ISSB standards respectively.
Under both ESRS and the ISSB standards, information that is material may only
be omitted from sustainability reporting in certain very limited circumstances. In
some cases, there could be an overlap in that the same material information may
meet the requirements and be omitted under both standards, but there could also
be differences. It is important to evaluate the omission of any material information
under each specific set of reporting requirements.
5.5.1 ESRS provisions related to sensitive and classified information
ESRS generally require the disclosure of information that an entity considers

confidential or business sensitive if that information is material. This may include
details of its strategy or planned investments to achieve targets.
ESRS 1 paragraphs 105 and 106, however, permit the omission of material
information if it is classified or sensitive information. The definitions of classified
and sensitive information listed in Figure SRG 5-6 are sourced from specific EU
legislation.

Figure SRG 5-6
Definition of classified and sensitive information
Term Definition
Classified information Any information designated by an EU security classification, if disclosed without

the appropriate authorisation could cause varying degrees of prejudice to the
interests of the EU or of one or more of the member states. 25
Sensitive information Information and data, including classified information, that is to be protected
from unauthorised access or disclosure because of obligations laid down (i) in
the EU, (ii) the national law, or (iii) in order to safeguard the privacy or security
of a natural or legal person. 26
Only the legal definition of these terms is decisive – an entity should not apply a
different definition from the one provided in the source legislation.
5.5.2 ESRS provisions related to information about strategy, plans, and

actions
According to ESRS 1 paragraph 106, when disclosing information about strategy,

plans, and actions, an entity is not required to disclose specific information related
to intellectual property, know-how, or the results of innovation if it meets the
following criteria: 27
□ the information is a secret in the sense that it is not, as a body or in the

precise configuration and assembly of its components, generally known
among or readily accessible to persons within the circles that normally deal
with the kind of information in question
□ it has commercial value because it is a secret
□ the entity has taken reasonable steps to keep it secret
ESRS disclosure requirements
If an entity omits classified or sensitive information (SRG 5.5.1), or specific

information related to intellectual property, know-how, or innovation, ESRS 1
paragraph 107 requires an entity to still comply with the disclosure requirement by
providing all other required information. An entity should make reasonable efforts
to confirm that the overall relevance of the disclosure is not impaired, despite the
omission of certain information. 28
Topical ESRS may also contain provisions regarding the omission of specific
topical datapoints. See the relevant SRG chapters on topical standards [coming
soon] for more detail.
5.5.3 ISSB standards provisions related to commercially sensitive

information
An entity reporting under the IFRS Sustainability Disclosure Standards may, in

limited circumstances, omit information about a sustainability-related opportunity
that is otherwise required if that information is commercially sensitive in
accordance with IFRS S1 paragraphs 73 and B34–B37. An entity using this
25 Defined in 2013/488/EU.
26 Defined in Regulation (EU) 2021/697.

exemption is not prevented from asserting compliance with IFRS Sustainability
Disclosure Standards. 29
As detailed in IFRS S1 paragraph B35, this provision only applies to information

about sustainability-related opportunities. An entity cannot use this provision to
omit information about sustainability related risks, nor should it be used as a basis
for broad non-disclosure of material information. 30
An entity qualifies for the exemption specified in paragraph B34 if, and only if:
a) information about the sustainability-related opportunity is not already publicly
available;
b) disclosure of that information could reasonably be expected to prejudice
seriously the economic benefits the entity would otherwise be able to realise
in pursuing the opportunity; and
c) the entity has determined that it is impossible to disclose that information in a
manner—for example, at an aggregated level—that would enable the entity to
meet the objectives of the disclosure requirements without prejudicing
seriously the economic benefits the entity would otherwise be able to realise
in pursuing the opportunity.
An entity is required to disclose when it has applied the exemption for one or more
opportunities, and to reassess whether it meets the criteria for omission at each
reporting date. 31
5.5.4 ISSB standards provisions related to prohibited information
Under IFRS S1 paragraphs 73 and B33, an entity is not required to disclose

information required by IFRS Sustainability Disclosure Standards when such
disclosure is prohibited by local laws or regulations. An entity using this exemption
is not prevented from asserting compliance with IFRS Sustainability Disclosure
Standards.
An entity need not disclose information otherwise required by an IFRS

Sustainability Disclosure Standard if law or regulation prohibits the entity from
disclosing that information. If an entity omits material information for that reason, it
shall identify the type of information not disclosed and explain the source of the
restriction.
This provision only applies when an entity is prohibited from providing the
information due to law or regulation. In contrast, if the law or regulation only
permits the entity not to disclose such information, an entity is still required to
provide material information in its sustainability reporting. 32


5.6 ESRS – General requirements disclosures
ESRS 1 provides an understanding of the architecture of ESRS, the drafting
conventions, and fundamental concepts used. It also provides the general
requirements for preparing and presenting sustainability information, such as the
required structure and content for the reporting and other basic reporting
requirements. 33
ESRS 2 establishes disclosure requirements that apply to all entities regardless of

their sector and apply across sustainability topics. 34 ESRS 2 is referred to as a
‘cross-cutting standard’ alongside ESRS 1. The cross-cutting standards apply to
all sustainability-related matters covered in the sustainability statement. 35
Throughout the ESRS cross cutting and topical standards, various terms are used
when describing whether an entity is required or permitted to disclose specific
pieces of information. See Figure SRG 5-7 for a summary of the ‘degrees of
obligation’ placed on an entity when disclosing information in accordance with
ESRS. 36
Figure SRG 5-7

Degrees of obligation in providing information per ESRS 1 paragraph 18
Form ESRS application
“shall disclose” The provision is prescribed by the standard and an entity is required to disclose
the relevant information unless the information is not material.
“may disclose” Indicates the optionality for an entity to provide voluntary disclosure to promote
good practice; however, it is permitted to exclude the information from its
“shall consider” Areas that an entity is expected to consider when preparing a specific
disclosure.
In addition to the degrees of obligation described above, ESRS 1 paragraph 29

indicates that some disclosure requirements in ESRS are required irrespective of
the materiality assessment. See SRG 4.3.4.1 for more information on disclosure
requirements which must be included in sustainability reporting regardless of the
outcome of the materiality assessment.
5.6.1 Structure of the ESRS sustainability statement
An entity is required to structure its ESRS sustainability reporting in four parts in a

prescribed order.
The undertaking shall structure its sustainability statement in four parts, in the
following order: general information, environmental information … social
information and governance information.
34 ESRS 2 General disclosures, paragraph 1.

The general information section includes general disclosures from ESRS 2 as well
as some topic-specific disclosures detailed in Appendix C of ESRS 2 that are
applicable in conjunction with ESRS 2. This section of the sustainability reporting
includes information regarding the basis of preparation of the sustainability
statement, an entity’s governance, strategy, impact, risk, and opportunity
management, and information on metrics and targets.
The environmental, social, and governance information parts include information

required by the respective topical standards.
If an entity has developed entity-specific disclosures, those disclosures should be

reported in the most relevant part of the sustainability statement alongside the
other disclosures. 37 For more information on entity-specific disclosures, see SRG
4.3.4.3.
Figure SRG 5-8 provides an illustration of what information should be included in

the four parts of a sustainability statement. 38
Figure SRG 5-8

The four parts of an ESRS sustainability statement
Governance
General information Environment information Social information information
□ ESRS 2 General □ ESRS E1 Climate □ ESRS S1 Own □ ESRS G1

disclosures, change workforce Business
including certain conduct
information of □ ESRS E2 Pollution □ ESRS S2 Workers
topical ESRS in the value chain
□ ESRS E3 Water and
listed in ESRS 2 marine resources □ ESRS S3 Affected
Appendix C communities
□ ESRS E4 Biodiversity
and ecosystems □ ESRS S4
Consumers and
□ ESRS E5 Resource use end-users
and circular economy
□ Disclosures required
related to Article 8 of
Regulation (EU) 2020/852
(Taxonomy
Regulation) (note 1)
Note 1: See SRG 19, Introduction to EU Taxonomy reporting, for more information.
The sustainability statement is to be prepared in such a way as to permit a

distinction between the information that is required by ESRS, and other
information that is included in the management report. The structure of the
sustainability statement should facilitate the understanding of the information. 39
ESRS further provide a “non-binding illustration of the structure of the

sustainability statement” in ESRS 1 Appendix F. 40

38 At the time of writing, no sector-specific ESRS have been published. When the sector-
specific ESRS are available, the disclosures required by those standards should be
presented alongside the relevant disclosures required by ESRS 2 and the relevant topical
sector-agnostic ESRS (ESRS 1 paragraph 116).
40 ESRS 1 paragraphs 110 and 115.

Question SRG 5-1
In which part of the sustainability statement should ESRS 2-related disclosures

required by the topical standards (excluding ESRS 2 SBM-3) be disclosed?
PwC response
ESRS 1 Appendix D and requirements in the topical standards related to ESRS 2
clearly state that those disclosures should be provided in the General information
part of the sustainability statement alongside other ESRS 2 disclosures. This is
supported by the following explanation from EFRAG.
Excerpt from EFRAG, ESRS Implementation Q&A Platform, Compilation of

Explanations January – July 2024, Question ID 296
ESRS 2-related Disclosure Requirements in topical standards must be reported in

the general section of the sustainability statement as they are part of the general
disclosures of ESRS 2. They are presented alongside the relevant ESRS 2
disclosure (e.g., ESRS 2 Disclosure Requirement IRO-1-related).
For the descriptive information required in ESRS 2 paragraph 46 (ESRS 2
Disclosure Requirement SBM-3-related disclosures), there is an option to present
them alongside the relevant topical disclosure if the undertaking elects to follow
the option in ESRS 2 paragraph 49.
The Environmental, Social, and Governance information parts may include cross
references to the corresponding ESRS 2 disclosures in the General information
part. 41
5.6.2 General information part of the sustainability statement
There is an interrelationship between ESRS 1 and ESRS 2, with ESRS 2

providing the disclosure requirements for some of the items covered in ESRS 1.
ESRS 2 disclosure requirements are applied irrespective of the outcome of an
entity’s materiality assessment, including all disclosure requirements and all
datapoints specified within the ESRS 2 disclosure requirements, with the
exception of metrics (see SRG 6.2.1 for more information about ESRS 2). The
materiality of information assessment drives the level of detail of these
disclosures. See SRG 4.3.4 for more detail on materiality of information under
ESRS.
The disclosure requirements in ESRS 2 begin with BP-1, General basis for
preparation of the sustainability statement and BP-2, Disclosure in relation to
specific circumstances.
5.6.2.1 BP-1, General basis for preparation of sustainability statements
ESRS 2 BP-1 requires an entity to provide an understanding of how it prepares its

sustainability statement, including the scope of consolidation, value chain
information, and any options which have been taken for omitting information.
Figure SRG 5-9 summarises the disclosures in ESRS 2 BP-1 and provides cross
references to where further discussion on each topic can be found, if applicable.

Figure SRG 5-9
Summary of disclosure requirements related to ESRS 2 BP-1
Topic Disclosure requirement
Basis of Whether the sustainability statement has been prepared on a consolidated or

preparation individual basis
(SRG 3.3)
Consolidated For consolidated sustainability statements:

reporting
□ Confirmation that the reporting boundary is the same as the financial
(SRG 2.2) statements or that an entity is not required to prepare financial
statements or the subsidiary is preparing the consolidated sustainability
statement as permitted in Article 48i of the Accounting Directive
□ Identify which subsidiaries are exempt from preparing individual or sub-
group sustainability statements (that is, they applied the subsidiary
exemption)
Value chain The extent to which:

information
□ The sustainability statement includes information regarding the entity’s
(SRG 3.4) upstream and downstream value chain
In this disclosure, the entity may choose to distinguish between the extent to
which the value chain is included in the materiality assessment, the entity’s
policies actions and targets, and the entity’s metric disclosures. 42
Omission of Whether the entity applied the option to omit information from the
material sustainability statement related to:
information
□ Information on intellectual property
(SRG 5.5.2)
□ Know-how
□ Innovation
Exclusion of Whether disclosures related to impending development or matters in the

information course of negotiation have been excluded, if the exemption is permissible by
the EU Member State in which the entity is based. 43
An entity is required to disclose the information in accordance with ESRS 2 BP-1

in the general part of its sustainability statement.
5.6.2.2 BP-2, Disclosures in relation to specific circumstances
The disclosures required by ESRS 2 BP-2 relate to specific circumstances or

requirements included in ESRS 1 and apply to an entity irrespective of an entity’s
materiality assessment or the sector in which it operates. These disclosures are
intended to provide transparency and understanding of the effects of these
circumstances on the sustainability statement. They may be reported alongside
the disclosures to which they refer.
Figure SRG 5-10 summarises the general requirement disclosures in ESRS 2 BP-
2 and provides cross references to where further discussion on each topic can be
found where relevant.
42ESRS 2 AR 1.
43As provided for in Directive 2013/34/EU, Article 19a, paragraph 3, and Article 29a,
paragraph 3.

Figure SRG 5-10
Summary of disclosure requirements related to ESRS 2 BP-2
Topic Description Disclosure requirement
Time horizons ESRS 1 provides standard definitions If an entity has deviated from the
for the short-, medium-, and long-term standard definitions in ESRS 1, its
(SRG 3.5.3.1)
future time horizons, but permits definitions of medium- or long-term
deviation from these intervals for the horizons and the reasons for applying
medium- or long-term if the defined those definitions
time horizons result in non-relevant
information.
Value chain Some metrics (metrics defined in □ The related metric(s)

estimation ESRS as well as entity-specific
□ The basis for preparation
metrics) require the inclusion of value
(SRG 5.4.4)
chain information. ESRS 1 allows for □ The resulting level of accuracy
the entity to rely on estimates using
□ Where applicable, the planned
indirect sources (‘secondary data’),
such as sector-average data or other actions to improve the accuracy
proxies, in certain circumstances. in the future
Sources of estimation ESRS 1 acknowledges that the use of □ The quantitative metrics and
and outcome reasonable assumptions and monetary amounts that are
uncertainty estimates is an essential part of subject to a high level of
preparing sustainability-related measurement uncertainty
(SRG 5.4)
information, but results in outcome
□ For each quantitative metric and
uncertainty.
monetary amount identified, the
sources of measurement
uncertainty and the assumptions,
approximations, and judgements
used or made
□ An entity may also disclose that it
considers forward looking
information to be uncertain

Topic Description Disclosure requirement
Changes in Certain situations, in particular when □ An explanation of the changes

preparation or an entity has redefined or replaced a and the reasons for them
presentation of metric or target or identified new
□ Revised comparative figures,
sustainability information in relation to estimated
unless it is impracticable to do so
information figures, may lead to the requirement
to restate comparative information in □ The difference between the figure
(SRG 3.7– [coming
accordance with ESRS 1. disclosed in the preceding period
soon])
and the revised comparative
figure
Reporting errors in Material prior period reporting errors □ The nature of the error
prior periods in accordance with ESRS 1.
□ To the extent practicable, the
(SRG 3.7 [coming If determining the effect of the error in correction for each prior period
soon]) all prior periods presented is included in the sustainability
impracticable, then the restatement statement
should correct the error from the
□ If correction of the error is not
earliest date practicable.
practicable, the circumstances
Hindsight shall not be used when supporting that conclusion
correcting disclosures in a prior
period. 44
Disclosures stemming ESRS 1 paragraph 114 permits the □ The existence of such
from other legislation inclusion of ‘additional information’ information in an entity’s
or generally accepted from the following sources in defined sustainability statement
sustainability circumstances:
□ In case of partial application of
reporting
(i) other legislation which requires the such other standards or
pronouncements
entity to disclose sustainability frameworks, a precise reference
(SRG 4.3.4.5) information to the paragraphs of the
standard or framework applied.
(ii) generally accepted sustainability
reporting standards and frameworks
Incorporation by ESRS 1 permits an entity to include A list of ESRS disclosure

reference information in its sustainability requirements, including specific
statement by reference to where the datapoints, that have been
(SRG 5.6.3)
information can be found in defined incorporated by reference.
circumstances.
Use of phase-in ESRS 1 provides a list of specific If the entity decides to make use of
provisions for an topical standards which are subject to the phase-in provisions:
entity or group not phased-in provisions for an entity or
□ whether the sustainability topics
exceeding the group not exceeding the average
covered by ESRS E4, ESRS S1,
average number of number of 750 employees during the
ESRS S2, ESRS S3, and ESRS
750 employees financial year, on its balance sheet
S4 have been assessed to be
during the financial date.
material; and
year, on its balance
sheet date □ if one or more of these topics has
been assessed to be material, for
(SRG 3.8.1.4)
each material topic include ‘de
minimis’ disclosures (see SRG
3.8.1.4 for more information). 45


An entity may also choose to disclose whether it relies on European standards
approved by the European standardisation system, as well as the extent to which
its process and data used for its sustainability reporting have been verified by an
external assurance provider. 46
5.6.3 Incorporation by reference
If certain criteria are met, an entity may incorporate specific pieces of information
into the sustainability statement by reference from a limited number of other
sources. The disclosures which are incorporated by reference into the
sustainability statement must also comply with the characteristics provided in
ESRS 1 paragraph 120.
The undertaking may incorporate information by reference to the documents, or

part of the documents, listed in paragraph 119, provided that the disclosures
incorporated by reference:
a. constitute a separate element of information and are clearly identified in the
document concerned as addressing the relevant Disclosure Requirement, or
the relevant specific datapoint prescribed by a Disclosure Requirement;
b. are published before or at the same time as the management report;
c. are in the same language as the sustainability statement;
d. are subject to at least the same level of assurance as the sustainability
statement; and
e. meet the same technical digitalisation requirements as the sustainability
statement.
ESRS 1 paragraphs 119 and 121 provide a set list of locations from which the
information may be incorporated by reference. These are: 47
□ another section of the management report
□ the financial statements
□ if not part of the management report, the corporate governance statement
□ the remuneration report
□ the universal registration document (referred to in Article 9 of Regulation (EU)

2017/1129)
□ public disclosures under Regulation (EU) No 575/2013 of the European

Parliament and of the Council (Pillar 3 disclosures).
the undertaking’s report prepared according to EU Eco-Management and Audit

Scheme (EMAS) Regulation (EU) No 1221/2009. When incorporating by
reference, an entity is required to ensure that the Pillar 3 information is prepared
in accordance with the same consolidation principles used for the sustainability
statement by supplementing the incorporated information. Similarly, an entity is
required to ensure the information in the EMAS report applies the same basis for
preparation as the ESRS information.
46 ESRS 2 AR 2.
47 ESRS 1 paragraphs 119 and 121.

In addition to complying with the specific requirements around location for the
datapoints incorporated by reference, and the characteristics in ESRS 1
paragraph 120, an entity must consider the overall cohesiveness of the
sustainability statement when it is assessing whether to incorporate information by
reference. Incorporating by reference should not impair the readability of the
sustainability statement. 48
5.7 ISSB standards – General requirements

disclosures
There are disclosure requirements specifically in IFRS S1 which relate to general
concepts surrounding the basis of preparation of the sustainability report. Figure
SRG 5-11 summarises the general requirement disclosures in IFRS S1 and
provides cross references to where further discussion on each topic can be found,
if applicable.
Figure SRG 5-11

Disclosure requirements for basis of preparation and general reporting
requirements
Topic Description Disclosure requirements
Time horizons The ISSB standards do not have set The definitions for short-, medium-,
definitions for short-, medium-, and and long-term time horizons as well as
(SRG 3.5.3.2)
long-term time horizons, so an entity how these definitions link to the
will need to determine relevant planning horizons used for strategic
definitions for its own sustainability decision-making 49
reporting
Sources of estimation An entity shall identify amounts it has Information about the most significant
and outcome disclosed that are subject to a high uncertainties affecting amounts
uncertainty level of measurement uncertainty and reported in an entity’s sustainability
make specific disclosures about those reporting, including:
(SRG 5.4)
amounts.
□ the sources of measurement
Generally, these disclosures will relate uncertainty for each amount
to the entity’s most difficult, subjective, identified as being of a high
and complex judgements, and so the measurement uncertainty; and
exact amount and content of these
□ the assumptions, approximations,
disclosures will vary depending on the
and judgements made when
entity’s specific facts and
measuring the amount. 50
circumstances.
Revision of estimates If an entity revises an estimate based □ An explanation and reasons for
on new information received, or if it the changes
(SRG 3.7 [coming
redefines or replaced a metric, then
soon]) □ Revised comparative figures,
the entity is required to make
unless impracticable (and disclose
disclosures about those changes.
this fact)
□ The difference between previous
and new amounts 51

49 IFRS S1 paragraph 30(c).

New metrics If an entity introduces a new metric in A comparative for the new metric
the current reporting period, it has a (unless impracticable). If it is
(SRG 3.7 [coming
specific disclosure requirement around impracticable, disclose this fact. 52
soon])
comparatives.
Reporting errors in If an entity identifies material errors in □ The nature of the errors
prior periods its prior period sustainability
□ The correction for the prior periods
information, then it shall restate the
(SRG 3.7 – [coming disclosed, unless impracticable (in
affected comparative and make
soon]) which case, disclose what
disclosures about the error.
circumstances led to the
conclusion that it is impracticable
and how and from when the error
has been corrected) 53
Judgements An entity is expected to make various Information that allows its users to
judgements as part of preparing the understand the judgements made in
sustainability report. The judgements the process of preparing the
include the process of identifying sustainability reporting that have the
sustainability risks and opportunities most significant effect on the
and identifying material information to information disclosed 54
report.
This disclosure requirement does not
apply to those judgements involving
estimation of amounts. Information
about estimates is covered by a
separate requirement.
Sources of guidance An entity uses sources of guidance as □ The specific sources of guidance
part of its process of identifying applied in preparing the
(SRG 4.4.3)
sustainability related risks and sustainability reporting
opportunities and identifying
□ The industry(s) specified in the
information to disclose.
ISSB standards, SASB standards,
These sources of guidance might or other sources of guidance that
include standards, other an entity has used when preparing
pronouncements, or industry practice. its sustainability report 55
Disclosures An entity reporting under the See SRG 4.2.2.2, for information on
stemming from other standards issued by the ISSB is provisions related to obscuring
legislation or permitted to include information to material information.
generally accepted meet legal and regulatory
sustainability requirements, even when that
reporting information is not material, as long as
pronouncements such information does not obscure
material information. 56


Incorporation by Information that is required by the For information incorporated by

reference ISSB standards can be incorporated reference:
by reference in certain circumstances,
(SRG 5.7.1) □ in which report the required
and if certain disclosures are provided
information is included;
about the information incorporated by
reference. □ an explanation of how the user
can access the report; and
□ the precise part of the report in
which the information is
included 57
Use of commercially In certain limited circumstances, an For each piece of information omitted,
sensitive provisions entity is permitted to omit material the fact that the entity has used the
information about a sustainability- exemption 58
(SRG 5.5.3)
related opportunity.
Non-provision of An entity is not required to provide The type of information not disclosed
information due to information in its sustainability report if and an explanation of the source of
regulation it is prohibited from making that the restriction 59
disclosure by law or regulation.
(SRG 5.5.4)
Statement of If an entity complies with all the An explicit and unreserved statement
compliance requirements of the IFRS of compliance with the IFRS
Sustainability Disclosure Standards, Sustainability Disclosure Standards 60
(SRG 2.3.3)
then it discloses a statement of
compliance. Using the provisions in
IFRS S1 paragraph 73 does not
preclude the entity from making a
statement of compliance.
An entity reporting under the ISSB standards may incorporate disclosures by

reference to another report per IFRS S1 paragraphs 63 and B45‒B46, if the
following conditions are met:
□ the incorporated information is available on the same terms and at the same
time as the sustainability-related financial disclosures
□ the complete set of sustainability disclosures is not made less understandable

by including information by incorporation
□ the incorporated information meets the requirements of IFRS Sustainability

Disclosure Standards, including the qualitative characteristic of IFRS S1
□ those responsible for authorising the sustainability reporting are required to

take responsibility for the referenced disclosures, in the same way they would
if the information was directly included in the sustainability reporting

58 IFRS S1 paragraph B36(a).
60 IFRS S1 paragraphs 72-73.

When information is incorporated by reference, IFRS S1 paragraph B47 requires
an entity to specify precisely where the original information is disclosed and how a
user can access that information.
5.8 SEC — General concepts

Entities required to file with the SEC are subject to the SEC’s broader disclosure
regime. The fundamental concepts discussed in this chapter are consistent with
the SEC's overall mission that entities “offering securities for sale to the public
must tell the truth about their business, the securities they are selling, and the
investment risks”. 61
Many of the fundamental concepts and general requirements are covered within
the SEC's regulations and the applicable financial reporting framework. Although
disclosures related to these topics are potentially relevant to the oversight and
disclosure of climate-related information, those regulations, which cover a broad
range of topics, are not addressed in this chapter.
See PwC’s SEC Volume for guidance regarding general disclosures applicable to
listed companies in the US.
If an entity uses incorporation by reference, the disclosure must meet certain

requirements. When an entity incorporates information by reference, it is required
to disclose, at the particular place where the information is required, the specific
location of the disclosure incorporated by reference, specifically: 62
□ the document where the disclosure was originally filed or submitted; and
□ the location of the disclosure within that document.
An active hyperlink to the disclosure incorporated by reference must be included if

such disclosure is publicly available on the SEC’s Electronic Data Gathering,
Analysis and Retrieval System (EDGAR) at the time of the filing. 63 Further,
disclosures incorporated by reference must not result in the related disclosures
being incomplete, unclear, or confusing. For example, required disclosure cannot
be incorporated by reference to a document in which that information has also
been referenced to another document. 64
Cross-references from the designated section of climate-related disclosures are

allowed to other sections within the same SEC form — for example, risk factors,
description of the business, and management’s discussion and analysis — as
stated in the instructions for each of the forms.
Figure SRG 5-12 summarises the cross reference and incorporation by reference
provisions allowed by the SEC climate disclosure rules.
61 SEC, Mission – Protecting Investors, accessed 24 July 2024.

62 SEC Rule 240.12b-23(e) of the Exchange Act 1934 and Rule 230.411(e) of the
Securities Act 1933.
63 SEC Rule 240.12b-23(c) and (d) of the Exchange Act 1934 and Rule 230.411(c) and (d)
of the Securities Act 1933.

64 SEC Rule 240.12b-23(e) of the Exchange Act 1934 and Rule 230.411(e) of the
Securities Act 1933.

Figure SRG 5-12
Cross reference and incorporation by reference of SEC climate disclosures by
form
Related climate Cross reference and incorporation by reference

Form type disclosures provisions
Form S-1, Form S- Climate Registrant should consider whether cross-referencing to

11, Form 10, Form disclosures the other disclosures in the separately captioned section
20-F, Form 10-K outside of would enhance presentation. 65
financial
Form 10-K: S-K 1505(c)(1) permits a registrant to
statements
incorporate by reference scope 1 and 2 GHG emissions
(Regulation S-K
disclosures required in the most recent Form 10-K to be
Item 1500
incorporated from the registrant’s Form 10-Q for the
through 1507)
second fiscal quarter in the immediately following fiscal
year, in which case it must state this intention in its
annual report on Form 10-K. 66
Form S-4, Form F-4 Climate Registrant and the company being acquired (Note 1)
disclosures should consider whether cross-referencing to the other
outside of disclosures in the separately captioned section would
financial enhance presentation.
statements
Registrant and the company being acquired may
(Regulation S-K
incorporate by reference the information required by
Item 1500
Regulation S-K Item 1500 through 1507, but only if it is
through 1507)
allowed to do so for other information required by the
form and by the same means provided by the form. 67
Form S-3, Form F-3 Scope 1 and/or If a registrant has not provided the climate-related
scope 2 GHG disclosures for the most recently completed fiscal year,
emissions the registrant is permitted to incorporate by reference
(Regulation S-K scope 1 and 2 GHG emissions disclosed in prior annual
Item 1505) or quarterly filings (Form 10-K, Form 10-Q, or Form 20-
F) if such information is as of the most recently
completed fiscal year that is at least 225 days prior to
the date of effectiveness of registration statement. 68
Note 1: An acquired business that is subject to SEC rules also must provide disclosures
responsive to Regulation S-K Item 1500-1507.
Disclosure incorporated by reference is generally not allowed in a prospectus

unless specifically stated in the relevant filing form — as stated in excerpts above
for climate-related disclosures in Form S-3, Form F-3, Form S-4, and Form F-4 —
or if related to information not required in a prospectus. A reference to a particular
term for a summary or outline required in a prospectus may be allowed. 69
SEC registrants are also not allowed to incorporate information into the financial
statements by reference unless specifically permitted or required by the SEC rules
or by the applicable accounting standards (that is, US GAAP or IFRS Accounting
Standards).
65 SEC, The Enhancement and Standardization of Climate-Related Disclosures for

Investors, Appendices A, C, G, H, and J.
66 SEC, Climate disclosure rules, Appendix J.
67 SEC, Climate disclosure rules, Appendices D and F.
68 SEC, Climate disclosure rules, Appendices B and E.
69 SEC Rule 230.411(a) and (b) of the Securities Act 1933.

Acknowledgements
Katie DeKeizer
Peter Flick
Heather Horn
Andreas Ohl
Dara Sarasati
Nina Schäfer
Olivier Scherer
Diana Stoltzfus
Hugo van den Ende
Valerie Wieman
Jan-Ben Wiese
Katie Woods

Chapter 6:
Pillars of sustainability
reporting
6.1 Pillars of sustainability reporting —
chapter overview
Each of the primary sustainability reporting frameworks require some degree of
general disclosures regarding the entity’s governance, strategy, risk management,
and use of metrics and targets as they relate to sustainability. These frameworks
include the following:

European Commission for purposes of compliance with the Corporate

See SRG 2, Applicability of sustainability reporting, for discussion of the entities

subject to these reporting regimes.
Although the breadth of these standards and regulations differ — ESRS and the
IFRS Sustainability Disclosure Standards broadly address a range of topics in
sustainability reporting, whereas the SEC rules are focused only on climate
disclosures — the general sustainability-related disclosure requirements
substantially align. The SEC’s climate disclosure rules, however, do not require
any general disclosures apart from those related to climate. As a result, all
disclosures under those rules are included within SRG 8, Climate [coming soon]
and are not addressed in this chapter.
The general disclosure requirements of the ESRS and IFRS Sustainability

Disclosure Standards are discussed in the following sections:
□ Introduction to the general sustainability reporting standards (SRG 6.2)
□ Governance over sustainability-related impacts, risks, and opportunities (as

applicable) (SRG 6.3)
□ Strategy regarding sustainability-related impacts, risks, and opportunities (as

□ Management of sustainability-related impacts, risks, and opportunities (as

□ Sustainability-related metrics and targets (SRG 6.6)
In addition, the sections provide clarity on where the frameworks align, and where
they diverge.

1 On 6 March 2024, the SEC issued its final climate disclosure rules, The Enhancement
and Standardization of Climate-Related Disclosures for Investors. On 4 April 2024, the SEC
PwC | Pillars of sustainability reporting (as of 30 June 2024) 6-1

evaluate the effect of — subsequent developments

□ IFRS Sustainability Disclosure Standards — sustainability-related risks

and opportunities
to ESRS.
ESRS.

reporting.

EFRAG has published the following sources of interpretive guidance with respect
to the ESRS:
□ EFRAG ESRS Implementation Q&A Platform — the EFRAG Q&A

Platform is updated with new information periodically, most recently with
the publication of the Compilation of Explanations January – July 2024
(EFRAG ESRS Q&A Compilation of Explanations)


standards.
SEC climate disclosure rules
As noted, the SEC climate disclosure rules are not covered in this chapter
because these rules themselves do not include general reporting requirements.
Beyond the topic of climate, however, SEC registrants are subject to a suite of
disclosure requirements, including required disclosures regarding the entity’s
overall governance and risk factors based on existing SEC rules, which may be
relevant to climate reporting. See PwC’s SEC Volume for guidance regarding
general disclosures applicable to all listed companies in the US.
6.2 Introduction to ESRS 2 and IFRS S1

The general sustainability reporting requirements in ESRS and the IFRS
Sustainability Disclosure Standards are applicable to all reporting entities
5 July 2024.
2024.

regardless of the sector in which they operate. The disclosure requirements are
detailed in:
□ ESRS 2 General disclosures
□ IFRS S1 General Requirements for Disclosure of Sustainability-related

Financial Information
One of the foundational points of alignment between ESRS and the ISSB
standards is the incorporation of the key elements of the recommendations of the
Task Force on Climate-related Financial Disclosures (TCFD). Leveraging this
popular framework provides a point of continuity with voluntary reporting and
unites the disclosure frameworks through key themes. Both standards are
structured around governance, strategy, risk management, and metrics and
targets which align with the four pillars of sustainability reporting first introduced by
the TCFD.
This chapter is similarly organised around these areas, with a discussion of

common areas of disclosure between ESRS 2 and IFRS S1 in each topic followed
by any incremental standard-specific disclosures.
6.2.1 Introduction to ESRS 2
ESRS 2 is one of the ESRS cross-cutting standards, meaning that it provides

disclosure requirements on sustainability information that apply across all
sustainability topics (information on ESRS 1 General requirements, which is the
other ESRS cross-cutting standard, may be found in SRG 3, Boundaries of
sustainability reporting, SRG 4, Materiality for sustainability reporting, and SRG 5,
Foundations of sustainability reporting).
ESRS 2 serves as the basis for most of the disclosures required under the general
information part of an entity’s sustainability statement. All disclosure requirements
in ESRS 2 are mandatory, irrespective of the outcome of the entity’s materiality
assessment. 4 In the rare situation when an entity determines that it has no
material sustainability matters, it would still need to disclose the information
required by ESRS 2. While omission of an entire ESRS 2 disclosure requirement
or datapoint is not permitted — with the exception of metrics as discussed below
— the extent of detail provided may be scaled based on the entity’s assessment
of the materiality of information.
As a cross-cutting standard, ESRS 2 establishes minimum disclosure

requirements (MDRs) for an entity’s sustainability-related policies, actions,
metrics, and targets. As discussed in ESRS 1 paragraph 71, this includes an
entity’s upstream and downstream value chain information, if actors in the value
chain are involved. These MDRs must be provided for each material sustainability
matter. In addition, they must be presented together with the disclosure
requirements provided in the relevant topical ESRS and any entity-specific
disclosures (including sector-specific matters as applicable). While MDRs for
policies, actions, and targets may not be omitted, the level of detail provided will
depend on the assessment of the materiality of information. In contrast, the MDRs
for metrics may be omitted based on an assessment of the relevance of that
information. See SRG 4.3.4. for detail about the materiality of information for
MDRs.
This chapter does not address the ESRS 2 disclosure requirements related to the
basis for presentation described in ESRS 2 BP-1, General basis for preparation of
sustainability statements, and ESRS 2 BP-2, Disclosures in relation to specific
circumstances. It also does not address the application of the transitional
provisions related to ESRS 2 SBM-1, Strategy, business model and value chain
4 ESRS 1 General requirements, paragraph 29; ESRS 2 General disclosures, paragraph 2.

and ESRS 2 SBM-3, Material impacts, risks and opportunities and their interaction
with strategy and business model. See SRG 5.6 for information about the basis of
presentation and SRG 3.8.1 for details on transitional provisions.
ESRS 2 interactions with ESRS 1
ESRS 1 and ESRS 2 are both cross-cutting standards and they are interrelated.
ESRS 1 describes:
□ the overall architecture of ESRS
□ the foundational concepts included in the standards
□ the general requirements for preparing and presenting sustainability

information
ESRS 2 details the specific disclosure requirements that realise the foundational
and general requirements described in ESRS 1. Thus, to comply with some of the
overarching requirements in ESRS 1, an entity must provide the information
specified by the disclosure requirements in ESRS 2.
Interrelationships between ESRS 2 and the topical ESRS
The disclosures required by ESRS 2 are broadly applicable to all entities. The
ESRS topical standards require specific disclosures that complement the ESRS 2
requirements. The specific disclosures in the topical standards that need to be
provided in conjunction with the disclosure requirements in ESRS 2 are detailed in
ESRS 2 Appendix C. For example, when describing the interactions of impacts,
risks, and opportunities with the entity’s strategy and business model under ESRS
2 SBM-3, an entity must consider the requirements in ESRS E4 Biodiversity and
ecosystems, paragraph 16, which requires detailed disclosures specific to how
impacts, risks, and opportunities related to biodiversity may impact an entity’s
strategy and business model.
With one exception, the topical ESRS disclosures supporting the ESRS 2 general
disclosures are only required if the topic is material. The disclosure requirement
referred to as IRO-1, Description of the process to identify and assess material
impacts, risks and opportunities, is the exception; a description of the process to
identify impacts, risks, and opportunities addressed by any of the environmental
and governance ESRS is required regardless of whether the topic is material (see
ESRS 2 Appendix C). For example, if ESRS E3 Water and marine resources is
not a material topic, an entity would still be required to describe the process to
identify and assess material water and marine resources-related impacts, risks,
and opportunities. Note that there is no requirement to describe the process to
identify impacts, risks, and opportunities in the social ESRS.
6.2.2 Introduction to IFRS S1
IFRS S1 sets the general requirements for the disclosure of sustainability-related

financial information when reporting in accordance with the IFRS Sustainability
Disclosure Standards. The purpose of IFRS S1 is similar to the way IAS 1
Presentation of Financial Statements (soon to be superseded by IFRS 18
Presentation and Disclosure in Financial Statements) sets the general
requirements for financial statements. IFRS S1 addresses the conceptual
foundations of sustainability reporting and general information and requirements.
These elements are discussed in SRG 5.7. This chapter addresses the IFRS S1
core disclosures (categorised by governance, strategy, risk management, and
metrics and targets).
The requirements of IFRS S1 only apply to material sustainability-related risks and

opportunities. Material sustainability-related risks and opportunities are the ones

that could reasonably be expected to affect an entity’s prospects. 5 The term
‘entity’s prospects’ refers to an entity’s cash flows, its access to finance, or its cost
of capital over the short-, medium-, or long-term. See SRG 4.4 for a discussion on
materiality assessment and SRG 3.5 for information on determining the time
horizons.
IFRS S1 is an overarching standard that guides the disclosures for all

sustainability-related financial information when reporting in accordance with the
IFRS Sustainability Disclosure Standards. 6 Although the ISSB standards currently
include one topical standard (IFRS S2 Climate-related Disclosures), the absence
of a topical standard about a sustainability-related risk or opportunity does not
negate the requirement to provide transparent disclosures for such a risk or
opportunity. For example, an entity that identifies a material risk related to
biodiversity or a material opportunity related to its recycling programs would need
to provide the disclosures required by IFRS S1 even though there is no related
topical standard. The ISSB is developing additional topic-specific standards. Until
then, the disclosure of all material sustainability-related risks and opportunities,
other than those related to climate, are required to comply with IFRS S1. See
SRG 6.4 for the disclosures required related to material risks and opportunities.
6.3 Governance over sustainability-related

impacts, risks, and opportunities (as
applicable)
Given the importance of effective governance to address sustainability-related
impacts, risks, and opportunities (as applicable), governance disclosures are
required across the sustainability reporting standards. These disclosures are
intended to provide users with transparency over the governance processes —
including related controls and procedures — established to monitor, manage, and
oversee sustainability-related matters.
This section provides an overview of the governance disclosures required by

ESRS and the ISSB standards. The principles and concepts addressed in the
governance disclosures are broadly aligned. In some areas, however, ESRS 2
requires more specific disclosures than IFRS S1. The principal governance
disclosures are compared in Figure SRG 6-1.
Figure SRG 6-1

Comparison of governance disclosure areas
Areas of disclosure ESRS 2 IFRS S1
Technical references ESRS 2 GOV-1, IFRS S1

GOV-2, GOV-3, paragraphs 26
GOV-4, GOV-5 and 27
Identity and role of the governance  

body
(SRG 6.3.1)
Process to inform governance body  

(SRG 6.3.2)
5 IFRS S1 General Requirements for Disclosure of Sustainability-related Financial

Information, paragraph 6.

Incentive schemes  
(SRG 6.3.3)
Statement of due diligence 

(SRG 6.3.4)
Risk management and internal 

controls over sustainability reporting
(SRG 6.3.5)
Areas of disclosure may vary between the frameworks. Specific disclosure

requirements within those areas may also differ. Common and incremental
disclosures, if any, are described in the following sections.
6.3.1 Identity and role of the governance body
An entity’s governance body plays a significant role in overseeing sustainability-

related impacts, risks, and opportunities (as applicable). Disclosures about the
sustainability governance structure allow investors and other stakeholders to
evaluate the extent of attention sustainability matters receive and by whom.
Typically, the governance body will be the board of directors, but it can also be a
committee, an equivalent body, or one or more individuals charged with
governance. While we refer in this section to a singular governance body, an
entity may have several governance bodies.
The level of disclosure detail related to the governance body oversight varies
between ESRS and the ISSB standards. While ESRS 2 includes additional areas
of disclosures, where the frameworks have disclosure requirements in common,
there is a high degree of alignment in this area.
Both ESRS 2 and IFRS S1 require an entity to disclose the governance body
responsible for oversight of sustainability-related impacts, risks, and opportunities
(as applicable), including their roles and responsibilities. In addition, both ESRS 2
and IFRS S1 require an entity to disclose all of the following: 7
□ how the governance body determines whether appropriate skills and expertise
(or competencies) are available or will be developed to oversee sustainability-
related impacts, risks, and opportunities (as applicable)
□ how responsibilities for each body or individual responsible for sustainability-

related impacts, risks, and opportunities (as applicable) are reflected in the
terms of reference, mandates, including role descriptions and other related
policies applicable to that governance body
□ a description of management’s role in the governance processes, controls

and procedures used to monitor, manage, and oversee sustainability-related
impacts, risks, and opportunities (as applicable)
□ whether the role of management is delegated to a specific management-level

position or management-level committee and how oversight is exercised over
that position or committee
□ whether management uses dedicated controls and procedures to support the

oversight and management of sustainability-related impacts, risks, and

opportunities (as applicable) and how these controls and procedures are
integrated with other internal functions
□ how the governance body oversees the setting of targets related to

sustainability-related impacts, risks, and opportunities (as applicable) and how
it monitors progress towards them
If there is more than one governance body, the disclosure should generally
consider them collectively although if aggregate disclosure would obscure material
information, disclosures should be disaggregated by body or individual.
Question SRG 6-1
Do the administrative, management and supervisory bodies referred to in ESRS 2

and the governance body referred to in IFRS S1 serve the same function?
PwC response
ESRS 2 introduces the term ‘administrative, management and supervisory bodies’
(AMSBs) to refer to the governance bodies responsible for oversight of impacts,
risks, and opportunities. As defined in Commission Delegated Regulation (EU)
2023/2772 Annex II (ESRS Annex II) Table 2, ‘Terms defined in the ESRS’,
AMSBs are the governance bodies with the highest decision-making authority in
the reporting entity. If an entity has no AMSBs, the Chief Executive Officer, and if
applicable, the deputy Chief Executive Officer, should be considered to hold the
highest decision-making authority.
The governance bodies that constitute the AMSBs can vary depending on the
legal form of the entity or the jurisdiction in which it is located. Some jurisdictions,
for example, may require an entity to have separate management and supervisory
bodies. The definition of AMSBs in ESRS Annex II Table 2 states that when the
management and supervision functions are separated, both tiers are within the
AMSBs. In this case, therefore, both need to be considered in the related
disclosures.
The stated objective in ESRS 2 and IFRS S1 for the governance disclosures is to
enable a user to understand the governance processes, controls, and procedures
an entity uses to monitor, manage, and oversee sustainability-related impacts,
risks, and opportunities (as applicable). 8 As a result, we believe that the difference
in terminology between AMSBs (under ESRS 2) and the governance body(s)
(which can include a board, committee, or equivalent body charged with
governance) or individuals under IFRS S1 would not lead to different disclosures.
Question SRG 6-2
What constitutes ‘expertise and skills’ and ‘skills and competencies’ as used in
ESRS 2 GOV-1 and IFRS S1, respectively?
PwC response
Note that while ESRS 2 GOV-1 paragraph 20(c) uses the term ‘expertise and
skills’ and IFRS S1 paragraph 27(a)(ii) uses the term ‘skills and competencies’, we
do not believe that there is a substantive difference between these terms.
Neither ESRS 2 nor IFRS S1 defines the attributes required when describing the
skills and expertise or competencies of the governance body or bodies. ESRS 2
AR 5, however, provides disclosure guidance and states that the expertise of the
administrative, management, and supervisory bodies (AMSBs) could be illustrated

by noting the composition of the bodies, including the members within the AMSBs
upon whom the entity relies for sustainability expertise.
Additionally, the disclosure under ESRS 2 should include the expertise the
governance bodies currently possess or can leverage through engagement with
outside experts or trainings. 9 An entity is required to state whether the AMSBs
have access to other sources of skills or experience, including topic-specific
experts or any training and education that is available to be leveraged by the
AMSBs and their members.
Reporting entities may also consider making similar disclosures when reporting
the skills and competencies of their governance bodies in accordance with the
ISSB standards.
6.3.1.1 Identification of governance body — incremental disclosures

required by ESRS 2
Although there is a high degree of alignment of the disclosures regarding the

identification of the governance body, ESRS 2 includes incremental datapoints
beyond those required by IFRS S1.
ESRS 2 GOV-1 requires specific disclosures regarding the composition and

diversity of the administrative, management, and supervisory bodies (AMSBs).
Specifically, ESRS 2 paragraph 21 requires an entity to disclose all of the
following:
□ the number of executive and non-executive members
□ representation of employees and other workers
□ experience relevant to the sectors, products, and geographic locations of the

entity
□ the percentage of independent board members
□ the percentage by gender and other aspects of diversity that the entity
considers
When disclosing the roles and responsibilities of the AMSBs, ESRS 2 also
requires entities to disclose both of the following:
□ information about the reporting lines to the AMSBs
□ how the skills and expertise available to the AMSBs relate to the entity’s
impacts, risks, and opportunities
ESRS 2 AR 4 notes that it may be effective to supplement the discussion of the

roles and responsibilities of the AMSBs with a diagram or organisational chart,
particularly if the governance organisation is complex.
Finally, ESRS 2 AR 3 states that the disclosures of roles and responsibilities of

the AMSBs may outline which aspects of sustainability are addressed within the
scope of their oversight, which may include the identification of impacts, risks, and
opportunities; changes to the sustainability-related elements of the entity’s
strategy or business model; policies and targets, action plans, and dedicated
resources; and sustainability reporting. It may also include the form of oversight
(decision-making, consultation, or providing information) for each aspect of
sustainability and the way such oversight is organised and formalised.

6.3.2 Processes to inform the governance body
Both ESRS 2 and IFRS S1 require disclosures about processes undertaken to

inform the governance body about both of the following:
□ how, and how often, the governance body is informed about material
sustainability impacts, risks, and opportunities (as applicable)
□ how the governance body considers material sustainability impacts, risks, and
opportunities (as applicable), including whether they considered related trade-
offs
‘Trade-offs’ refer to the need to balance competing priorities when making

decisions about sustainability-related impacts, risks, and opportunities (as
applicable). For example, a decision to re-design a planned production site to
mitigate the impact on local biodiversity may require incremental cost or may
delay the project timeline. The disclosure of trade-offs is required in the context of
how the governing body oversees strategy, decisions on major transactions, and
an entity’s risk management processes.
The term ‘major transactions’ is not defined in either standard. One approach is to
interpret the term as referring to financial transactions that are significant.
Assessing whether a financial transaction is significant will require judgement.
Considerations may include, for example, the purchase or sale price of
acquisitions or disposals, the transaction’s effect on current or future financial
performance and its effect on an entity’s operations or strategy, as well as
whether the transaction is disclosed in the entity’s financial statements.
6.3.2.1 Processes to inform the governance body(s) — incremental

disclosures required by ESRS 2
Beyond the common disclosures between ESRS 2 and IFRS S1, ESRS 2 GOV-2
includes incremental disclosures about the process to inform the ASMBs. These
include:
□ whether and by whom the AMSBs are informed about impacts, risks, and
opportunities
□ whether, by whom, and how frequently the AMSBs are informed about the
implementation of due diligence and the results and effectiveness of policies,
actions, metrics and targets adopted to address impacts, risks, and
opportunities
□ how the AMSBs addressed sustainability matters during the reporting period
In addition, ESRS 2 paragraph 26(c) requires the entity to disclose a list of the
specific impacts, risks, and opportunities addressed by the AMSBs or their
committees during the reporting period.
ESRS 2 AR 6 notes that the disclosure may address how the governance
organisation ensures that there is an appropriate mechanism to monitor progress
when the AMSBs focus on high-level targets and management focuses on more
detailed targets.
6.3.3 Incentive schemes
In some cases, an entity may choose to embed incentives into remuneration

programs based on meeting sustainability targets or goals. Disclosures about
such incentives, including related metrics, provide transparency regarding whether
such incentives are offered to the members of the governance body.

While ESRS 2 GOV-3 includes several disclosure requirements on the integration
of sustainability-related performance in incentive schemes, the IFRS S1
disclosures about incentive schemes are limited. Both standards, however,
require an entity to disclose whether and how sustainability-related performance
metrics are included in remuneration policies. 10
6.3.3.1 Incentive schemes — incremental disclosures required by ESRS 2
ESRS 2 GOV-3 paragraph 29 also requires the following disclosures if there are
incentive schemes offered to the members of AMSBs that are linked to
sustainability matters:
□ the key features of the incentive schemes
□ whether performance is assessed against sustainability targets or impacts

and if so, which ones
□ the level at which the terms of the incentive schemes are reviewed and
approved
□ the percentage of variable compensation dependent upon sustainability-

related targets or impacts
Disclosures for listed companies reporting in the EU should align with the entity’s
remuneration report prescribed by the the Shareholder Rights Directive. 11 Subject
to the ESRS 1 provisions addressing incorporation by reference, an entity may
refer to disclosures provided in its remuneration report. 12
6.3.4 Statement of due diligence — ESRS
ESRS 1 defines due diligence as:
Due diligence is the process by which undertakings identify, prevent, mitigate and
account for how they address the actual and potential negative impacts on the
environment and people connected with their business.
The outcome of this process informs the entity’s materiality assessment. To

facilitate an overall understanding of the entity’s due diligence process with
respect to sustainability matters, ESRS 2 GOV-4 requires an entity to map the
main elements of due diligence delineated in ESRS 1 paragraph 61 to where the
information is provided in its sustainability statement. This disclosure does not
mandate any particular actions or behaviours or extend the responsibilities of the
AMSBs. 13
The following are examples of where elements detailed in ESRS 1 related to due
diligence may be reflected in ESRS 2 disclosures:
□ information on how the entity embeds due diligence in its governance,

strategy and business model can be found in disclosures required by ESRS 2
GOV-2 and GOV-3
10 ESRS 2 paragraph 29(c); IFRS S1 paragraph 27(a)(v).

11 Directive
2007/36/EC.
12 ESRS 2 AR 7.

□ information on how the entity engages with affected stakeholders can be
found in disclosures required by ESRS 2 GOV-2 and SBM-2
ESRS 2 AR 8 notes that this mapping may be accomplished through the use of
infographics, such as a table or chart, which cross-references core elements of
people and environment to the applicable sections within the entity’s sustainability
reporting where a user can find additional context and discussion.
Figure SRG 6-2 depicts a table included in ESRS 2 AR 10 which illustrates one
approach to mapping the core elements of the due diligence report to the entity’s
sustainability reporting. Use of the table is not required. An entity may adopt other
means to map the core elements between the two reports.
Figure SRG 6-2

Example of mapping as presented in ESRS 2 AR 10
CORE ELEMENTS OF DUE DILIGENCE PARAGRAPHS IN THE

SUSTAINABILITY STATEMENT
a) Embedding due diligence in xx

governance, strategy and business
model
b) Engaging with affected stakeholders in xx

all key steps of the due diligence
c) Identifying and assessing adverse xx

impacts
d) Taking actions to address those xx

adverse impacts
e) Tracking the effectiveness of those xx

efforts and communicating
ESRS 2 AR 9 indicates that an entity may include additional columns to identify

where there are further disclosures within the sustainability statement that relate
to impacts on people and/or the environment, recognising that there could be
multiple sections within a report that discuss these items.
Although a specific statement on due diligence is not required under the IFRS
Sustainability Disclosure Standards, an entity reporting under that framework may
find it a useful means to convey its efforts to users.
6.3.5 Risk management and internal controls — ESRS
ESRS 2 GOV-5 requires disclosures that provide an understanding of an entity’s

risk management and internal control processes over sustainability reporting.
These requirements are related but incremental to the disclosures discussed in
SRG 6.5.1 about the processes to identify sustainability-related impacts, risks,
and opportunities.
ESRS 2 GOV-5 paragraph 36 requires an entity to disclose all of the following:
□ the key components and main features of the company’s risk management
and internal control processes for sustainability reporting
□ the risk management process followed and how identified risks were
prioritised

□ the risks identified as well as any actions or strategies to mitigate those risks,
including internal controls
□ how the entity connects the results of these risk management activities with
other functions within the entity
□ how the members of the AMSBs are informed about the results of these
activities
As described in ESRS 2 AR 11, ESRS 2 GOV-5 relates solely to the internal

control processes over the data used in sustainability reporting, including over
information obtained from other organisations within the value chain. Entities may
consider risks relating to, for example, the integrity and completeness of the data,
the accuracy of estimates, the availability of data in the value chain, and whether
the data can be obtained on a timely basis.
6.4 Strategy regarding sustainability-related

applicable)
Required disclosures related to strategy are meant to provide transparency
around sustainability-related impacts, risks, and opportunities (as applicable) and
how such sustainability matters are addressed and managed. The foundation of
the disclosures is the interaction of these matters with an entity’s strategy,
business model, and value chain.
This section provides an overview of the required disclosures related to an entity’s

strategy for managing sustainability-related impacts, risks, and opportunities (as
applicable).
6.4.1 Disclosures of the outcome of the materiality assessment — list of

material impacts, risks, and opportunities (as applicable)
One of the objectives of the disclosures required by ESRS and the IFRS
Sustainability Disclosure Standards about an entity’s strategy is to help users
understand the outcomes of an entity’s materiality assessment and how identified
sustainability-related impacts, risks, and opportunities (as applicable) affect and
inform overall strategy.
The principles, concepts, and areas of disclosures with respect to identified

sustainability matters are generally aligned. ESRS 2 SBM-3 and IFRS S1
paragraphs 28 to 31 both require an entity to list the sustainability-related impacts,
risks and opportunities (as applicable) identified through its materiality
assessment and the time period in which those matters are likely to manifest. Both
frameworks also require that each sustainability-related impact, risk, and
opportunity (as applicable) be described in sufficient detail to understand its
nature. 14
IFRS S1 paragraph 30(c) also requires disclosure of how an entity defines ‘short-
term’, ‘medium-term’, and ‘long-term’ and how these definitions align with the
planning horizons used in its strategic decision-making (see SRG 3.5.3 for
discussion on time horizons). No similar disclosures are required by ESRS 2
because the time horizons are defined. Another difference in requirements is that
only ESRS 2 requires an entity to disclose changes in material impacts, risks, and
opportunities from the prior period. 15
14 ESRS 2 paragraph 48(a); IFRS S1 paragraph 30(a).

15 ESRS 2 paragraph 48(g).

This section addresses the disclosures related to the sustainability-related
impacts, risks, and opportunities (as applicable) identified by management. See
SRG 6.5.1 for required disclosures relating to the process employed by
management to identify these matters.
6.4.2 Effects of sustainability-related impacts, risks, and opportunities (as

applicable)
Information about the effects of sustainability-related impacts, risks, and

opportunities (as applicable) on an entity is an important element of disclosure
under both ESRS 2 and IFRS S1. Sustainability matters may affect an entity’s
strategy, business model, and value chain. ESRS 2 and IFRS S1 define the term
‘business model’ similarly.
Definition from ESRS Annex II, Table 2
Business model: The undertaking’s system of transforming inputs through its

activities into outputs and outcomes that aims to fulfil the undertaking’s strategic
purposes and create value over the short-, medium- and long-term. ESRS use the
term business model’ in the singular, although it is recognised that undertakings
may have more than one business model.
Definition from IFRS S1 Appendix A
Business model: An entity’s system of transforming inputs through its activities

into outputs and outcomes that aims to fulfil the entity’s strategic purposes and
create value for the entity and hence generate cash flows over the short, medium
and long term.
An entity’s business model is how it operates to produce goods and deliver

services in order to generate cash flows and reach profitability. In contrast, an
entity’s value chain represents the full range of interactions, activities, resources,
and relationships related to its business model and the environment in which it
operates.
Disclosures about the effects of sustainability-related impacts, risks, and

opportunities (as applicable) help users of the sustainability reporting better
understand how such matters affect or might affect an entity. They also inform
users about how the entity plans to address those sustainability matters and
therefore link back to the entity’s sustainability strategy.
Although the principles and concepts represented by the disclosures are generally
aligned, the actual disclosure requirements differ in some respects. Figure SRG 6-
3 provides a high-level comparison of the effects of sustainability-related impacts,
risks, and opportunities (as applicable) based on the components of the
disclosures required by ESRS 2 and IFRS S1.

Figure SRG 6-3
Strategy of sustainability-related impacts, risks, and opportunities (as applicable)
— comparison of disclosure areas
Technical references ESRS 2 SBM-1, IFRS S1

SBM-2, and paragraphs 32 to
SBM-3 42
Effects on business model and value chain  

(SRG 6.4.2.1)
□ Changes to strategy and business model  

□ Concentration of sustainability-related impacts, risks, and  
opportunities (as applicable) in business model and value
chain
□ Description of strategy, business model and value chain 
□ Effects of impacts on people or the environment 

□ How impacts originate from strategy and business model 
Effects on strategy and decision-making  
(SRG 6.4.2.2)
Resilience of strategy and business model  

(SRG 6.4.2.3)
Current and anticipated financial effects  

(SRG 6.4.2.4)

6.4.2.1 Effects on business model and value chain
Disclosures of effects on the business model and value chain are broadly aligned
under ESRS 2 and IFRS S1. Both standards require an entity to disclose the
current and anticipated effects of sustainability-related impacts, risks, and
opportunities (as applicable) on its business model and value chain.
ESRS 2 and IFRS S1 also require the disclosure of where the sustainability-
related impacts, risks, and opportunities (as applicable) are concentrated in an
entity’s business model and value chain. 16 Both standards refer to geographical
areas, facilities, and types of assets as elements to consider in preparing
concentration disclosures. 17 While ESRS 2 mandates the consideration of these
16 ESRS 2 paragraph 48(a); IFRS S1 paragraph 32(b).

17 ESRS 2 AR 17; IFRS S1 paragraph 32(b).

elements, IFRS S1 suggests these as examples for assessing concentrations in
both the value chain and the business model.
ESRS 2 requires incremental disclosure describing an entity’s business model

and value chain. Entities reporting under the IFRS Sustainability Disclosure
Standards may want to include similar information to allow users to better
understand how the business model and value chain may be affected by
sustainability risks and opportunities.
Effects on the business model and value chain — incremental

ESRS 2 SBM-1 paragraph 42 requires an entity to provide details about the key
elements of its business model and value chain. If there is more than one
business model or more than one value chain, the entity should address the key
ones. These descriptions are meant to help users understand how these elements
may be exposed to impacts, risks, and opportunities.
ESRS 2 paragraph 42(c) requires the description of the business model and value
chain to include:
□ inputs and approach to gathering, developing, and securing those inputs
□ outputs and outcomes in terms of current expected benefits for customers,

investors, and other stakeholders
□ the main features of the upstream and downstream value chain and the
entity’s position in the value chain, including a description of the main
business actors (such as key suppliers, customers, distribution channels, and
end users) in the value chain and their relationships with the entity
ESRS 2 refers to inputs and outputs when describing the business model. While
ESRS do not define these terms, we believe an entity may look by analogy to
IFRS 3 Business combinations, which defines an input as an economic resource
that creates outputs or can contribute to the creation of outputs. Examples of
inputs may include raw materials, rights, non-current assets, and employees.
IFRS 3 describes outputs as the result of processes applied to inputs. Examples
of outputs may include goods and services, dividends, and investment income.
When disclosing details about its business model and value chain, an entity is
required by ESRS 2 AR 14 to consider:
□ key activities, resources, distribution channels, customer segments
□ key business relationships, including with suppliers and customers
□ the cost structure and revenue of its business segments
□ the potential impacts, risks, and opportunities in its significant sectors and
how they might influence its own business model or value chain
The description of the main features of an entity’s upstream and downstream

value chain should help a user understand how the value chain was considered in
its materiality assessment as required by ESRS 1. See SRG 4.3.1 for a discussion
of the materiality assessment. The description may also include an indication of
the value chain’s relative contribution to an entity’s performance and position and
how it contributes to the creation of value for the entity. 18
Additionally, ESRS 2 paragraph 38 requires specific disclosures about the key

elements of an entity’s strategy that relate to or affect sustainability matters. An
18 ESRS 2 AR 15.

entity’s description of the key elements of its strategy is required by ESRS 2
paragraph 40(a) to include all of the following:
□ significant groups of products and/or services offered, including changes

during the reporting period
□ significant markets and/or customer groups, including changes in the

reporting period
□ headcount of employees by geographical areas
□ any products or services banned in certain markets, if material
As described in ESRS 2 AR 13, ‘significant’, as used above, means accounting for

more than 10% of the entity’s revenue and/or connected to material actual
impacts or material potential negative impacts of the entity. For information
regarding the reference to ‘revenue’, see Question SRG 6-4.
Other key elements of an entity’s general strategy required to be disclosed are

detailed in Figure SRG 6-4.
Figure SRG 6-4

General strategy disclosures
Reference Required disclosure
ESRS 2 paragraph A breakdown of total revenue by significant ESRS sector (for IFRS reporters,
40(b) where applicable, reconciled to IFRS 8 Operating segments, but with certain
exceptions) 19
ESRS 2 paragraph A list of the additional significant ESRS sectors, such as activities that give rise
40(c) to intercompany revenues, in which the entity develops significant activities, or in
which it is or may be connected to material impacts
ESRS 2 paragraph Where applicable, a statement indicating together with the related revenues, that
40(d) the entity is active in any of the following areas:
□ the fossil fuel (coal, oil, and gas) sector, including a disaggregation of
revenues derived from coal, oil, and gas, as well as the revenues derived
from Taxonomy-aligned economic activities related to fossil gas 20
□ chemicals production
□ controversial weapons (anti-personnel mines, cluster munitions, chemical
weapons, and biological weapons)
□ the cultivation and production of tobacco
ESRS 2 paragraph Sustainability-related goals related to significant groups of products and

40(e) services, customer categories, geographical areas, and relationships with
stakeholders
ESRS 2 paragraph Assessments of current significant products and/or services, and significant
40(f) markets and customer groups in relation to the sustainability-related goals
19 If the entity is based in an EU Member State that allows for an exemption from the
disclosure of revenue by categories of activity and geographical markets referred to in
Article 18, paragraph 1(a) of Directive 2013/34/EU because the information is prejudicial,
an entity electing that exemption may omit the breakdown of revenue by significant ESRS
sector. In this case the entity must nevertheless disclose the list of ESRS sectors that are
significant for the entity.
20 As required under Article 8(7)(a) of Commission Delegated Regulation 2021/2178.

Reference Required disclosure
ESRS 2 paragraph The elements of the entity’s strategy that relate to or impact sustainability
40(g) matters, including the main challenges ahead, critical solutions or projects to be
put in place, when relevant for sustainability reporting
The extent of the above disclosures allows users to better understand how the
business model and value chain may be affected by sustainability impacts, risks,
and opportunities.
In addition to disclosing the current and anticipated effects of impacts, risks, and
opportunities (as applicable) on an entity’s business model and value chain,
ESRS 2 paragraph 48(b) specifically requires the entity to disclose any changes
or potential changes it plans to make to its business model. The description of
past or planned changes to an entity’s business model in response to its impacts,
risks, and opportunities should be detailed enough to understand the nature of the
changes. Examples of changes to an entity’s business model may include items
such as a transition to renewable energy, withdrawal of non-ecological products,
development of new products or services, or a shift to sustainable or organic raw
materials.
Specific to sustainability-related impacts, ESRS 2 paragraph 48(c) also requires

an entity to disclose:
□ how its impacts and potential impacts, negative and positive, affect (or are
expected to affect) people or the environment
□ how its impacts originate from or are connected to the entity’s strategy and
business model
□ the reasonably expected time horizon (that is, short-term, medium-term, or

long-term)
□ whether the impacts arise from the entity’s business activities or through its
business relationships, and the nature of such activities or relationships.
If an entity’s time horizon deviates from the medium- or long-term time horizons
specified in ESRS 1 paragraph 77 as permitted by ESRS 1 paragraph 80 in
limited circumstances, the entity also needs to describe the definitions used and
the reason for the deviation. See SRG 3.5.3 for definitions of time horizons.
Question SRG 6-3
What are the ESRS sectors referred to in ESRS 2 SBM-1?
PwC response
ESRS 2 SBM-1 includes a requirement to provide a breakdown of revenue by
ESRS sectors and a list of other significant ESRS sectors. ESRS sectors will be
defined in connection with EFRAG’s development of sector-specific ESRS.
ESRS 1 Appendix C includes a transitional provision that requires this information

to be reported only after the European Union adopts a delegated act specifying
the ESRS sectors in connection with the issuance of sector-specific ESRS,
expected by 2026. 21
21On 29 April 2024, the European Council approved a two-year delay of the deadline for
adoption of certain sector-specific and the non-EU dedicated standards (extending the
deadline to 30 June 2026). The delay in issuance of the standards, however, does not

In the EFRAG ESRS Q&A Compilation of Explanations, Question ID 39 confirms
that the breakdown of revenue by ESRS sector is not required until such date as
the ESRS sectors are defined by the European Commission. 22
Question SRG 6-4
What is meant by the reference to ‘revenue’ in ESRS SBM-1?
PwC response
In referring to the required breakdown of revenue, ESRS 2 paragraph 40(b) refers
to consistency with how revenue is included in the entity’s financial statements.
Note that ESRS uses the terms ‘revenue’, ‘total revenue’, and ‘net revenue’
synonymously and as a generic proxy for ‘net turnover’ as used in the CSRD, but
“acknowledging in whatever way possible revenues that are defined under the
applicable GAAP”. 23
6.4.2.2 Effects on strategy and decision-making
ESRS 2 and IFRS S1 are also broadly aligned with respect to disclosures of
effects on strategy and decision-making. Both standards require an entity to
disclose information about the effects of sustainability-related impacts, risks, and
opportunities (as applicable) on its strategy and decision-making.
The disclosures should also include how the entity has responded or plans to
respond to these effects, or pursue opportunities, including changes or potential
changes to its strategy. 24 Both standards also require disclosure of the qualitative
and quantitative progress against plans, or action plans, the entity has disclosed
in previous reporting periods. 25 See SRG 6.5.3 for further discussion.
The disclosures of the effects on strategy and decision-making are intrinsically

linked to the effects of sustainability-related impacts, risks, and opportunities (as
applicable) on an entity’s business model and value chain because such effects
often directly inform the entity’s strategic direction and may influence strategic
decisions, which may result in changes to an entity’s business model and value
chain.
Effects on strategy and decision-making — incremental disclosures

required by ESRS 2
ESRS 2 paragraph 48(b) mandates that an entity disclose the effects of impacts,
risks, and opportunities on its strategy and decision-making, with a specific
requirement to disclose both the current and anticipated effects.
Although ESRS 2 SBM-3 does not specify that the disclosures of current and
anticipated financial effects need to be quantitative, a transitional provision in
ESRS 1 Appendix C allows an entity to comply with ESRS SBM-3 by providing
only qualitative disclosures for the anticipated financial effects for the first 3 years.
This implies that some quantitative information is required outside of the
transitional period. See SRG 3.8.1.4 for discussion of this transitional provision.
ESRS 2 AR 18 also clarifies that the disclosure of financial effects can be made
for individual risks or opportunities or by aggregating groups of risks and
impact the deadline for reporting. See SRG 2.2.8 for information on the timing of first-time
application.
22 EFRAG, ESRS Implementation Q&A Platform, Compilation of Explanations January-July
2024, Question ID 39, pages 65-66.

23 EFRAG Q&A Compilation of Explanations, Question ID 482, pages 69-71.
24 ESRS 2 paragraph 48(b); IFRS S1 paragraph 33(a).
25 ESRS 2 paragraph 68(e); IFRS S1 paragraph 33(b).

opportunities, when this provides more relevant information and does not obscure
material information.
Note that topical standards ESRS E2 Pollution, ESRS E3 Water and marine
resources, ESRS E4 Biodiversity and ecosystems, and ESRS E5 Resource use
and circular economy, each include a provision that allows an entity to provide
qualitative information about anticipated financial effects if quantitative information
cannot be obtained without undue cost or effort. 26 Although no specific disclosures
are required in this circumstance, disclosures similar to those required by IFRS S1
paragraph 40 in similar circumstances may be useful (see Figure SRG 6-6).
Effects on strategy and decision-making — incremental disclosures

required by IFRS S1
IFRS S1 paragraph 33(c) requires an entity to disclose any trade-offs between

sustainability-related risks and opportunities that the entity has considered.
Disclosures on trade-offs are meant to convey how consideration of sustainability-
related risks and opportunities may have influenced strategic decisions. For
example, when deciding on the location of new operations, an entity might have
taken into considerations the environmental effects of those operations and the
employment opportunities they would generate in the communities.
6.4.2.3 Resilience of strategy and business model
Both ESRS 2 paragraph 48(f) and IFRS S1 paragraph 41 require an entity to

disclose information about its resilience in relation to its strategy and business
model, although neither standard provides detail on how to assess that resilience.
The requirements to disclose the resilience of an entity’s strategy and business
model are intended to inform users about the entity’s ability to cope with, adapt to,
and withstand the effects of sustainability-related risks and related uncertainties in
different scenarios, including taking advantage of opportunities. The resilience of
an entity’s strategy and business model ensures its long-term growth and stability
amidst the dynamic landscape of sustainability-related risks and opportunities.
The entity must disclose a qualitative and, where applicable, quantitative analysis
of its resilience, including the methodology used and time horizons applied. When
providing quantitative data, the entity may report single figures or ranges.
6.4.2.4 Financial effects
Both ESRS 2 and IFRS S1 require an entity to disclose the current and
anticipated financial effects of its sustainability-related risks and opportunities on
its financial position, financial performance, and cash flows. These disclosures are
designed to complement and expand upon information in the financial statements,
by making connections between sustainability-related risks and opportunities and
the information disclosed in the related financial statements.
Current financial effects
For current financial effects, an entity must disclose the effects of sustainability-
related risks and opportunities on its financial position, financial performance, and
cash flows for the current period. 27 Both ESRS 2 paragraph 48(d) and IFRS S1
paragraph 35(b) also require quantitative and qualitative disclosures of which risks
and opportunities that have caused current financial effects also present a
significant risk of material adjustment to the carrying amounts of assets and
liabilities reported in the related financial statements within the next annual
26 ESRS E2 Pollution, paragraph 39(a), ESRS E3 Water and marine resources, paragraph
33(a), ESRS E4 Biodiversity and ecosystems, paragraph 45(a), and ESRS E5 Resource
use and circular economy, paragraph 43(a).
27 ESRS 2 paragraph 48(d); IFRS S1 paragraph 34(a).

reporting period. We believe this is a distinct data point. Examples may include
assets and liabilities that can be subject to a material adjustment are property,
plant and equipment, intangible assets, goodwill, inventory, sustainability-linked
debt, and decommissioning provisions.
Anticipated financial effects
For anticipated financial effects, both ESRS 2 and IFRS S1 require an entity to
disclose the anticipated financial effects of its sustainability-related risks and
opportunities over the short-, medium-, and long-term. 28 This includes how the
entity’s financial position, financial performance, and cash flows are expected to
change in response to its strategy to manage these risks and opportunities. In
some topical standards, ESRS 2 SBM-3 disclosures of anticipated financial effects
may be qualitative if quantitative information cannot be obtained without undue
cost or effort (see discussion in SRG 6.4.2.2).
In considering the anticipated financial effects, both standards require an entity to

consider investments, disposal plans, and planned sources of funding to
implement its strategy. Examples of investment and disposal plans provided within
both standards are capital expenditures, major acquisitions, disposals, joint
ventures business transformation, innovation, new business areas, and asset
retirements. 29 Planned sources of funding are typically cash from operations, debt,
or equity based.
The disclosure requirement for anticipated financial effects does not mandate a
disclosure in each time horizon (that is, in the short-, medium-, and long-term). It
only requires consideration of whether the anticipated financial effect occurs over
those periods. This means that, depending on the facts and circumstances, an
entity may need to disclose an effect in some periods, but not others. For
example, if an entity plans to complete a major investment several years from now
to mitigate a sustainability-related risk, but that risk is assessed to be immaterial in
the short-term, the entity may need to disclose the long-term risk, but would not be
required to disclose any anticipated financial effects in the short-term.
Current and anticipated financial effects
Figure SRG 6-5 includes a list of considerations which we believe are reasonable
when an entity is disclosing current and anticipated financial effects. Example
SRG 6-1 illustrates these considerations.
Figure SRG 6-5

Considerations when disclosing current and anticipated financial effects
Area of disclosure Suggested treatment
Current actions to address □ Reflect the overall effect of risks and

sustainability-related risks opportunities on the current and next
and opportunities reporting period
□ Include the effect of actions taken during
the period
28 ESRS 2 paragraph 48(e); IFRS S1 paragraphs 34(b), 35(c), and 35(d).

29 ESRS 2 paragraph 48(e)(i); IFRS S1 paragraph 35(c)(i).

Area of disclosure Suggested treatment
Future actions to address □ Include an entity’s plans to manage its

sustainability-related risks sustainability-related risks and
and opportunities opportunities over the short-, medium-, and
long-term in the assessment of anticipated
financial effects.
□ This includes an explanation of the
planned actions and the related cost to
implement them, and the mitigating effects
of such actions.
The combined presentation of planned actions and the mitigating effects of such
actions may be contrary to how risks and opportunities are usually reported, which
is generally based on their effect without regard to mitigating actions.
Supplemental disclosure of the anticipated financial effects of sustainability-
related risks and opportunities without regard to planned actions, if material, may
be useful to users.
Question SRG 6-5
What costs should be considered when disclosing the current and anticipated
financial effects of sustainability-related risks and opportunities under both ESRS
2 and IFRS S1?
PwC response
ESRS 2 paragraph 48(e) and IFRS S1 paragraph 35 provide limited guidance on
the costs that should be included when disclosing current and anticipated financial
effects of sustainability-related risks and opportunities. While referring broadly to
the effect on financial position, financial performance, and cash flows, the
examples provided in both standards only refer to investments, disposal plans,
and sources of funding to implement an entity’s strategy.
Excerpt from ESRS 2 paragraph 48(e)(i) [IFRS S1 paragraph 35(c)(i)]
its investment and disposal plans (for example, [plans for] capital expenditure,
major acquisitions and divestments, joint ventures, business transformation,
innovation, new business areas and asset retirements), including plans the
undertaking [entity] is not contractually committed to
Financial effects may capture costs linked to the effects of, and actions that
address, sustainability-related risks or opportunities. For assets, this may include:
□ investments, such as capital expenditures and acquisitions of businesses,

divestments, joint ventures, joint operations, asset retirements, impairment of
property, plant, and equipment or intangible assets
□ the increase or decrease of raw material costs
□ other capitalised costs (for example, development costs)
For liabilities, the recognition of provisions, other liabilities, contingent liabilities,

and unrecognised liabilities should also be considered.
Financial effects on an entity’s financial performance may comprise costs and

favourable changes (for example, increased revenue or decreased costs) that are
linked to the effects of, and actions that address, sustainability-related risks or

opportunities. This would include, for example, costs related to operating
expenses, impairment, amortisation, and depreciation costs, increases and
decreases of cost of sales or other costs and increases or decreases in revenues
or other income.
Question SRG 6-6
Do an entity’s investment and disposal plans need to be included in an approved

business plan to be disclosed in connection with actions related to managing
sustainability-related risks and opportunities?
PwC response
No. Neither ESRS 2 nor IFRS S1 restrict the disclosure of plans to those that have
received formal approval. Management may want to consider, however, if the
acquisition or disposal plans are reasonably expected to occur and if any required
approvals have been received when determining the extent of plans to be
disclosed.
Investments and disposal plans do not need to be contractually committed to be

considered when disclosing the anticipated financial effects on financial position.
In practice, however, the plans are generally expected to be formally part of an
entity’s business plan prior to being included in this analysis.
Example SRG 6-1

Financial effects of actions in a high flood risk area
Violet Company Ltd (Violet Co), a calendar year-end reporting entity, operates in a
high flood risk area and is exposed to the risk of flooding. Over a period of three
years, Violet Co addresses the effect of the flood risk as follows:
□ In 20X1, Violet Co has not yet determined an appropriate mitigating solution.

No major flooding occurs.
□ In 20X2, Violet Co invests in a flood defence wall, paying an upfront fee of €1

million. Violet Co does not expect material financial effects from flooding in the
first three months of 20X3 prior to completion of the flood defence wall.
□ In 20X3, construction begins and Violet Co makes a final payment of €2

million. Construction of the wall is expected to be completed by March 20X3.
By building the flood wall, Violet Co expects to fully mitigate the potential flooding
costs over the short-, medium-, and long-term. Without the wall, Violet Co has
assessed that the anticipated financial damage would be approximately €4 million
over the short-term, €5 million over the medium-term, and €10 million over the
long-term.
How should Violet Co consider the risk of flooding, the actions taken, and
expected to be taken when disclosing its current and anticipated financial effects
in 20X1, 20X2, and 20X3 (for purposes of this example, assume all amounts are
material)?
Analysis
In 20X1, before any planned mitigation, Violet Co would consider and disclose the
anticipated short-, medium-, and long-term financial effects from flooding.
In 20X2, there is a plan in place and Violet Co has incurred expenses related to
the construction of the wall. Violet Co would disclose (a) its current financial
effects of actions taken during the period (that is, the upfront fee of €1 million) and
(2) its anticipated financial effects, including the cost of future actions to address
the risk of flooding (that is, the expected final payment of €2 million. Because the

final payment is due in 20X3, Violet Co would show the €2 million as a short-term
anticipated financial effect. Violet Com would also disclose the risk of future
flooding and the mitigating effects of the actions taken to mitigate that risk (that is,
the future risk of damages of €4 million over the short-term, €5 million over the
medium-term, and €10 million over the long-term as well as the damages that will
be prevented by the defence wall).
In 20X3, when the wall is fully constructed, Violet Co would disclose the €2 million
current financial effect for the final payment. It may, however, determine that there
is no longer a material risk of flood damage and so may no longer need to identify
the risk in its disclosures. In making that determination, Violet Company Ltd would
likely need to consider the risk of the wall failing to prevent flood damage.
Financial effects — incremental disclosures required by IFRS S1
IFRS S1 clarifies that the notes in the related financial statements may include
information on current financial effects of sustainability-related risks and
opportunities, though not all current effects will be disclosed in the footnotes.
When they are reported within the financial statement notes, however, an entity
may want to cross-reference to avoid duplication of information. 30 See
considerations for cross referencing in SRG 5.7.1. An entity should also consider
the IFRS S1 provisions regarding the connectivity of information between
sustainability and financial reporting.
IFRS S1 paragraph 36 also clarifies that when providing quantitative information,

an entity may disclose a single amount or a range. For anticipated financial
effects, an entity is required to use: 31
□ all reasonable and supportable information available at the reporting date

without undue cost and effort
□ an approach that is commensurate with the skills, capabilities, and resources

that are available to an entity
IFRS S1 requires both quantitative and qualitative information on financial effects

for each risk and opportunity. As discussed in IFRS S1 paragraphs 38 and 39,
there are specific circumstances when an entity may not need to provide specific
quantitative or qualitative information about the current and anticipated financial
effects. See detail in Figure SRG 6-6.
Figure SRG 6-6

Details of incremental disclosures required
Type of
disclosure Reason not required Disclosure required
Quantitative □ Financial effects are not □ Explanation of why quantitative

information separately identifiable information on current or
about anticipated financial effects is not
□ Level of measurement uncertainty
current and required
in estimating is so high that it
anticipated
would not provide useful □ Qualitative information about the
financial
information financial effects, including financial
effects
statement line items, totals, and
subtotals affected or likely to be
affected by that sustainability-
related risk or opportunity
30 IFRS S1 paragraph B45; IFRS S1 Basis for Conclusions, paragraph BC105.


Type of
disclosure Reason not required Disclosure required
Quantitative □ Entity does not have the skills, □ Quantitative information on

information capabilities, or resources to combined financial effects of that
about determine the information sustainability-related risk or
anticipated opportunity with other
financial sustainability-related risks or
effects opportunities and other factors
unless combined financial effects
would not be useful
The IFRS S1 Basis for Conclusions notes that an entity cannot avoid providing
quantitative information if it has the resources available to invest in obtaining or
developing the necessary skills and capabilities.
IFRS S1 Basis for Conclusions on General Requirements for Disclosure of

Sustainability-related Financial Information, paragraph BC107
The ISSB decided that an entity is required to use an approach that is

commensurate with the skills, capabilities and resources that are available to the
entity in preparing disclosures about the anticipated financial effects of a
sustainability-related risk or opportunity. The ISSB noted that an entity cannot
avoid providing quantitative information for anticipated financial effects because it
does not have the skills or capabilities to do so if it has the resources available to
obtain or develop those skills or capabilities.
6.4.3 Interests and views of stakeholders — ESRS
ESRS 2 SBM-2 requires an entity to describe how the interests and views of its
stakeholders are considered in the entity’s strategy and business model.
Stakeholder engagement is defined as an ongoing process of interaction and
dialogue between the entity and its stakeholders that enables management to
hear, understand, and respond to their interests and concerns.
While ESRS 2 does not require an entity to engage with stakeholders, it does
require specific disclosures when the entity has engaged with them. Engagement
with stakeholders is also an important element of the materiality assessment. See
SRG 4.3.2.1 for information on stakeholder engagement in the materiality
assessment.
The undertaking shall disclose a summarised description of:

(a) its stakeholder engagement, including:
i. the undertaking’s key stakeholders;
ii. whether engagement with them occurs and for which categories of
stakeholders;
iii. how it is organised;
iv. its purpose; and
v. how its outcome is taken into account by the undertaking;

In addition, ESRS 2 paragraph 45 requires the following disclosures based on the
outcome of the stakeholder engagement:
□ the entity’s understanding of the interests and views of its key stakeholders as
they relate to the entity’s strategy and business model, to the extent that these
were analysed during the entity’s due diligence process and/or materiality
assessment process (see SRG 6.3.4 for discussion of the due diligence
process)
□ any amendments to the entity’s strategy and/or business model, including
o how the entity has amended or expects to amend its strategy and/or
business model to address the interests and views of its stakeholders
o any further steps that are being planned and in what timeline
o whether these steps are likely to modify the relationship with and views of
stakeholders
In addition, an entity is required to disclose whether and how the administrative,

management, and supervisory bodies are informed about the views and interests
of affected stakeholders with regard to the entity’s sustainability-related impacts.
6.5 Management of sustainability-related

applicable)
The required disclosures about the management of sustainability-related impacts,
risks, and opportunities (as applicable) provide users with an understanding of
how those sustainability matters are identified, assessed, and managed, as well
as whether those processes are integrated into existing risk management
processes. As highlighted in this section, ESRS detail separate disclosure
requirements for the processes (ESRS 2 IRO-1) and policies (ESRS 2 MDR-P) to
identify and manage impacts, risks, and opportunities (as applicable),
respectively. In contrast, IFRS S1 includes a combined provision related to
processes and related policies to identify and manage risks (IFRS S1 paragraph
44). For purposes of comparison, this section discusses processes and policies
separately, although in combination, the two ESRS disclosure requirements and
the single IFRS S1 disclosure requirement meet the same objective.
While the principles and concepts related to the processes and policies to identify
and assess sustainability-related impacts, risks, and opportunities (as applicable)
and manage risk are generally aligned; ESRS 2 specifies additional disclosures
related to certain topics. Figure SRG 6-7 provides a high-level comparison of the
areas of disclosure about management of sustainability-related impacts, risks, and
opportunities (as applicable) between ESRS 2 and IFRS S1.

Figure SRG 6-7
Management of sustainability-related impacts, risks, and opportunities (as
applicable) — comparison of ESRS 2 and IFRS S1
Technical references ESRS 2 IRO-1, IFRS S1

ESRS 2 IRO-2, paragraphs 43 and
ESRS 2 MDR-P, 44
and ESRS 2
MDR-A
Processes to identify and assess sustainability-related  

impacts, risks, and opportunities (as applicable)
(SRG 6.5.1)
Policies to manage sustainability-related impacts, risks,  

and opportunities (as applicable)
(SRG 6.5.2)
Actions to manage sustainability-related impacts, risks,  

(SRG 6.5.3)
Integration into overall risk management  

(SRG 6.5.4)
Disclosures of materiality-related assessments 

(SRG 6.5.5)

6.5.1 Processes to identify and assess sustainability-related impacts, risks,

Both ESRS 2 paragraph 51 and IFRS S1 paragraphs 44(a) and 44(b) require
disclosures of an entity’s processes for identifying and assessing sustainability-
related impacts risks, and opportunities (as applicable). While the required
disclosures differ in some respects, the shared objective is to allow users to
understand and evaluate an entity’s overall risk profile and its overall risk
management process about these sustainability matters.
Processes are intended to cover the entire spectrum from identifying the
sustainability-related impacts, risks, or opportunities (as applicable) to how they
are addressed. Processes generally derive from adopted sustainability-related
policies and refer to the flow of activities to achieve a particular end, typically
associated with mitigating actions and efforts. For example, sustainability-related
processes may be procedures or internal controls established by an entity to
identify relevant sustainability-related risk drivers or procedures to monitor
progress towards sustainability-related targets.
When describing the processes used to identify, assess, prioritise, and monitor
sustainability-related risks, both standards require similar disclosures.

The undertaking shall disclose the following information:

(a) description of the methodologies and assumptions applied in the described
process; …
(c) an overview of the process used to identify, assess, prioritise and monitor
risks and opportunities that have or may have financial effects. The disclosure
shall include: …
ii. how the undertaking assesses the likelihood, magnitude, and nature of
effects of the identified risk and opportunities (such as the qualitative or
quantitative thresholds and other criteria used as prescribed by ESRS 1
section 3.5 Financial materiality);
iii. how the undertaking prioritises sustainability-related risks relative to other
types of risks, including its use of risk-assessment tools;
…
(g) the input parameters it uses (for example, data sources, the scope of
operations covered and the detail used in assumptions); and
(h) whether and how the process has changed compared to the prior reporting
period, when the process was modified for the last time and future revision
dates of the materiality assessment.
To achieve this objective, an entity shall disclose information about:

a. the processes and related policies the entity uses to identify, assess, prioritise
and monitor sustainability-related risks, including information about:
(i) the inputs and parameters the entity uses (for example, information about
data sources and the scope of operations covered in the processes); …
(iii) how the entity assesses the nature, likelihood and magnitude of the effects
of those risks (for example, whether the entity considers qualitative factors,
quantitative thresholds or other criteria);
(iv) whether and how the entity prioritises sustainability-related risks relative to
other types of risk; …
(vi) whether and how the entity has changed the processes it uses compared
with the previous reporting period;
See SRG 4.3.2 and SRG 4.4.1 for information on the financial materiality
assessment for ESRS and the ISSB standards, respectively, including qualitative
factors and quantitative thresholds.
6.5.1.1 Processes to identify and assess sustainability-related impacts, risks,

and opportunities (as applicable) – incremental disclosures required
by ESRS 2
ESRS 2 IRO-1 requires an entity to disclose its processes for identifying and
assessing impacts, risks, and opportunities and the materiality of those impacts,
risks, and opportunities. See SRG 4.3.2 for discussion of the ESRS materiality
assessment. This section addresses the overall processes required to be
disclosed by ESRS-2 IRO-1. Additional descriptions of processes specific to the
environmental and governance topical ESRS are also required. See SRG 6.2.1 for
discussion of the interaction of ESRS 2 with the topical standards.

While disclosure requirements on processes used to identify and assess impacts,
risks, and opportunities (as applicable) are generally aligned between ESRS 2
and IFRS S1, ESRS 2 paragraph 53 requires additional disclosures which include:
□ a description of the methodologies and assumptions applied
□ a description of the decision-making process and the related internal control

procedures
□ when the process was modified for the last time and future revision dates of
the materiality assessment
Further, ESRS 2 requires disclosures of input parameters and whether and how
the process has changed compared to the prior reporting period, covering not only
the process to identify sustainability-related risks, but also the process used to
identify impacts and opportunities.
ESRS 2 paragraph 53(b) requires specific disclosures about the process.
The undertaking shall disclose the following information: …

(b) an overview of the process to identify, assess, prioritise and monitor the
undertaking’s potential and actual impacts on people and the environment,
informed by the undertaking’s due diligence process, including an explanation of
whether and how the process:
i. focusses on specific activities, business relationships, geographies or other
factors that give rise to heightened risk of adverse impacts;
ii. considers the impacts with which the undertaking is involved through its own
operations or as a result of its business relationships;
iii. includes consultation with affected stakeholders to understand how they may
be impacted and with external experts;
iv. prioritises negative impacts based on their relative severity and likelihood,
(see ESRS 1 section 3.4 Impact materiality) and, if applicable, positive
impacts on their relative scale, scope and likelihood, and determines which
sustainability matters are material for reporting purposes, including the
qualitative or quantitative thresholds and other criteria used as prescribed by
ESRS 1 section 3.4 Impact materiality.
See SRG 4.3 and SRG 4.4 for further discussion.
In addition, ESRS 2 paragraph 53(c) requires separate disclosures around the

process an entity uses to identify, assess, prioritise, and monitor risks and
opportunities that have or may have financial effects. An entity must provide:
□ an overview of how it considers the connections of its impacts and

dependencies with the risks and opportunities that may arise from them
□ how an entity assesses the likelihood, magnitude, and nature of the effects of
identified risk and opportunities
□ how it prioritises sustainability-related risks relative to other types of risks,

including the use of risk-assessment tools.
The process to assess likelihood, magnitude and nature may include information
such as the qualitative or quantitative thresholds and other criteria used by
management in connection with its materiality assessment.

6.5.1.2 Processes to identify and assess sustainability-related impacts, risks,
and opportunities (as applicable) – incremental disclosures required
by IFRS S1
IFRS S1 paragraph 44(a)(ii) requires incremental disclosure of whether and how

sustainability-related scenario analysis is used to inform the identification of
sustainability-related risks.
6.5.2 Policies to manage sustainability-related impacts, risks, and

opportunities (as applicable)
In addition to the disclosure of processes, an entity is required to disclose its

policies related to the processes to identify, assess, prioritise, and monitor (that is,
manage) sustainability-related risks under both ESRS 2 and IFRS S1. 32 Policies
are generally how an entity implements its strategy or management decisions.
6.5.2.1 Policies to manage material sustainability matters – incremental

Both ESRS 2 and IFRS S1 require disclosures about policies related to the
processes to manage sustainability-related risks, as noted in SRG 6.5.2. ESRS 2
MDR-P requires the same disclosure related to impacts and opportunities.
In addition, ESRS 2 requires disclosure of policies to address impacts, risks, and

opportunities referred to as minimum disclosure requirements (MDR), as
discussed in SRG 6.2.1. ESRS 2 also establishes a minimum level of disclosures
about the policies related to each material sustainability matter. Overall, the
disclosure requirements are intended to provide users with an understanding of
the entity’s policies (1) to prevent, mitigate, and remediate actual and potential
impacts, (2) to address risks, and (3) to pursue opportunities.
In addition, ESRS 2 paragraph 65 requires disclosure about the policies adopted

to manage material sustainability matters including:
□ a description of the key aspects of the policy, including its general objectives
and which impacts, risks, and opportunities the policy relates to and the
process for monitoring
□ a description of the scope of the policy, or of its exclusions, in terms of

activities, upstream and/or downstream value chain, geographies, and if
relevant, affected stakeholder groups
□ the most senior level in the entity’s organisation that is accountable for the
implementation of the policy
ESRS 2 AR 21 notes that the description of the scope of a policy may include
which activities and/or segments of the entity’s own operations or upstream and
downstream value chain the policy addresses. An entity may also explain
additional relevant boundaries, such as geographies. In addition, information
about the extent of the value chain covered by the policy may be provided if the
policy does not cover the full value chain.
If relevant, the following information is also required:
□ a reference to the third-party standards or initiatives the entity commits to

respect through the implementation of the policy
32 ESRS 2 paragraph 65; IFRS S1 paragraph 44(a).

□ a description of the consideration given to the interests of key stakeholders in
setting the policy
□ whether and how the entity makes the policy available to potentially affected
stakeholders, and stakeholders who need to help implement it
If an entity has not adopted policies to address specific sustainability matters, it is

required to state that disclosure cannot be provided and the rationale for not
having adopted policies. This disclosure may include a timeframe over which the
entity plans to adopt such policies. 33
Question SRG 6-7
When reporting under ESRS, if a single policy addresses multiple sustainability

matters (for example, greenhouse gas emissions and air pollution), does the
policy need to be duplicated in each of the relevant sections of the sustainability
statement?
PwC response
No. ESRS 2 AR 20 permits an entity to report on the policy in one section of its
sustainability statement and include a cross-reference to that section in the other
impacted section. For example, the entity could report the policy in the
environmental section and include a cross reference in the pollution section.
6.5.3 Actions to manage sustainability-related impacts, risks, and

opportunities (as applicable)
ESRS 2 includes specific disclosure requirements for actions to manage

sustainability-related impacts, risks, and opportunities. While IFRS S1 does not
specifically refer to ‘actions’, it refers to an entity’s response to, and plans to
respond to, sustainability-related risks and opportunities as part of its required
strategy disclosures (see SRG 6.4.2.2). 34 In the periods subsequent to
establishing a plan, the entity needs to disclose progress against that plan. ESRS
2 requires specific disclosure in this area. Although not specific, we believe that
the IFRS S1 disclosures achieve a similar objective. Note that IFRS S2 requires
specific disclosure about direct and indirect mitigation and adaptation efforts
related to climate change, which would address some of the disclosures required
for climate change-related impacts, risks, and opportunities identified under
ESRS.
6.5.3.1 Actions to manage sustainability-related impacts, risks, and

opportunities (as applicable) – incremental disclosures required by
ESRS 2
ESRS 2 MDR-A requires specific disclosures related to actions to address

sustainability-related impacts, risks, and opportunities. Similar to MDR-P, MDR-A
sets a minimum level of disclosures.
An entity is required to provide the following disclosures for actions taken or

planned to implement a policy related to a material sustainability matter. The
same disclosures are required by ESRS 2 paragraph 68 if actions are taken in the
absence of a specific policy:


□ a list of key actions taken in the reporting year and planned actions for the
future years, including the expected outcomes and how they contribute to
achieving policy objectives and targets
□ the scope of key actions in terms of: (i) activities, (ii) upstream or downstream
value chain, (iii) geographies, and (iv) if applicable, affected stakeholder
groups
□ the time horizons when each key action is expected to be completed
□ if applicable, key actions taken to remedy those harmed by material actual

impacts and the related results
□ if applicable, quantitative and qualitative information about the progress made

with respect to actions or action plans previously disclose
Key actions are those actions that materially contribute to achieving the entity’s
objectives in addressing sustainability-related impacts, risks, or opportunities.
When appropriate, key actions may be aggregated. 35
An action to address an impact, risk, or opportunity for one sustainability matter

may result in a material negative impact or risk related to another matter. In these
situations, ESRS 1 paragraph 53 requires specific disclosure.
In such situations, the undertaking shall

a. disclose the existence of material negative impacts or material risks together
with the actions that generate them, with a cross-reference to the topic to
which the impacts or risks relate and
b. provide a description of how the material negative impacts or material risks
are addressed under the topic to which they relate.
Further, if the implementation of an action plan requires significant operational

expenditures or capital expenditures, ESRS 2 paragraph 69 requires an entity to:
□ describe the current and future resources (financial or otherwise) allocated to

the action plan
□ provide the amount of current financial resources incurred and explain how
these amounts relate to the most relevant amounts presented in the financial
statements
□ provide the amount of expected future financial resources to implement the

plan
If applicable, the description of current and future resources needs to include the
relevant terms of sustainable finance instruments (for example, green bonds), the
environmental or social objectives of the plan; and whether preconditions could
affect the ability to implement the planned actions (for example, the granting of
financial support or public policy and market developments). 36
The disclosures of significant operational and capital expenditures should be

consistent with the disclosures in ESRS 2 paragraph 48 related to the current and
anticipated financial effects of the entity’s sustainability-related risks and
opportunities (see SRG 6.4.2.4 for further discussion).
35 ESRS 2 AR 22.

If an entity has not taken actions to address specific sustainability matters, ESRS
2 paragraph 62 requires it to state that disclosure cannot be provided and to
provide the rationale for not having adopted actions. This disclosure can include a
timeframe over which the entity plans to adopt such actions.
6.5.4 Integration into overall risk management
In addition to requiring disclosures about an entity’s process to identify and assess

sustainability-related impacts, risks, and opportunities (as applicable), ESRS 2
and IFRS S1 require disclosure of whether and how those processes are
integrated into, and inform, the entity’s overall risk management process. 37 These
disclosures are intended to help users assess the entity’s overall risk profile and
its overall risk management process.
The integration of sustainability-related processes into an entity’s overall risk

management process requires embedding sustainability-related considerations
into the existing risk management cycle (for example, risk identification, risk
assessment, risk mitigation, and risk monitoring cycles). An example of this
integration may include the integration of sustainability-related risks into the
entity’s existing risk identification cycle, project risk review, or adding
sustainability-related risks into an existing risk matrix.
ESRS 2 and IFRS S1 use similar language to describe the disclosures required.
(e) The extent to which and how the process to identify, assess and manage
impacts and risks is integrated into the undertaking’s overall risk profile and risk
management processes;
(f) The extent to which and how the process to identify, assess and manage
opportunities is integrated into the undertaking’s overall management process
where applicable
IFRS S1 paragraph 44(c)
The extent to which, and how, the processes for identifying, assessing, prioritising
and monitoring sustainability-related risks and opportunities are integrated into
and inform the entity’s overall risk management process.
In this area of disclosure there are no differences between the two frameworks.
6.5.5 Disclosures of materiality-related assessments — ESRS
ESRS 2 IRO-2 includes incremental disclosure requirements related to materiality

assessments, including materiality of information, material disclosure
requirements, and immaterial sustainability matters. See SRG 4.3 for discussion
of the ESRS materiality assessment.
Material information
ESRS 2 paragraph 55 requires an entity to explain how it has determined the

material information to be disclosed related to its material impacts, risks, and
opportunities, including the use of thresholds and/or how it has implemented the
criteria in ESRS 1.
37 ESRS 2 paragraphs 53(e) and 53(f); IFRS S1 paragraph 44(c).

Material disclosure requirements
An entity is required to provide disclosure over how it complied with the general
disclosure requirements of ESRS 2 in preparing its sustainability statement,
including which disclosure requirements are included in the sustainability
statement and the topics omitted as a result of materiality assessments. 38 Further,
ESRS 2 paragraph 56 requires the entity to list the page numbers or paragraphs
where the related disclosures are located.
An entity is also required to provide a table of the datapoints included in other EU

legislation as detailed in Appendix B to ESRS 2. This table must include the
location of the datapoint, or if not material, must be labelled ‘not material’. 39 ESRS
2 AR 19 provides flexibility in where and how the entity provides this information.
Question SRG 6-8
Is disclosure required if an entity concludes that there are no impacts, risks, or

opportunities associated with one or more of the topical standards and it has
therefore determined the topic to be immaterial?
PwC response
No further disclosures are required for immaterial sustainability matters, with one
exception.
If an entity concludes that climate change is not material and therefore omits the
disclosures required by ESRS E1 Climate change, ESRS 2 paragraph 57 requires
the entity to provide an explanation of how it arrived at that conclusion, including a
forward-looking analysis of the conditions that could lead the entity to conclude
that climate change is material in the future.
While similar disclosures are not required if an entity concludes that any of the
other topical standards are immaterial, ESRS 2 paragraph 58 notes that an entity
may choose to provide that information.
6.6 Sustainability-related metrics and targets

ESRS and the IFRS Sustainability Disclosure Standards are each based, in part,
on the principles outlined in the TCFD framework. As described in the TCFD
framework, providing information on metrics and targets allows users “to better
assess the organization’s potential risk-adjusted returns, ability to meet financial
obligations, general exposure to climate-related issues, and progress in managing
or adapting to those issues”. 40 While TCFD is specific to climate, the principles
apply to all sustainability-related metrics and targets.
This section provides an overview of the disclosures related to sustainability-

related metrics and targets.
6.6.1 Sustainability-related metrics
The disclosure of metrics required by ESRS 2 MDR-M and IFRS S1 are intended
to provide an overall understanding of the metrics used to measure, monitor, or

39 ESRS 1 paragraph 35; ESRS 2 paragraph 56.
40 Task Force on Climate-related Financial Disclosures, Implementing the
Recommendations of the Task Force on Climate-related Financial Disclosures, October

2021, page 21.

evaluate performance and effectiveness of material sustainability-related impacts,
risk, and opportunities (as applicable).
Metrics are qualitative or quantitative indicators that an entity uses to measure

and report on the effectiveness of its sustainability-related policies and progress
against its targets over time. Metrics are generally reported for the current
reporting period and for comparative periods to show trends in performance.
The disclosures required by ESRS and the IFRS Sustainability Disclosure

Standards are applied to all metrics. While the principles and concepts related to
metrics are broadly aligned, there are some differences in disclosure requirements
between ESRS 2 and IFRS S1. Figure SRG 6-8 provides a high-level comparison
of the areas of disclosure about the metrics used to assess sustainability-related
impacts, risks, and opportunities (as applicable) between ESRS 2 and IFRS S1.
Figure SRG 6-8

‘Comparison of disclosure areas about metrics
Technical references ESRS 2 MDR-M IFRS S1 paragraphs

45 to 50, 52, and 53
Methodology, limitations, and key assumptions for  

entity-specific metrics
(SRG 6.6.1.1)
Methodology, limitations, and key assumptions for 

metrics derived from other sources
(SRG 6.6.1.1 and SRG 6.6.1.3)
Validation of entity-specific metrics  

(SRG 6.6.1.1)
Validation of metrics derived from other sources 

(SRG 6.6.1.1 and SRG 6.6.1.3)
Areas of disclosure vary between the frameworks. Specific disclosure

6.6.1.1 Sustainability-related metrics — aligned disclosures
Both ESRS and the IFRS Sustainability Disclosure Standards require the
disclosure of specific topical metrics. That is, the ESRS topical standards and
IFRS S2 include metrics specific to individual topics (for example, climate in ESRS
E1 and IFRS S2 or biodiversity in ESRS E4). If determined to be material, the
metrics required by the respective standards are required even if not previously
used by management. 41
ESRS 2 paragraph 76 and IFRS S1 paragraphs 46-47 also require the disclosure
of entity-specific metrics, although the circumstances that require them differ.
ESRS 1 AR 4(a) instructs an entity preparing entity-specific disclosures to
consider available and relevant frameworks, initiatives, reporting standards and
benchmarks (see SRG 6.6.1.2). IFRS S1 paragraph 58, on the other hand,
requires reference to and consideration of SASB metrics and permits

consideration of metrics defined by other specific standard-setting bodies or used
by entities in the same sector or geography (see SRG 6.6.1.3).
Common disclosure requirements for entity-specific metrics: 42
□ whether the metric is validated by a third party and, if so, which party
□ the methodologies used to calculate the metric including significant

assumptions, inputs, and limitations of the method used
ESRS also require these disclosures for metrics derived from other sources (see
SRG 6.6.1.2). With regard to the validation of metrics, ESRS 2 paragraph 77(b)
clarifies that the disclosure is only required if the third party is an external body
other than the assurance provider.
Both standards provide guidance on how to present the metrics. Under ESRS 2
and IFRS S1, metrics must be labeled and defined using names and descriptions
that are meaningful, clear, and precise. 43 When currency is specified as the unit of
measure, both standards require an entity to use the presentation currency of its
related financial statements. 44 Finally, both standards require that the definition
and calculation of metrics used to set the targets and monitor progress must be
consistent over time. 45
6.6.1.2 Sustainability-related metrics — incremental disclosures required by

ESRS 2
Metrics to be reported under ESRS 2 MDR-M include those that are defined by
ESRS (that is, those derived from the topical ESRS) and those set by an entity,
which are either internally developed or derived from other sources.
ESRS do not prescribe how an entity should develop its metrics. ESRS 1 AR 4(a)
notes, however, that comparability with other entities will be more difficult to
achieve when using entity-specific disclosures and requires an entity to consider if
leveraging other frameworks, such as technical material issued by the ISSB or the
Global Reporting Initiative (GRI), would better support comparability.
Examples of when an entity may set its own metrics include:
□ the impact, risk, or opportunity relates to the entity’s upstream or downstream

value chain, but the ESRS-defined metric relates purely to own operations
□ ESRS do not define a metric for a sustainability matter (for example, ESRS
S2 Workers in the value chain does not define any metrics)
□ a specific metric is broadly used in a particular industry or is otherwise sector-

specific
□ management has developed its own metrics to manage its sustainability-

related risks or opportunities for a specific product line or geography
ESRS 2 paragraph 77 and IFRS S1 paragraph 50 require the following

disclosures for entity-specific metrics, as noted in SRG 6.6.1. ESRS 2 paragraph
77 also requires these disclosures for metrics derived from other sources:
□ the methodologies, including related limitations and significant assumptions

used
42 ESRS 2 paragraph 77(a)-(b); IFRS S1 paragraph 50.

43 ESRS 2 paragraph 77(c); IFRS S1 paragraph 53.
44 ESRS 2 paragraph 77(d); IFRS S1 paragraph 24.

□ whether the metrics are validated by a third party other than the assurance
provider and, if so, which third party
Finally, ESRS 2 paragraph 71 requires all the metrics to be presented alongside

disclosures prescribed by the topical ESRS and not in the general information
section of a sustainability statement. See SRG 5.6.1 for discussion of the format
of the sustainability statement.
6.6.1.3 Sustainability-related metrics — incremental disclosures required by

IFRS S1
In addition to the metrics required by IFRS Sustainability Disclosure Standards,

IFRS S1 paragraph 46 requires the disclosure of metrics used to measure and
monitor the following:
□ sustainability-related risks or opportunities
□ performance in relation to that risk or opportunity, including progress toward

any target the entity has set and any targets required to be met by law or
regulation
Metrics used by an entity to measure and monitor sustainability-related risks and

opportunities must include metrics associated with particular business models,
activities, or other common features that characterise participation in an industry.
IFRS S1 paragraph 57 requires an entity to apply judgement to identify

information that faithfully represents its specific risk or opportunity and that would
be relevant to the decision-making needs of an entity’s primary users (see SRG
4.4.3). In making that judgement, IFRS S1 paragraph 58(a) specifically requires
an entity to ‘refer to and consider’ the applicability of the metrics associated with
the disclosure topics included in the SASB standards. An entity may, however,
conclude that the metrics specified in the SASB standards are not applicable to its
circumstances.
In addition, to the extent that they do not conflict with the IFRS Sustainability
Disclosure Standards, an entity may refer to and consider the applicability of:
□ the Climate Disclosure Standards Board Framework Application Guidance
□ pronouncements of other standard‑setting bodies, including the Global

Reporting Initiative (GRI) and ESRS
□ metrics disclosed by entities that operate in the same industry or geographical

region
For metrics that have been developed by an entity, IFRS S1 paragraphs 50(a) and
50(b) specifically require it to provide the following disclosures (in addition to those
listed in SRG 6.6.1):
□ how the metric is defined, including whether it is derived from a metric defined
outside the IFRS Sustainability Disclosure Standards and, if so, which source
and how the metric differs from that definition
□ whether the metric is an absolute measure, a measure expressed in relation

to another metric, or a qualitative measure (such as a colour coding indicating
progress)
While the term ‘absolute measure’ is not defined in IFRS S1, an entity may
analogise to the definition of ‘absolute target’ in IFRS S2.

An absolute target is defined as a total amount of a measure or a change in the

total amount of a measure.
If a metric used by an entity is taken from a source other than the IFRS
Sustainability Disclosure Standards, IFRS S1 paragraphs 48–49 requires
disclosure of the source of the metric.
6.6.2 Sustainability-related targets
The setting of targets is an effective way for an entity to communicate its

commitment to sustainability. A sustainability-related target may be quantitative or
qualitative — it may refer to a specific level, threshold, quantity, or qualitative goal
that the entity wishes to meet over a defined time horizon in order to address its
sustainability-related impacts, risks, and opportunities (as applicable).
Sustainability-related targets must be linked to defined metrics to measure and
track progress. The definition of a target referenced in ESRS 2 calls this
‘objective-oriented’. Neither ESRS 2 nor IFRS S1 require an entity to establish
targets, but they do require disclosures of material sustainability-related targets
that have been set by an entity.
A target is defined in ESRS Annex II Table 2. While the term is not defined in the
IFRS Sustainability Disclosure Standards, we believe the following definition
would be applicable under both frameworks.
Definition from ESRS Annex II Table 2
Targets: Measurable, outcome-oriented and time-bound goals that the

undertaking aims to achieve in relation to material impacts, risks or opportunities.
They may be set voluntarily by the undertaking or derive from legal requirements
on the undertaking.
Not all objectives and aspirations of an entity qualify as a target. A goal or

aspiration becomes a target if the entity uses a defined time horizon over which
the target should be achieved, and the progress in achieving the target can be
measured. That is, there is a degree of specificity required for a goal to be
considered a target. An example of a measurable, outcome-oriented, and time-
bound goal is a waste reduction target with an aim to reduce by 50% the food
waste generated (in kg) per tonne of food handled in the manufacturing process
by 2030 versus a 2020 baseline. Goals that lack each of the elements of a target
would not qualify as a target.
While the principles and concepts related to targets are broadly aligned, there are
more extensive disclosures required under ESRS 2. Figure SRG 6-9 provides a
high-level comparison of areas of disclosures on targets between ESRS 2 and
IFRS S1.

Figure SRG 6-9
Comparison of disclosure areas on targets
Technical references ESRS 2 MDR-T IFRS S1

paragraphs 45,
51, and 53
Description of the target  

(SRG 6.6.2.1 and SRG 6.6.2.2)
Base year  
(SRG 6.6.2.1)
Milestones and interim targets  

(SRG 6.6.2.1)
Performance against targets  

(SRG 6.6.2.1 and SRG 6.6.2.2)
Changes, linkage to policy, and other details 

(SRG 6.6.2.2)
Both ESRS 2 paragraph 79 and IFRS S1 paragraph 51 include the common

objective of providing users with information about progress towards targets that
an entity has set itself and those it is required to meet by law or regulation. Where
areas of disclosures are common, the disclosures required by ESRS 2 and IFRS
S1 are aligned.
ESRS 2 requires more granular information than IFRS S1 regarding the targets an
entity has set. While not expressly required by IFRS S1, the IFRS Sustainability
Disclosure Standards require an entity to provide disclosures that meet the
qualitative characteristics of useful information. An entity may consider the
disclosures delineated in ESRS 2 to help meet this objective. See SRG 5.2 for
information about the qualitative characteristics of useful information.
6.6.2.1 Sustainability-related targets — aligned disclosures
For each target, both ESRS 2 paragraph 80 and IFRS S1 paragraph 51 require an
entity to disclose the following information:
□ Description of the target, including the defined target level to be achieved

(quantitative or qualitative)
An entity is required to provide details of the specific target set, including
whether the target is quantitative or qualitative in nature. As applicable, this
information can also state whether the target is absolute or relative and the
unit of measurement.
□ Period covered by the target

The sustainability-related target must be defined clearly over time. It can be
applicable for the current reporting period or over the short-, medium-, or long-
term. The disclosure of the period should be specific enough (for example,
until 2030) to allow users to track progress towards achieving the target by
comparing performance data over time.

□ Any milestones or interim targets
A milestone or interim target is a checkpoint between the current period and
the target end date to assess progress against the target and allows an entity
to make any adjustments to its plans and targets.
□ Base year (base period) from which progress is measured

The base year or base period is the starting point or reference timeframe from
which progress is measured. The base period is also commonly known as
‘baseline’.
□ Any revisions to the target and an explanation for those revisions

Revision of targets can be driven by several factors such as changes in
circumstances, new information or data available, or ambition increase.
□ Performance against each disclosed targets

The disclosure of performance includes information on how the target is
monitored and reviewed and the metrics used, whether the progress is in line
with what had been initially planned, and an analysis of trends or significant
changes in the performance of the entity towards achieving the target.
Sustainability-related targets must be linked to defined metrics to measure

and track progress. The related metric used to set a target can be a cross-
industry metric, an industry-based metric, or a metric set by the entity.
This information can be presented in a comprehensive table, including information

on the baseline and target value, milestones, and achieved performance over the
prior periods.
Question SRG 6-9
What does ‘setting’ a target mean?
PwC response
ESRS 2 and IFRS S1 both require disclosure of information on targets an entity
has set for each material sustainability-related matter, however, neither standard
defines ‘setting’ a target.
ESRS 2 paragraph 22(d) and IFRS S1 paragraph 27(a) require certain disclosures
regarding how the governance bodies oversee the setting of targets. We believe
that a target has been set if approved by the governance bodies. In addition, in
the absence of such approval, an entity must consider other facts and
circumstances to determine if a target has been set. For example, we believe that
the factors that may indicate a target has been set may include — but are not
limited to — if the target is or has been:
□ communicated publicly, for example, in public sustainability reporting

(voluntary or mandated), quarterly or annual financial reports or press
releases
□ reported to and monitored by the overseeing bodies or individuals
□ used to assess progress on material sustainability matters and is linked to

material impacts, risks, and opportunities
□ linked to the entity’s sustainability policy objectives
□ derived from a legal requirement or a financial goal
□ considered by management or internal committees in decision making

□ used as a basis for variable compensation or remuneration
In addition, an entity should consider whether adjustments to the financial

statements (for example, the reduction of the useful life of an asset to reflect plans
to replace it with a greener alternative) reflect implicit approval of a target that
should be disclosed in the sustainability reporting.
Question SRG 6-10
What disclosures are required in a subsidiary’s standalone sustainability reporting

when its parent has set a consolidated sustainability-related target?
PwC response
The disclosures required by the subsidiary may differ depending on the facts and
circumstances. The following fact patterns provide examples of considerations in
disclosing a target set by a parent:
□ If a subsidiary entity has been allocated all or a portion of its parent’s

sustainability-related target, the subsidiary should disclose that it has set a
target and include all applicable disclosures.
□ In the absence of a formal allocation from the parent, a subsidiary may set an
internal target to track its contribution toward the parent’s target. When
determining if a subsidiary has in effect set its own target, it may consider the
factors in Question SRG 6-9. A subsidiary that effectively set its own target
should include all applicable disclosures.
□ If there has been no formal allocation of a target from the parent to a

subsidiary, the subsidiary should disclose the existence of the parent’s target
and adapt the disclosures as applicable. It may consider whether it would be
appropriate to disclose its relative contribution to the target (for example, if the
target relates to water and the subsidiary contributes 30% of the parent’s
water usage, it should consider disclosure). The subsidiary should not,
however, assert that it has ‘set’ a target itself in the absence of a formal
allocation or establishment of the target at the subsidiary level.
In disclosing information about a target established by a parent, a subsidiary

should ensure that its disclosure is transparent and provides appropriate context
to the users of its sustainability reporting.
6.6.2.2 Sustainability-related targets — incremental disclosures required by

ESRS 2
ESRS 2 MDR-T includes minimum disclosures that must be included for each
target set related to an entity’s material sustainability matters. Only targets related
to material impacts, risks, and opportunities require disclosure. Incremental
disclosures related to targets are required by the topical standards.
The disclosures under ESRS 2 are intended to provide the user with transparency
for each material sustainability matter of the following.
a. whether and how the undertaking tracks the effectiveness of its actions to
material impacts, risks and opportunities, including the metrics it uses to do
so;

b. measurable time-bound outcome-oriented targets set by the undertaking to
meet the policy’s objectives, defined in terms of expected results for people,
the environment, or the undertaking regarding material impacts, risks and
opportunities;
c. the overall progress towards the adopted targets over time;
d. in the case that the undertaking has not set measurable time-bound outcome-
oriented targets, whether and how it nevertheless tracks the effectiveness of
its actions to address material impacts, risks and opportunities and measures
the progress in achieving its policy objectives; and
e. whether and how stakeholders have been involved in target setting for each
material sustainability matter.
In addition to the disclosures discussed in SRG 6.6.2.1, ESRS 2 paragraph 80

requires the following disclosures for any measurable, outcome-oriented, and
time-bound sustainability-related targets the entity has set:
□ a description of the relationship of the target to the policy objectives
□ the scope of the target, including the entity’s activities and/or its upstream
and/or downstream value chain where applicable and geographical
boundaries
□ the baseline value (that is, the value of the metric in the base year)
□ the methodologies and significant assumptions used to define targets,

including where applicable, the selected scenario, data sources, alignment
with national, EU, or international policy goals and how the targets consider
the wider context of sustainable development and/or local situation in which
impacts take place
□ whether the entity’s targets related to environmental matters are based on

conclusive scientific evidence
□ whether and how stakeholders have been involved in target setting for each
material sustainability matter
□ for changes in targets, the corresponding metrics or underlying measurement

methodologies, significant assumptions, limitations, sources, and processes
to collect data adopted within the defined time horizon — this includes an
explanation of the rationale for those changes and their effect on
comparability (see SRG 3.5.5)
□ for performance against disclosed targets, information on how the target is

monitored and reviewed and the metrics used, whether the progress is in line
with what had been initially planned, and an analysis of trends or significant
changes in the performance of the entity towards achieving the target
Unless a Disclosure Requirement states otherwise, comparative information must

be included when reporting progress against a base year. In discussing achieved
milestones between the base year and reporting period, historical information may
also be included. 46
When disclosing targets related to the prevention or mitigation of environmental

impacts, ESRS 2 AR 24 requires the entity to prioritise targets related to the
reduction of the impacts in absolute terms rather than in relative terms. When
targets address the prevention or mitigation of social impacts, they may be

specified in terms of the effects on human rights, welfare, or positive outcomes for
affected stakeholders.
Question SRG 6-11
Does ESRS require disclosure if an entity has not set any targets?
PwC response
If an entity has not set any targets because it has not set targets with reference to
the specific sustainability matter concerned, ESRS 2 paragraph 72 requires the
entity to:
□ disclose this to be the case
□ provide reasons for not having adopted targets
In addition, when the entity has not set measurable outcome-oriented targets,
ESRS 2 paragraph 81(b) still requires disclosure of whether the entity still tracks
the effectiveness of its policies and actions in relation to the material
sustainability-related impacts, risks, and opportunities, and if so, it is required to
disclose:
□ any processes through which it does so
□ the defined level of ambition to be achieved
□ any qualitative or quantitative indicators it uses to evaluate progress, including

the base period from which progress is measured
As discussed in ESRS 2 AR 26, in the absence of measurable targets, an entity

can disclose progress in achieving the objective of a policy with reference to a
baseline. Additionally, while not required, ESRS 2 paragraph 81(a) permits
voluntarily disclosure of whether targets will be set and the timeframe for setting
them, or the reasons why the entity does not plan to set such targets.
Acknowledgements
Catherine Benjamin
Catherine Chartrand
Peter Flick
Heather Horn
Andreas Ohl
Nina Schäfer
Olivier Scherer
Diana Stoltzfus
Hugo van den Ende
Valerie Wieman
Katie Woods

Chapter 7:
Greenhouse gas emissions
reporting
7.1 Greenhouse gas emissions reporting
overview
A greenhouse gas is one that absorbs heat energy and radiates it back into the
atmosphere. Reducing greenhouse gas emissions has been the focus of a wide
coalition of governments, non-governmental organisations, businesses, and
individuals in response to increasing evidence of the negative effect of climate
change on society. The Kyoto Protocol, adopted on 11 December 1997, commits
the 192 countries that are currently party to the agreement to limit and reduce
emissions related to seven specified greenhouse gases, as summarised in Figure
SRG 7-1. 1
Figure SRG 7-1

Seven gases covered by the Kyoto Protocol
Gases Abbreviation
Carbon dioxide CO2
Methane CH4
Nitrous oxide N2O
Hydrofluorocarbons HFCs
Perfluorocarbons PFCs
Nitrogen trifluoride NF3
Sulphur hexafluoride SF6
These seven gases are consistent with those included in most major emissions
reductions schemes — including the Paris Agreement which was signed on 12
December 2015 at the United Nations (UN) Climate Change Conference (COP21)
— because of their high global warming potential (GWP) or because they exist in
the atmosphere at high volumes. 2 The latest assessment finalised in March 2023
by the United Nations body responsible for assessing the science related to
climate change revealed that carbon dioxide accounts for the majority (75%) of
total greenhouse gas (GHG) emissions in the atmosphere, followed by methane
(18%), and nitrous oxide (4%). 3 In discussing greenhouse gases, amounts are
normally converted to metric tonnes (mt) of carbon dioxide equivalents, expressed
as CO2e (or sometimes as CO2eq).
Global efforts to reduce GHG emissions include emissions trading schemes —

such as the European Union Emissions Trading System (EU ETS) — as well as a
focus on establishing corporate targets and reduction goals. 4 In addition, timely
reporting of greenhouse gas emissions is viewed as a critical component of
understanding an entity’s contribution to GHG emissions and progress against its
1 United Nations Climate Change, “What is the Kyoto Protocol?”.

2 The overall objective of the Paris Agreement is to hold “the increase in the global average
temperature to well below 2ºC above pre-industrial levels” and pursue efforts “to limit the
temperature increase 1.5ºC above pre-industrial levels”. See United Nations Climate
Change, “The Paris Agreement” for more information.
3 United Nations Intergovernmental Panel on Climate Change, “Sixth Assessment Report of
the Intergovernmental Panel on Climate Change”, page 11. Percentages are based on data
as of 2019, the latest year for which emissions data is included in the report.
4 See PwC publication “European Union regulations beyond CSRD” for a brief introduction
to EU ETS.
PwC | Greenhouse gas emissions reporting (as of 30 June 2024) 7-1

goal. As a result, GHG reporting is a foundational element of mandatory and
voluntary sustainability reporting worldwide (see SRG 7.2).
7.1.1 The building blocks of GHG emissions reporting
The basic steps for developing and reporting an inventory of GHG emissions are
the same, irrespective of whether the amounts are prepared for mandated or
voluntary reporting.
Figure SRG 7-2

The building blocks of GHG accounting and reporting
1 Understand GHG reporting requirements
2 Establish organisational boundaries
3 Determine operational boundaries
4 Measure greenhouse gas emissions
5 Report greenhouse gas emissions
Each of these steps is further described in this chapter as follows:
□ Step 1 — Understand GHG reporting requirements

Assess applicable mandatory GHG reporting regulations and consider any
voluntary reporting. See SRG 7.2.
□ Step 2 — Establish the organisational boundary

Determine the scope of the entities, assets, and operations to be included in
an entity’s greenhouse gas emissions accounting and reporting. See SRG
7.3.
□ Step 3 — Determine the operational boundary

Identify all sources of direct and indirect emissions for the purpose of
categorising and reporting. Classify GHG emissions among the scopes,
referred to as determining the operational boundary. See SRG 7.4.
□ Step 4 — Measure greenhouse gas emissions

Aggregate data and calculate greenhouse gas emissions from the entities,
assets, and operations in the reporting entity’s organisational boundary. See
SRG 7.5, SRG 7.6, and SRG 7.7 for discussion of scope 1, scope 2, and
scope 3 measurement, respectively. Also see SRG 7.8 for establishing base
year emissions and SRG 7.9 for a discussion of greenhouse gas emissions
reductions.
□ Step 5 — Report greenhouse gas emissions

Finally, once an entity has inventoried and measured its emissions, it must
consolidate and report those emissions in accordance with the relevant
reporting requirements. See SRG 7.10.
Reporting entities should also consider if there are any transitional provisions that
affect their reporting in the initial years of application of new reporting

requirements. See SRG 3.8 for a general discussion of transitional provisions and
SRG 7.11 for highlights of provisions applicable to GHG disclosures.
7.1.2 Understanding the scopes of greenhouse gas emissions
Greenhouse gas emissions are commonly classified as direct or indirect:
□ direct emissions — the source of the emissions is owned or controlled by the

reporting entity
□ indirect emissions — the source of emissions is not owned or controlled by

the reporting entity but the emissions occur as a consequence of its activities
(that is, the emissions are included within the reporting entity’s upstream and
downstream value chain — referred to herein as the ‘value chain’)
Identifying direct (scope 1) and indirect (scope 2 and scope 3) emissions is a

critical step in creating the GHG inventory, which represents a complete account
of an entity’s GHG emissions footprint, as depicted in Figure SRG 7-3.
Figure SRG 7-3

Understanding the GHG emission scopes
Scope 1
Scope 2 Scope 3
Purchased Company Upstream

electricity, facilities and
steam, downstream
heating, activities
and cooling Company
assets
Indirect Direct Indirect
Scope 1 emissions are direct emissions from sources that are owned or controlled
by the reporting entity. Scope 2 emissions are indirect emissions from steam,
heating, cooling, and electricity purchased and used by the entity. All other indirect
emissions that are a consequence of the activities of the reporting entity but occur
at sources it does not own or control are classified as scope 3 emissions.
The classification of emissions as scope 1, scope 2, or scope 3 will depend on an

entity’s organisational and operational boundaries — which together comprise the
GHG emissions reporting boundary (as discussed in SRG 7.3 and SRG 7.4).
Determining the reporting boundary, however, may only be accomplished after
obtaining an understanding of the basic requirements of the applicable
greenhouse gas emissions reporting standards and requirements (see SRG 7.2).
These foundational steps underpin the completeness and accuracy of an entity’s
greenhouse gas accounting and reporting.

7.2 Understand GHG reporting requirements
The World Council for Sustainable Development (WBCSD) and World Resource
Institute (WRI) launched the Greenhouse Gas Protocol (the GHG Protocol)
initiative in 1998 with a mission to develop GHG accounting and reporting
standards. The GHG Protocol is now widely used to measure, manage, and report
greenhouse gas emissions from an entity’s own operations and its value chain
(see SRG 3.3 and SRG 3.4.1 for the general definitions of own operations and
value chain, respectively). Given the broad application of the GHG Protocol
guidance for purposes of voluntary reporting, it is not surprising that the GHG
Protocol guidance is referenced — and in some cases mandated — in
sustainability reporting standards and rules that have emerged worldwide:
□ European Sustainability Reporting Standards (ESRS) issued by the European

Commission for purposes of compliance with the Corporate Sustainability
Reporting Directive (CSRD) in the European Union (EU)

Sustainability Standards BoardTM (ISSB)
In addition, two laws passed in California in October 2023 — California Senate Bill
(SB) 253, Climate Corporate Data Accountability Act, and California SB 261,
Greenhouse gases: climate-related financial risk — both require reporting of
greenhouse gas emissions from a broad range of public and private entities,
including US subsidiaries of non-US entities.
See SRG 2, Applicability of sustainability reporting, for discussion of the entities in

the scope of these standards and reporting requirements. Figure SRG 7-4
summarises the key GHG-related provisions of these standards and rules:
Figure SRG 7-4

Summary of GHG emissions reporting requirements
Organisational boundary
Source Guidance (note 1) Measurement
GHG Protocol Provides general guidance Requires use of the equity Prescribes measurement
on measurement and share or a control methodologies for direct
(SRG 7.2.1)
reporting of GHG approach (financial or and indirect emissions
emissions operational)
challenges. SEC registrants should continue to apply the existing climate disclosure rules
until the stay is lifted or the litigation is resolved.

ESRS 6 GHG emissions reporting Requires use of a defined Requires use of the GHG
requirements are included approach Protocol, unless in conflict
(SRG 7.2.2)
in ESRS E1 Climate with guidance in ESRS
Emissions of the
change (ESRS E1)
consolidated group would Entities may also consider
be included (financial Commission
control approach) Recommendation (EU)
2021/2279 or the
Emissions of associates,
requirements of EN
joint ventures, and other
International Organization
unconsolidated
for Standardization (ISO)
arrangements would be
14064-1, when not in
included based on
conflict with ESRS E1 and
operational control
the GHG Protocol
IFRS GHG emissions reporting Requires use of the equity Requires use of the GHG
Sustainability requirements are included share or a control Protocol, unless in conflict
Disclosure in IFRS S2 Climate-related approach (financial or with guidance in IFRS S2
Standards 7 Disclosures (IFRS S2) operational) as permitted
Permits an entity to use
by the GHG Protocol
(SRG 7.2.3) another method, if
Permits an entity to use required by a regulator or
another method, if exchange
required by a regulator or
exchange
SEC 8 The SEC climate Provides flexibility for Provides flexibility in

disclosure rules include registrants to select an approach to measurement
(SRG 7.2.4)
GHG emissions reporting approach, including one of
Requires disclosure of the
requirements for certain the approaches under the
protocol or standard used
registrants GHG Protocol
The adopting release
Requires disclosure of the
mentions the GHG
organisational boundary
Protocol as a potential
and method used
protocol 9
California SB Reporting of scope 1, Requires use of the equity Requires use of the GHG
253 10 scope 2, and scope 3 share or a control Protocol
emissions in accordance approach (financial or
(SRG 7.2.5.1)
with the GHG Protocol operational) as permitted
by the GHG Protocol
6 ESRS E1 Climate Change AR 39(a); EFRAG and IFRS Foundation, ESRS-ISSB

Standards: Interoperability Guidance, 2 May 2024, footnote 7, page 11.
7 IFRS S2 paragraph 29(a)(ii).
8 SEC, The Enhancement and Standardization of Climate-Related Disclosures for
Investors, Regulation S-K Item 1505.

9
SEC, Final climate disclosure rules, page 253. The SEC provides an ‘adopting release’ in
the basis for the new rules, the SEC’s response to public comments (including changes to
the rules), explanation of the final rules, and the economic analysis supporting the costs
and benefits of the new rules.
10
California SB 253, Climate Corporate Data Accountability Act.

California SB Reporting of GHG Requires use of the equity Requires use of the GHG
261 11 emissions as part of a share or a control Protocol
(SRG 7.2.5.2) report prepared in approach (financial or
Permits use of a national
accordance with the Task operational) as permitted
methodology, if consistent
Force on Climate-related by the GHG Protocol or
with the GHG Protocol
Financial Disclosures “national reporting
(TCFD) 12 methodologies if they are
consistent with the GHG
Protocol methodology”
Note 1: See SRG 7.3 for discussion of the approaches to determination of the
organisational boundary.
The GHG Protocol is foundational to mandatory GHG emissions reporting and is

widely used in voluntary sustainability reporting, as such this section first provides
an overview of its requirements (SRG 7.2.1). It then discusses the general
requirements of the other reporting frameworks, including their interaction with the
GHG Protocol, as follows:
□ European Sustainability Reporting Standards (SRG 7.2.2)
□ IFRS Sustainability Disclosure Standards (SRG 7.2.3)
□ SEC climate disclosure rules (SRG 7.2.4)
□ California climate disclosure laws (SRG 7.2.5)
Identifying the appropriate sources of guidance will be important for entities to

ensure compliance. In addition, in SRG 7.2.6 we discuss general conventions
related to terminology used and implementation guidance referenced in this
Sustainability reporting guide (SRG).
7.2.1 The Greenhouse Gas Protocol
The GHG Protocol is the leading standard for measuring and reporting GHG
emissions at the corporate level. It issued its initial standard for corporate
reporting of greenhouse gas emissions in 2001. It has subsequently issued
additional standards, guidance, and calculation tools, including considerations for
specific sectors as well as information on greenhouse gas emissions policy for
project developers, investors, verifiers, analysts, policymakers, and cities and
local governments.
The guidance issued by the GHG Protocol has various levels of authority and
applicability for corporate reporting of GHG emissions as discussed in the
following sections. Reporting entities should be aware of the sources of guidance
and consider applicability in their specific facts and circumstances.
7.2.1.1 The Greenhouse Gas Protocol — required guidance
The Greenhouse Gas Protocol Corporate Accounting and Reporting Standard (the
Corporate Standard) is a comprehensive framework to quantify, track, and report
GHG emissions. The first edition of the Corporate Standard was issued in 2001.
The Corporate Standard has subsequently been amended, and the GHG Protocol
11
California SB 261, Greenhouse gases: climate-related financial risk.
12
The Task Force on Climate-related Financial Disclosures (TCFD) was created by the
Financial Stability Board (FSB) in 2015 to improve and increase reporting of climate-related
financial information.

has added supplemental standards, guidance, and calculation tools. The guidance
required to develop and report corporate level emissions inventories in
accordance with the GHG Protocol is summarised in Figure SRG 7-5.
Figure SRG 7-5

Navigating the GHG Protocol standards
Standard / guidance Details
Corporate Accounting and □ Primary standard for accounting and reporting

Reporting Standard of greenhouse gas emissions by entities
(Corporate Standard)
Scope 2 Guidance, an □ Guidance for measuring and reporting

amendment to the GHG emissions from purchased or acquired
Protocol Corporate electricity, steam, heating, and cooling (scope
Standard 2 emissions)
(Scope 2 Guidance) □ Amendment to the Corporate Standard and
must be applied to comply with the Corporate
Standard
Corporate Value Chain □ Guidance for purposes of reporting scope 3

(Scope 3) Accounting and emissions, if required or elected
Reporting Standard
□ The Corporate Standard itself does not require
(Scope 3 Standard) reporting of scope 3 emissions
ESRS, the IFRS Sustainability Disclosure Standards, California SB 253, and

TCFD specifically refer to the Corporate Standard and the Scope 3 Standard in
reference to the GHG Protocol. 13 As such, the Corporate Standard, the Scope 2
Guidance (which is considered part of the Corporate Standard), and the Scope 3
Standard are collectively referred to as the ‘GHG Protocol’ within this document.
Updating the GHG Protocol for recent developments

On 23 November 2022, the GHG Protocol launched four surveys to gather
stakeholder feedback on the need for updates or additional guidance to their
Corporate Standard, Scope 2 Guidance, Scope 3 Standard, and other
supporting documents. Further, on 14 November 2023, the GHG Protocol
announced a new governance structure including plans to establish a Steering
Committee and an Independent Standards Board. 14 In addition, it has released
multiple documents summarising the results of its surveys, including the final
summary report and proposal summary related to the Corporate Standard. As
of June 2024, the GHG Protocol has indicated that draft standards and
guidance will be released for public comment in 2025 with final publication
expected in the latter half of 2026. Entities may monitor the GHG Protocol
website if they are interested in the latest information. 15
13 TCFD refers to the Corporate Value Chain (Scope 3) Accounting and Reporting Standard
(Scope 3 Standard) in the context of reporting scope 3 emissions, which it encourages for
all entities. See SRG 7.2.5.2.
14 GHG Protocol, Announcement: “GHG Protocol Launches New Governance with Call for
Steering Committee and Independent Standards Board Applications”.

15 GHG Protocol, “GHG Protocol Corporate Suite of Standards and Guidance Update
Process”, accessed 30 June 2024.

7.2.1.2 GHG Protocol supplemental guidance and interpretations
In addition to the Corporate Standard, Scope 2 Guidance, and the Scope 3

Standard, the GHG Protocol has issued selected interpretive guidance relevant to
reporting corporate level emissions inventories is summarised in Figure SRG 7-6:
Figure SRG 7-6

GHG Protocol supplemental guidance
Topic Guidance Description
Scope 3 Technical Guidance for □ Companion document to the Scope 3

measurement Calculating Scope 3 Standard and should be used in conjunction
Emissions with the Scope 3 Standard
(Scope 3 Calculation □ Provides technical guidance including
Guidance) methods for each category, data sources,
and examples
Sector guidance GHG Protocol Agricultural □ Supplement to the Corporate Standard

Guidance
□ Covers all agricultural subsectors, including
(Agricultural Guidance) livestock, crop production, and land use
change
The Global GHG Accounting □ Created by the Partnership for Carbon

and Reporting Standard for Accounting Financials (PCAF) and in
the Financial Industry conformance with the Scope 3 Standard
(PCAF Standard) □ Provides specific guidance for measuring
scope 3 category 15 financed emissions
□ ESRS and TCFD (when reporting scope 3
emissions) explicitly require consideration of
the PCAF Standard, Part A (see SRG 7.7)
Further, the GHG Protocol is also developing land sectors and removals guidance
covering “land management, land use change, biogenic products, carbon dioxide
removal technologies, and related activities in GHG inventories”. The GHG
Protocol has announced the initial guidance will be finalised in 2024 and issued in
the first quarter of 2025. 16
We would generally expect entities reporting in accordance with the GHG Protocol
to apply the guidance summarised in Figure SRG 7-6, as applicable. In addition,
further, entities reporting under ESRS or TCFD (if reporting scope 3 emissions)
must consider the sector guidance for the financial industry as noted in the table.
In instances where this supplemental guidance to the GHG Protocol is specifically
referenced in the sustainability standards (for example, in ESRS E1 AR 46(b)
where financial institutions should consider the PCAF Standard, Part A when
reporting information on financed emissions), reporting entities should use this
guidance for reporting and measurement as applicable.
Reporting entities should ensure they are aware of available guidance and its
interaction with the GHG Protocol and other frameworks. In addition, entities
should disclose the reporting framework applied, including the use of any
supplemental or additional guidance.
16 GHG Protocol, Land Sectors and Removals: Workstream Update, 3 July 2024.

Question SRG 7-1
Does the GHG Protocol provide any other guidance?
PwC response
Yes. In addition to the guidance summarised in Figures SRG 7-5 and SRG 7-6,
the GHG Protocol has issued other guidance that may be considered by entities in
other emissions reporting scenarios.
□ Product level reporting

The Product Life Cycle Accounting and Reporting Standard (Product
Standard) complements the Scope 3 Standard by focusing on the product life
cycle (whereas the Scope 3 Standard accounts for value chain emissions at
the corporate level)
□ Project level reporting

The GHG Protocol for Project Accounting (Project Guidance) has issued
principles for quantifying benefits of climate mitigation projects and for
reporting GHG emissions and removals over the product life cycle; includes
supplements devoted to “Land Use, Land-Use Change, and Forestry” as well
as “Grid-Connected Electricity Projects”
□ U.S. public sector

The Greenhouse Gas Protocol for the U.S. Public Sector (U.S Public Sector
Guidance) interprets the Corporate Standard for the public sector; and is
“applicable to all levels of government in the United States, including federal,
state, regional, and municipal/city government” 17
In general, this guidance would not be applicable in reporting GHG emissions for
purposes of the global reporting standards and rules. ESRS E1, however,
references the Product Standard, the Land Use, Land Use Change, and Forestry
Guidance (which is part of the Project Guidance), and the Agricultural Guidance
(included in Figure SRG 7-6) as sources of guidance to consider in preparing
information on GHG removals and storage. 18 This guidance may also be helpful to
entities in preparing their emission reporting, as applicable.
The GHG Protocol has also developed guidance for policymakers and cities and
local governments, including guidance for governments in designing goals and
emission-reduction targets and a standard approach to reporting progress to
achievement. 19 This supplemental guidance may be used for reporting purposes if
helpful within the context of the GHG Protocol and other regulatory reporting
requirements.
Entities may also refer to resources such as working papers published by WRI on
(1) estimating and reporting avoided emissions, including disclosing positive and
negative GHG effects of a product and (2) measuring and reporting potential GHG
17 GHG Protocol, The Greenhouse Gas Protocol for the U.S. Public Sector (U.S. Public
Sector Standard), page 4.
18
GHG Protocol, Land Use, Land Use Change, and Forestry Guidance for GHG Project
Accounting, was launched in 2006 as part of the GHG Protocol’s broader guidance on
project accounting, The GHG Protocol for Project Accounting. This guidance provides
principles for quantifying benefits of climate change mitigation projects.
19 GHG Protocol guidance: (1) “Global Protocol for Community-Scale Greenhouse Gas
Inventories” — provides guidance for cities in tackling GHG emissions and reductions and
includes a supplement related to “Forests and Trees”; (2) “Policy and Action Standard” —
guidance for evaluating the GHG impact of specific policies; and, (3) The Mitigation Goal
Standard (Mitigation Goal Standard).

emissions associated with fossil fuel reserves (which are not reported under
current standards). 20
Lastly, the GHG Protocol endorsed certain externally developed guidance that it
deems consistent with its framework and principles (referred to as ‘built on GHG
Protocol’ — see Question SRG 7-2).
Question SRG 7-2
What is the purpose and significance of guidance ‘built on GHG Protocol’?
PwC response
As noted above, the GHG Protocol has issued guidance to address specific
issues in emissions measurement and reporting for certain sectors. And, although
the GHG Protocol continues to incorporate resources into its suite of guidance
and standards, other groups and organisations have also developed guidance that
leverages the broader GHG Protocol framework to address sector- and product-
specific topics. To support these efforts, the GHG Protocol provides a ‘Built on
GHG Protocol’ mark to recognise resources developed by external organisations
that it deems consistent with its framework.
As part of its process, the GHG Protocol reviews the first and final drafts of the
externally developed guidance, tool, or program to assess conformity with its
standards. Sectors and products with guidance ‘built on GHG Protocol’ are
summarised in Figure SRG 7-7. 21
Figure SRG 7-7

‘Built on GHG Protocol’ sector and product guidance
Sectors Products
□ Aerospace □ Concrete (specifically for use in

North America)
□ Construction (including
supplemental sector guidance on □ Information and communications
accounting for and reducing technology products
embodied emissions for the
□ Pharmaceutical products and
building sector)
medical devices
□ Logistics operations (including
shippers, carriers, and logistics
services providers)
□ US dairy cooperatives and
processors
□ Waste
In addition, ‘Built on GHG Protocol’ guidance has been released related to

quantifying “GHG emission reductions from clean energy activities conducted
under the USAID Global Climate Change Initiative”. 22
Entities should note, however, that while this guidance has been endorsed by the
GHG Protocol, it is not considered part of the GHG Protocol. Therefore, although
it may be helpful in interpretation and practical application of the GHG Protocol, it
20 WRI working papers: (1) “Estimating and Reporting the Comparative Emissions Impact of
Products” and (2) “A Recommended Methodology for Estimating and Reporting the
Potential Greenhouse Gas Emissions From Fossil Fuel Reserves”.
21 GHG Protocol, “Guidance Built on GHG Protocol”, accessed 30 June 2024.
22 USAID, “The Clean Energy Emissions Reduction (CLEER) Protocol”.

is not authoritative. Further, this guidance does not supersede the requirements of
the relevant regulatory reporting frameworks.
There are also various ‘Built on GHG Protocol’ calculation tools. Entities should
perform their own due diligence prior to using any of these tools.
7.2.2 European Sustainability Reporting Standards
Figure SRG 7-8 summarises the guidance to be considered in reporting GHG

emissions in accordance with ESRS.
Figure SRG 7-8

GHG emissions reporting under ESRS E1 — hierarchy of guidance
Guidance
ESRS E1 Defines overall scope 1, scope 2, and scope 3 reporting

requirements, including organisational boundaries to be
applied (see SRG 7.3.3) and disclosures (see SRG
7.10)
GHG Protocol Must consider principles, requirements, and guidance of

the GHG Protocol 23
PCAF Standard, Must consider for financed emissions of financial

part A institutions 24
Commission May also consider, if not in conflict with ESRS E1 and

Recommendation the GHG Protocol
EU 2021/2279 or
ISO 14064-1
In applying this guidance, entities must first adhere to any specific reporting
requirements prescribed by ESRS. In the absence of specific guidance in ESRS,
however, entities are required to consider the guidance in the GHG Protocol in
measuring their scope 1, scope 2, and scope 3 GHG emissions. As noted, entities
“may” also apply other available guidance (that is, Commission Recommendation
(EU) 2021/2279 or ISO 14064-1), however, this guidance would only apply if not
in conflict with ESRS and the GHG Protocol. 25
On 2 May 2024, EFRAG and the ISSB issued a document highlighting

interoperability of their climate standards. The interoperability document confirms
the hierarchy of guidance applicable in reporting GHG emissions in accordance
with ESRS as follows:
Excerpt from ESRS-ISSB Standards: Interoperability Guidance, footnote 7 26
ESRS E1 has been built incorporating in its text content from the GHG Protocol,
and has specific requirements regarding organisational boundary …. When
additional guidance is needed, paragraph AR39(a) of ESRS E1 requires entities to
consider the principles, requirements and guidance provided by the GHG Protocol
23 ESRS E1 AR 39(a) and AR 46(a). Note that ESRS specifies the version of the Corporate
Standard and Scope 3 Standard to be used as 2004 and 2011, respectively. The GHG
Protocol is in the process of updating its standards and guidance, however, entities
reporting in accordance with ESRS should continue to use the versions referenced in
ESRS E1 until further guidance is provided.
24 ESRS E1 AR 46(b).
25 ESRS E1 AR 39.
26 ESRS-ISSB Standards: Interoperability Guidance, footnote 7, page 11.

and allows an entity to consider the requirements stipulated by ISO 14064-1:2018
or Commission Recommendation (EU) 2021/2279. Where ISO 14064-1 deviates
from the GHG Protocol reporting rules, ESRS require reporting in accordance with
ESRS E1 … and the GHG Protocol.
We discuss specific guidance from ESRS E1 where applicable in this chapter. In

its absence, entities are required to consider the guidance in the GHG Protocol
and the PCAF Standard.
Question SRG 7-3
What is ISO 14064-1?
PwC response
The International Organization for Standardization published ISO 14064-1 for the
purpose of reporting greenhouse gas emissions and emissions removals. It is
designed to guide entities in quantification, monitoring, and reporting. ESRS E1
AR 39 permits entities to supplementally consider and apply the guidance
prescribed by ISO 14064-1 when reporting GHG emissions.
Based on ESRS E1 AR 39, however, an entity would be required to first consider

ESRS and then the GHG Protocol in preparing its GHG emissions. It could only
apply the ISO standards to the extent they do not contradict the other guidance.
See Figure SRG 7-8.
7.2.3 IFRS Sustainability Disclosure Standards
The guidance to be considered in reporting GHG emissions in accordance with

the IFRS Sustainability Disclosure Standards is summarised in Figure SRG 7-9.
Figure SRG 7-9

GHG emissions reporting under IFRS S2 — hierarchy of guidance
Guidance Application
IFRS S2 Defines overall scope 1, scope 2, and scope 3 reporting

requirements, including organisational boundaries to be
applied (see SRG 7.3.4) and disclosures (see SRG 7.10)
Appendix B includes additional detail on measurement and
reporting and should be considered as part of the standard
GHG Protocol Must measure in accordance with the principles,

requirements, and guidance of the GHG Protocol, unless an
entity is required to apply a different method by a jurisdictional
authority or exchange where it is listed 27
Other Another method is permitted if required by a jurisdictional

authority or exchange for the entire entity
In applying this guidance, IFRS S2 paragraph B23 clarifies, “For the avoidance of
doubt, an entity shall apply the requirements in the Greenhouse Gas Protocol: A
Corporate Accounting and Reporting Standard (2004) only to the extent that they
27 IFRS S2 paragraph 29(a)(ii). Note that IFRS S2 specifies the version of the Corporate
Standard and Scope 3 Standard to be used as 2004 and 2011, respectively. The GHG
Protocol is in the process of updating its standards and guidance, however, entities
reporting in accordance with the IFRS Sustainability Disclosure Standards should continue
to use the versions referenced in IFRS S2 until further guidance is provided.

do not conflict with the requirements in this Standard.” Consequently, entities must
first adhere to any requirements prescribed by IFRS S2, including IFRS S2
Appendix B. The application of IFRS S2 is in turn governed by IFRS S1 General
Requirements for Disclosure of Sustainability-related Financial Information (IFRS
S1).
In the absence of guidance in IFRS S2, however, entities are required to apply the
measurement guidance in the GHG Protocol, unless they qualify for the limited
exception provided for reporting under the requirements of a regulatory authority
or exchange — this would include, for example, ESRS reporting requirements.
Note, however, that IFRS S2 also provides limited transition relief for the first year
of reporting which would allow an entity to use a method used in the period
immediately prior to first time application. See SRG 7.11.2 for further discussion of
the transition reliefs available in initial application of the ISSB standards.
Question SRG 7-4
Can entities reporting GHG emissions pursuant to the requirements of IFRS S2

elect to use the ESRS E1 measurement guidance?
PwC response
IFRS S2 paragraph B24 states, “If the entity is required by a jurisdictional authority
or an exchange on which it is listed to use a different method for measuring its
greenhouse gas emissions, the entity is permitted to use this method rather than
using the [GHG Protocol]”. As noted, this exception is only available when use of
another method is required.
Therefore, an entity that applies ESRS voluntarily (that is, the entity is not subject
to CSRD) would not be permitted to apply ESRS E1 for measurement (for
example, determination of organisational boundaries) for its IFRS S2 reporting. In
this case, the reporting entity would be required to use one of the approaches
allowed by the GHG Protocol, unless it is required to use another method by a
jurisdiction or exchange.
Question SRG 7-5
Would a reporting entity qualify for the use of an alternative measurement

approach if only part of the entity is subject to jurisdictional or exchange reporting?
PwC response
No. IFRS S2 paragraph B25 states:
In some circumstances, an entity might be subject to a requirement in the

jurisdiction in which it operates to disclose its greenhouse gas emissions for a
specific part of the entity or for some of its greenhouse gas emissions …. In such
circumstances, the jurisdictional requirement does not exempt the entity from
applying the requirements in [IFRS S2] to disclose the entity’s Scope 1, Scope 2
and Scope 3 greenhouse gas emissions for the entity as a whole.
Based on this guidance, a limited jurisdictional requirement applicable to only a

portion of the entity would not exempt the reporting entity from its overall reporting
obligation under IFRS S2. IFRS S2 is specific that a reporting entity qualifies for
an alternative measurement approach only where that approach is required. As

such, an entity would only be eligible to apply an approach required by a
jurisdiction or exchange if it applies to the entire group.
7.2.4 SEC climate disclosure rules
The SEC climate disclosure rules issued on 6 March 2024 require certain SEC
registrants — ‘large accelerated’ and ‘accelerated’ filers — to disclose scope 1
and/or scope 2 emissions, if material. 28 See SRG 2.4.1 for further information on
the scope of the SEC rules and Question SRG 7-6 for considerations in assessing
whether GHG emissions are material. In addition, although the SEC climate
disclosure rules generally do not require reporting of scope 3 emissions, there are
limited circumstances when disclosure of some scope 3 information may be
needed (see Question SRG 7-34). If a registrant is required to report GHG
emissions, the rules also require certain disclosures related to methodology,
significant inputs, and significant assumptions. The required disclosures include
the organisational and operational boundaries used as well as the “protocol or
standard used to report the GHG emissions”. 29
With the intent of providing additional flexibility, however, the SEC rules do not
define specific methods a registrant should use to determine its organisational
boundaries (see SRG 7.3.5). Further, as described in the adopting release, the
rules do not specify the protocol or standards to be used in measurement of GHG
emissions:
Excerpt from adopting release for the SEC climate disclosure rules 30
The final rule requires a brief description of, in sufficient detail for a reasonable
investor to understand, the protocol or standard used to report the GHG
emissions, including … requir[ing] a registrant to disclose whether it calculated its
GHG emissions metrics using an approach pursuant to the GHG Protocol’s
Corporate Accounting and Reporting Standard, an EPA regulation, an applicable
ISO standard, or another standard.
Although the SEC rules allow registrants to select a measurement approach

among multiple options, we would expect entities to consider recognised
standards and frameworks, such as the GHG Protocol or ESRS. Thus, in general,
we do not separately discuss the SEC GHG emissions disclosure requirements in
this chapter because we would expect most entities to follow the guidance in the
GHG Protocol for emissions calculations. The GHG Protocol is the most
commonly used approach for measurement and, as discussed in SRG 7.2.2 and
SRG 7.2.3, it is foundational to reporting emissions under ESRS and the IFRS
Sustainability Disclosure Standards. Thus, following the GHG Protocol will also
aid comparability and interoperability.
Where applicable, however, we highlight specific matters that require

consideration by SEC registrants, including in the approach to organisational
boundaries (see SRG 7.3.5) and disclosure requirements (see SRG 7.10). In
addition, the SEC climate disclosure rules reference the ISO standard on
emissions or the regulations of the U.S. Environmental Protection Agency (U.S.
EPA). Information about the ISO standard and U.S. EPA regulations is discussed
in Questions SRG 7-3 and SRG 7-7, respectively.
28 Although the SEC climate disclosure rules issued 6 March 2024 generally apply to all
domestic registrants and foreign private issuers, only ‘large accelerated’ and ‘accelerated’
filers are required to disclose GHG emissions, if material. ‘Large accelerated’ and
‘accelerated’ filer status refers to the size of the filer as discussed in SRG 2.4.1.

Question SRG 7-6
How does a registrant assess materiality of GHG emissions information in the

context of evaluating whether disclosure is required under the SEC climate
disclosure rules?
PwC response
For purposes of SEC reporting, an entity should assess materiality of GHG
emissions information in a manner consistent with other SEC rules and
regulations. When evaluating whether scope 1 or scope 2 emissions are material,
an entity should evaluate not only the amount of emissions, but also qualitative
factors that may be meaningful to investors.
Factors to consider in the evaluation may include whether emissions are

significant enough to expose the entity to transition risks, or if emissions are
critical to an investor’s understanding of progress made towards achieving the
entity’s established targets or goals. The SEC climate disclosure rules adopting
release provides further context and states:
Excerpt from adopting release for the SEC climate disclosure rules 31
For example, where a registrant faces a material transition risk that has
manifested as a result of a requirement to report its GHG emissions metrics under
foreign or state law because such emissions are currently or are reasonably likely
to be subject to additional regulatory burdens through increased taxes or financial
penalties, the registrant should consider whether such emissions metrics are
material under the final rules. A registrant’s GHG emissions may also be material
if their calculation and disclosure are necessary to enable investors to understand
whether the registrant has made progress toward achieving a target or goal or a
transition plan that the registrant is required to disclose under the final rules.
Additional questions an entity could consider in assessing the materiality of GHG

emissions include:
□ Does compliance with other jurisdictions have a material effect on the entity’s
financial position through potential fines or required changes to products or
services?
□ If the information is provided voluntarily outside of an SEC filing (for example,

as part of the entity’s sustainability reporting), why is the information being
provided? Was the information requested from suppliers, customers, or
investors?
□ Has the entity made any public commitments about net zero or carbon neutral
goals? Does the entity advertise any products as ‘green’, carbon neutral, or
similar assertions?
□ Does the information relate to a disclosed target, goal, or transition plan?
□ Does the achievement of certain levels of GHG emissions affect executive

compensation?
The assessment of materiality should incorporate quantitative and qualitative

factors and will require judgement from preparers. Refer to SRG 4.2.1.3 and SRG
4.5 for guidance on materiality more broadly as it relates to application of the SEC
climate disclosure rules.
31
SEC, Climate disclosure rules, pages 246–247.

Question SRG 7-7
What are the “EPA regulation[s]” referenced in the SEC climate disclosure rules?
PwC response
The U.S. Environmental Protection Agency is a regulatory agency authorised by
the US Congress to develop and enforce regulations that span across
environmental topics, including clean air, land, and water. As part of its
jurisdiction, the U.S. EPA requires “large GHG emission sources, fuel and
industrial gas suppliers, and CO2 injection sites in the United States”
(encompassing approximately 8,000 facilities) to measure and report greenhouse
gas emissions annually. 32 Scope 1 GHG emissions reported to the U.S. EPA
account for about 50% of total US GHG emissions. 33
For entities subject to its reporting requirements, the U.S. EPA prescribes specific
methodologies for each source type, including electricity generation, petroleum
and natural gas systems, aluminium production, food processing, general
stationery fuel combustion sources, and many others. Further, emissions from
those sources are generally categorised as either (1) combustion or (2) process
emissions (which include those generated during chemical transformation of raw
materials and fugitive emissions). The U.S. EPA provides multiple calculation
methods for each source category, which allows entities to select the best method
in their circumstances, including availability of data and systems.
Based on the optionality provided in the SEC rules, registrants that have assets
and facilities subject to U.S. EPA reporting may be able to use these emission
calculations for the purpose of SEC reporting. These techniques and approaches
may also be used for assets that are outside of U.S. EPA jurisdiction.
Question SRG 7-8
Are there emission sources excluded from the requirements of the SEC climate
disclosure rules?
PwC response
Yes. The SEC rules expressly permit the exclusion of emissions from manure
management systems. This exclusion is provided because of federal regulations
in the United States (the 2023 Consolidated Appropriations Act) which prohibit the
use of appropriated funds to implement provisions of rules mandating reporting of
GHG emissions associated with manure management systems. 34
7.2.5 California climate disclosure laws
Four laws requiring sustainability related disclosures were signed into law in
California in October 2023. Two of these laws, California SB 253 and SB 261,
require in scope entities to report greenhouse gas emissions information as
discussed in the following sections. These reporting requirements are further
discussed in the following sections.
In addition, the California sustainability laws have extraterritorial provisions,

including applicability to subsidiaries of non-US headquartered entities. See SRG
2.4.2 for discussion of the applicability of these reporting requirements.
32
U.S. EPA, “Greenhouse Gas Reporting Program (GHGRP)” webpage.
33
U.S. EPA, “What is the GHGRP?”.

7.2.5.1 California SB 253 — Reporting in accordance with the GHG Protocol
California SB 253 requires in scope entities to report scope 1, scope 2, and scope
3 greenhouse gases in accordance with the GHG Protocol. The law does not
contain a materiality threshold, thus, if an entity is subject to California SB 253
reporting will be required.
Excerpt from California Health and Safety Code Section 38532(c)(1) 35
(c)(1) On or before January 1, 2025, the [California Air Resources Board] shall
develop and adopt regulations to require a reporting entity to annually disclose …
all of the reporting entity’s scope 1 emissions, scope 2 emissions, and scope 3
emissions. …
(A)(ii) A reporting entity shall, beginning in 2026, measure and report its emissions
of greenhouse gases in conformance with the Greenhouse Gas Protocol
standards and guidance, including the Greenhouse Gas Protocol Corporate
Accounting and Reporting Standard and the Greenhouse Gas Protocol Corporate
Value Chain (Scope 3) Accounting and Reporting Standard developed by the
World Resources Institute and the World Business Council for Sustainable
Development, including guidance for scope 3 emissions calculations that detail
acceptable use of both primary and secondary data sources, including the use of
industry average data, proxy data, and other generic data in its scope 3 emissions
calculations.
As noted, the law requires entities to report in accordance with the GHG Protocol
standards and guidance. Therefore, in general, we do not separately highlight
California SB 253 in this chapter. Instead, entities calculating emissions and
preparing disclosures for purposes of compliance with California SB 253 should
follow the guidance for reporting under the GHG Protocol — including
organisational boundaries, operational boundaries, measurement, and
disclosure. 36
There are certain implementation details about the law that are uncertain (for
example, the date by which reporting will be due annually). The California Air
Resources Board (CARB) has been charged with developing and adopting
regulations to enact California SB 253 as discussed in Question SRG 7-9.
Question SRG 7-9
Will California issue any interpretive guidance related to application of California

SB 253?
PwC response
The California Air Resources Board is a California agency that has responsibility
for climate change programs and air pollution control efforts in California. 37 CARB
has been charged with developing and adopting regulations to enact California SB
253 (and California SB 261, discussed in SRG 7.2.5.2) prior to 1 January 2025.
This guidance is expected to include information about matters such as the exact
due date in 2026 for initial reporting as well as the logistics of how and when the
information is to be published. In addition, the regulations to be adopted by CARB
may provide additional clarity on some of the provisions in the bill. Absent
additional guidance from CARB, however, entities subject to California SB 253
35 Section 38532 of the California Health and Safety Code added by California SB 253.
36 Note that starting in 2033, and every 5 years thereafter, CARB “may survey and assess
currently available greenhouse gas accounting and reporting standards”. It may adopt an
alternative standard as a result of this review. Until such time that there is a change,
however, entities will report in accordance with the GHG Protocol to comply with SB 253.
37 California Air Resource Board, “About 'The California Air Resources Board'”.

should be prepared to provide reporting of GHG emissions in accordance with the
GHG Protocol.
7.2.5.2 California SB 261 — Reporting in accordance with the Task Force on

Climate-related Financial Disclosures
California SB 261 requires entities to provide reporting prepared in accordance

with the Task Force on Climate-related Financial Disclosures. TCFD provides
disclosure ‘recommendations’ in 11 areas of disclosure divided among four pillars:
governance, strategy, risk management, and metrics and targets. Although the
disclosures are framed as recommendations, we generally believe these would be
required for an entity to assert compliance with the TCFD framework and we
discuss these ‘recommendations’ as requirements in this guide.
With respect to greenhouse gas emissions reporting, TCFD requires entities to

report scope 1 and scope 2 GHG emissions, irrespective of materiality:
Excerpt from TCFD, Metrics and Targets, Recommended Disclosure b),

Guidance for All Sectors 38
Organizations should provide their Scope 1 and Scope 2 GHG emissions

independent of a materiality assessment, and, if appropriate Scope 3 GHG
emissions and the related risks. All organizations should consider disclosing
Scope 3 GHG emissions.
GHG emissions should be calculated in line with the GHG Protocol methodology
to allow for aggregation and comparability across organizations and jurisdictions.
(footnotes omitted)
TCFD also “strongly encourages” all entities to disclose scope 3 GHG emissions,
indicating that “it believes such emissions are an important metric reflecting an
organization’s exposure to climate-related risks and opportunities”,
notwithstanding some of the related calculation challenges. 39 In assessing
whether scope 3 emissions should be disclosed, TCFD recommends that entities
consider their scope 3 emissions in relation to their total emissions. Some of the
considerations highlighted in Question SRG 7-6 with respect to the assessment of
materiality of emissions for SEC disclosure may also be helpful in assessing the
materiality of scope 3 emissions for disclosure under the TCFD standard.
The footnotes also clarify that in lieu of the calculation methodologies in the GHG
Protocol, “Organizations may use national reporting methodologies if they are
consistent with the GHG Protocol methodology.” 40 This may include, for example,
ESRS as discussed in SRG 7.2.2. Thus, although TCFD provides some limited
flexibility, in general, entities will follow the GHG Protocol for purposes of
calculating emissions for inclusion in a TCFD report. Note, however, that the
disclosures required under TCFD differ from the GHG Protocol, as discussed in
SRG 7.10.
Except for highlighting the disclosure differences, in general, we do not separately

discuss California SB 261 in the remainder of this chapter, because we would
expect most entities to follow the GHG Protocol in preparing their emissions
reporting for inclusion in a TCFD report.
38 TCFD, Implementing the Recommendations of the Task Force on Climate-related

Financial Disclosures, October 2021, page 21.
39
TCFD, Implementing the Recommendations of the Task Force on Climate-related
Financial Disclosures, October 2021, footnote 32, page 21.
40
TCFD, Implementation recommendations, October 2021, footnote 34, page 21.

TCFD industry-specific guidance
In addition to the general guidance for all industries, TCFD provides supplemental
guidance and disclosure recommendations for certain sectors. Figure SRG 7-10
includes the defined sectors included in the ‘non-financial groups’. It also provides
a general description of types of entities that may be included in the financial
sectors identified by TCFD.
Figure SRG 7-10

Industries with supplemental guidance under TCFD
Sector Industries
Financial sector 41 □ Banks — Retail banks, commercial banks, community development banks,
Investment banks, credit unions, savings and loan associations
□ Insurance companies — Accident and health insurers; property and casualty
insurers; and financial guarantors
□ Asset owners — Public- and private-sector pension plans, re-insurance
companies, endowments, and foundations
□ Asset managers — Mutual fund companies, hedge funds, private equity
firms, real estate asset managers, exchange-traded fund (ETF) providers,
wealth management firms
Non-financial □ Energy — Oil and gas, coal, electric utilities

groups 42
□ Transportation — Air freight, passenger air transportation, maritime
transportation, rail transportation, trucking services, automobiles and
components
□ Materials and buildings — Metals and mining, chemicals, construction
materials, capital goods, real estate management and development
□ Agriculture, food, and forest products — Beverages, agriculture, packaged
food and meats, paper and forest products
Entities operating in one of the sectors highlighted in Figure SRG 7-10 should
incorporate the applicable additional guidance and disclosures in preparing their
TCFD report.
See further discussion of the TCFD requirements in SRG 22, Jurisdictional

reporting requirements [coming soon].
Throughout this Sustainability reporting guide, we use common terms to describe

aspects of the sustainability standards and regulations, as well as references to
interpretative guidance as discussed below.

41 TCFD, Implementation recommendations, October 2021, “Supplemental Guidance for

the Financial Sector”, pages 24–54.
42 TCFD, Implementation recommendations, October 2021, “Supplemental Guidance for
Non-Financial Groups”, pages 56–68.



opportunities
to ESRS.
ESRS.




standards.
7.3 Establish the organisational boundary

The first step in measuring and reporting GHG emissions is to identify the scope
of entities, assets, and operations that should be included in a reporting entity’s
GHG emissions disclosures.
7.3.1 Defining organisational boundaries
Organisational boundaries define the scope of the entities, assets, and operations
included in an entity’s greenhouse gas emissions accounting and disclosure,
referred to by the GHG Protocol as ‘consolidation’. And, consistent with the
concept of consolidation in financial reporting, the determination of the
organisational boundaries drives the accounting for, and reporting of, the
greenhouse gas emissions associated with an entity.
The GHG Protocol defines organisational boundaries as follows:
Excerpt from the Corporate Standard glossary 45
Organizational boundaries
The boundaries that determine the operations owned or controlled by the
reporting company, depending on the consolidation approach taken (equity or
control approach).
How an entity should determine its organisational boundaries, however, varies

depending on whether the entity is reporting in accordance with the GHG Protocol
or another sustainability reporting framework. Figure SRG 7-11 provides a
summary of the organisational boundary approaches among the sustainability
standards and rules.
43
ESMA, Public Statement, “Off to a good start: first application of ESRS by large issuers”,
5 July 2024.
2024.
45 GHG Protocol, GHG Protocol Corporate Accounting and Reporting Standard (Corporate
Standard), page 100.

Figure SRG 7-11
Summary of the approaches to determine the organisational boundary for
measuring GHG emissions
Framework Organisational boundary
GHG Protocol Allows two approaches to determine the organisational

boundary:
Corporate Standard,
Chapter 3 □ equity share
(SRG 7.3.2) □ control (with control determined based on either
financial or operational control)
ESRS □ Emissions of the consolidated accounting group

(parent and subsidiaries) follow the organisational
ESRS E1 paragraph
boundaries of the consolidated financial statements
50
(that is, financial control)
(SRG 7.3.3)
□ Emissions of associates, joint ventures, and other
unconsolidated arrangements would be presented
based on operational control
IFRS Sustainability □ Requires use of one of the approaches allowed by

Disclosure the GHG Protocol (equity share, financial control,
Standards operational control)
IFRS S2 paragraph □ Allows use of a different method if required by a
29(a)(ii) jurisdictional authority or exchange
(SRG 7.3.4)
SEC climate □ Provides flexibility in determining the organisational

disclosure rules boundary approach
Regulation S-K Item □ The method used and differences, if material,
1505(b)(1)(i) between the defined organisational boundary and
scope of entities and operations included in the
(SRG 7.3.5)
entity’s consolidated financial statements must be
disclosed
In addition to discussing the organisational boundary approaches under each of

the frameworks, this section includes:
□ factors in selecting an organisational boundary approach (SRG 7.3.6)
□ an example illustrating the effect of the different approaches (SRG 7.3.7)
□ considerations in changing the organisational boundary approach (SRG 7.3.8)
Properly determining the organisational boundary is foundational to GHG

emissions reporting. Further, given the potential effect on reported GHG
emissions, understanding the different approaches to determining organisational
boundaries may be helpful for both preparers and users.
7.3.2 Establish the organisational boundary — GHG Protocol
The GHG Protocol outlines two approaches for establishing organisational

boundaries: equity share and control, with control determined based on either
financial or operational control.

Figure SRG 7-12
GHG Protocol approaches to determine the organisational boundary
Control approaches
Equity share Financial control Operational control
A reporting entity includes its A reporting entity includes 100% A reporting entity includes 100%
share of GHG emissions of the GHG emissions from of the GHG emissions from
according to its share of equity in entities, assets, and operations entities, assets, and operations
an operation over which it has financial control over which it has operational
control
□ Equity share represents the An entity has financial control if it
reporting entity’s rights to the has full authority to introduce and An entity has operational control if
economic risks and rewards implement financial policies it has full authority to introduce
from an operation and implement operating policies
The reporting entity has financial
□ Equity share typically aligns control of any entity consolidated The operational control approach
with the equity ownership in the financial statements focuses on the ability to operate
percentage; however, the the assets during the reporting
Financial control normally
economic substance is more period, notwithstanding legal
represents the right to the majority
important than legal form ownership of the asset
of the economic benefits of an
operation; it does not necessarily
align with ownership percentage
In some corporate structures, the organisational boundary will be the same under
any of the GHG Protocol approaches. For example, Chapter 3 of the Corporate
Standard states, “If the reporting company wholly owns all its operations, its
organisational boundary will be the same whichever approach is used.” 46 The
approach applied, however, may make a significant difference in other
organisational structures, especially in complex situations where an entity’s voting
or ownership and economic rights differ or where assets are owned and operated
by different parties.
Each approach described in the GHG Protocol provides criteria to use when
establishing the entities which should be included within a reporting entity’s
organisational boundary. In practice, the determination of entities to be included in
the organisational boundary using the equity share and financial control
approaches is typically relatively straightforward. The evaluation may be more
judgemental for reporting entities with complex capital structures, including tax
structures and other structured arrangements. Even in those cases, however, the
concepts involved in the determination of equity share or financial control align
with financial reporting.
Application of the operational control approach may require additional judgement.

In addition, under any of the approaches, the analysis will require understanding
of all parties involved with an entity, whether through equity ownership or a
contractual arrangement.
7.3.2.1 Equity share approach
Under the equity share approach, the percentage of emissions included within an
entity’s organisational boundary will be determined based on its economic interest
in the operations. This interest frequently aligns with the reporting entity’s equity
ownership percentage and, if so, the same ownership percentage used for
financial reporting is applied in calculating emissions generated in those
operations.
46 GHG Protocol, Corporate Standard, page 17.

If there are differences in equity ownership and exposure to the risks and rewards
of ownership, however, the GHG Protocol states that the relationship’s economic
substance will always override the legal ownership interest.
Excerpt from the Corporate Standard, Chapter 3 47
The equity share reflects economic interest, which is the extent of rights a
company has to the risks and rewards flowing from an operation. Typically, the
share of economic risks and rewards in an operation is aligned with the
company’s percentage ownership of that operation, and equity share will normally
be the same as the ownership percentage. Where this is not the case, the
economic substance of the relationship the company has with the operation
always overrides the legal ownership form to ensure that equity share reflects the
percentage of economic interest.
Consistent with this guidance, in situations when voting rights and economic
interests are different, we believe an entity should account for its share of GHG
emissions following the methodology used to recognise its economic interest in
the consolidated financial statements. For example, if an entity has a 20% equity
interest but recognises 40% of the earnings in the financial statements because it
holds 40% of the risks and rewards of ownership (that is, it holds a 40% economic
interest), it would also recognise 40% of the entity’s scope 1, scope 2, and scope
3 emissions as part of its own emissions inventory.
7.3.2.2 Control approaches
The premise behind the financial and operational control approaches is that an
entity should account for the GHG emissions over which it has control through
either its financial or operational decisions. Following either control approach, the
reporting entity would account for and report 100% of the GHG emissions of an
entity, asset, or operation under its control.
Financial control
A starting point for determining financial control is evaluating which entities,

assets, and operations are included in the consolidated group for financial
reporting purposes.
The Corporate Standard provides guidance that an entity has financial control of
an operation if it controls financial decisions for its own economic benefit. It further
states that the application of this criteria is consistent with the concepts of
consolidation in the financial statements.
This criterion is consistent with international financial accounting standards;

therefore, a company has financial control over an operation for GHG accounting
purposes if the operation is considered as a group company or subsidiary for the
purpose of financial consolidation, i.e., if the operation is fully consolidated in
financial accounts.
The underpinning of the evaluation of financial control under the GHG Protocol is
alignment with the financial statements. Thus, an entity, asset, or operation
consolidated in the group financial statements — whether the financial statements
are prepared under IFRS Accounting Standards, US GAAP, or local GAAP —
would be under the financial control of the parent entity. Note that this applies to

48 GHG Protocol, Corporate Standard, pages 17–18.

all consolidated entities, even if the reporting entity owns less than 50% of the
equity interests. If a reporting entity has financial control, it would include 100% of
the GHG emissions associated with the relevant entity, asset, or operation within
its own GHG emissions inventory, irrespective of its ownership percentage.
Question SRG 7-10
Would an entity applying the GHG Protocol financial control approach always
have financial control over entities, assets, or operations included in its
consolidated financial statements?
PwC response
Yes. The financial control approach defined in the GHG Protocol aligns with the
consolidation concepts in the financial accounting and reporting standards. A
reporting entity has financial control over all entities, assets, and operations
consolidated in its financial statements. Financial control is determined based on
the applicable generally accepted accounting principles applied in preparing the
financial statements for the reporting entity. Therefore, under the financial control
approach, 100% of the GHG emissions from entities in the consolidated group
would be reported as part of the reporting entity’s own scope 1, scope 2, and
scope 3 emissions, as applicable.
A reporting entity, however, may also have arrangements for which its financial
statements reflect its proportionate share of the assets, liabilities, income, and
expenses of an entity, site, operation, or asset. This may include, for example,
jointly controlled assets, jointly controlled entities, and joint arrangements
classified as joint operations under IFRS 11 Joint Arrangements as well as
undivided interests accounted for following the proportionate consolidation method
(for example, under US GAAP). For the purposes of this guide, we refer to these
arrangements collectively as ‘joint operations’.
For partnerships and joint operations, the entity would report GHG emissions
based on its equity share (see Question SRG 7-12). See SRG 3.3.4 for further
discussion of the inclusion of joint operations in sustainability reporting. Further,
see SRG 7.4.2 for specific considerations related to reporting emissions from
leased assets.
Question SRG 7-11
When applying the GHG Protocol financial control approach, how should an entity
report emissions from associates, joint ventures, and other investees accounted
for using the equity method of accounting (for example, IAS 28 Investments in
Associates and Joint Ventures or ASC 323, Investments — Equity Method and
Joint Ventures)?
PwC response
The nature of a relationship accounted for under the equity method of accounting
is such that the reporting entity has concluded for accounting purposes that it has
‘significant influence’ over the investee but does not have financial
control. Following the GHG Protocol financial control approach, financial control is
synonymous with consolidation under financial accounting standards.
As such, the reporting entity would not have financial control of the associate, joint
venture, or other investee accounted for using the equity method of accounting
and the equity method investee would not be included in the reporting entity’s
organisational boundary. 49

Excerpt from the Corporate Standard, Chapter 3, Table 1 50
Associated/affiliated The parent company has significant influence over

companies the operating and financial policies of the company,
but does not have financial control. Normally, this
category also includes incorporated and non-
incorporated joint ventures and partnerships over
which the parent company has significant influence,
but not financial control.
The table in the Corporate Standard further indicates that under the financial
control approach, the entity should report “0% of GHG emissions” of the
associated/affiliated companies (accounted for as equity method investments) as
part of its scope 1 and scope 2 emissions. 51
The equity method investee’s emissions — for which the entity has significant
influence but not financial control — would need to be considered for inclusion in
the reporting entity’s scope 3 category 15, emissions if material (see SRG 7.7). 52
Question SRG 7-12
When applying the GHG Protocol financial control approach, how should an entity
report GHG emissions associated with ‘joint operations’?
PwC response
The GHG Protocol provides specific guidance for reporting GHG emissions
associated with ‘joint operations’ (see Question SRG 7-10 for further information
on the definition of joint operations).
Excerpt from the Corporate Standard, Chapter 3, Table 1 53
Non-incorporated joint Joint ventures/partnerships/operations are

ventures / partnerships / proportionally consolidated, i.e., each partner
operations where partners accounts for their proportionate interest of the joint
have joint financial control venture’s income, expenses, assets, and liabilities.
The table in the GHG Protocol further indicates that under the financial control
approach, the entity would report its “equity share of GHG emissions” for joint
ventures, partnerships or joint operations that are proportionally consolidated as
part of its scope 1 and scope 2 emissions. 54 This approach is consistent with
accounting principles and the presentation in financial statements. The entity
would be reporting its interest in the partnership, arrangement, or joint operation
for both financial reporting and GHG reporting.
Operational control
Operational control is held by the entity that has the authority to introduce and
implement operating policies — whether explicitly or implicitly through equity
interests, ownership agreements, or other contractual arrangements — for an
entity, asset, or operation during the reporting period.

51
GHG Protocol, Corporate Standard, page 19.
52 GHG Protocol, Scope 3 Standard, page 52.

It is expected that except in very rare circumstances, if the company or one of its
subsidiaries is the operator of a facility, it will have the full authority to introduce
and implement its operating policies and thus has operational control. …
It should be emphasised that having operational control does not mean that a
company necessarily has authority to make all decisions concerning an operation.
For example, big capital investments will likely require the approval of all the
partners that have joint financial control. Operational control does mean that a
company has the authority to introduce and implement its operating policies.
When an entity, asset, or operation is consolidated by a reporting entity under

financial accounting standards, the consolidating entity will have financial control.
Typically, if a reporting entity has the right to direct the financial decisions which
most significantly affect the economics of the entity, asset, or operation, it will also
have the full authority to introduc and implement operating policies.
Determining which entity has operational control, however, may be more difficult
for complex ownership or operational structures, including non-consolidated
arrangements. Further analysis will also be required when the reporting entity is
not the operator of the entity, asset, or operation, and instead contracts with
another party to perform certain services, including operating activities, on behalf
of the owner(s) or investor(s).
Accordingly, to determine which party has operational control of a complex

structure or arrangement, the reporting entity should perform an assessment of
which party has the authority to direct the operations of the entity, asset, or
operation. As noted in the excerpt, the authority to direct the operations does not
necessarily mean that the entity can make all operating decisions (for example, an
entity may have operational control even when approval of capital and operating
budgets and other similar decisions is required from another party).
Because the determination of organisational boundaries is foundational to GHG

emissions reporting, questions may arise in applying the guidance to different
types of ownership arrangements. In particular, the application of operational
control may require judgement in various scenarios as further discussed in
frequently asked questions included in this section.
Question SRG 7-13
Would an entity applying the GHG Protocol operational control approach always
have operational control over entities, assets, and operations in its consolidated
financial statements?
PwC response
It depends. An entity typically has both operational and financial control over the
entities, assets, and operations in its consolidated group as determined by
applicable financial accounting standards (for example, ASC 810, Consolidation,
or IFRS 10 Consolidated Financial Statements). The entities, assets, or
operations are included in the consolidated financial statements because the
reporting entity has the right, as the owner, to direct the financial decisions which
most significantly affect its economics. Further, ownership of the entity, asset, or
operation typically also provides the reporting entity with the authority to introduce
and implement operating policies, and thus would also provide operational
control. See SRG 7.3.2.

There are structures or arrangements, however, where a party other than the
owner of the equity interests may have operational control through a contractual
arrangement. This may be the case, for example, for an entity consolidated under
the variable interest entity model under US GAAP. Under the operational control
approach, the party with the authority to make operating decisions during the
reporting period would report 100% of the emissions related to the entity, asset, or
operation as part of its scope 1, scope 2, and scope 3 emissions, as applicable.
Further, if it does not have operational control, the equity or asset owner would
disclose material emissions associated with its investment in the entity as part of
its scope 3 category 15 emissions and would not report the emissions of such
entity, asset, or operation as part of its scope 1 and scope 2 GHG emissions.
Refer to Question SRG 7-14 below for further considerations and indicators of
operational control when evaluating complex structures and contractual
arrangements. In addition, note that the guidance is different for reporting under
ESRS as discussed in SRG 7.3.3.
Question SRG 7-14
What are the key factors and indicators when assessing whether an entity has
operational control?
PwC response
The evaluation of operational control should start with (1) identifying the relevant
operating policies and decisions which most significantly affect the operations of
the entity, asset, or operation and (2) determining which entity has the right to
implement those policies and control those decisions.
In many cases this will be a straightforward evaluation but for entities, assets, or
operations with multiple parties involved, this assessment will require
consideration of contractual rights within operating or other agreements. When the
contractual arrangements specify one party with the full authority to implement
operating policies, this party will have operational control. When the contractual
arrangements, however, do not explicitly specify the party with the full authority to
make operating decisions, the reporting entity should consider relevant factors
based on facts and circumstances.
For example, we believe entities may consider the non-exhaustive list of indicators
in Figure SRG 7-13 in assessing which entity has operational control. The
absence of one indicator would not necessarily lead to the conclusion that an
entity does not have operational control.
Figure SRG 7-13

Factors to consider in assessing operational control
Factor Considerations
Holding the operating With respect to the criteria for determining operational control, the Corporate
license Standard states, “This criterion is consistent with the current accounting and
reporting practice of many companies that report on emissions from facilities,
which they operate (i.e., for which they hold the operating licence).” 56 ESRS E1
AR 40 includes the same indicator. Accordingly, for entities, assets, or
operations that require an operating licence — for example, facilities in more
carbon-intensive and industrial industries — holding the licence to operate may
be a strong indicator of operational control.

Factor Considerations
Responsibility or liability For certain high emitting industries — for example, energy, utilities, and
for legal and contractual transportation — the operator of a large asset or facility is required to report
obligations regarding emissions information and/or comply with emission limits to operate within a
emissions jurisdiction (for example, EU ETS or reporting to U.S. EPA). The party with these
responsibilities is usually the operator. This would also be a strong indicator of
operational control.
Ready access to the data Control over the systems that produce emissions data as well as access to the
needed to estimate the data necessary to calculate or measure GHG emissions from an asset or
GHG emissions operation is another indicator of the entity with the authority to direct the
operation of those assets.
Authority to introduce The authority to implement operating policies is foundational to the

operating policies and demonstration of operational control. 57 The full authority to introduce operating
make operating policies and direct operating activities generally means making day to day
decisions operating decisions although the significance may differ based on the nature of
the entity, asset, or operations. Examples of decisions may include:
□ determining the fuel provider or energy provider
□ choosing the vendors for or the type of equipment or machinery
□ deciding how and when to run machinery or equipment
These decisions may be performed by a party with total autonomy or may be
performed on behalf of another party. Determining who has the right to control
these decisions must be carefully evaluated within contractual arrangements.
Lease arrangements A lease is an arrangement that conveys the right to control the use of an
when the entity is the identified asset during the lease term. Specifically, a lease gives a lessee the
lessee right to direct the use of the asset and to substantially all the economic benefits
from the use of such asset during the lease period. See SRG 7.4.2 for further
discussion.
The entity with operational control would include 100% of the GHG emissions
associated with the relevant entity, asset, or operation within its GHG emission
inventory, irrespective of its ownership percentage. 58
Question SRG 7-15
When evaluating which entity has the ‘full authority to introduce and implement
operating policies’ when assessing operational control, should contractual kick-out
and removal rights be considered?
PwC response
Evaluating which entity has operational control may be complex, particularly when
there are complex ownership or operational structures, including non-consolidated
arrangements, potentially resulting in multiple parties which hold some control.
For example, a question may arise in the following fact pattern:
□ two parties form a joint venture (JV) to operate an asset
□ they establish an operating agreement whereby one of the joint venture

partners has the authority to assign and delegate a third-party operator


□ the JV partner also has the authority to replace the third-party operator without
cause (that is, they hold substantive kick out rights)
□ the third-party delegated operator performs day to day operations and has the
authority in the agreement to introduce and implement operating policies
subject to approval of capital and operating budgets by the JV partners
In such situations, it may be difficult to determine which party has the full authority
to introduce and implement operating policies. As such, additional analysis may
be needed to determine which party has operational control.
In performing this analysis, we believe it is important to consider the differences

between financial control and operational control in the GHG Protocol. The GHG
Protocol states:
It is expected that except in very rare circumstances if the company or one of its
subsidiaries is the operator of the facility, it will have the full authority to introduce
and implement its operating policies and thus operational control. …
It should be emphasized that having operational control does not mean that a
company necessarily has authority to make all decisions concerning an operation.
For example, big capital investments will likely require the approval of all of the
partners that have joint financial control.
It further states that this guidance is in line with the current practice of many
companies that report emissions from facilities which they operate (that is, hold
the operating license). In contrast, many financial reporting and consolidation
concepts (for example, ASC 810 and IFRS 10) use the existence of substantive
kick-out or removal rights as the determining factor for consolidation accounting
conclusions. Given that the GHG Protocol distinguishes between the concepts of
financial and operational control and highlights different considerations, we
believe an entity may reach different conclusions about financial and operational
control for some structures.
As such, in applying the operational control approach, in situations where there

are conflicts between the holder of substantive contractual rights and the actual
operator of the asset or operation, we believe priority should be placed on the
day-to-day operating decisions (often referred to as ‘boots on the ground’). For
example, in the JV outlined above, the delegated operator presently has the
authority and is actively implementing operating policies/decisions. Thus, this
entity has operational control during the reporting period. The operator would
retain operational control until the operator is replaced, either because the
contract expires or the JV partner with substantive kick-out rights exercises those
rights.
Contractual arrangements and rights within them need to be evaluated to

determine the nature of the activities and ensure they are representative of true
operating activities and decisions. The existence of such substantive kick out
rights, however, do not demonstrate operational control and would not supersede
the authority granted to a delegated operator presently operating the asset or
operation.

Question SRG 7-16
What is the impact of using a service provider?
PwC response
A service provider may be hired on behalf of an asset owner or, more commonly,
investors in an unconsolidated subsidiary or associate. The presence of a service
provider may make it more complex to determine which entity has operational
control. In such cases, the reporting entity will need to consider the nature of the
services and the contractual arrangements. Specifically, the reporting entity
should assess whether the service provider performs significant operating
activities such that the service provider has the authority to establish the operating
policies and direct the use of the asset or operations during the reporting period.
This may lead to the conclusion that the service provider has operational control.
This fact pattern may be more common in certain industries or types of
arrangements.
In evaluating operational control, however, reporting entities should consider the

nature of the service arrangements: not every agreement labeled an ‘operating’
or ’operating and maintenance’ agreement provides operational control. These
agreements could provide rights to perform minor maintenance or other activities
that would not be deemed key operating decisions for the asset or facility.
Accordingly, reporting entities must consider the nature of the entity, asset, or
operation, to identify the key operating decisions and which party has the authority
to direct those operating decisions and implement operating policies.
See also Question SRG 7-15 for discussion of how substantive kick-out rights
should be considered in the operational control assessment.
7.3.3 Establish the organisational boundary — ESRS
ESRS provide overall guidance about the entities, assets, and operations to be
included in an entity’s sustainability reporting in ESRS 1 General requirements,
paragraphs 62–67. This guidance is also the foundation for determining the
organisational boundary for reporting of greenhouse gas emissions. Further, an
entity’s sustainability reporting includes its ‘own operations’ and its upstream and
downstream value chain. Distinguishing between an entity’s own operations and
its value chain is important for purposes of GHG reporting because it will affect the
classification of emissions among the scopes (see SRG 7.4). See SRG 3.3 for
further information about the determination of an entity’s own operations.
As summarised in Figure SRG 7-14, the reporting entity will follow a two-step
approach in determining the organisational boundaries for reporting GHG
emissions:
Figure SRG 7-14

Summary of organisational boundary approach under ESRS
Entities, assets, and

operations Organisational boundary under ESRS
Consolidated accounting □ In accordance with ESRS 1 paragraph 62 the starting point for sustainability
group reporting is the financial statements; this is consistent with the ‘financial
control approach’ of determining the organisational boundaries
□ The reporting entity would include 100% of scope 1, scope 2, and scope 3
emissions from consolidated entities or subsidiaries in its GHG inventory,
irrespective of the percentage ownership of these entities

Entities, assets, and
operations Organisational boundary under ESRS
Associates, joint □ Reporting of the emissions will depend on whether the reporting entity has
ventures, and operational control
unconsolidated
□ When the reporting entity has operational control, the associates, joint
arrangements
ventures, and unconsolidated arrangements are part of ‘own operations’;
100% of scope 1, scope 2, and scope 3 emissions will be included as part of
the reporting entity’s emissions inventory
□ When the reporting entity does not have operational control, its interests
may be reported in the applicable scope 3 categories
Other relationships □ The evaluation of operational control is not limited to associates, joint
ventures, and unconsolidated arrangements but could include other
relationships (see Question SRG 7-20)
ESRS E1 paragraph 50 requires a reporting entity to disaggregate its scope 1 and

scope 2 emissions between the consolidated accounting group and investees
such as associates, joint ventures, and unconsolidated arrangements. See further
discussion in the following sections.
Consolidated accounting group
Consistent with the broader guidance for sustainability reporting, an entity’s

financial statements are the starting point for identifying the entities, assets, and
operations included in its organisational boundaries for greenhouse gas emissions
reporting. 60
No assessment of control is required for entities, assets, and operations included

in the consolidated reporting group. Further, as confirmed in the ESRS-ISSB
Standards: Interoperability Guidance, the disclosure of emissions from the
consolidated group is consistent with the application of the financial control
approach.
Excerpt from ESRS-ISSB Standards: Interoperability Guidance, footnote 7 61
An entity that is required to apply ESRS E1 is expected to comply with the

guidance of the GHG Protocol in disclosing the emissions of the consolidated
group under the financial control approach (see paragraph 50(a) of ESRS E1)
See further discussion in Question SRG 7-10.
Associates, joint ventures, and unconsolidated arrangements
ESRS E1 also requires an entity to report emissions from investees such as

associates, joint ventures, and unconsolidated arrangements based on whether
the reporting entity has operational control.
ESRS E1 paragraph 46
When disclosing the information on GHG emissions required under paragraph

44, the undertaking shall refer to ESRS 1 paragraphs from 62 to 67. In principle,
the data on GHG emissions of its associates or joint ventures that are part of the
undertaking’s upstream and downstream value chain (ESRS 1 Paragraph 67) are
60
ESRS 1 General requirements, paragraph 62.
61 ESRS–ISSB Standards: Interoperability Guidance, footnote 7, page 11.

not limited to the share of equity held. For its associates, joint ventures,
unconsolidated subsidiaries (investment entities) and contractual arrangements
that are joint arrangements not structured through an entity (i.e., jointly controlled
operations and assets), the undertaking shall include the GHG emissions in
accordance with the extent of the undertaking’s operational control over them.
When an entity concludes that it does have operational control of an entity or

arrangement outside of its consolidated group, it will include 100% of the GHG
emissions in its reported scope 1, scope 2, and scope 3 emissions, as
applicable. See also discussion of reporting of leases in SRG 7.4.2.
Excerpt from ESRS E1 AR 40
When preparing the information for reporting GHG emissions from its associates,
joint ventures, unconsolidated subsidiaries (investment entities) and contractual
arrangements as required by paragraph 50, the undertaking shall consolidate
100% of the GHG emissions of the entities it operationally controls.
Further, ESRS E1 provides guidance for reporting emissions when the entity does
not have operational control as follows:
Excerpt from ESRS E1 AR 46(h)(iii)
For each significant Scope 3 GHG category, disclose the reporting boundaries
considered, the calculation methods for estimating the GHG emissions as well as
if and which calculation tools were applied. The Scope 3 categories should be
consistent with the GHG [Protocol] and include: …
iii. Scope 1, 2 and 3 GHG emissions from associates, joint ventures,
unconsolidated subsidiaries (investment entities) and joint arrangements for which
the undertaking does not have operational control and when these entities are
part of the undertaking’s upstream and downstream value chain.
Thus, the emissions from associates, joint ventures, unconsolidated subsidiaries

(investment entities), and joint arrangements over which the entity does not have
operational control would be reported as part of the entity’s scope 3 emissions.
Depending on the reporting entity’s relationship with these entities and
arrangements, the related emissions will either be classified as part of the
appropriate scope 3 category or as part of its emissions in scope 3 category 15
(investments) (or both, see Question SRG 7-35 in SRG 7.7.1.3). 62 See discussion
of the application of operational control under ESRS in Question SRG 7-17.
Question SRG 7-17
How should an entity evaluate operational control when reporting under ESRS?
PwC response
Commission Delegated Regulation (EU) 2023/2772, Annex II (ESRS Annex II),
Table 2 ‘Terms defined in the ESRS’ includes a list of acronyms and glossary of
terms used in ESRS. ESRS Annex II Table 2 defines operational control as
follows:
62 ESRS E1 AR 46(h)(iii).

Excerpt from ESRS Annex II Table 2
Operational control over an entity, site, operation or asset is the situation where
the undertaking has the ability to direct the operational activities and relationships
of the entity, site, operation or asset.
On 31 May 2024, EFRAG released IG 2 Value chain. As noted in EFRAG IG 2

paragraph 41, the definition of operational control in ESRS aligns with the GHG
Protocol definition of operational control. 63 This interpretation is consistent with
guidance issued by the GHG Protocol in its resource published comparing the
GHG Protocol to other regulatory climate disclosure rules, including the
frameworks and standards discussed within this chapter. 64 Refer to 7.3.2.2 for
further discussion of the evaluation of operational control, including indicators
when evaluating whether a reporting entity has operational control of entities
outside the consolidated group (as defined in ESRS E1 paragraph 46).
Question SRG 7-18
When applying ESRS, how should an entity report emissions from associates,
joint ventures, and other investees accounted for using the equity method of
accounting (IAS 28 and ASC 323)?
PwC response
Entities accounted for using the equity method are not part of the consolidated
group and are not under the reporting entity’s financial control (see Question SRG
7-11). Instead, these types of entities should be evaluated for operational control
under ESRS E1 paragraph 46.
Question SRG 7-19
When applying ESRS, how should an entity report GHG emissions associated
with ‘joint operations’?
PwC response
An entity may have arrangements for which its financial statements reflect its
proportionate share of the assets, liabilities, income, and expenses of an entity,
site, operation, or asset. This may include, for example, jointly controlled assets,
jointly controlled entities, and joint arrangements classified as joint operations
under IFRS 11 as well as undivided interests accounted for following the
proportionate consolidation method under US GAAP. We refer to these
arrangements collectively as ‘joint operations’ in this guide.
EFRAG IG 2 addresses the GHG emissions associated with joint operations as

follows:
EFRAG IG 2 paragraph 51
Furthermore, for IFRS preparers, any assets, including the undertaking’s share of
any assets held jointly in joint operations (defined in IFRS11) or its liabilities,
including its share of any liabilities incurred jointly in joint operations (defined in
IFRS 11) will be part of the balance sheet for financial reporting purposes, i.e.,
included in disclosures under paragraph 50(a). In addition, where the reporting
undertaking has operational control over its joint operators’ (defined in IFRS 11)
63 EFRAG IG 2 Value chain, page 14.

64 Overview of GHG Protocol Integration in Regulatory Climate Disclosure Rules, page 9.

assets, the GHG emissions arising from this will be included in scope 1 and 2
under ESRS E1 paragraph 50(b).
Although this is specific to entities reporting in accordance with IFRS Accounting

Standards, we believe the same guidance would apply to entities reporting under
US GAAP for purposes of their financial reporting. Consistent with ESRS E1
paragraph 50(a), a reporting entity’s scope 1, scope 2, and scope 3 emissions
would include emissions related to its proportionate share of assets, liabilities,
income, and expenses reported in the financial statements.
A reporting entity would also be required to apply the guidance in ESRS

paragraph 50(b) to the portion of the joint operation that is not proportionally
consolidated in its financial statements. If it has operational control, it would
include 100% of the scope 1, scope 2, and scope 3 emissions. If, however, the
reporting entity does not have operational control, it would only reflect the portion
of the scope 1, scope 2, and scope 3 emissions related to its proportionate share
of assets, liabilities, income and expenses reported in the financial statements.
Question SRG 7-20
When applying ESRS, is the reporting entity required to consider operational

control for relationships beyond associates, joint ventures, and unconsolidated
arrangements?
PwC response
EFRAG IG 2 indicates that the evaluation of operational control does not apply
only to the entities listed in ESRS 1 paragraphs 46 and 50(b).
ESRS E1 (paragraph 50 (b)) requires disclosing the Scope 1 and 2 emissions of

undertakings under operational control separately from the ones related to the
consolidated group (presented following ESRS E1 paragraph 50 (a)). The latter
correspond to the outcome of the financial control approach in the GHG Protocol.
Please note that a literal reading of paragraph 50(b) may make it seem as if this is
only applicable to investees (associates, joint arrangements and unconsolidated
subsidiaries, etc.) under operational control but this is not the intention. GHG
emissions of entities, assets and sites under operational control but without
financial control (or without investment relationship) will also be included in the
disclosure under paragraph 50(b).
Thus, although this is not full application of operational control (because the
consolidated group is evaluated using financial control), an entity reporting under
ESRS should consider whether and how it should evaluate relationships outside
the consolidated group for potential operational control for purposes of GHG
reporting.
Question SRG 7-21
What if control is temporary (for example, the operator will change in the
upcoming year)?
PwC response
ESRS E1 AR 40 states “When the undertaking has a contractually defined part-
time operational control, it shall consolidate 100% of the GHG emitted during the
time of its operational control.” EFRAG IG 2 provides clarifying guidance as
follows:

When the reporting undertaking is the operator of the activities during a certain
phase of the production process and its partner is the operator in another phase,
the reporting undertaking would report its scope 1 and 2 of the GHG emissions
that pertain to the phase that it operationally controls.
Consequently, a reporting entity should report 100% of the GHG emissions for the
period over which it had operational control. This guidance also further supports
the idea that the entity with actual operational control for the period should report
the GHG emissions.
While no such explicit guidance is included in the IFRS Sustainability Disclosure

Standards or the GHG Protocol, we believe the principles would apply when
reporting under these standards in situations in which an entity has only
temporary operational control.
7.3.4 Establish the organisational boundary — IFRS Sustainability

Disclosure Standards
Sustainability reporting prepared in accordance with the ISSB standards includes

information about an entity’s own operations and its upstream and downstream
value chain. Further, an entity’s financial statements are the starting point for
identifying the entities, assets, and operations included in a reporting entity’s own
operations. SRG 3.3 and 3.4 provide an overview of the general approach to
determining the boundaries of sustainability reporting.
For purposes of reporting GHG emissions, however, the IFRS Sustainability

Disclosure Standards require entities to apply one of the organisational boundary
approaches in the GHG Protocol, except in limited circumstances. IFRS S2
paragraph 29(a)(ii) states that an entity shall:
IFRS S2 paragraph 29(a)(ii)
Measure its greenhouse gas emissions in accordance with the Greenhouse Gas
Protocol: A Corporate Accounting and Reporting Standard (2004) unless required
by a jurisdictional authority or an exchange on which the entity is listed to use a
different method for measuring its greenhouse gas emissions.
Based on this guidance, an entity would determine its organisational boundaries in

accordance with one of the approaches prescribed by the GHG Protocol, unless a
regulator or exchange requires it to follow another approach. See SRG 7.2.3 for
more information on circumstances when the jurisdictional exception may be
applied.
See SRG 7.3.2 for further discussion of the alternative approaches for determining
an entity’s organisational boundaries under the GHG Protocol (that is, equity
share approach, or financial or operational control approach). In addition, see
specific considerations for evaluating equity method investees and joint operations
in Questions SRG 7-11 and SRG 7-12.

Question SRG 7-22
Are there any specific factors an entity should consider in selecting an

organisational boundary approach for purposes of reporting in accordance with
the IFRS Sustainability Disclosure Standards?
PwC response
An entity reporting in accordance with the IFRS Sustainability Disclosure
Standards is required to use one of the organisational boundary approaches in the
GHG Protocol, unless another approach is required by a jurisdictional authority or
exchange. SRG 7.3.7 provides some general factors to consider in selecting an
organisational boundary approach when applying one of the approaches in the
GHG Protocol. In addition, the ESRS organisational boundary approach would be
acceptable as a measurement methodology required by a jurisdictional authority if
the reporting entity is required to report in accordance with ESRS.
In selecting an organisational boundary approach, however, entities may want to

consider the overall reporting boundaries for ISSB reporting. IFRS S1 paragraph
20 states, “An entity’s sustainability-related financial disclosures shall be for the
same reporting entity as the related financial statements (see paragraph B38).”
Therefore, while we believe any of the GHG Protocol methods for determining
organisational boundaries would be appropriate, the equity share or financial
control approach will most closely align the boundaries for GHG reporting with the
rest of the sustainability report.
Refer to SRG 7.3.2.1 and SRG 7.3.2.2 for further discussion on equity share and
the control approaches included in the GHG Protocol.
7.3.5 Establish the organisational boundary — SEC
The SEC climate disclosure rules require certain SEC registrants — ‘large
accelerated’ and ‘accelerated’ filers — to disclose scope 1 and/or scope 2
emissions, if material (see SRG 2.4.1 for further information on the scope of the
SEC rules). 65 The SEC provides registrants subject to these disclosure
requirements with optionality in selecting the methodology used to determine its
organisational boundaries as follows:
Excerpt from Regulation S-K Item 1505(b)(1)
Describe the methodology, significant inputs, and significant assumptions used to

calculate the registrant’s GHG emissions disclosed pursuant to this section. This
description must include:
(i) The organizational boundaries used when calculating the registrant’s disclosed
GHG emissions, including the method used to determine those boundaries. If the
organizational boundaries materially differ from the scope of entities and
operations included in the registrant’s consolidated financial statements, provide a
brief explanation of this difference in sufficient detail for a reasonable investor to
understand.
In describing the organisational boundary approach, the adopting release provides

additional commentary indicating that entities will be able to leverage existing
frameworks. Specifically, the adopting release states: “a registrant will have
flexibility to use, for example, one of the methods for determining control under the
65 Although the SEC climate disclosure rules generally apply to all domestic registrants and
foreign private issuers, only ‘large accelerated’ and ‘accelerated’ filers are required to
disclose GHG emissions, if material. ‘Large accelerated’ and ‘accelerated’ filer status refers
to the size of the filer as discussed in SRG 2.4.1.

GHG Protocol”. 66 Other frameworks and standards referenced in the adopting
release include the U.S. EPA regulations, ISO 14064-1, and “other standards”,
which may include ESRS and the IFRS Sustainability Disclosure Standards.
Accordingly, we would generally expect an entity to look to these other
established standards and regulations in determining its organisational
boundaries.
Question SRG 7-23
Are there any specific factors an entity should consider in selecting an

organisational boundary approach for SEC reporting?
PwC response
We believe that any of the approaches to determine organisational boundaries
described in this chapter would be appropriate to use for purposes of SEC
reporting, including one of the approaches allowed by the GHG Protocol or the
approach prescribed by ESRS. SRG 7.3.7 provides some general factors to
consider in selecting an organisational boundary approach when applying one of
the approaches in the GHG Protocol.
In addition, for purposes of SEC reporting, an entity may want to consider the
requirements of Regulation S-K Item 1505, which requires registrants to disclose
any material differences between the organisational boundaries used for
calculation of GHG emissions and the scope of entities and operations in the
consolidated financial statements. The equity share or the financial control
approach under the GHG Protocol will result in an organisational boundary that
most closely aligns with the consolidated financial statements, as discussed in
SRG 7.3.2.
In addition, when selecting the approach, a registrant may want to consider

interoperability and whether the approach selected will comply with its other
reporting responsibilities, if any (for example, CSRD and California SB 253 and
SB 261).
7.3.6 Selecting an organisational boundary approach
Although ESRS prescribes the organisational boundaries to be used in reporting

GHG emissions, other frameworks allow entities to apply one of the approaches in
the GHG Protocol or may provide other flexibility in determining the organisational
boundary (see SRG 7.3.3, SRG 7.3.4, SRG 7.3.5 for further discussion of the
requirements across the frameworks).
Accordingly, an entity preparing GHG emissions information in accordance with

the GHG Protocol — or for purposes of reporting in accordance with the IFRS
Sustainability Disclosure Standards, compliance with the SEC climate disclosure
rules, California SB 253 or SB 261, or for other reporting purposes — has
flexibility in selecting among the equity share or one of the control approaches. 67
In selecting an approach, these entities must consider the appropriate approach to
use in their circumstances.
66 SEC, Climate disclosure rules, page 251.

67 The IFRS Sustainability Disclosure Standards require entities to measure GHG
emissions following the GHG Protocol unless “required by a jurisdictional authority or an
exchange on which the entity is listed to use a different method for measuring its
greenhouse gas emissions.” IFRS S2 paragraph 29(a)(ii). See SRG 7.2.3 for further
discussion.

The GHG Protocol Corporate Standard makes no recommendation as to whether

voluntary public GHG emissions reporting should be based on the equity share or
any of the two control approaches, but encourages companies to account for their
emissions applying the equity share and a control approach separately.
Companies need to decide on the approach best suited to their business activities
and GHG accounting and reporting requirements.
Although no approach is recommended, the Corporate Standard highlights which

approach may better align with various factors as outlined in Figure SRG 7-15.
Figure SRG 7-15

Factors influencing selection of an organisational boundary approach following the
GHG Protocol
Equity Financial Operational
Overall factor GHG Protocol description 69 share control control
Reflection of “A company that derives an economic profit from 

commercial a certain activity should take ownership for any
reality GHG emissions generated by the activity. This is
achieved by using the equity share approach,
since this approach assigns ownership for GHG
emissions on the basis of economic interest in a
business activity.”
Government “Since compliance responsibility generally falls to 

reporting and the operator (not equity holders or the group
emissions company that has financial control), governments
trading will usually require reporting on the basis of
programs operational control.”
Liability and “The ultimate financial liability will often rest with  
risk the group company that holds an equity share in
management the operation or has financial control over it.
Hence, for assessing risk, GHG reporting on the
basis of the equity share and financial control
approaches provides a more complete picture.”
Alignment with “The same consolidation rules that are used in  

financial financial accounting should be applied in GHG
reporting accounting. The equity share and financial control
approaches result in closer alignment between
GHG accounting and financial accounting.”
Management “For the purpose of performance tracking, the  

accountability control approaches seem to be more appropriate
and since managers can only be held accountable for
performance activities under their control.”
tracking
Cost of “Companies are likely to have better access to  

administration operational data and therefore greater ability to
and data ensure that it meets minimum quality standards
access when reporting on the basis of control.”


Equity Financial Operational
Overall factor GHG Protocol description 69 share control control
Completeness “Companies might find it difficult to demonstrate  

of reporting completeness of reporting when the operational
control criterion is adopted, since there are
unlikely to be any matching records or lists of
financial assets to verify the operations that are
included in the organisational boundary.”
In selecting an approach, an entity may also want to consider all of its reporting
requirements to allow alignment where possible. For example, the ESRS-ISSB
Standards: Interoperability Guidance highlights that an entity applying the financial
control approach for purposes of compliance with IFRS S2 could then add the
emissions for the entities required by ESRS E1 paragraph 50(b) (that is,
associates, joint ventures, and unconsolidated arrangements determined based
on operational control, see SRG 7.3.3) for purposes of complying with ESRS. 70
See Questions SRG 7-22 and SRG 7-23 for discussion of specific considerations
when selecting an organisational control approach for purposes of reporting in
accordance with the IFRS Sustainability Disclosure Standards or SEC climate
disclosure rules, respectively.
See also SRG 7.3.8.2 for changes in approach upon first time application of the
new standards.
7.3.7 Impact of organisational boundaries approach on reported GHG

emissions — illustrative example
The following example illustrates the effectof the organisational boundary

approach on the amount of scope 1 and scope 2 emissions reported by an entity.
Example SRG 7-1

Applying different organisational boundary approaches to the same GHG
emissions inventory
HoldCo, an SEC registrant headquartered in the United States (US), has
operations worldwide. HoldCo’s organisational structure is as follows:
HoldCo
Reporting entity
100% 25% 60% 50%

Moringa Maple Joint
Eucalyptus
Black Forest Co Manufacturing Inc. Operation
Partners
German consolidated US consolidated Canadian
Australian equity
subsidiary subsidiary proportionately
method investment
consolidated entity
50%
Jacaranda
Ventures
California equity
method investment
Holdco’s interests in its subsidiaries and affiliates are summarised as follows:
70
ESRS-ISSB standards: Interoperability Guidance, section 4.1, page 23.

Entity Considerations
Black Forest □ HoldCo owns 100% of the equity interests in BFC and
Co. (BFC) consolidates for financial reporting purposes.
□ HoldCo has financial and operational control over BFC.
Jacaranda □ HoldCo accounts for its 50% indirect equity interest in JV

Ventures (JV) following the equity method of accounting. Accordingly,
Holdco concludes it does not have financial control of JV.
□ The joint arrangement provides that HoldCo has full
authority to appoint JV’s management personnel, as well
as introduce and implement operating policies; capital and
operating budgets are subject to approval by both
partners.
□ Based on the terms of the joint arrangement, HoldCo
concludes that it has operational control.
Eucalyptus □ HoldCo accounts for its 25% equity interest in EP using

Partners (EP) the equity method of accounting. Accordingly, Holdco
concludes it does not have financial control of EP.
□ The EP management agreement conveys to HoldCo the
right to vote on certain key decisions about the operations
and activities, however, another equity interest holder
operates the facility and has the right to implement the
most significant operating policies.
□ Based on the terms of the management agreement,
HoldCo concludes that it does not have operational control
of EP.
Moringa □ HoldCo owns 60% of the equity interests in MMI and

Manufacturing consolidates it for financial reporting purposes.
Inc. (MMI)
□ HoldCo operates MMI and has full authority to appoint
management personnel, introduce and implement
operating and financial policies, and approve capital and
operating budgets.
□ HoldCo concludes that it has financial and operational
control.
Maple Joint □ HoldCo holds a 50% undivided interest in Maple, together

Operation with an unaffiliated entity.
(Maple)
□ HoldCo accounts for Maple as a joint operation and
reports its interest in the assets, liabilities, income, and
expenses in its financial statements (for example, under
IFRS 11 or following the proportionate consolidation
method of accounting under US GAAP).
□ Based on the terms of the operating agreement for Maple,
HoldCo is the operator of Maple and has operational
control over Maple.
Management expects to have reporting responsibilities using ESRS. In addition,

management is assessing the impact of the organisational boundary alternatives
under the GHG Protocol for purposes of assessing the approach to be used for
the IFRS Sustainability Disclosure Standards, the SEC rules, and California SB
253 and SB 261.

What are HoldCo’s scope 1 and scope 2 emissions under the different
approaches to determining its organisational boundary?
Analysis
It calculates total consolidated scope 1 and scope 2 GHG Protocol emissions

under each of these requirements as follows:
GHG Protocol (note 1)
Equity CO2e Equity Financial Operational

interest Accounting (note 2) ESRS share control control
HoldCo 100% Consolidated 100 100 100 100 100
BFC 100% Consolidated 100 100 100 100 100
JV 50% Equity method 100 100 50 0 100
EP 25% Equity method 100 0 25 0 0
MMI 60% Consolidated 100 100 60 100 100
Maple 50% Proportionally 100 100 50 50 100
consolidated
600 500 385 350 500
Note 1: As discussed above, California SB 253 requires use of the GHG Protocol; the IFRS
Sustainability Disclosure Standards and TCFD also require use of the GHG Protocol unless
a different method is required by another jurisdiction or exchange. Further, the SEC climate
disclosure rules allow an entity flexibility in determining its organisational boundaries using
the approaches under the GHG Protocol, ESRS, or another standard.
Note 2: for purposes of this simplified example, CO2e from each of the entities is presumed
to be the same.
HoldCo determines the amount of scope 1 and scope 2 emissions to report under
each of the organisational boundary approaches as discussed below. Note that
the table is intended to illustrate the effect of the various organisational boundary
approaches on scope 1 and scope 2 emissions. The analysis below also includes
certain scope 3-related considerations. See SRG 7.7 for scope 3 measurement
considerations.
ESRS
In accordance with ESRS, an entity should report emissions of the parent and its
consolidated subsidiaries following the organisational boundaries of the
consolidated financial statements. Thus, reported scope 1, scope 2, and scope 3
emissions will include 100% of the emissions of HoldCo and its consolidated
subsidiaries: BFC and MMI.
Further, GHG emissions of associates, joint ventures, jointly controlled

arrangements and other unconsolidated arrangements are presented based on
operational control (ESRS E1 paragraph 50(b)). Because HoldCo has operational
control of JV, it will include JV’s scope 1, scope 2, and scope 3 emissions as part
of its reported scope 1, scope 2, and scope 3 emissions. In contrast, because
HoldCo does not have operational control of EP, it will not include any of EP’s
emissions in its reported scope 1 and scope 2 emissions. Instead, EP’s GHG
emissions should be considered for reporting as part of HoldCo’s scope 3
emissions because EP is included in Holdco’s value chain.
Additionally, as Holdco has joint control and proportionally consolidates Maple,

Holdco’s respective proportion (50% in this example) of emissions are reflected in
Holdco’s organisational boundary as part of the consolidated group (ESRS E1

paragraph 50(a)). Additionally, as Holdco has operational control over Maple,
Holdco will also include the remaining 50% of Maple’s scope 1, scope 2, and
scope 3 emissions in its emissions reporting (ESRS E1 paragraph 50(b), see SRG
7.10 for reporting considerations). Therefore, 100% of Maple’s emissions will be
reported as part of Holdco’s scope 1, scope 2, and scope 3 emissions (see
Question SRG 7-19).
GHG Protocol — Equity share approach
Under the equity share approach, an entity includes its share of GHG emissions
from entities, assets, and operations based on its share of equity. Therefore, its
scope 1, scope 2, and scope 3 emissions would include 100% of the scope 1,
scope 2, and scope 3 emissions of HoldCo itself and its wholly-owned subsidiary
BFC. In addition, HoldCo’s scope 1, scope 2, and scope 3 emissions would
include 25%, 50%, 60%, and 50% of the scope 1, scope 2, and scope 3 emissions
of EP, JV, MMI, and Maple, respectively.
GHG Protocol — Financial control approach
Under the financial control approach, an entity’s emissions reporting includes

100% of the GHG emissions from entities, assets, and operations that it
consolidates in the financial statements (and thus over which it has financial
control). HoldCo has financial control over BFC and MMI and includes 100% of
their GHG emissions in its reported scope 1, scope 2, and scope 3 emissions as
applicable. Because HoldCo accounts for EP and JV following the equity method
of accounting and does not have financial control, Holdco does not include any of
their emissions in its reported scope 1 and scope 2 emissions; however, it would
need to consider their GHG emissions as part of its scope 3 reporting.
Further, under the financial control approach, an entity’s emissions reporting

would include its equity share of the emissions associated with a jointly-controlled
entity that is proportionately consolidated in the financial statements. Accordingly,
HoldCo includes 50% of Maple’s GHG emissions within its reported scope 1,
scope 2, and scope 3 emissions.
GHG Protocol — Operational control approach
Under the operational control approach, an entity’s emissions reporting includes

100% of the GHG emissions from entities, assets, and operations over which it
has operational control. HoldCo has operational control over its consolidated
subsidiaries as well as JV and Maple and includes 100% of their GHG emissions
in its reported scope 1, scope 2, and scope 3 emissions as applicable. Because it
does not have operational control over EP, HoldCo does not include any of EP’s
emissions in its reported scope 1 and scope 2 emissions; however, it would need
to consider EP’s emissions as part of its scope 3 emissions reporting.
7.3.8 Changes in organisational boundary approaches
An entity may change its approach to determining the organisational boundary to

comply with a new required framework. An entity may also want to voluntarily
change its approach due to a change in circumstances. The effect of changing the
organisational boundary approach under various scenarios is discussed further
below.
7.3.8.1 Mandatory change in organisational boundary approach (for

example, first-time application of ESRS)
The application of ESRS to comply with CSRD requires an entity to follow a

prescribed method for determining the organisational boundary which differs from

those in the GHG Protocol. As a result, an entity may need to change its
organisational boundary approach during first-time application of ESRS.
ESRS 1 provides transitional provisions stating that an entity is not required to

provide prior year information in the first year of application. 71 A reporting entity,
however, may choose to voluntarily provide prior period information. The entity
may only present prior period information side-by-side with the current year
disclosures if it is comparable: this may be the case if the previously reported
amount was prepared on the same basis as the current year or the entity adjusts
the information such that it is comparable to the current year. See discussion of
considerations in disclosing in the first year of application of ESRS in Question
SRG 3-12 in SRG 3.5.5.
7.3.8.2 Voluntary change in organisational boundary approach as a result

of first-time application of new reporting requirements
Many entities are currently providing voluntary reporting using one of the GHG
Protocol approaches to determining the organisational boundary (or a variant
thereof). Given that these approaches are generally accepted or required under
the ISSB standards, the SEC rules, and California SB 253 and SB 261, a question
arises as to whether an entity may elect to apply a new approach at the time of
first-time application of the new requirements.
The first-time application of a new reporting requirement may lead an entity to

change its sustainability reporting methodology in certain areas, including
potentially changing its approach to determining its organisational boundary for
GHG reporting. We believe an entity has flexibility to make changes for first-time
compliance with required reporting, including electing a new approach to
determining its organisational boundary.
Comparative information in the first year of application is generally not required

under the IFRS Sustainability Disclosure Standards, the SEC climate disclosure
rules, and California SB 253 and SB 261. 72 In order to provide prior period
information in the first year of application, the entity would need to meet the
conditions outlined in Questions SRG 3-12 and SRG 3-13 in SRG 3.5.5.
7.3.8.3 Other voluntary changes in organisational boundary approach
After an initial accounting policy has been established — with the exception of
first-time application of new reporting requirements as discussed in SRG 7.3.8.1
and SRG 7.3.8.2 — we believe the determination of the organisational boundary
approach is an accounting and reporting policy that should be applied
consistently. Changes in the organisational boundary approach should be limited
to instances where significant changes in facts and circumstances affect the
transparency and usability of GHG emissions reporting.
Events that may trigger an entity to reassess its organisational boundary approach
may include a significant change in the organisational structure (for example, as a
result of a merger, acquisition, or disposal), a change in the entity’s business
strategy, or changes in the factors outlined in Figure SRG 7-15 as discussed in
SRG 7.3.6.
As with other reporting policy changes, we would expect an entity to consider

whether the change results in accounting and reporting that is more relevant to
the users. This evaluation would be entity-specific and requires an analysis to

72
The SEC climate disclosure rules (Regulation S-K Item 1505(a)(1)) require disclosure of
prior period comparative information in the first year of application if the information has
previously been disclosed in an SEC filing.

ensure the change is justifiable and results in reporting that is representative of
the entity's GHG emissions profile.
If an entity concludes a change is appropriate, it should provide disclosure

including the rationale for the change and why it is more relevant in the
circumstances. Further, entities should consider disclosing that the approach has
changed from prior year, even if comparative information is not presented in the
same report. This will assist users and prevent confusion given the availability of
previously reported information. Entities should also consider the impact of a
change in the approach to organisational boundaries on base-year emissions
(refer to SRG 7.8.2).
Further, note that an entity reporting under ESRS would not be permitted to
change from the approach prescribed in ESRS E1.
7.4 Determine the operational boundaries

Once an entity has established its organisational boundary, it needs to determine
its operational boundary by (1) identifying all sources of GHG emissions within its
organisational boundary and (2) classifying them as either direct (scope 1) or
indirect (scope 2 or scope 3) emissions. An entity’s organisational and operational
boundaries together create the reporting boundary for GHG emissions.
Figure SRG 7-16

GHG reporting boundary
GHG reporting boundary
HoldCo
Reporting entity
Black Forest Co Moringa Manufacturing Inc

German consolidated US consolidated subsidiary
subsidiary
Leased office Company-owned Manufacturing Company-owned

building vehicle fleet facility office building
Operational boundary — direct and indirect sources of emissions
Figure SRG 7-16 provides an example of how the operational boundaries may be
determined for a simple corporate structure (note that this is a portion of the
structure included in Example SRG 7-1). An entity needs to determine the
operational boundaries for all entities within its organisational boundary. The
purpose of determining the operational boundary is to identify the sources of
emissions and classify them as direct (scope 1) and indirect (scope 2 and scope
3) emissions.
In addition to the general guidance for determination of operational boundaries in

SRG 7.4.1, see specific considerations for leased assets in SRG 7.4.2.

7.4.1 Determine operational boundaries
Establishing its operational boundaries requires an entity to develop a

comprehensive understanding of its sources of emissions — including the assets,
groups of assets, or processes within its organisational boundary which generate
emissions.
Excerpt from the Corporate Standard glossary 73
Operational boundaries — The boundaries that determine the direct and indirect
emissions associated with operations owned or controlled by the reporting
company. This assessment allows a company to establish which operations and
sources cause direct and indirect emissions, and to decide which indirect
emissions to include that are a consequence of its operations.
Emissions from sources owned or controlled by the entity are referred to as direct
emissions and are categorised as scope 1 emissions. All other emissions are
indirect (scope 2 and scope 3) emissions. The GHG Protocol defines indirect
emissions as those emissions that are a consequence of the operations of the
entity but occur at sources owned or controlled by another company. Indirect
emissions from purchased electricity, steam, heating, and cooling are categorised
as scope 2 emissions. The remaining indirect emissions generated in the entity’s
value chain are scope 3 emissions. ESRS, the IFRS Sustainability Disclosure
Standards, and the SEC climate disclosure rules also define emissions as scope
1, scope 2, and scope 3 consistent with the definitions in the GHG Protocol. 74
Question SRG 7-24
What is the difference between operational control and operational boundaries?
PwC response
Operational control is one of the approaches outlined in the GHG Protocol to
determine an entity’s organisational boundaries. See SRG 7.3.2.2 for further
discussion of considerations in applying the operational control.
Once the entity has established its organisational boundary following the selected
approach, it will determine its operational boundaries including the identification of
sources of emissions and whether they are classified as direct or indirect.
7.4.1.1 Sources of GHG emissions
GHG emissions may arise from multiple sources, including stationary combustion,
mobile combustion, physical or chemical processing, and fugitive sources and
other chemical reactions. Different business processes, operations and activities
may have similar types of emission sources. For example, a manufacturer may
identify multiple stationary combustion emission sources as a result of the use of
boilers, engines or generators.
A common challenge entities face is developing a comprehensive understanding

of the direct and indirect emissions sources across their operations and business
processes. Developing a holistic understanding of emissions sources underpins
an entity’s ability to ensure its GHG emissions inventory is complete. It requires an
entity to work collaboratively across its business units, as well as with its value
73GHG Protocol, Corporate Standard, page 100.

74
Commission Delegated Regulation (EU) 2023/2772, Annex II; Table 2 ‘Terms defined in
ESRS’; IFRS S2 Appendix A.

chain partners. Figure SRG 7-17 provides examples of some of the primary
sources of greenhouse gas emissions.
Figure SRG 7-17

Examples of sources of GHG emissions
Sources Examples
Stationary Burning of fossil fuels to operate stationary assets (for

combustion example, boilers, furnaces, turbines)
Mobile combustion Burning of fossil fuels to operate company

owned/controlled mobile sources (for example, trucks,
trains, ships, airplanes, buses, and cars)
Physical or chemical Manufacturing or processing of chemicals and

processing materials, (for example, cement, aluminium, adipic
acid, ammonia manufacture, and waste processing)
Fugitive emissions Intentional or unintentional releases, (for example,

equipment leaks; methane emissions from coal mines
and venting; hydrofluorocarbon (HFC) emissions
during the use of refrigeration and air conditioning
equipment; and methane leakages from gas transport)
Although emissions generating activities may vary based on several factors —

including the nature of operations and industry — identifying and classifying all
emissions sources is a critical step in quantifying GHG emissions.
7.4.1.2 Understanding the scopes of emissions
After identifying potential sources of emissions, entities will need to classify them
among scope 1, scope 2, and scope 3 (that is, establish the operational
boundaries).
Scope 1
Scope 1 emission sources may be obvious, like a manufacturing plant with direct
emissions from combustion of fuels to operate its machinery. Others may be less
obvious but are still part of an entity’s direct scope 1 emissions. For example, a
technology company may run large fossil-fuel powered generators as a backup in
case its power supplied from the electricity grid fails. Periodic testing and use of
these generators create emissions that are part of the entity's scope 1 carbon
footprint. See SRG 7.5 for discussion of measurement of scope 1 emissions.
Scope 2
The most common source of scope 2 emissions is purchased electricity. Other

examples of scope 2 emissions include GHG emissions from purchased steam,
heating, and cooling (referred to collectively in the Corporate Standard and this
chapter as ‘purchased electricity’). 75 While identifying scope 2 emissions may
seem relatively easy, determining the source of the purchased electricity — and
whether it is from fossil fuel, nuclear, or renewable sources — for purposes of
calculating and reporting GHG emissions may be complex. See SRG 7.6 for
discussion of measurement of scope 2 emissions.
75GHG Protocol, Corporate Standard, page 25, states, “The term ‘electricity’ is used … as
shorthand for electricity, steam, and heating/cooling”.

Scope 3 (value chain emissions)
All other indirect emissions are categorised as scope 3 or value chain emissions.
Scope 3 emissions are the consequence of the activities of the reporting entity but
occur at sources owned or controlled by another company — for example,
suppliers, manufacturers, distributors, retailers or customers.
Scope 3 emissions are distinguished between upstream and downstream

emissions, depending on the activity from which they are generated:
□ Upstream emissions
Upstream emissions are generated by processes that occur up to the point of
receipt by the reporting entity — for example, manufacturing of purchased
goods or transportation of purchased goods between the manufacturing
facility and the reporting entity.
□ Downstream emissions
Downstream emissions are generated by processes that occur after the
reporting entity completes the activities performed as part of the operations
that it owns or controls — for example, distribution of sold goods between the
reporting entity’s facilities and retailers or use of sold products by the end
consumers.
The Scope 3 Standard further categorises scope 3 emissions into 15 distinct

categories, with 8 categories for upstream emissions and 7 categories related to
downstream emissions. See Figure SRG 7-31 and Figure SRG 7-32 for further
detail of the upstream and downstream scope 3 categories, respectively.
Mapping the value chain
A critical component of creating the inventory of scope 3 emissions is to identify

the entities, assets, or operations that together comprise an entity’s value chain.
Developing the greenhouse gas value chain inventory is accomplished by
mapping the value chain and will depend on the entity’s organisational boundary
approach (see SRG 7.3) and its operational boundaries.
Mapping the value chain is a comprehensive exercise. On 31 May 2024, EFRAG

issued implementation guidance to assist preparers in analysing value chain
activities when preparing sustainability information in accordance with ESRS. 76
See further discussion of mapping the value chain, including the effect of the
EFRAG guidance, in SRG 7.7.
7.4.1.3 Determining operational boundaries — illustrative example
The following example illustrates how a reporting entity may assess its operational
boundaries, including consideration of entities in its value chain.
Example SRG 7-2

Identifying GHG emissions sources
Moringa Manufacturing Inc. (MMI) is a clothing manufacturer that produces T-
shirts using sustainable materials and practices within a manufacturing facility
which it owns and operates. Manufacturing activities performed by MMI
employees on-site include sourcing raw materials, such as cotton, silk and wool
from third-party suppliers, washing, steaming, cutting and sewing fabric, and
packing t-shirts for shipment to third-party retailers who operate on a consignment
basis. MMI has installed back-up generators to mitigate power interruptions and
air conditioning units to maintain stable working conditions within the
76 EFRAG IG 2.

manufacturing facility. MMI uses third-party providers for shipping and distribution
services.
As a first step in identifying emissions for reporting, MMI determines its

organisational boundary using the operational control approach. Based on its
analysis, MMI determines that its own operations fall within its organisational
boundary. In addition, management concludes that its organisational boundary
excludes its distributor, Green Goods Company (GGC) and retailer, Fashion
Fabrics Corporation (FFC), because it does not have operational control over
these entities. MMI will, however, consider the emissions of these entities as part
of its disclosure of its value chain emissions.
After establishing its organisational boundary, MMI identifies and classifies

sources of emissions within its own operations and value chain.
Identifying sources of emissions
MMI identifies the following sources of direct and indirect GHG emissions from its
production and manufacturing assets.
Sources Relevant activities Type
Stationary Combustion of fossil fuels to operate boilers Direct

combustion and generators
Processing Use of chemicals to process and prepare Direct

fabrics for manufacturing
Fugitive Use of refrigerants in air conditioning units Direct
Purchased Combustion of fossil fuels during the Indirect

electricity generation of purchased electricity
Emissions from stationary combustion and processing as well as the fugitive

emissions from refrigerants are direct emissions that would be reported within
scope 1 of MMI’s GHG emissions inventory.
In addition, MMI has scope 2 emissions from purchased electricity used in its
operations. These are indirect emissions generated through the creation of
electricity by sources that are owned or controlled by third party utility providers.
Depending on the extent to which electricity used in manufacturing is purchased
from renewable sources, MMI may have the ability to reduce its scope 2
emissions. MMI could also purchase contracts for emission attribute certificates or
similar contractual instruments to reduce emissions under the market-based
method of calculating scope 2 emissions (see SRG 7.6).
MMI also performs a comprehensive analysis of sources of emissions in its

upstream and downstream value chain (that is, scope 3 emissions), including
emissions associated with its distributor (GGC) and retailer (FFC). For example,
scope 3 emissions may include GHG emissions associated with producing and
transporting the fabric and thread used in manufacturing, employee transportation
(commuting to the manufacturing facility), distribution and sale to its retailer (FFC),
and final disposal of the t-shirts by the end consumer. Note that the value chain
emissions have been significantly simplified for purposes of this example; see
SRG 7.7 for further discussion of scope 3 emissions.
Classifying sources of emissions
After MMI identifies all emissions sources, it must classify those sources among
scope 1, scope 2, and scope 3 emissions for the purpose of its reporting. This

analysis includes classification of emissions from sources within its organisational
boundary as well as emissions from its value chain.
The table includes MMI’s classification of the emissions for purposes of its
reporting. It also includes the classification of the emissions from the perspective
of the distributor and retailer, highlighting differences in classification of the same
emissions depending on the perspective of each entity.
Value chain MMI GGC FFC

activity Description (manufacturer) (distributor) (retailer)
Manufacturing MMI owns and controls the operations Scope 1 and Scope 3 Scope 3
activities and assets used in manufacturing scope 2
activities and therefore they fall within
its organisational boundary. GHG
emissions from these operations are
classified as direct emissions of MMI.
MMI’s manufacturing emissions are
part of GGC and FFC’s value chains,
as both GGC and FFC are purchasing
and distributing MMI’s products. As
such, MMI’s scope 1, scope 2, and
scope 3 emissions need to be
assessed for inclusion in GGC and
FFC’s value chain reporting (scope 3
emissions).
Storage and The assets used in storage and Scope 3 Scope 1 and Scope 3
distribution distribution activities are controlled by scope 2
activities GGC; GGC will classify the related
emissions as part of its scope 1 and
scope 2 emissions.
Emissions associated with storage and
distribution comprise a part of MMI’s
value chain. As such, GGC’s scope 1,
scope 2, and scope 3 emissions need
to be assessed for inclusion in MMI’s
and FFC’s value chain reporting (scope
3 emissions).
Retail activities The assets used in retail activities are Scope 3 Scope 3 Scope 1 and
leased by FFC (see discussion below scope 2
for detailed analysis of the classification
of emissions from leased assets).
Emissions associated with retail
activities comprise a part of MMI’s
value chain. As such, FFC’s scope 1,
scope 2, and scope 3 emissions need
to be assessed for inclusion in MMI’s
and GGC’s value chain reporting
(scope 3 emissions).
In this example, MMI determines that both GGC and FFC fall within its value
chain. While emissions occurring within the organisational boundaries of GGC and
FFC, respectively, are not related to assets owned and controlled by MMI, those
emissions are associated with activities occurring on MMI’s behalf. In short, the
scope 1, scope 2, and scope 3 emissions of GGC and FFC associated with

storage, transportation, sale, and other downstream activities, are the scope 3
emissions of MMI.
MMI may also have additional sources of emissions in its value chain, including
upstream emissions associated with generation and procurement of goods and
services used in MMI’s manufacturing process as well as from its headquarters,
which are beyond the scope of this example.
7.4.2 Classification of GHG emissions from leased assets
The classification of emissions from leased assets is particularly challenging as it

depends on (1) the sustainability reporting framework applied, (2) the
organisational boundary approach applied, and (3) the interaction with the
applicable accounting standards. Because most entities will apply either the GHG
Protocol or ESRS for classification and measurement of emissions, this section
evaluates classification under these frameworks as follows:
□ Evaluating leased assets under the GHG Protocol (SRG 7.4.2.1)
□ Evaluating leased assets under ESRS (SRG 7.4.2.2)
An entity that applies a different approach to determine its organisational

boundaries and classify emissions — for example, an approach in accordance
with the requirements of an exchange or regulator as permitted under the IFRS
Sustainability Disclosure Standards — should assess lease classification under
the principles of the applicable protocol or framework.
7.4.2.1 Evaluating leased assets under the GHG Protocol
The GHG Protocol provides guidance for classification of emissions associated

with leased assets. In accordance with the guidance, as written, the classification
of emissions from leased assets depends on (1) the organisational boundary
approach applied and (2) the type of leasing arrangement (as determined by lease
accounting standards). Further, following the published GHG Protocol guidance,
generally, operational control is held by the entity operating the leased asset (that
is, the lessee).
Subsequent to the publication of the current GHG Protocol standards, however,

the IFRS Accounting Standards and US GAAP changed the accounting model for
lease arrangements. The discussion of leases in the GHG Protocol, however, has
not been updated to reflect the amended terminology and guidance in the IFRS
Accounting Standards and US GAAP. The disconnect between the GHG Protocol
and current IFRS and US GAAP accounting standards may create difficulties for
entities in classifying emissions from leased assets.
The guidance related to classification of emissions from leases under the GHG
Protocol instructs the preparer to “consult an accountant” or the “audited financial
statements” for clarification on the classification of leases. 77 As a result of the
changes to the lease standards, however, the lease types and related definitions
in the GHG Protocol do not align with the current definitions of control and
financial reporting concepts in the IFRS Accounting Standards and US GAAP.
Because the GHG Protocol intended the classification of emissions associated

with leased assets to align with financial reporting, we encourage reporting entities
to classify emissions based on the interaction of (1) the underlying principles
embedded in the GHG Protocol and (2) the current financial accounting
requirements as discussed in this section. Note that Question SRG 7-25 provides
77
GHG Protocol, Corporate Standard, pages 29, 32, and 96; Scope 3 Standard, page 124.

considerations for entities following the GHG Protocol measurement principles
and applying local GAAP for financial reporting.
Reporting emissions related to leased assets — current GHG Protocol

guidance
The GHG Protocol classifies emissions from leases based on the interaction of
the type of lease and the entity’s approach to determination of organisational
boundaries. The GHG Protocol defines lease types as follows:
□ capital or finance lease — A lease which transfers substantially all the risks
and rewards of ownership to the lessee and is accounted for as an asset on
the balance sheet of the lessee78
□ operating lease — A lease that does not transfer risk and rewards of
ownership and is not recorded as an asset on the balance sheet of a lessee 79
In addition, separate guidance is provided for lessees and lessors as summarised

in Figure SRG 7-18:
Figure SRG 7-18

GHG Protocol current guidance — classification of GHG emissions from leased
assets 80
Organisational
boundary
approach Scope 1 Scope 2 Scope 3
Lessee
Equity share and Scope 1 emissions from Scope 2 emissions from Emissions from operating
financial control finance and capital leases finance and capital leases leases, as well as any
additional value chain
emissions associated with
other leased assets 81
Operational control Scope 1 emissions from all Scope 2 emissions from all Any additional value chain
lease types (operating, lease types emissions associated with
finance, and capital leased assets
leases)
Lessor
Equity share and Scope 1 emissions from Scope 2 emissions from Emissions from finance
financial control operating leases only operating leases only and capital leases (note 2)
(note 1) (note 1)
Any additional value chain
leased assets
Operational control None None Emissions from all lease

types (operating, finance,
and capital leases)
78
GHG Protocol, Corporate Standard, pages 96 and 97.
79
GHG Protocol, Corporate Standard, page 100.
80
GHG Protocol, Corporate Standard, pages 31–32; Scope 3 Standard, pages 124–125.
81 Generally, a lessee would report scope 1 and scope 2 emissions from leased assets as if
such assets were its own. Any additional emissions generated in the value chain of the
leased asset would also be reported as scope 3 (for example, upstream emissions
associated with the production of fuel consumed by a leased vehicle).

Note 1: In an operating lease, the lessor retains the physical asset on the statement of
financial position.
Note 2: In a capital or finance lease or sales-type lease, the lessor derecognises the leased
asset and records a net investment in a lease as a receivable on the statement of financial
position.
According to the GHG Protocol, GHG emissions associated with leased assets
recorded on the lessee’s balance sheet (that is, finance/capital leases) would be
classified as part of the lessees scope 1, scope 2, and scope 3 emissions
inventory of the lessee. In contrast, however, the classification of GHG emissions
associated with operating leases — which were not recorded on the lessee’s
balance sheet under IAS 17 and ASC 840 — depends on the organisational
boundary approach selected according to the GHG Protocol as illustrated in
Figure 7-18.
Impact of new lease accounting guidance on classification of

emissions
IFRS 16 Leases and ASC 842, Leases, revised the definition of a lease as well as
the lease classification criteria. Both the FASB and the IASB agreed that the
lessee's right to control the use of the leased asset during the lease term meets
the definition of an asset.In accordance with this guidance, a contract is or
contains a lease if it conveys the right to control the use of an identified asset for a
period of time in exchange for consideration. Control is determined by assessing
whether the customer has (1) the right to obtain substantially all of the economic
benefits from use of the asset and (2) the right to direct its use.
Under both IFRS 16 and ASC 842, a lease provides the lessee with the right to
control the use of the asset as well as the right to substantially all of the related
economic benefits during the term of the lease. Although the lessor legally owns
the leased asset, it typically cannot use the leased asset without lessee consent
during the lease term. Therefore, in general, this control is reflected through the
recognition of a right-of-use asset on the lessee’s statement of financial position.
Lessee emissions reporting
The IFRS 16 and ASC 842 accounting models are predicated on the recognition
of the lessee’s control of the use of the leased asset during the lease term.
Consistent with this control and the related presentation of the right-of-use asset
on the lessee’s statement of financial position, we believe that the lessee should
report scope 1 and scope 2 emissions from the leased asset during the term of
the lease, notwithstanding the type of lease or organisational boundary approach
selected. Any additional emissions generated in the value chain of the lessee from
the leased asset would be reported as scope 3 emissions (for example, upstream
emissions associated with the production of fuel consumed by a leased vehicle).
The recognition of the emissions associated with the right-of-use asset as part of
the lessee’s emissions inventory is consistent with the recognition of a right-of-use
asset on the statement of financial position during the term of the lease,
regardless of the lease type. Further, we believe this approach follows the
principles of the GHG Protocol while also reflecting the updated accounting
standards.
Lessor emissions reporting
In contrast, the revised guidance in IFRS 16 and ASC 842 did not significantly
change the lease accounting model for the lessor. Specifically, for operating
leases, the lessor maintains the physical asset on its statement of financial
position; for finance and sales-type leases, the lessor derecognises the physical
asset and records a lease receivable. Accordingly, we believe the lessor should

continue to follow the guidance for accounting for GHG emissions of leased
assets outlined in the GHG Protocol as reflected in Figure SRG 7-18.
Figure SRG 7-19 summarises the classification of GHG emissions following the
principles of the GHG Protocol and the current lease classification under IFRS
Accounting Standards and US GAAP.
Figure SRG 7-19

GHG Protocol — Classification of GHG emissions from leased assets following
the revised IFRS Accounting Standards or US GAAP
Organisational
boundary
approach Scope 1 Scope 2 Scope 3
Lessee
All approaches Scope 1 emissions from all Scope 2 emissions from all Any additional value chain
lease types lease types emissions associated with
leased assets
Lessor
Equity share and Scope 1 emissions from Scope 2 emissions from Emissions from finance
financial control operating leases only operating leases only and capital leases (note 2)
(note 1) (note 1)
Any additional value chain
leased assets
Operational control None None Emissions from all lease

types (operating, finance,
and capital leases)
Note 1: In an operating lease, the lessor retains the physical asset on the statement of
financial position.
Note 2: In a capital or finance lease or sales-type lease, the lessor derecognises the leased
asset and records a net investment in a lease as a receivable on the statement of financial
position.
We believe the approach summarised in Figure SRG 7-19 best aligns current
accounting standards and the principles within the GHG Protocol.
Accordingly, until additional guidance is issued by the GHG Protocol, we believe

an entity could report GHG emissions from leased assets consistent with the
amended lease accounting standards in IFRS 16 and ASC 842 (as outlined in
Figure SRG 7-19). Other approaches may be acceptable (for example, the
approach outlined in the GHG Protocol as summarised in Figure SRG 7-18). Note,
however, that there will be challenges for IFRS reporters in following the prior
guidance as lessees reporting in accordance with the IFRS Accounting Standards
no longer classify leases as operating and finance leases. Further, although US
GAAP reporters still nominally record operating and finance leases, the substance
of an operating lease for the lessee no longer completely aligns with the
definitions used in the GHG Protocol.

Question SRG 7-25
How should local GAAP reporting entities report emissions associated with leases
when reporting following the GHG Protocol (for example, for compliance with the
IFRS Sustainability Disclosure Standards or California SB 253)?
PwC response
Some entities may follow local financial reporting standards with definitions of a
lease that do not align to the new IFRS and US GAAP guidance. In these cases,
entities should follow the general framework for classifying emissions associated
with leases based on the organisational boundary approach applied (equity share,
or one of the control approaches), and the interaction with the applicable
accounting standards.
Accordingly, when reporting in accordance with the GHG Protocol, for entities
following local GAAP, reporting GHG emissions for leases would generally be
expected to follow the guidance summarised in Figure SRG 7-18.
7.4.2.2 Evaluating leased assets under ESRS
ESRS E1 prescribes a specific organisational boundary approach which requires

a reporting entity’s emissions inventory to include the scope 1, scope 2, and
scope 3 emissions from (1) its consolidated accounting group as well as the from
unconsolidated entities, assets, and (2) operations over which it has operational
control (ESRS E1 paragraph 46) (see SRG 7.3.3 for further discussion).
As discussed above, the accounting for operating leases under IFRS 16 and ASC
842 requires a lessee to recognise a right-of-use asset on its consolidated
statement of financial position. Depending on lease type, the lessor recognises
either a finance lease receivable or the physical asset. As such, we would expect
both lessees and lessors reporting under IFRS 16 and US GAAP to include
emissions from the right-of-use or physical leased assets, respectively, within their
organisational boundaries as part of their scope 1 and scope 2 emissions.
Figure SRG 7-20 summarises reporting of lease-related emissions for entities

reporting in accordance with ESRS that prepare their financial statements under
either the IFRS Accounting Standards or US GAAP. See Question SRG 7-26 for
discussion of reporting under ESRS for entities that prepare their financial
statements following local GAAP.
Figure SRG 7-20

ESRS classification of GHG emissions from leased assets for entities following
IFRS Accounting Standards or US GAAP
Lease type Scope 1 Scope 2 Scope 3
Lessee
All leases Scope 1 emissions from all Scope 2 emissions from all Any additional value chain
lease types lease types emissions associated with
leased assets
Lessor
Operating leases Scope 1 emissions Scope 2 emissions Any additional value chain
(note 1) emissions associated with
leased assets

Lease type Scope 1 Scope 2 Scope 3
Finance or sales None None Any value chain emissions

type lease (note 2) associated with the lease
(for example, downstream
leased assets)
Note 1: When there is a leased asset recognised on the balance sheet of the lessor (for
example, in an operating lease arrangement), emissions reported for such arrangement
would be considered in the lessor’s scope 1, scope 2 and scope 3 emissions inventory.
Note 2: When there is no leased asset recognised on the balance sheet of the lessor (for
example, in a finance lease arrangement when lessor derecognises leased asset and
records net investment in a lease as a receivable), emissions reported for such
arrangement would be considered in scope 3.
Further, we would expect an entity to follow the same approach if it prepares its
financial statements under local GAAP as discussed in Question SRG 7-26.
Question SRG 7-26
How should local GAAP reporting entities report emissions associated with leases
when reporting GHG emissions under ESRS?
PwC response
Although the accounting may vary under local GAAP, we believe the recognition
of emissions associated with leased assets will be the same under ESRS,
irrespective of the accounting model applied.
Under certain local GAAPs, a right-of-use asset for the lessee is not recognised.
In this case, however, we believe the lessee should assess the assets under the
operational control model as part of the requirement under ESRS E1 paragraph
46. Specifically, ESRS defines operational control as “the situation where the
undertaking has the ability to direct operational activities and relationships of the
entity, site, operation or asset”. 82 Because the lessee directs the use of the asset
(and its operating activities) during the lease term, it would have operational
control. Accordingly, it should classify the associated emissions as part of its
scope 1, scope 2, and scope 3 emissions inventory.
The view that the lessee should assess the assets under operational control is
also supported by implementation guidance in EFRAG IG 2.
EFRAG IG 2 paragraph 51 83
ESRS E1 (paragraph 50 (b)) requires disclosing the Scope 1 and 2 emissions of

undertakings under operational control separately from the ones related to the
consolidated group (presented following ESRS E1 paragraph 50 (a)). …
Please note that a literal reading of paragraph 50(b) may indicate that it is only
applicable to investees (associates, joint arrangements and unconsolidated
subsidiaries, etc.) under operational control. We believe that this is not the
intention. Disclosures under this paragraph should include GHG emissions from
all entities, assets or operations under operational control.
The lessor would also recognise the emissions as scope 1 and scope 2 where it
recognises a leased asset on its statement of financial position. In cases,
82
Commission Delegated Regulation (EU) 2023/2772, Annex II.
83EFRAG IG 2, page 15.84 MMBTu is defined as ‘one million British thermal units’ and is
the common unit used to measure heating content of natural gas.

however, where the lessor recognises its interest in the asset as a finance lease
receivable, it would record all emissions related to the leased asset as scope 3
because it does not have operational control. Other approaches may be
acceptable.
7.5 Scope 1 measurement

Once an entity establishes its organisational and operational boundaries, it may
begin the process of aggregating data and calculating greenhouse gas emissions
from its operations. This section discusses the calculation of scope 1 emissions.
See SRG 7.6 and SRG 7.7 for information on the calculation of scope 2 and
scope 3 emissions, respectively.
Scope 1 emissions represent direct GHG emissions from sources owned or

controlled by the entity. Although each entity may have a slightly different process,
the general process for calculating scope 1 emissions involves three steps as
depicted in Figure SRG 7-21:
Figure SRG 7-21

Three steps to calculate scope 1 emissions
Measure and calculate emissions from various sources
(1) Select (2) Collect activity (3) Calculate and

measurement data and choose aggregate emissions
approach emission factors for reporting
Prior to calculating scope 1 emissions, an entity needs to develop a complete list

of emission sources. Once all sources of scope 1 emissions have been identified,
the next step is to determine whether emissions will be measured using direct or
indirect techniques. The Corporate Standard does not provide prescriptive
guidance on which measurement technique should be used. Instead, it states that
an entity should select the approach that will result in the most precise
measurement for each emissions source, taking into consideration the context of
reporting and data availability.
Direct and indirect measurement approaches provide different levels of precision

and usually yield different results when measuring the same GHG emissions.
These differences may lead to lack of comparability in reporting, thus, in selecting
a measurement approach we believe an entity should consider both the accuracy
of approaches available as well as existing industry practice. In addition, entities
reporting in accordance with the IFRS Sustainability Disclosure Standards should
consider the guidance provided in IFRS S2 Appendix B, as discussed in SRG
7.2.3. This guidance may also be helpful for other reporting entities.
Once a methodology to calculate and measure GHG emissions is selected, it

should be applied consistently and transparently disclosed.
7.5.1 Direct measurement
Direct measurement depends on detailed monitoring of GHG emissions data and

requires the use of continuous emissions monitoring (CEM) systems. Continuous
emissions monitoring is typically employed in carbon intensive industries (for
example, fossil fuel power generation facilities, industrial facilities). Well
maintained CEM systems that are subject to frequent calibration and verification
procedures are an effective method to provide accurate, consistent, and reliable
GHG emissions data.

7.5.2 Indirect measurement
When continuous emissions monitoring is not practical or available, greenhouse

gas emissions are often measured by applying indirect measurement techniques
which require (1) activity data, (2) emission factor(s), and (3) global warming
potential(s). Emissions calculated using an indirect measurement technique are
inherently estimates: the accuracy and reliability of the results depend on the
quality of the data and reasonableness of assumptions used.
GHG emissions measured using an indirect measurement approach are generally

calculated using the equation in Figure SRG 7-22:
Figure SRG 7-22

Equation for indirect measurement of scope 1 emissions
=
Global
Emissions
(CO2e)
Activity
data x Emissions
factor(s) x warming
potentials
Note that the same basic formula is used for the indirect measurement of any
GHG emissions, whether scope 1, scope 2, or scope 3. Factors to consider in
developing the inputs into the GHG emissions calculation are discussed in the
following sections.
7.5.2.1 Activity data
Activity data is a quantitative measure of the activity driving GHG emissions. This
input represents the measurement of actual activity or consumption associated
with emissions-producing business processes, such as MMBTu of natural gas
combusted by a boiler or vehicle engine, or the number of miles travelled by a
company-owned vehicle. 84 It is important to properly identify and document the
unit of measure used for the activity data so that it may be appropriately and
consistently translated into the same units of measure as the emission factors.
The methods used to collect activity data may vary widely based on the size of an
entity, the nature of its operations, and its industry and regulatory requirements.
Depending on these factors, an entity may collect data at the level of an individual
asset, group of assets, specified process or facility, or even at the entity level (this
is often the case for smaller, less sophisticated entities). Common methods of
collecting data include the use of metering systems or supplier invoices to
determine the volume of fuel consumed.
Existing systems, processes, and controls are a key input into the design of
the activity data collection process. The level at which activity data is collected
and accumulated will often depend on its availability and existing processes. For
example, if an entity has well-controlled fuel meters and effective processes and
controls to monitor fuel consumption, it may decide to use activity data at the
meter level (that is, individual combustion devices). In contrast, an entity that does
not have meter data but instead gathers and reviews fuel consumption from utility
invoices may conclude that invoice data is the best source for GHG emissions
calculations. Entities may also need to develop estimation techniques for data that
is missing or not available on a timely basis (including the considerations in IFRS
S2 Appendix B, as applicable).
In some cases, specific methodologies for collecting, measuring, and aggregating

activity data may be prescribed by an environmental regulator (for example, the
MMBTu is defined as ‘one million British thermal units’ and is the common unit used to
84
measure heating content of natural gas.

U.S. EPA). In such cases, the entity should follow the prescribed approach
consistently and ensure it is appropriately disclosed.
7.5.2.2 Emission factors
An emission factor represents the quantity of GHG emissions released per unit of
a specific activity. These factors are usually expressed as the weight of a pollutant
divided by a unit of weight, volume, distance, or duration of the activity emitting
the pollutant (that is, the activity data). An entity may use published emission
factors or may use a calculation methodology to derive tailored emission factors
that would be more representative of its operations. Determining the appropriate
source of emission factors depends on various considerations, including the type
of activity generating the GHG emissions and the availability of associated
emission factors. In addition, in some cases, regulators, standard setters, or users
of the GHG emissions information may direct entities to use a specific source (for
example, sector or jurisdictional data).
Notwithstanding the potentially enhanced accuracy obtained through the use of

tailored emission factors, in current practice, most entities use published emission
factors in their GHG emissions calculations. Obtaining the data to calculate
tailored emission factors may not be practical, and use of published emission
factors substantially simplifies the calculation process. An entity committed to
emission reduction targets, however, may want to consider the use of tailored
emission factors as these may better reflect its reduction efforts.
Selecting and applying emission factors
The GHG Protocol prescribes guidelines for the reporting of seven gases,
consistent with those included in most major GHG emission reduction schemes. A
separate emission factor — reflecting the relative pollution rate of each gas — is
applied to each type of greenhouse gas emitted by an activity or source of
emissions. Accordingly, having a clear understanding of which gases are
associated with each emission source is an important step in performing the
calculation. Common sources of emissions and the related greenhouse gases are
illustrated in Figure SRG 7-23.
Figure SRG 7-23

Examples of sources of emissions
Source Description Typical emissions
Stationary Combustion of fuels in □ Carbon dioxide

combustion stationary equipment such
□ Methane
as boilers, furnaces,
burners, turbines, heaters, □ Nitrous oxide
incinerators, engines, and
flares
Mobile Combustion of fuels in □ Carbon dioxide

combustion transportation devices
□ Methane
such as automobiles,
trucks, buses, trains, □ Nitrous oxide
airplanes, ships, barges,
and other vessels
Physical or Emissions from physical or □ Carbon dioxide

chemical chemical processes such
□ Perfluorocarbons
processing as cement manufacturing,
petrochemical processing, □ Nitrogen trifluoride
and aluminium smelting

Source Description Typical emissions
Fugitive Intentional and □ Carbon dioxide

unintentional releases such
□ Sulphur hexafluoride
as equipment leaks and
emissions from coal piles, □ Hydrofluoro-carbons
wastewater treatment, pits,
cooling towers, and gas □ Perfluorocarbons
processing facilities □ Methane
The GHG Protocol calculation tools are typically prepopulated with published
emission factors based on a particular activity and, in some cases, may be
tailored as needed. These tools include calculation methodologies for specific
industry sectors and types of emission sources. In addition, they often include
guidance documents that may be helpful, especially for entities in the earlier
stages of developing their GHG emissions inventory. Entities should perform their
own due diligence prior to using any of these tools (see Question SRG 7-1).
Published emission factors
Published emission factors are generally derived from an analysis of long-term

emissions data sets for general use based on activity type, irrespective of
supplier-specific considerations. These emission factors are published by multiple
sources, including the U.S. Environmental Protection Agency and the International
Energy Agency (IEA), as well as the United Kingdom’s Department for Energy
Security & Net Zero (DESNZ) and Department for Environment Food & Rural
Affairs (DEFRA).
To improve relevance and accuracy of reported scope 1 emissions, an entity

should use the best available emission factors that are most relevant to the period
on which the entity is reporting. In addition, the data quality indicators discussed in
the Scope 3 Standard — which address the representativeness and quality of
data — may be helpful in selecting emission factors. 85 See further information in
Figure SRG 7-35 in SRG 7.7.4.1. These considerations are consistent with the
guidance in ESRS E1 AR 43 which requires use of “suitable” emission factors.
Further, IFRS S2 paragraph B29 requires a reporting entity to elect and apply an
emission factor that best represents the entity’s activities.
Tailored emission factors
The use of published emission factors may under or overstate GHG emissions
because these published emission factors may not be reflective of an entity’s
actual greenhouse gas emissions, particularly if its processes have a different
level of GHG emissions than industry peers. As a result, in some more carbon-
intensive industries, an entity may use other methodologies — for example, fuel
sampling and analysis of the fuels used in stationary combustion sources —
instead of relying on published emission factors. The use of this type of entity-
specific approach is referred to herein as using ‘tailored emission factors’.
Relevant information to develop tailored emission factors associated with

combustion may include:
□ analysis of the fuel used in the combustion process to determine the carbon
content
85
GHG Protocol, Corporate Standard Frequently Asked Questions, question 12. The GHG
Protocol released these frequently asked questions in July 2024 as a supplemental
resource.

□ heat content of a fuel obtained from supplier-provided information
□ analysis of sector-specific emissions data based on industry studies
□ emission rates calculated based on the emitting sources specifications, age,

and condition
Different techniques may be more appropriate depending on the sources of GHG

emissions. For example, for combustion sources, a fuel analysis method using
specific carbon content usually yields the most precise results. The carbon
content impacts the amount of carbon dioxide that is emitted during the
combustion process and can vary depending on factors like the source and quality
of the natural gas. To apply this method, the entity needs to know the actual
carbon content of fuel combusted. In practice, common methods used to
determine the carbon content include sampling of fuel and performing chemical
analysis in a laboratory owned by the reporting entity, engaging third-party
specialists to perform sample testing and chemical analysis of fuel, or obtaining
carbon content data from fuel suppliers.
Once the carbon content of fuel is determined, the entity may determine the
tailored emission factor using the equation in Figure SRG 7-24: 86
Figure SRG 7-24

Sample equation for calculation of a tailored emission factor for CO2 emissions
from fuel combustion
Fuel carbon
=
Tailored 44/12
content
emission
factor for
in units of mass of
carbon to volumes
x ratio of molecular
weights of CO2 and
CO2 carbon
of fuel
The carbon content of fuel is directly related to CO2 emissions; therefore, this
equation for developing a tailored emissions factor for fuel combustion applies to
the calculation of CO2 emissions only. In practice, when using an indirect
calculation technique, entities generally use published emission factors to
calculate GHG emissions associated with other gases (methane and nitrous oxide
in the case of combustion). In addition, the formula in Figure SRG 7-24 is obtained
from the U.S. EPA’s guidance for direct emissions from stationary combustion
sources. Other emission sources and other agencies may require the use of
different formulas for the conversion.
Global warming potential
Every greenhouse gas released into the atmosphere has a different radiative
effect (that is, the degree to which it traps heat within the atmosphere), referred to
as its global warming potential (GWP). GWP is a factor that measures how much
energy one ton of a gas will absorb relative to one ton of CO2 emissions over a
specific timeframe, usually 100 years. The higher the GWP, the more heat the gas
traps in the atmosphere and, therefore, the more that gas contributes to global
warming. While CO2 accounts for most of the volume of the greenhouse gases in
the atmosphere, other gases — such as methane and hydrofluorocarbons — have
much higher GWPs. This distinction is critical as a relatively small volume of GHG
emissions from other gases may become material to the entity’s overall carbon
footprint once converted to carbon dioxide equivalent.
The Intergovernmental Panel on Climate Change (IPCC) is a United Nations body

which “provides regular assessments of the scientific basis of climate change, its
86U.S. EPA, “Greenhouse Gas Inventory Guidance: Direct Emissions from Stationary
Combustion Sources,” Equation 3, page 5.

impacts and future risks, and options for adaptation and mitigation”. 87 The IPCC
published its most recent Guidelines for National Greenhouse Gas Inventories in
2006; these guidelines were refined in 2019 to fill in gaps and address out-of-date
science. 88 The IPCC guidelines categorise emission factors by source and provide
a heat content and conversion factor to arrive at the unit of relevant gases emitted
(for example, carbon dioxide, methane, nitrous oxide). In certain cases, published
emission factors may contemplate and embed the impact of GWP values — in
these circumstances, a separate GWP factor would not need to be applied (see
illustration in Example SRG 7-7).
The IPPC publishes GWP values which are referenced by the GHG Protocol,
ESRS E1, IFRS S2, and various regulatory agencies. 89 These values are
refreshed as part of broader updates prepared during regular assessment cycles.
The IPCC finalised the Sixth Assessment Report (AR6) in March 2023; the IPCC
began its seventh assessment cycle in July 2023. The IPCC Synthesis Report
published on 20 March 2023 provides an overview of the state of knowledge of
climate change based on findings of AR6. 90 The GWP values from the IPCC Fifth
Assessment Report (AR5), however, are still used in some GHG emissions
calculations. 91 For example, these values are included in a summary document
produced by the GHG Protocol, “Global Warming Potential Values”. 92
It should be noted, however, that ESRS E1 AR 39(d) and IFRS S2 paragraph B21
specifically require the use of the GWP values from the latest assessment report.
Further, we believe that preparers should also use the most recent GWP values
when reporting greenhouse gas emissions for other purposes, including reporting
in accordance with the GHG Protocol. See Question SRG 7-27 for considerations
when global warming potentials are embedded in an entity’s selected emission
factors.
Figure SRG 7-25 summarises the common sources of various gases as well as
the associated global warming potentials (or range of potentials as applicable)
based on the GWP values from AR6. 93
Figure SRG 7-25

Summary of global warming potentials by type of gas
Global
warming
Gas Common sources potential
Carbon dioxide Combustion of fossil fuels 1

Physical or chemical reactions from
industrial processes
Incineration of solid waste
Methane Coal mining 27.9

Livestock
Fossil fuels extraction
Natural gas transmission and
distribution
Decay of solid waste in landfills
87 IPCC, “About the IPCC”.

88 IPCC, 2006 IPCC Guidelines for National Greenhouse Gas Inventories and 2019
Refinement to the 2006 IPCC Guidelines for National Greenhouse Gas Inventories.
89
ESRS E1 AR 39(d); IFRS S2 paragraph B21.
90 IPCC, Synthesis Report of the Sixth Assessment Report, March 2023.
91 IPCC, Synthesis Report of the Fifth Assessment Report,2015.
92 GHG Protocol, Global Warming Potential Values.93 IPCC, IPCC AR6 WGI Report, March
2023.
93 IPCC, IPCC AR6 WGI Report, March 2023.

Global
warming
Gas Common sources potential
Nitrous oxide Agriculture 273

Combustion of fossil fuels
Domestic wastewater treatment
Hydrofluorocarbons Production and use of cooling 5–14,600

equipment (for example, refrigerators
and air conditioners)
Perfluorocarbons Aluminium production 7,380–12,400

Leakages of cooling equipment
Nitrogen trifluoride Produced in the manufacture of 17,400

semiconductors and liquid crystal
display (LCD) panels as well as certain
types of solar panels and chemical
lasers
Sulphur Leakages of insulation and fire 24,300

hexafluoride extinguishment materials
As noted in the table, there is a range of global warming potential values for
certain categories of gases, reflecting different types of gases within each
category. Therefore, the GWP used in the calculation of greenhouse gas
emissions should be based on the specific type of gas within a family of gases.
For example, the GHG Protocol Global Warming Potential Values document
includes 19 types of hydrofluorocarbons, each with their own chemical designation
and varying GWPs. Thus, identification of the specific type of gas within a family
of gases will result in more representative reporting.
Question SRG 7-27
Does a reporting entity need to adjust its emission factors if they include
embedded GWPs that are not based on the latest IPCC assessment report?
PwC response
ESRS E1 and IFRS S2 require the use of the global warming potential values
based on a 100-year time horizon from the latest IPCC assessment. We believe
preparers should use the most current information when calculating GHG
emissions for any reporting purposes. In some cases, however, published
emission factors may include embedded GWPs that are not updated to the most
recent assessment report.
IFRS S2 paragraph B22 addresses this issue and provides a specific exception
when a published emission factor includes embedded GWPs.
If an entity uses emission factors to estimate its greenhouse gas emissions, the
entity shall use—as its basis for measuring its greenhouse gas emissions—the
emission factors that best represent the entity’s activity (see paragraph B29). If
these emission factors have already converted the constituent gases into CO2
equivalent values, the entity is not required to recalculate the emission factors
using global warming potential values based on a 100-year time horizon from the

latest Intergovernmental Panel on Climate Change assessment available at the
reporting date.
ESRS do not explicitly address this issue. In evaluating whether to use emission
factors with GWP values that have not been updated to the latest assessment
report, we recommend that an ESRS preparer consider the overall ESRS E1 AR
43 requirement to use “suitable and consistent” emission factors as discussed
above. An entity should also consider the qualitative characteristics of information,
including relevance and comparability of information. If these other factors indicate
that the emission factors with embedded GWPs have not been updated are the
most suitable in the circumstances, we believe they may be used with transparent
disclosure.
All of the frameworks require an entity to provide clear and transparent

disclosures of the sources of emission factors used, why they were chosen, and
any changes to these inputs or assumptions. In accordance with these
requirements, an entity should provide disclosure on the GWPs and emission
factors used, as well as any embedded GWPs and the assessment report from
which they were sourced.
Question SRG 7-28
Is an entity required to use the same set of emission factors for all sources of
emissions?
PwC response
No. Emission factors should be specific to the nature of the activity contributing to
emitting of greenhouse gases. While a reporting entity should strive for
consistency when reporting on its GHG emissions inventory, it is important that it
selects the appropriate emission factors for each activity. Accordingly, the
emission factor selected would be affected by the nature of the activity, as well as
the market and the geographical location. We would, however, expect an entity to
use the same emission factors for the same or similar activities in the same
geographic region and to otherwise look for consistency where appropriate. In
addition, as required by each of the frameworks the sources of emission factors
and the reason for such selection should be disclosed.
Question SRG 7-29
Is an entity required to use the same set of emission factors and GWPs for all
entities and arrangements within its organisational boundary?
PwC response
No. As discussed in Question SRG 7-28, a reporting entity should use emission
factors that are representative of the specific activity. The appropriate emission
factors may also be further affected by the geographical location and market of
the activities and operations. Accordingly, a reporting entity may select different
emission factors depending on the nature of its subsidiaries and operations as
well as their geographical locations and markets. The reporting entity should
consider each activity separately and choose the most appropriate emission
factors in the circumstances. As discussed in Question SRG 7-28, however, we
would expect an entity to use the same emission factors for the same or similar
activities in the same geographic region and to otherwise look for consistency
where appropriate. The emission factors used and the reason for their selection
should also be disclosed, as required by each of the frameworks.

Question SRG 7-30
May an entity use different emission factors in different reporting periods?
PwC response
Yes. A reporting entity should strive for consistency and comparability when
calculating and reporting GHG emissions, however, an entity should use the best
available emission factors that are most relevant to the period for which emissions
are being reported. As a result, a reporting entity will typically select a source and
use the most recent emission factors from that source for each reporting year to
estimate the GHG emissions for a particular activity. We believe an update in
year-over-year emission factors from the same source is part of the normal
reporting cycle and would not require update to previously reported information.
The factors used, however, should be disclosed.
There are circumstances, however, where a reporting entity may determine that it
would be appropriate to change the source of its emission factors for a certain
activity. This decision to change sources is generally driven by changes in
circumstances, such as organisational or structural changes within an entity or the
new availability of better information. ESRS E1 paragraph 39, IFRS S2 paragraph
29(a)(iii), and SEC Regulation S-K Item 1505(b)(1) all require disclosure of
measurement methodologies, inputs and assumptions, including emission factors
as well as the reasons for such selection, and any changes to these items during
the reporting period.
The GHG Protocol also requires disclosure of methodologies, as well as changes

in methodology that trigger recalculation of base year emissions (which we believe
would include a change in the source of emission factors). 94 We would also
generally expect entities reporting under the GHG Protocol to include the
additional disclosures required by the other frameworks.
7.5.3 Scope 1 measurement — illustrative examples
The examples below illustrate the calculation of GHG emissions in a simplified

fact pattern involving one single asset owned and controlled by an entity. The
calculation of greenhouse gases in Example SRG 7-3 is based on published
emission factors, whereas Example SRG 7-4 uses fuel analysis and sampling to
arrive at a tailored emission factor.
Example SRG 7-3

Calculating scope 1 emissions using published emission factors
Moringa Manufacturing Incorporated (MMI) is calculating its 20X1 scope 1
emissions for the purpose of publishing its first sustainability report. MMI operates
a production facility that relies on a natural gas-fired boiler system to generate the
steam used in its production process. Natural gas combustion typically results in
three greenhouse gas emissions: carbon dioxide (CO2), methane (CH4), and
nitrous oxide (N2O).
The boiler system does not include a continuous emissions monitoring system, so
MMI plans to calculate its GHG emissions using the standard formula for indirect
measurement of emissions based on:
□ Activity data
Activity data is the volume of natural gas combusted during operation of the
boiler system during 20X1. MMI obtains this information based on invoices
received from its utility provider. Alternatively, it could obtain this information
94
GHG Protocol, Corporate Standard, pages 25 and 63.

from a specific meter that measures volume of gas combusted, if such meter
was attached to the boiler. Using metered data may result in a more precise
emissions calculation at the specific emissions source level (that is, a boiler in
this example).
□ Published emission factors

MMI obtains emission factors from the “Emission Factors for Greenhouse Gas
Inventories” published by the U.S. EPA. 95 MMI determines this source is
relevant and reliable as its manufacturing facility is located in the United
States. Alternatively, it could have used emission factors published by the IEA
or other countries, as applicable. For the purpose of this example, the
emission factors have not been converted to CO2e and the GWP values are
separately included in the calculation below.
□ Global warming potentials

MMI obtains the global warming potentials from the IPCC’s “Sixth Assessment
Report (AR6)”. 96 MMI obtains the GWPs directly from AR6, in lieu of using the
GWPs from the U.S. EPA document used as the source for its emission
factors, because the U.S. EPA document does not reference the GWPs from
AR6 (the most recent assessment report). MMI makes this update in
accordance with its policy to use the most recently published GWPs available
at the time of reporting.
What are MMI’s calculated carbon dioxide equivalent emissions using published
emission factors?
Analysis
MMI calculates its carbon dioxide equivalent emissions as follows:
(a) (b) (c) (d)=(a)x(b)x(c) (d)/1000
Global
Natural gas Emission warming
burned factor potential Emissions Emissions
kg/MMBTu Metric tonnes
MMBTu (rounded) kg CO2e CO2e
(1) Carbon dioxide (CO2) 100,000 53.06 1 5,306,000 5,306
(2) Methane (CH4) 100,000 0.0010 27.9 2,790 3
(3) Nitrous oxide (N2O) 100,000 0.0001 273 2,730 3
5,311,520 5,312
Based on its analysis, MMI determines that combustion of 100,000 MMBTu of

natural gas in its boiler system results in 5,312 metric tonnes of scope 1 CO2e
emissions. To calculate total emissions from the production facility, MMI would
repeat this process for all sources of emissions identified and would sum the
calculated amounts.
Further, MMI should disclose its policy for selecting emission factors, global
warming potential values, and other inputs.
95 U.S. EPA, “Emission Factors for Greenhouse Gas Inventories”, Table 1 Stationary
Combustion, last modified 5 June 2024.
96 IPCC, Synthesis Report of the Sixth Assessment Report, March 2023.97 GHG Protocol,
Corporate Standard, page 25, states, “The term ‘electricity’ is used … as shorthand for
electricity, steam, and heating/cooling”.

Example SRG 7-4
Calculating scope 1 emissions using tailored emission factors derived from fuel
analysis and sampling
Assume the same facts as Example SRG 7-3 except that MMI decides to apply
the fuel analysis method to develop a tailored emission factor for carbon dioxide to
arrive at a more precise measure of GHG emissions. MMI will continue to use
published emission factors to calculate CH4 and N2O emissions from its natural
gas-fired boiler system (consistent with Example SRG 7-3).
MMI engages a third party to perform the fuel analysis of the carbon content of
natural gas used in its boiler. The third party collects samples of MMI’s natural gas
in accordance with industry standards and performs a laboratory analysis to
determine the concentrations of different components present in the natural gas.
The molecular weight of carbon in natural gas is calculated by adding the
proportionate molecular weights of its components (for example, carbon dioxide,
methane, ethane, propane), based on the gas stream analysis measured through
sampling. After completing its analysis, the third party provides a report which
includes the molar fraction and carbon content of the gases comprising the natural
gas. MMI uses this information to calculate its tailored emission factor for carbon
dioxide as follows:
Molar Carbon
Natural gas component fraction content
Percent LB of carbon per scf
(1) Carbon dioxide (CO2) 1 0.0003
(2) Methane (CH4) 88 0.0269
(3) Ethane (C2H6) 6 0.0037
(4) Propane (C3H8) 5 0.0046
100 0.0355
Standard conversion of scf to MMBTu / 0.001026
Standard conversion of pound (lb) to kilogram (kg) / 2.20462
Kilograms of carbon to MMBTu of fuel 15.6945
Ratio of molecular weights of CO2 to carbon x 44/12
Tailored emission factor 57.5465
MMI converts the carbon content in pound (lb) per standard cubic foot (scf) to
kilogram (kg) per MMBTu and multiplies by the ratio of the molar fraction of
carbon dioxide to carbon to determine the final tailored emission factor. These
calculations are performed using the conversion factors provided in the U.S. EPA
emission factors table.
Note that after combustion, the contribution from each gas component to CO2
emissions will vary based on the composition of the gas and the proportionate
weight of those components. Combustion also results in emission of relatively
minimal amounts of methane and nitrous oxide and MMI follows the typical
practice of using the standard published emission factors for determination of the
CO2e emissions from these gases.
What are MMI’s calculated carbon dioxide equivalent emissions using tailored
emission factors?
Analysis
MMI calculates its carbon dioxide equivalent emissions as follows:

(a) (b) (c) (d)=(a)x(b)x(c) (d)/1000
Global
Natural gas Emission warming
burned factor (note 1) potential Emissions Emissions
Metric tonnes
MMBTtu kg/MMBTu kg CO2e CO2e
(1) Carbon dioxide (CO2) 100,000 57.5465 1 5,754,650 5,755

(2) Methane (CH4) 100,000 0.0010 27.9 2,790 3
(3) Nitrous oxide (N2O) 100,000 0.0001 273 2,730 3
5,760,170 5,761
Note 1: The emission factor used for carbon dioxide is the tailored emissions factor
calculated in the tailored emission factor calculation above. For methane and nitrous oxide,
MMI uses the published emission factors from Example SRG 7-3.
Based on its analysis, MMI determines that combustion of 100,000 MMBTu of

natural gas in its boiler system results in 5,761 metric tonnes of scope 1 CO2e
emissions. As a result of using more specific data about the fuel composition of
natural gas combusted, MMI determines that its actual emissions are 8% greater
than it calculated using the published emission factors in Example SRG 7-3 (5,761
- 5,312 = 449 / 5,312 = 8%). This demonstrates the importance of (1) using the
best information available to calculate GHG emissions and (2) transparent
disclosure, including details on the sources of emission factors used as well as the
reason for their selection.

Once an entity calculates its scope 1 emissions, it will follow a similar process to
calculate scope 2 emissions. Further, consistent with the process to calculate
scope 1 emissions, to improve the accuracy and consistency of reporting scope 2
emissions, entities should formalise and document processes and policies for data
gathering (including the relevant sources of GHG emissions, sources of activity
data, estimation methodology, emission factors applied, and assumptions inherent
in preparing the GHG emissions inventory).
This section discusses the calculation of scope 2 emissions. See SRG 7.5 and
SRG 7.7 for the measurement of scope 1 and scope 3 emissions, respectively.
7.6.1 Scope 2 emissions
Scope 2 emissions represent indirect emissions from the generation of purchased

energy (for example, purchased electricity, heating and cooling). In 2015, the
GHG Protocol published Scope 2 Guidance which is an amendment to the
Corporate Standard. An entity is required to follow this guidance if it is reporting in
accordance with the Corporate Standard. See also SRG 7.2.2 and SRG 7.2.3 for
discussion of the applicability of the Scope 2 Guidance when reporting in
accordance with ESRS and the ISSB standards, respectively.
The calculation of scope 2 emissions is illustrated in Figure SRG 7-26 and follows
the same overall process as the calculation of scope 1 emissions.

Figure SRG 7-26
Three steps to calculate scope 2 emissions
Measure and calculate emissions from various sources
(1) Select (2) Collect activity (3) Calculate and

measurement data and choose aggregate emissions
approach emission factors for reporting
This section focuses on the calculation of GHG emissions associated with

purchased electricity, the most common source of scope 2 emissions. Other
sources of scope 2 emissions include purchased steam, heating, and cooling (all
sources of scope 2 emissions are referred to collectively in the Corporate
Standard and in this document as ‘purchased electricity’). 97
Prior to calculating scope 2 emissions, an entity needs to develop a complete list

of sources. Once all sources of scope 2 emissions have been identified, the next
step is to select a measurement approach. Since scope 2 emissions are indirect,
and not controlled by the reporting entity, it typically would not be able to measure
the emissions directly. Consequently, scope 2 emissions are calculated using an
indirect measurement approach.
7.6.2 Indirect measurement
Scope 2 emissions are measured by applying the indirect measurement

techniques described in SRG 7.5, which require (1) activity data, (2) emission
factor(s), and (3) global warming potential(s). Emissions calculated using an
indirect measurement technique are inherently estimates: the accuracy and
reliability of the results depends on the quality of the data and reasonableness of
assumptions used.
GHG emissions measured using an indirect measurement approach are generally

calculated using the equation in Figure SRG 7-27:
Figure SRG 7-27

=
Global
Emissions
(CO2e)
Activity
data x Emissions
factor(s) x warming
potentials
Note that scope 2 emissions are measured using the same formula applied in
indirect measurement of scope 1 and scope 3 emissions (see Figures SRG 7-21
and SRG 7-35, respectively). In addition, the determination of activity data and
global warming potential(s) for scope 2 emissions follows the same process as
that for scope 1 emissions (see SRG 7.5). The activity data for determining scope
2 emissions, however, is primarily focused on obtaining actual consumption of
purchased electricity, steam, heating, and cooling (for example, kilowatt hours of
electricity consumed at a production facility or office building). Electricity
consumption data to calculate scope 2 emissions for purchased electricity is
primarily obtained from utility supplier invoices.
Further, determining the appropriate emission factors for scope 2 GHG

measurement, will depend on whether an entity is calculating its scope 2
97GHG Protocol, Corporate Standard, page 25, states, “The term ‘electricity’ is used … as
shorthand for electricity, steam, and heating/cooling”.

emissions following the ‘location-based’ or ‘market-based’ methods. These
measurement methods are introduced in the Scope 2 Guidance.
Excerpt from the Scope 2 Guidance, Section 1.5 98
A location-based method reflects the average emissions intensity of grids on

which energy consumption occurs (using mostly grid-average emission factor
data). A market-based method reflects emissions from electricity that companies
have purposefully chosen (or their lack of choice). It derives emission factors from
contractual instruments, which include any type of contract between two parties
for the sale and purchase of energy bundled with attributes about the energy
generation, or for unbundled attribute claims.
In the context of scope 2 emissions, an emission factor represents the intensity of

GHG emissions created by the sources of electricity generation in the applicable
power grid or specific supplier serving the location of the entity’s operations. 99
Electricity generated from a renewable resource will inherently have a lower
emission factor than electricity generated from a fossil fuel burning facility.
7.6.3 Scope 2 reporting requirements
The GHG Protocol requires entities to measure and disclose scope 2 GHG
emissions using both the location-based and market-based methods.
Measurement and disclosure requirements under the various sustainability
reporting frameworks, however, vary as summarised in Figure SRG 7-28.
Figure SRG 7-28

Scope 2 GHG emission reporting requirements
Location- Market-
Framework based based Notes
GHG Yes Yes Requires measurement and disclosure of both

Protocol location-based and market-based scope 2 GHG
emissions 100
ESRS Yes Yes Consistent with the GHG Protocol; requires

measurement and disclosure of both location-based
and market-based scope 2 emissions 101
IFRS Yes No Requires measurement and disclosure using the

Sustainability location-based method, with additional requirements
Disclosure to disclose information about any contractual
Standards instruments utilised in the scope 2 emissions
inventory 102
SEC climate Either Either Permits the flexibility to elect a protocol or standard
disclosure for measuring GHG emissions, including the market-
rules based, the location-based or both methods 103
98 GHG Protocol, Scope 2 Guidance, an amendment to the GHG Protocol Corporate
Standard (Scope 2 Guidance), page 8.

99
In non-technical terms, a power grid is a network of transmission lines that connect
numerous sources of generation for distribution to industrial, commercial, and retail
customers.
100 GHG Protocol, Scope 2 Guidance, page 8.
101 ESRS E1 paragraph 49.
102 IFRS S2 paragraph 29 (a)(v).

See SRG 7.10.5 for further discussion of the disclosures required when reporting
scope 2 greenhouse gas emissions.
7.6.4 Location-based method
The location-based method calculates GHG emissions using regional grid

emission factors that represent the climate impact of the power grid that supplies
the location of the entity’s operations (that is, grid intensity).
A power grid served by a higher proportion of generators relying on fossil fuels will
have higher emissions — and accordingly higher emission factors — than a
region served by lower emission or renewable resources (for example, wind,
solar, hydro). An entity typically has limited ability to directly impact the mix of
fuels used to generate electricity in its region. It does, however, have the ability to
lower emissions by reducing consumption in high emitting grid locations (or
relocating high consumption facilities to lower emitting areas).
Location-based emission factors are usually sourced from published regional,

subnational, or national production data sets. These published emission factors
are periodically updated at the discretion of the publishing authority. For example,
the U.S. EPA publishes updated emission factors annually in April. 104 Other
examples of publishing authorities include the United Kingdom's Department for
Energy Security & Net Zero (DESNZ) and Department for Environment Food &
Rural Affairs (DEFRA), which publish updated emission factors annually, and the
International Energy Agency (IEA) which publishes country-specific data annually.
Entities should use the best available emission factors that are most relevant to
the period being reported as the generation mix (sources of generation) continues
to change over time. In addition, to improve relevance and accuracy of reported
GHG emissions, an entity should use the most representative emission factors
available for the location of its operations. For example, where available, an entity
should use emission factors for the local region rather than factors calculated for
an entire country). See further discussion of considerations when selecting
emission factors in SRG 7.5.2.2., including Questions SRG 7-27 through SRG 7-
30.
7.6.5 Market-based method
The market-based method of calculating scope 2 GHG emissions uses emission

factors that reflect an entity’s contractual arrangements. This method allows an
entity to incorporate its efforts to reduce electricity-related GHG emissions through
contractual or other arrangements into its calculation of scope 2 emissions. For
example, entities with net zero and other emission reduction targets often enter
into agreements to purchase energy attribute certificates (EACs) to reduce
reported scope 2 greenhouse gas emissions. EACs are contractual instruments
that do not directly affect the actual electricity consumed by an entity. As a result,
there are certain quality and credibility risks associated with using EACs to reduce
reported emissions.
The following sections provide a basic primer on EACs and discuss the relevant
quality criteria that must be considered as part of reporting EACs in accordance
with the GHG Protocol and ESRS. As discussed in SRG 7.6.5.2, these criteria are
also recommended for preparers following the ISSB standards or SEC climate
disclosure rules.
7.6.5.1 Energy attribute certificates — understanding the basics
An energy attribute certificate is a contractual instrument which represents certain

information (or attributes) about the source of energy generation; however, EACs
104 U.S. EPA, GHG Emissions Factors Hub.

do not represent the energy itself. Common examples of EACs include renewable
energy certificates (RECs), green tags, tradeable renewable certificates, or
guarantees of origin (GOs). In the United States, RECs —as they are commonly
referred to — originally emerged as a way of tracking compliance with individual
state or federal requirements for retail sellers of electricity (for example, regulated
utilities and direct access suppliers) to obtain a certain amount of their power
supply from renewable energy sources. 105 A REC is issued when one megawatt of
renewable energy is generated and delivered to the grid. Today, more than 100
countries have some form of renewable portfolio standards in place. 106 EACs are
often government regulated, with tracking and monitoring by the local jurisdiction.
Generally, EACs used for sustainability reporting purposes are associated with a
renewable or zero-emissions power source (for example, solar, wind, hydro,
geothermal, or nuclear). A key feature of EACs is that they can be bifurcated or
‘unbundled’ from the underlying commodity electricity and sold separately. Thus,
one entity (typically the local utility) may buy the electricity, while another entity
buys the energy attribute characteristic. Unbundled EACs allow for the renewable
or green attribute characteristic to be sold to an entity located in a grid that is not
physically connected to or in the same market as the associated generation. This
potential disconnect between the electricity physically delivered to and consumed
by an entity and the emissions that it actually reports introduces certain quality
concerns as discussed in SRG 7.6.5.2.
The lifecycle of an EAC after it has been generated, registered, and possibly sold
or transferred ends with retirement or redemption of the credit with the applicable
regulatory or tracking agency. The retirement or redemption represents the
surrender and ‘consumption’ of the credit. Depending on the specific contractual
arrangements, the owner of the certificate may retire it directly or may contract
with another entity to execute redemption on its behalf. One of the most important
quality criteria is alignment of the timing of retirement or redemption of the
certificate and claiming the certificate in a market-based calculation.
See further discussion of the EAC quality criteria in the following section. Also
refer to SRG 7.10.5 for information on the scope 2 disclosure requirements,
including required disclosures about contractual arrangements such as EACs.
Question SRG 7-31
Are carbon offsets and emission allowances EACs?
PwC response
No. EACs are contractual instruments that represent attributes about the energy
generated — typically renewable or other zero-emissions energy — but do not
represent energy itself. EACs may be used to reduce scope 2 emissions reported
under the market-based method.
In contrast, carbon offsets represent a measurement of emissions reductions and

may not be used to reduce scope 2 emissions. Instead, carbon offsets may be
used to reduce an entity’s scope 1 or scope 3 emissions. The GHG Protocol,
ESRS, the ISSB standards, and the SEC climate disclosure rules, however, all
require entities to present their GHG emissions gross with separate disclosure of
carbon offsets. Entities are also required to disclose information about the quality
of the offsets used. See SRG 7.9 for further discussion on the use of carbon
offsets to reduce GHG emissions, including required disclosures.
105 U.S. Energy Information Administration, Iowa - State Profile and Energy Estimates,
Analysis.
106 National Renewable Energy Laboratory, Renewable Electricity Standards: Good
Practices and Design Considerations.

Emission allowances represent a regulatory right to emit GHG (measured in
metric tonnes of CO2) and are used in emission trading schemes.
7.6.5.2 Energy attribute certificates — Scope 2 minimum quality criteria
Because of the quality and credibility risks associated with EACs, the Scope 2
Guidance specifies minimum quality criteria for contractual instruments used to
determine emission factors under the market-based method. Additional
requirements may also apply depending on the program or jurisdiction.
Entities reporting in accordance with the GHG Protocol must consider the
minimum quality criteria. Further, ESRS E1 AR 45(a) requires entities to consider
principles and requirements of the Scope 2 Guidance, including “in particular the
Scope 2 quality criteria in chapter 7.1 relating to contractual instruments”.
Although the ISSB standards and the SEC climate disclosure rules do not directly
refer to the Scope 2 Guidance minimum quality criteria, we believe consideration
of these factors and the related recommended disclosures will contribute to high
quality reporting. Refer to scope 2 disclosure requirements, including disclosure of
EACs, in SRG 7.10.5.
Scope 2 quality criteria
The minimum quality criteria for EACs specified by the Scope 2 Guidance are
summarised in Figure SRG 7-29. 107
Figure SRG 7-29

Minimum quality criteria for EACs
Criteria Description
1 Convey the direct GHG emission rate attribute associated with the
unit of electricity produced
2 Be the only instruments that carry the GHG emission rate attribute
claim associated with that quantity of electricity generation
3 Be tracked and redeemed, retired or cancelled by or on behalf of the

entity
4 Be issued and redeemed as close as possible to the period of energy

consumption to which the instrument is applied
5 Be sourced from the same market in which the entity’s electricity-

consuming operations are located and to which the instrument is
applied
6 Supplier or utility-specific emission factors should be calculated

based on delivered electricity, incorporating certificates sourced and
retired on behalf of its customers. Electricity from renewable facilities
for which the attributes have been sold off shall be characterised as
having the GHG attributes of the residual mix in the utility or supplier-
specific emission factor.

Criteria Description
7 Ensure all purchased or direct contractual instruments conveying

emissions claims be transferred to the entity only. No other
instruments that convey this claim to another end user shall be issued
for the contracted electricity. The electricity from the facility shall not
carry the GHG emission rate claim for use by a utility.
8 An adjusted, residual mix characterising the GHG intensity of

unclaimed or publicly shared electricity shall be made available for
consumer scope 2 calculations, or its absence shall be disclosed by
the entity.
Double counting is one of the main issues that may occur with EACs — for
instance, if a renewable facility sells the renewable attributes of the electricity that
it generated, but also sells the electricity as having a lower emission factor when
compared to the local utility. This may occur if a renewable generator sells the
EACs to one entity and the power — without the EACs — to another entity. Both
buyers may believe they can claim the use of renewable energy and apply an
emission factor of zero in their scope 2 market-based calculation, but only the
entity that purchased the EACs should claim them, notwithstanding where the
power is physically delivered. Protocols addressing ownership, transfer, and
redemption of the certificates are a key point to ensuring that double counting
does not occur. Additionally, using residual mix emission factors when not
purchasing EACs also limits the risk of double counting EACs across entities.
The vintage of generation of the EAC is also an important quality consideration, as

long-aged EACs may indicate quality issues. Further, differences between timing
and location of the generation and entity’s usage of the EAC may raise credibility
issues about an entity’s claim that it relates to lower emissions in the reporting
period.
Although the quality criteria outlined in the Scope 2 Guidance attempt to address
these risks, worldwide there is a wide range of EAC tracking and reporting
programs that oversee the generation, transferability, and redemption of these
instruments. The Scope 2 Guidance does not provide strict guardrails on how to
apply the quality criteria, thus leading to diversity in practice. For example,
according to criteria 5, a market boundary currently could be an area as large as a
country, group of countries, or based on regulatory restrictions on the use of an
instrument. See SRG 7.10.5 for further information on related disclosure
requirements.
7.6.5.3 Emission factors for scope 2 market-based reporting
EACs or equivalent instruments are conveyed to entities through a variety of

contractual arrangements. An entity should use the most appropriate, precise, and
highest quality emission factors available when applying the market-based
method. In addition, an entity should use the best available emission factors that
are most relevant to the period being reported as the generation mix (sources of
generation) continues to change over time.
The Scope 2 Guidance describes a hierarchy of precision of instruments that

should be considered when applying the market-based method as highlighted in
Figure SRG 7-30. 108

Figure SRG 7-30
Emission factors for scope 2 market-based method — categories shown from
most to least precise
Emission factors Indicative examples
Energy attribute □ Bundled or unbundled renewable energy

certificates or certificates
equivalent instruments
□ Guarantees of origin
□ Power purchase agreements that also convey
RECs or GOs
□ Other certificate instruments that meet the scope
2 quality criteria
Contracts for □ Contracts for power purchase agreements from

electricity specified renewable sources
□ Contracts that convey attributes to the entity
where certificates do not exist
□ Contracts for power that are silent on attributes,
where attributes are not tracked
Supplier / utility □ Emission rate allocated and disclosed to retail

emission rates electricity users
□ Green energy tariffs
□ Voluntary renewable electricity programs or
products
Residual mix □ Subnational or national emission rates that use

energy production data excluding voluntary
instrument purchases
Other grid-average Subnational or national location-based factors such

emission factors as:
□ eGRID total output emission rates (United States)
□ DEFRA annual grid average emission factor
(United Kingdom)
□ IEA national electricity emission factors
As summarised in Figure SRG 7-30, EACs, contracts, and supplier-specific

emission rates and the various characteristics of these instruments should be
considered first as these instruments provide a more precise measure of GHG
emissions for the specific market. Depending on availability of this information and
after consideration of these instruments, entities should apply residual mix factors,
if available, or other location-based factors.
Residual mix factors represent the GHG emissions and generation that remain
after certificates, contracts, and supplier-specific emission rates have been
claimed and removed. Residual mix factors should be used by an entity if it
operates in markets that have differentiated products and supplier-specific data,
but it did not purchase certificates or contracts for electricity from a specified
source and where supplier-specific information is unavailable.
The availability of supplier-specific and residual mix factors varies significantly by

geographical region and market in which the entity operates. For example, in the
United States, certain industry groups (for example, Edison Electric Institute (EEI))

obtain and publish data on supplier-specific and residual mix factors for carbon
dioxide emissions. These supplier-specific and residual mix factors may be used
by an entity in the United States in calculating its scope 2 emissions under the
market-based method.
In contrast, the European residual mix factors published annually by the

Association of Issuing Bodies (AIB) — and formerly by Reliable Disclosure
Systems for Europe (RE-DISS) — are the standard residual mix emission factors
used by entities with operations in European regions that are AIB member
countries. 109 The AIB residual mix factors should be used in reporting scope 2
emissions under the market-based method in applicable countries in
circumstances when supplier-specific emission factors are unavailable.
To improve relevance and accuracy of reported scope 2 emissions under the

market-based method, an entity should seek to use the most representative
emission factors available in the market they operate in, after consideration of
contractual instruments. When there are no other market-based emission factors
available (for example, supplier-specific or residual mix factors), the location-
based emission factors should be used, as is the case for methane (CH4) and
nitrous oxide (N2O).
Entities should also consider the criteria discussed in the Scope 2 Guidance,
Chapter 6.11.3, Supplier-specific emissions rate, when determining use of
supplier-specific emission factors. 110 Transparent disclosure of the emission
factors used is especially important given the variety of emission factors that may
be appropriate depending on the circumstances. Further, as stated in the GHG
Protocol, the absence of residual mix factors “can impact the overall accuracy of
the emissions allocation within that market. Therefore, companies are required to
disclose this absence transparently.” 111
Question SRG 7-32
What factors affect the quality of scope 2 emissions reporting when using the
market-based method?
PwC response
The quality of the contractual instruments used in applying the market-based
method is a key factor in the overall quality of the reported scope 2 GHG
emissions information. In addition, we believe the vintage of the EACs used, the
market boundaries applied, and the timing of retirement of the EACs also affect
the underlying quality of the information reported. Factors we recommend
considering in assessing the quality of reporting include:
□ Vintage
Disconnects between the timing of the generation of the electricity and an
EAC applied to reduce the related GHG emissions significantly diminish the
substance of the transaction as well as the usefulness of the related GHG
emissions reporting. For example, there is a disconnect if an EAC generated
in 2022 is applied to power generated and consumed in 2024. ESRS, the
ISSB standards, and the SEC climate disclosure rules do not prescribe any
vintage requirements. In the absence of any specific requirements, however,
we recommend entities consider vintage requirements on the smallest
increment that is practicable to enhance the quality of reporting (for example,
within the month of generation or comparable billing cycle).
109 AIB, European Residual Mix, last modified June 2024.


□ Market boundaries
As discussed, the Scope 2 Guidance currently permits an entity to use a
market boundary as large as a country or group of countries, or based on
regulatory restrictions on the use of an instrument. As a result, an entity is not
precluded from reducing its scope 2 emissions with an EAC generated in a
market where it has no operations and with no direct physical connection to
the location where the scope 2 emissions are generated. Further, the Scope 2
Guidance provides limited guidance on how to conclude that an EAC is not
suitable for reducing scope 2 emissions under this quality criteria.
We believe that the lack of boundaries diminishes the usefulness and

transparency of the related reporting. Although not required by the
sustainability reporting standards and rules, we recommend entities limit EAC
instruments used to reduce scope 2 emissions to those in the same control
area as the purchased electricity consumption (such that the EAC instrument
would reduce emissions in the area where the electricity is consumed).
□ Retirement
The GHG Protocol specifies the EAC should be retired as close to the
reporting period as possible. We believe the quality of an entity’s emissions
reporting is strengthened by aligning the EAC retirement criterion with
financial reporting such that only those instruments retired during the reporting
period are included in the calculation of scope 2 emissions.
A focus on purchasing high quality EACs, located in the same control area,
generated at the same time as the electricity used, and retired in the applicable
reporting period will enhance the usefulness of the underlying emissions reporting.
Transparent disclosure of the attributes outlined above will also enhance the
quality of reporting.
Question SRG 7-33
What are some of the factors an entity should consider in selecting between the
use of the location-based and market-based method for calculating scope 2
emissions when the sustainability framework does not specify the method
required (for example, for reporting in accordance with the SEC climate disclosure
rules)?
PwC response
As described in Figure SRG 7-28, most of the required reporting frameworks
specify which method — that is, location-based, market-based, or both — an
entity is required to use in calculating and disclosing its scope 2 emissions. An
entity preparing disclosure for SEC or voluntary reporting, however, may select
between the two methods, depending on its circumstances.
There are benefits and limitations to both the location-based and market-based
method, some of which depend on the availability of residual mix emission factors.
Although the market-based method is more representative of an entity’s
contractual arrangements, a criticism of this method is that it does not always
reflect the physical location of the consumption or the actual grid generating the
power. This is due to the nature of many EAC contractual instruments which allow
the sale of ‘virtual’ power and the related energy attribute. Emissions associated
with the remaining energy usage after reflecting contractual arrangements will be
calculated using either residual mix or location-based emission factors.
Residual mix emission factors are often higher than location-based factors
because they represent the resulting mix of energy after all clean energy attributes
have been used (that is, the residual mix factor represents the mix of brown power
that remains in the grid). In contrast, location-based factors — while
representative of the physical location of energy consumption — do not reflect the

true residual energy mix after accounting for the EACs and renewable resources
that are designated to specific parties via contractual terms. When such residual
mix factors are unavailable, however, and thus location-based factors are used,
the GHG emissions from brown power (that is, non-renewable or higher emissions
power generated from non-renewable sources) may inherently be understated.
7.6.5.4 Measurement of scope 2 emissions using the location-based and

market-based methods — illustrative examples
The following examples illustrate the impact of using the location-based versus
market-based methods of measuring scope 2 emissions, including the effect of
the availability of residual mix factors.
Example SRG 7-5

Calculating scope 2 emissions without a residual mix factor
Fashion Fabrics Corporation (FFC), a retailer, operates 30 stores located across
the United States. Each store is approximately 10,000 square feet and consumes
approximately 150 megawatt hours (MWhs) of electricity a year.
To help meet their emissions reduction goals during 2020, FFC entered into a
bundled power purchase agreement (PPA) with Ivy Power Producers (IPP), a
renewable energy supplier that owns wind facilities in California, to supply
approximately 50% of its power needs in California. IPP provides FFC with RECs
for each megawatt hour of power purchased and retires the RECs on behalf of the
entity.
During 2023, FFC consumed 5,000 MWhs of power (for its retail stores and
headquarters location) and purchased 1,000 RECs under their PPA with IPP. FFC
obtained and retired (claimed the use of the instrument with the governing
authority) each of the RECs received from the bundled PPA during the fiscal year.
FFC prepares its scope 2 emissions using both the location-based and market-
based methods for its 2023 sustainability report.
For illustrative purposes, the example below excludes methane (CH4) and nitrous
oxide (N2O) emissions.
Location-based calculation
For the location-based method calculation, FFC obtains calculation inputs as

follows:
□ Activity data
Activity is the amount of electricity consumed in operations during 20X3. FFC
obtains the information on its electricity consumption primarily from monthly
utility invoices; alternatively, it could obtain its consumption information
directly from its meters if it had a metering system in place.
□ Emission factors
FFC obtains grid emission factors from the ‘GHG Emission Factors Hub’
published by the U.S. EPA. 112 FFC uses the most relevant eGRID subregion
emission factors published by the U.S. EPA, for each of its territories in which
it consumed electricity.
U.S. EPA, Emission Factors for Greenhouse Gas Inventories, Table 6 Electricity, last
112
modified 5 June 2024.

FFC obtains the global warming potential values from the IPCC’s ‘Sixth
Assessment Report’. 113 FFC obtains the GWPs directly from AR6, in lieu of
using the GWPs from the U.S. EPA document used as the source for its
emission factors, because the U.S. EPA document does not reference the
GWPs from AR6 (the most recent assessment report). The global warming
potential of CO2 is 1 (because it is the baseline for all other gases).
Based on the data provided above, total location-based carbon dioxide emissions
are calculated as follows:
(f)=(a)x(d) (g)=(f) /
(a) (b) (c)=(a)-(b) (d) (e) x(e) 2204.62
Emission Global
Territory (eGRID Energy Net energy factor warming
Name) consumed EACs consumed (CO2) potential Emissions Emissions
Metric
tonnes
MWh 1 / MWh MWh lb/MWh lb CO2e
California (CAMX - Not Not
WECC California) 2,000 applicable applicable 497.4 1 994,800 451
Mid-Atlantic-NYC
(NYCW - NPCC
NYC/Westchester) 750 885.2 1 663,900 301
Mid-Atlantic- Other
(RFCE - RFC East) 750 657.4 1 493,050 224
Midwest (SRMW -
SERC Midwest) 1,500 1,369.9 1 2,054,850 932
4,206,600 1,908
Following the location-based method, FFC determines that its total scope 2
carbon dioxide emissions in 2023 are 1,908 metric tonnes. FFC will include
disclosure of the sources of its emission factors applied in its sustainability
reporting.
Market-based calculation
FFC’s scope 2 market-based calculation reflects the RECs obtained through its
contractual arrangement. FFC obtains calculation inputs as follows:
□ Activity data
The amount of electricity consumed in operations is the same as in the
location-based calculation. Further, FFC obtains the number of RECs
purchased and delivered under the power purchase agreement from the
delivery terms as stated in the bundled PPA. The terms for the RECs follow
the administrative process of the California state renewable portfolio
standards program, which allows for direct certificate transfer into the
offtaker’s (FFC’s) account concurrent with generation of the renewable power.
As previously mentioned, the RECs purchased and delivered under the PPA
are transferred into FFC’s account and retired by FFC during the year. Prior to
including the RECs in its market-based calculation, FFC evaluates the RECs
and determines that they meet the relevant quality criteria. Specifically, the
113 IPCC, Synthesis Report of the Sixth Assessment Report, March 2023.

purchased RECs were generated in a geographical location that is near FFC’s
operations (for example, in the same state) and were received and retired in
the same year they are being used to reduce scope 2 GHG emissions. Thus,
it reduces its energy consumed by 1,000 MWhs in its market-based scope 2
emissions calculation.
For the remaining emissions not subject to EACs or other renewable power
purchase agreements, FFC determines the applicable emission factors
following the market-based scope 2 hierarchy prescribed by the Scope 2
Guidance.
Accordingly, FFC first evaluates whether there are any supplier-specific

emission factors available. All of its California locations are located in Los
Angeles and served by a specific local utility. FFC obtains EEI’s annual
publication of supplier-specific and residual mix factors from the “Electric
Company Carbon Emissions and Electricity Reporting Database for Corporate
Customers” and identifies the applicable supplier-specific emissions factor (lbs
CO2/MWh) for its local utility. 114 This supplier-specific factor is referred to as
the ‘Utility Average Emissions Rate’ within the database and is adjacent to the
residual mix factor that can be used if the supplier-specific rate is unavailable.
FFC identifies its local utility in the database and identifies the applicable
supplier-specific emissions factor for use in the calculation.
For the remainder of its locations in other parts of the country, FFC is served
by multiple utilities, some of which are not included in the referenced EEI
emissions reporting database. As such, it evaluates whether there are any
residual mix factors that are available and reliable and determines that there
are none. Thus, for its locations outside of California, FFC uses the same
location-based grid emission factors used in its location-based calculation.
FFC includes disclosure with its market-based calculation that no residual mix
factors were available. It also accordingly discloses the location-based factors
used in the market-based calculation.

FFC applies the same global warming potential used in its location-based
calculation.
Based on the data provided above, total market-based carbon dioxide emissions
are calculated as follows:
(f)=(c)x (g)=(f) /
(a) (b) (c)=(a)-(b) (d) (e) (d)x(e) 2204.62
Emission Global
Energy Net energy factor warming
Territory consumed EACs consumed (CO2) potential Emissions Emissions
Metric
tonnes
MWh 1 / MWh MWh lb/MWh lb CO2e
California 2,000 1,000 1,000 374 1 374,000 170
Mid-Atlantic - NYC 750 0 750 885.2 1 663,900 301
Mid-Atlantic - Other 750 0 750 657.4 1 493,050 224
Midwest 1,500 0 1,500 1369.9 1 2,054,850 932
MARKET-BASED 3,585,800 1,627
Edison Electric Institute, Electric Company Carbon Emissions and Electricity Reporting
114
Database, last modified April 2024.

Based on its analysis, FFC determined that the 5,000 MWh consumed at its retail
stores and headquarter location during 2023 results in scope 2 carbon dioxide
emissions of 1,908 metric tonnes when calculated following the location-based
method and 1,627 metric tonnes under the market-based method.
Example SRG 7-6

Calculating scope 2 emissions using a residual mix factors
Moringa Fashion Company (MFC), a retailer, operates 30 stores located across
France and UK. Each store is approximately 10,000 square feet and consumes
approximately 150 megawatt hours (MWhs) of electricity a year.
To help meet their emissions reduction goals, MFC entered into a bundled power
purchase agreement with Oval Power Producers (OPP), a renewable energy
supplier that owns wind facilities in northern UK, to supply approximately 50% of
its power needs. OPP provides MFC with Guarantees of Origin (GOs) from
specified wind facilities for each megawatt hour of power purchased and retires
the GOs on behalf of the entity.
During 2023, MFC consumed 5,000 MWhs of power (for its retail stores and
headquarters location) and purchased 1,000 GOs (representing 1,000 MWhs of
renewable energy) under their PPA with OPP. MFC obtained and retired (claimed
the use of the instrument with the governing authority) each of the GOs received
from the bundled PPA during the fiscal year. MFC prepares its scope 2 emissions
using both the location-based and market-based methods for its 2023
sustainability report.
For illustrative purposes, the example below excludes methane (CH4) and nitrous
oxide (N2O) emissions.
Location-based calculation
For the location-based method calculation, MFC obtains the following calculation
inputs from the following sources:
□ Activity data
This is the amount of electricity consumed in its operations during 2023. MFC
obtains the information on its electricity consumption primarily from monthly
utility invoices; alternatively, it could obtain its consumption information
directly from meters if it had a metering system in place.
For its UK stores, MFC obtains grid emission factors from the ‘UK electricity’
tab of the 2023 emission factors published by DESNZ and DEFRA (most
recent location-based factors published by these organisations). 115 MFC also
obtains the 2022 provisional electricity only location-based factors for their
France locations from the 2023 emission factors database published by IEA
(most recent location-based factors published by IEA).

The emission factors from DESNZ and DEFRA and IEA have the IPCC GWP
values embedded within the factors. Per review of the published sources the
GWPs used in the calculation of CO2e are based on IPCC’s ‘Fifth Assessment
Report’ (AR 5) over a 100-year period. In accordance with its policy, MFC
does not update the GWPs to the latest global warming potentials from the
latest assessment report because the GWPs are already embedded within the
115DEFRA, Greenhouse gas reporting: conversion factors 2023, last updated 28 June
2023.

published emission factors. This policy is consistent with Question SRG 7-27
in SRG 7.5.2.2.
Based on the data provided above, total location-based carbon dioxide (CO2)
emissions are calculated as follows:
(a) (b) (c)=(a)-(b) (d) (e) (f)=(a) (g)=(f) /
x(d)x(e) 1000
Global
Emission warming
Energy Net energy factor (CO2e) potential
Territory consumed EACs consumed (note 1) (note 1) Emissions Emissions
Metric
tonnes
MWh 1 / MWh MWh kg/MWh kg CO2e
UK - North 2,000 Not applicable Not applicable 204.96 Not applicable 409,920 410
UK - West 750 204.96 153,720 154
UK - East 750 204.96 153,720 154
France 1,500 65.5 98,250 98
815,610 816
Note 1: The emission factor from emission sources listed are in CO2e and accordingly
have the GWP values embedded in the emissions factor.
Following the location-based method, MFC determines that its total scope 2
carbon dioxide (CO2) emissions are 816 metric tonnes. MFC will include
disclosure of the sources of its emission factors applied in its sustainability report.
Market-based calculation
MFC’s scope 2 market-based calculation reflects the EACs obtained through

contractual arrangements. MFC obtains its calculation inputs from the following
sources:
□ Activity data
The amount of electricity consumed in operations is the same as in the
location-based calculation. Further, MFC obtains the number of GOs
purchased and delivered under the power purchase agreement from the
delivery terms as stated in the bundled PPA. The terms for the GOs under the
PPA follow the administrative process of the applicable jurisdictional program
which allow for direct certificate transfer into the offtaker’s account upon
generation of the renewable power.
As previously mentioned, the GOs purchased and delivered under the PPA
are transferred into MFC’s account and retired by MFC during the year. Prior
to including the EACs in its market-based calculation, MFC evaluates the
EACs and determines that they meet the relevant quality criteria. Specifically,
the purchased renewable GOs were generated in a nearby geographical
location to MFC’s operations (for example, in the UK) and were received and
retired in the same year they are being used to reduce scope 2 emissions.
Thus, MFC reduces its energy consumed in northern UK by 1,000 MWhs in its
market-based scope 2 emissions calculation.
For the remaining emissions not subject to EACs or other renewable power
purchase agreements, MFC determines the applicable emission factors
following the market-based scope 2 hierarchy prescribed by the Scope 2
Guidance. Accordingly, it first evaluates whether there are any supplier-
specific emission factors available. MFC’s UK-West locations are served by

the same individual local utility, Waterberry Power Producers (WPP). MFC
obtains the supplier-specific factor for WPP directly from the supplier (kg
CO2/MWh). For the remainder of its locations, MFC is served by multiple
utilities, directly from the grid. As such, it evaluates whether there are residual
mix factors that are available and reliable. MFC determines the European
residual mix factors published by the Association for Issuing Bodies are
suitable for the calculation. These residual mix factors are the latest factors
published by AIB, published in June 2024 and are based on 2023
information. 116
MFC discloses with their market-based calculation the source of their

contracts, supplier-specific factors and residual mix factors.

The GWP values are embedded in the emission factors used.
Based on the data provided above, total market-based carbon dioxide (CO2)
emissions are calculated as follows:
(f)=(c)x(d) (g)=(f) /
(a) (b) (c)=(a)-(b) (d) (e) x(e) 1000
Emission Global
factor warming
Energy Net energy (CO2e) potential
Territory consumed EACs consumed (note 1) (note 1) Emissions Emissions
Metric
tonnes
MWh 1 / MWh MWh kg/MWh kg CO2e
UK - North 2,000 1,000 1,000 388.4 Not applicable 388,400 388
UK - West 750 - 750 342 256,500 257
UK – East 750 750 388.4 291,300 291
France 1,500 - 1,500 40.74 61,110 61
997,310 997
Note 1: The emission factors include embedded GWP values, so the GWP value does not
need to be separately included in the formula.
Based on its analysis, MFC determined that 5,000 MWh consumed at their retail
stores results in scope 2 carbon dioxide emissions of 816 metric tonnes under the
location-based method and 997 metric tonnes under the market-based method.
As illustrated in these calculations, MFC’s location-based CO2 emissions are
lower compared to the emissions calculated using the market-based method.
The outcome of this example is different than Example SRG 7-5 where the use of
the market-based method resulted in lower emissions than the location-based
method. This demonstrates the importance of (1) using the best information
available to calculate emissions, including residual mix factors and (2) transparent
disclosure, including details on the sources of emission factors, used as well as
the reason for their selection and the calculation approach. See SRG 7.10.5 for
disclosure considerations.

Scope 3 emissions represent all indirect emissions — other than purchased
electricity included in scope 2 — that occur in the value chain of a reporting entity
116 AIB, European Residual Mix 2023, last updated June 2024.

and that are the consequence of its activities. Scope 3 emissions are a critical
component of a reporting entity’s GHG emissions inventory.
The GHG Protocol, ESRS, and the IFRS Sustainability Disclosure Standards all
require reporting of gross scope 3 emissions by category. Reporting of scope 3
emissions is also required by California SB 253 and is recommended for TCFD
reporting for compliance with California SB 261 (see SRG 7.2.5). The SEC climate
disclosure rules do not require reporting of scope 3 emissions, although entities
with targets and goals related to scope 3 emission reductions may need to
disclose some scope 3 information (see Question SRG 7-34).
This section addresses the foundational concepts of scope 3 upstream and

downstream value chain emissions, including key measurement methodologies,
as prescribed by the GHG Protocol. The GHG Protocol’s Scope 3 Standard
outlines the key steps necessary for measurement and reporting of scope 3
emissions as follows:
□ Identifying and categorising scope 3 activities (SRG 7.7.1)
□ Establishing the minimum boundary (SRG 7.7.2)
□ Establishing the time boundary (SRG 7.7.3)
□ Collecting value chain data (SRG 7.7.4)
□ Measuring scope 3 emissions (SRG 7.7.5)
This section also highlights certain commonalities and differences among the
sustainability disclosure frameworks. Entities reporting in accordance with ESRS
or the IFRS Sustainability Disclosure Standards should ensure they consider the
applicable scope 3 guidance in those standards. In addition, disclosures related to
scope 3 emissions are addressed in SRG 7.10.6.
Question SRG 7-34
What disclosures are required if an SEC registrant has a material scope 3

emissions-related target or goal?
PwC response
The SEC climate disclosure rules do not require disclosure of scope 3 emissions
for any registrant. SEC Regulation S-K Item 1504, however, requires disclosure of
material climate-related targets and goals. This disclosure requirement includes
any specific targets and goals related to emissions (to the extent they are material
to a registrant’s business, results of operations, or financial condition). Further, as
part of the required disclosures on any material climate-related target or goal, the
registrant would need to also disclose progress made towards achieving the target
or goal, which may include information about its emissions.
Therefore, if an SEC registrant has a material target or goal relating to its scope 3
emissions, it would also be required to disclose that target or goal. Further, in
discussing progress toward achieving that target or goal, it may need to include
information about its scope 3 emissions. Similarly, SEC registrants not required to
disclose scope 1 and scope 2 emissions (that is, registrants that are not large
accelerated or accelerated filers, see SRG 2.4.1.2) would be required to disclose
the related target or goal and relevant information. See SRG 8, Climate [coming
soon], for further information on the SEC disclosure requirements related to
climate targets and goals.

7.7.1 Identifying and categorising scope 3 activities
To establish a complete picture of its upstream and downstream value chain

emissions, a reporting entity should create a value chain map. This analysis
entails developing an understanding of the activities and partners in its value
chain — including an inventory of all purchased and sold goods and services, as
well as a list of value chain partners associated with its operations.
The process for identifying scope 3 emissions is complex and depends on the size
and variability of the entity’s value chain activities. The Scope 3 Standard
prescribes criteria to help entities identify relevant scope 3 activities — including
whether the activity has been determined as significant by sector-specific
guidance, contributes to the reporting entity’s risks, can be influenced by the
reporting entity, or is deemed critical by its stakeholders.
The GHG Protocol defines fifteen distinct categories of scope 3 emissions to

capture the nature of upstream and downstream activities that may occur across
an entity’s value chain. This categorisation of activities is a critical component of
the scope 3 emissions inventory process under the GHG Protocol, as the
categories determine both what emissions information should be captured and
how those emissions should be measured. Both ESRS and the IFRS
Sustainability Disclosure Standards also require categorisation of emissions in
accordance with the 15 categories identified by the GHG Protocol.
7.7.1.1 Scope 3 categories — upstream emissions
Upstream emissions represent emissions from those activities associated with

purchased or acquired goods and services. Upstream emissions occur in the
value chain until the point at which the reporting entity receives the good or
service. Figure SRG 7-31 below summarises the eight categories of upstream
emissions provided in the Scope 3 Standard.
Figure SRG 7-31

Summary of upstream scope 3 categories
Category Description
1. Purchased goods and Extraction, production and transportation of goods and services purchased or
services acquired by the reporting entity — including raw materials, components, and
parts purchased to process, transform, or include in another product or final
good for resale
2. Capital goods Extraction and production of capital goods purchased or acquired by the entity —
including equipment, machinery, buildings, facilities, and vehicles used in
operations
3. Fuel and energy Extraction, production, and transportation of fuels and energy purchased or
related activities (not acquired by the entity, not already accounted for in scope 1 or scope 2 —
in scope 1 or scope including mining of coal, refining of gasoline and transmission and distribution of
2) natural gas
4. Upstream Transportation and distribution of goods purchased by the entity between its tier
transportation and 1 suppliers and its own operations — including air, rail, road, and marine
distribution transport between supplier warehouses and the reporting entity’s facilities
5. Waste generated in Disposal and treatment of waste generated in the entity’s operations — including
operations disposal in a landfill, recovery for recycling, incineration, composting, combustion
of solid waste, and wastewater treatment

6. Business travel Transportation of employees for business-related activities — including air, rail,
bus and automobile travel (other than employee commuting to and from work)
7. Employee commuting Transportation of employees between their homes and their worksites —
including air, rail, bus and automobile travel for employees commuting to work in
vehicles other than those owned or operated by the reporting entity
8. Upstream leased Operation of leased assets by the entity (lessee) other than those captured in
assets scope 1 and scope 2 by lessee (see SRG 7.4.2 for discussion of leased assets)
Categorisation of emissions in the appropriate category is important for

appropriate disclosure. The Scope 3 Standard provides further information on
each of the categories.
7.7.1.2 Scope 3 categories — downstream emissions
Downstream emissions represent emissions from those activities associated with

sold goods and services. Downstream emissions occur after the reporting entity
sells or transfers control of the good or service. Figure SRG 7-32 summarises the
seven categories of downstream emissions provided in the Scope 3 Standard.
Figure SRG 7-32

Summary of downstream scope 3 categories
9. Downstream Transportation and distribution of goods sold by the entity between its operations
transportation and and the end consumer — including air, rail, road, marine transport and storage of
distribution sold products between the reporting entity’s facilities and retail facilities
10. Processing of sold Processing of goods sold by downstream companies — including materials,
products components, and parts purchased by a manufacturer
11. Use of products sold End use of goods and services sold by end consumer — including use of
automobiles, appliances and refrigeration equipment that directly consume
energy
12. End-of-life treatment Waste disposal and treatment of goods sold by the entity — including disposal in
of sold products a landfill, recovery for recycling, incineration, composting, combustion of solid
waste, and wastewater treatment after use of the end product
13. Downstream leased Operation of assets owned by the entity (lessor) and leased to other entities,
assets other than those already captured in scope 1 and scope 2 (see SRG 7.4.2 for
discussion of leased assets)
14. Franchises Franchisor operations, not included in scope 1 and scope 2 — including
emissions from operating a franchise gas station
15. Investments Operation of investments other than those captured in scope 1 and scope 2 —
including equity investments, debt investments and project finance, often
referred to as financed emissions
Understanding the differences among the categories and what is included in each
is a critical step in properly identifying and categorising scope 3 emissions.

7.7.1.3 Categorising scope 3 emissions
Although not every category will be relevant for all entities, the scopes and
categories are designed to be mutually exclusive such that there is no double
counting between the categories or across the scopes of an entity’s reporting. By
design, however, two or more entities may report the same greenhouse gases
within their respective scope 3 emissions. This approach is intended to facilitate
and influence multiple entities to take actions to reduce emissions within a value
chain.
As discussed in SRG 7.4, upstream and downstream value chain emissions

exclude direct emissions from activities owned or controlled by the reporting
entity. For example, while greenhouse gases generated by third-party
manufacturers during the production of purchased products are reported as scope
3 emissions, the emissions generated by a reporting entity's use of those same
products in its own operations are reported as part of either its scope 1 or scope 2
emissions.
Question SRG 7-35
How should a reporting entity reflect scope 3 emissions from value chain partners
that span across multiple categories (for example, a supplier in which the
reporting entity also holds an investment that is accounted for following the equity
method)?
PwC response
Scope 3 emissions should be categorised based on the nature of the activities
that are generating emissions. There may be instances where a reporting entity
has more than one business relationship with a value chain partner which may
warrant capturing emissions in multiple categories, such as when a reporting
entity purchases products from an investment accounted for using the equity
method.
EFRAG IG 2 clarifies the guidance provided in ESRS E1 with respect to how the
reporting entity should classify emissions from associates and joint ventures with
which it also has a business relationship.
Furthermore, when determining impact metrics, the data in relation to the

associates or joint ventures are not limited to the share of equity held but shall be
considered on the basis of the impacts that are directly linked to the undertaking’s
products and/or services through its business relationships (ESRS 1 paragraph
67).
Further, EFRAG IG 2 paragraph 59 includes a decision tree for GHG emissions

reporting that illustrates that, and states that, a reporting entity would include both
(1) its “share of impacts attributable to [its] products and services” and (2) “Scope
3 emissions category 15 ‘investments’ if significant”. 117 Note, however, that ESRS
E1 requires an entity to disclose only those scope 3 categories that it determines
are ‘significant’. ESRS E1 AR 46(d) states that an entity would identify ‘significant’
scope 3 categories based on the magnitude of their estimated GHG emissions
and other criteria from the Scope 3 Standard, including considerations such as
financial spend, influence, related transition risks and opportunities or stakeholder
views. 118
117 EFRAG IG 2, paragraph 59, page 17.

118
ESRS E1 AR 46(d).

Consistent with this guidance, a reporting entity must include emissions related to
both its investment relationship and business relationships in its scope 3
emissions. For example, assuming both category 1 and category 15 have been
identified as significant, an entity that purchases products from an investee would
account for value chain emissions associated with the purchased goods as part of
its scope 3 category 1. Separately, it would also reflect emissions associated with
its investment in the investee as part of category 15. 119
GHG Protocol and ISSB standards
Although the GHG Protocol and the ISSB standards do not provide explicit
guidance, we would generally expect a reporting entity to follow the same
approach when it has a business relationship with an associate or joint venture
partner. That is, it should include emissions related to the business relationship in
the appropriate category as well as reflect its investment as part of scope 3
category 15. For completeness and consistency, a reporting entity should treat its
business relationships in the same manner, whether conducted through an
investee or an unrelated party.
7.7.2 Establishing the minimum boundary
Determining the relevant scope 3 emissions to be included in the GHG emissions

inventory is complex and depends on the entity’s value chain mapping exercise
(see SRG 7.7.1). Given the variability of relationships, operations, and activities
that comprise a value chain, scope 3 represents a broad spectrum of emissions.
As such, the GHG Protocol prescribes guidance for determining the scope 3
boundary — that is, the relevant emissions that are required to be included in the
entity’s scope 3 inventory.
7.7.2.1 Scope 3 minimum boundary — GHG Protocol
The GHG Protocol prescribes a minimum boundary for each scope 3 category,
which represents the minimum activities that the reporting entity must include in its
scope 3 emissions for that category.
Excerpt from the Scope 3 Standard 120
The minimum boundaries are intended to ensure that major activities are included
in the scope 3 inventory, while clarifying that companies need not account for the
value chain emissions of each entity in its value chain, ad infinitum.
The purpose of the minimum boundary is to ensure that all relevant and significant
scope 3 activities are captured in the GHG emissions inventory, without the
expectation of entities to account of value chain emissions ‘ad infinitum’ as
described by the Scope 3 Standard. 121 For some scope 3 categories — including
purchased goods and services, capital goods, fuel- and energy-related activities
— the minimum boundary includes all upstream (cradle-to-gate) emissions.
Practically, this requires entities to capture all upstream emissions that occur
during raw material extraction (that is, the cradle) through receipt of the materials
by the reporting entity (that is, the gate).
In contrast, for other scope 3 categories, the GHG Protocol minimum boundary
includes the scope 1 and scope 2 emissions of the reporting entity’s suppliers,
119
EFRAG IG 2, “Purchase transactions with an associate” call-out box, page 19.
120
GHG Protocol, Corporate Value Chain (Scope 3) Accounting and Reporting Standard
(Scope 3 Standard), page 31.

distributors, manufacturers, or other supply chain partners. Figure SRG 7-33
summarises the minimum boundaries for each category of scope 3 emissions. 122
Figure SRG 7-33

Summary of minimum boundaries
Category Minimum boundary
1. Purchased goods All upstream (cradle-to-gate) emissions of purchased goods and services
and services
2. Capital goods All upstream (cradle-to-gate) emissions of purchased capital goods
3. Fuel and energy All upstream (cradle-to-gate) emissions from purchased fuels, purchased
related activities electricity, consumed in energy T&D systems as well as emissions from
(not in scope 1 or generation of electricity sold to customers
scope 2)
4. Upstream The scope 1 and scope 2 emissions of transportation and distribution providers
transportation that occur during use of vehicles and facilities
and distribution
5. Waste generated The scope 1 and scope 2 emissions of waste management suppliers that occur
in operations during disposal or treatment of products within the reporting entity’s operations
6. Business travel The scope 1 and scope 2 emissions of transportation carriers that occur during
use of vehicles (for example, from energy use)
7. Employee The scope 1 and scope 2 emissions of employees and transportation providers
commuting that occur during use of vehicles (for example, from energy use)
8. Upstream leased The scope 1 and scope 2 emissions of lessors that occur during the reporting
assets company’s operation of leased assets (for example, from energy use), other
than those already captured in scope 1 and scope 2
9. Downstream The scope 1 and scope 2 emissions of transportation providers, distributors, and
transportation retailers that occur during use of vehicles and facilities (for example, from energy
and distribution use)
10. Processing of The scope 1 and scope 2 emissions of downstream companies that occur during
sold products processing (for example, from energy use)
11. Use of products The direct use-phase emissions of sold products over their expected lifetime
sold (that is, the scope 1 and scope 2 emissions of end users)
12. End-of-life The scope 1 and scope 2 emissions that occur during disposal or treatment of
treatment of sold sold products
products
13. Downstream The scope 1 and scope 2 emissions of lessees that occur during operation of
leased assets leased assets (for example, from energy use).
14. Franchises The scope 1 and scope 2 emissions of franchisees that occur during operation
of franchises (for example, from energy use)
122 GHG Protocol, Scope 3 Standard, pages 35–37.

Category Minimum boundary
15. Investments The scope 1 and scope 2 emissions generated by the reporting entity’s equity
investments, debt investments (with known use of proceeds), and project
finance, as defined by the Scope 3 Standard
The GHG Protocol requires disclosure of any emissions within the minimum
boundary. In addition, it identifies certain ‘optional’ categories which an entity may
choose to disclose but for which the GHG Protocol does not require disclosure.
For example, an entity may optionally choose to report lifecycle emissions —
which are those emissions from every stage of the product lifecycle from raw
material extraction (that is, the cradle) to the end of the product or resource
lifecycle (that is, the grave). Examples of such optional scope 3 emissions include
lifecycle emissions associated with manufacturing vehicles, facilities or
infrastructure associated with categories 4 and 9, as well as indirect use-phase
emissions of products sold over their lifetime for category 11.
In addition, ESRS and the IFRS Sustainability Disclosure Standards provide

supplemental guidance that should be considered in reporting under those
standards.
7.7.3 Establishing the time boundary
The GHG Protocol also introduces the concept of time boundaries — designed to
account of all emissions associated with an entity’s activities in the reporting
period. The time boundary is intended to standardise timing of reporting scope 3
value chain emissions, such that an entity reports its scope 3 emissions at the
time its associated value chain activity occurs and not necessarily at the time
when the emissions are generated. 123
For example, an entity purchasing a finished good would account for all of the
expected upstream emissions associated with production and manufacturing of
that good in the year in which the good is purchased, which may be different than
the period in which the good was produced by the manufacturer. In contrast, an
entity selling products would account for emissions associated with the distribution
or use of its products, in the year in which it makes its sale. Although those
emissions may occur in a future year, they are a result of the reporting entity’s
activity within the reporting period, and as such, would be included in its scope 3
inventory during that year.
7.7.4 Collecting value chain data
The activity and emissions data for reporting scope 3 emissions may range both in
quality and in form. In general, entities may use two types of data as described in
Figure SRG 7-34:
Figure SRG 7-34

Types of scope 3 emissions data
Data type Description
Primary data (also □ Directly from specific activities within an entity’s

referred to as supplier- value chain
specific data)
123 GHG Protocol, Scope 3 Standard, pages 32–33.

Data type Description
Secondary data □ Not from specific activities within an entity’s value

chain
□ Generally includes industry-average data and
other industry published or proxy data
Examples of primary and secondary data across upstream and downstream value
chain activities include:
□ Category 1, purchased goods and services
o Primary data — site-specific energy use or emissions data directly from

suppliers
o Secondary data — industry average emission factors per material

consumed from life-cycle analysis
□ Category 9, transportation and distribution of products sold
o Primary data — activity-specific distance traveled
o Secondary data — estimated distance traveled based on industry-

average data, respectively.
Primary data (for example, supplier-specific data) generally provides a more

precise measure of activity as it is extracted directly from the emissions
generating activities. Entities may struggle, however, to obtain high quality primary
data for all relevant value chain activities due to its complexity, expansive size,
and composition. In these instances, entities may resort to secondary data —
including financial, proxy, industry-average or other generic datatypes — to
estimate activity needed to calculate scope 3 emissions.
7.7.4.1 Data quality
The quality of reported scope 3 emissions will depend on completeness of the

included sources of emissions as well as the quality of the data used to calculate
such emissions. Assessment of availability and quality of this data is critical to
determine the most appropriate methodology to measure scope 3 emissions,
which in turn will affect accuracy of those emissions. The quality of various
sources of primary and secondary data may vary.
The Scope 3 Standard highlights data quality indicators that should be evaluated
when selecting data and evaluating data quality as summarised in Figure SRG 7-
35. 124
Figure SRG 7-35

Scope 3 data quality criteria from the GHG Protocol
Indicator Description Higher quality data
Technology The extent to which the data Data generated using the same or similar
representativeness set reflects the actual technology
technology used

Indicator Description Higher quality data
Temporal The extent to which the data Data generated within the same reporting year
representativeness set reflects the actual time or or near the reporting period
age of the activity
Data generated and used within three years or
updated every three years is generally an
indicator of quality data although there are no
bright lines
Geographical The degree to which the data Data generated from the same or similar
representativeness set reflects the actual geographical location or site
geographical location of the
activity (for example, country
or site)
Completeness The degree to which the data Data from all relevant sites over an appropriate
is statistically representative of time period is collected and used
the relevant activity
Data addresses seasonal and other normal
Includes the percentage of fluctuations in data
locations for which the data is
available and used out of the
total number that relate to a
specific activity
Reliability The degree to which the Data generated is verified based on

sources, data, collection appropriate measurements or assumptions
methods and verification used are verified (for example, through on-site
procedures used to obtain the monitoring, reviewing calculations, or cross-
data are dependable checking with other sources.
In addition, IFRS S2 paragraphs B32 to B63 provide guidance for measurement of

emissions, including selecting the measurement approach, inputs and
assumptions and navigating other judgements. Although specific to entities
reporting in accordance with the ISSB standards, this guidance may be helpful to
all entities reporting scope 3 emissions.
As highlighted above, entities should select data that is the most representative in
terms of technology, time, and geography. Data used should also be complete
and reliable. Further, when possible, product-specific, process-specific, or site-
specific emissions data should be collected from suppliers and other value chain
partners. The reporting entity should first engage with tier 1 suppliers — that is,
the entities from which it purchases goods or services — given the direct
contractual relationships between these suppliers and the reporting entity.
Where relevant, a reporting entity may also seek to obtain information from its tier
2 suppliers — the entities from which the tier 1 suppliers purchase goods and
services. 125 Lastly, when the reporting entity is not able to collect supplier-specific
data or if the data obtained is not complete, the reporting entity should use
secondary data from reliable sources. In determining the appropriate sources, the
reporting entity should focus on alignment of the source with the data quality
indicators in Figure SRG 7-35. The availability and quality of data obtained by an
entity during the data collection process will affect its selection of measurement
and calculation methods used to determine its scope 3 emissions.
125
GHG Protocol, Scope 3 Standard, page 78.

7.7.5 Measuring scope 3 emissions
After an entity has developed a complete inventory of sources of scope 3 activities

and emissions, the next steps are to aggregate the data and select an emissions
calculation methodology. Since by definition, the entity does not directly control
scope 3 emissions, these emissions are generally quantified using the indirect
calculation methodology depicted in Figure SRG 7-36.
Figure SRG 7-36

=
Global
Emissions
(CO2e)
Activity
data x Emissions
factor(s) x warming
potentials
Note that this is the same formula used in indirect measurement of scope 1 and
scope 2 emissions (see Figures SRG 7-22 and SRG 7-27, respectively). The
process for collecting data for scope 3 emissions may be quite different from the
collection process for scope 1 and scope 2, however, due to the variability in value
chain activities and the fact that these emissions occur outside of the entity’s own
operations.
The distinction between data types is particularly critical for the measurement of
scope 3 emissions, as the most appropriate calculation approach differs for each
relevant category of scope 3 emissions based on the nature of the data available.
The GHG Protocol has issued Technical Guidance for Calculating Scope 3
Emissions, which is a supplement to the Scope 3 Standard, and provides
guidance on different calculation approaches. Figure SRG 7-37 summarises some
of the approaches discussed in the Scope 3 Calculation Guidance as acceptable
for each scope 3 category. 126
Figure SRG 7-37

Summary of calculation methods for scope 3 categories
Category 1 2 3 4 5 6 7 8 9 10 11* 12 13 14 15
Supplier- specific    
Average- data /product           
Spend-based (note 1)    
Hybrid  
Distance-based    
Site-specific   
Fuel-based    
Waste-type  
Category-specific (note 2)    
* Use of products sold calculation methods vary by direct use and indirect use phase
emissions. Refer to the Scope 3 Calculation Guidance for more information.
Note 1: This also includes the average-spend based approach.
126GHG Protocol, Technical Guidance for Calculating Scope 3 Emissions (Scope 3

Calculation Guidance), Appendix D, pages 162–182.

Note 2: Category-specific calculation methods include methods for lessor/lessee, franchise,
project, asset-specific and investment-specific, as applicable.
Among the most used calculation methods across multiple scope 3 categories are
the supplier-specific, average-data, and spend-based calculation methods. Each
of these calculation approaches falls under the scope of the indirect measurement
technique but vary in terms of data inputs. Entities will need to apply judgement as
to the measurement approach that is most appropriate depending on availability
and quality of data.
Beyond the supplier-specific, average data, and spend-based calculation

methods, the Scope 3 Calculation Guidance prescribes additional calculation
methods for certain categories. These other calculation techniques are also
indirect but may use different data inputs due to the nature of activities. Industry
groups are also establishing calculation methodologies for calculating scope 3
emissions.
Supplier-specific calculation method
The supplier-specific calculation method relies on emissions data obtained from

suppliers in the value chain as depicted in Figure SRG 7-38. The supplier-specific
method is most appropriate when product-level emissions data from first-tier
suppliers is available.
Figure SRG 7-38

Calculating scope 3 emissions — Supplier-specific method
=
Supplier-
Activity Global
Emissions
(CO2e)
data
(quantity)
x specific
emissions x warming
potentials
factor(s)
Practically, an entity would identify the quantity of goods purchased or consumed

from its suppliers and multiply them by the supplier-specific factors to calculate the
scope 3 emissions associated with its purchased or consumed goods. If emission
factors do not already capture the impact of global warming potential values, GWP
values should also be factored into the calculation.
Average-data or average-product calculation method
The average-data method estimates emissions by collecting data on the mass (for
example, kilograms or pounds) of the product and multiplying it by the relevant
secondary emission factors (for example, industry average) as depicted in Figure
SRG 7-39. The average-data method is most appropriate when (1) the entity
collects activity data based on the mass or volume of goods and (2) access to
emission factors is limited to industry-averages (such as those collected from data
systems or bill of materials), as opposed to product-level data for each unit
produced.
Figure SRG 7-39

Calculating scope 3 emissions — Average-data method
=
Emission
Activity Global
Emissions
(CO2e)
data (mass
or volume)
x factor(s) per
mass of x warming
potentials
production

To quantify emissions based on average activity data, the most appropriate
emissions factor is one that is based on the mass or volume of products
purchased or consumed. Similar to the supplier-specific method, if emission
factors do not already capture the impact of global warming potential values, GWP
values should also be factored into the calculation.
An alternative to using either the supplier-specific or average-data calculation

methods is to use a hybrid method, which combines the use of supplier-specific
data (where available) and secondary data. When applying the hybrid method,
reporting entities would obtain scope 1 and scope 2 emission data directly from
suppliers, measure upstream emissions using suppliers’ activity data and an
appropriate emission factor, and would supplement with secondary data to
calculate upstream emissions wherever supplier-specific data is not available.
Spend-based calculation method
The spend-based method is most appropriate when use of the supplier-specific,

average data, and hybrid methods are not feasible due to data limitations. This
calculation method estimates emissions by collecting data on the economic value
of goods and services purchased and multiplying it by relevant secondary
emission factors as depicted in Figure SRG 7-40.
Figure SRG 7-40

Calculating scope 3 emissions — Spend-based method
Emission
=
Activity
Global
x
factor(s) per
Emissions
(CO2e)
data (value
of goods
economic
value or
x warming
potentials
purchased) production
To quantify emissions using the spend-based method, reporting entities would

obtain the economic value of goods purchased or consumed from purchase
records, bill of materials, or other data systems. The value would be multiplied by
an emissions factor that represent emissions per unit of economic value, such as
tonnes of CO2e per dollar spent.
A simplified scope 3 calculation is included in Example SRG 7-7.
Example SRG 7-7

Calculating scope 3 emissions for category 1 — purchased goods and services.
Moringa Manufacturing Inc. (MMI) is a clothing manufacturer that produces T-
shirts. Manufacturing activities performed by MMI employees on-site include
sourcing raw materials, such as cotton, silk and wool from third-party suppliers,
washing, steaming, cutting and sewing fabric, and packing t-shirts for shipment to
third-party retailers. Note that MMI is the same entity used in Example SRG 7-2.
MMI’s scope 3 category 1 emissions inventory reflects upstream, or cradle-to-

gate, emissions associated with purchased goods (for example, fabrics) used in
the manufacturing of T-shirts. This category captures indirect emissions occurring
in the upstream value chain from the point of weaving the fabrics (including
textiles such as cotton, silk and wool), to the point of receipt by MMI.
MMI utilises the Scope 3 Standard and the Scope 3 Calculation Guidance for
measuring and reporting its scope 3 emissions from purchased goods and
services. MMI’s suppliers do not provide supplier-specific emissions information,
therefore, based on the data available, MMI decides to use the spend-based
method for calculating scope 3 category 1 emissions.

To calculate its emissions using the spend-based method, MMI collects activity
data from supplier’s invoices and bills of lading that it obtains from its accounting
department. Activity data aggregated by MMI includes US dollars spent on textiles
as well as the related type of fabrics. Based on its invoices, MMI purchases 100kg
of fabric for a total of USD 200.
MMI’s policy is to use the best available emission factors that are most relevant to
the period being reported from the U.S. EPA emission factors hub. The U.S. EPA
emissions factors hub is a common source of emission factors for spend-based
calculations, that provides emission factors expressed in CO2e per US dollar. 127
Given the activity data available to MMI, it applies the emission factor published
by the EPA (- 0.452 kg of CO2e) for every dollar spent on textiles purchased from
a textile and fabric finish mill.
MMI calculates its scope 3 emissions for purchased goods and services using the
spend-based method as follows:
(e)=(b)x(c) (f)=(e) /
(a) (b) (c) (d) x(d) 1000
Global
Spend-based calculation Fabric Fabric Emission warming
method purchased purchased factor (CO2) potential Emissions Emissions
Metric
kg CO2e / tonnes
kg US Dollars dollar spent kg CO2e
Category 1 emissions from

purchased fabrics 100 200 0.452 1 90.4 0.0904
This calculation reflects upstream cradle-to-gate emissions associated with the

weaving and finishing of fabrics, and does not include other upstream emissions,
such as transportation and distribution of fabrics from the suppliers to MMI.
While the spend-based calculation remains the most commonly used method for
calculating scope 3 category 1 emissions, entities could alternatively apply other
calculation methods, depending on its ability to access certain activity data and
emission factors. For example, if MMI has access to supplier-specific emission
factors quantifying emissions per kilogram of cotton, silk, or wool, it could apply
the supplier-specific method as a more precise calculation of its upstream scope 3
category 1 emissions.
7.7.5.1 Allocating value chain emissions
Scope 3 emissions occur at sources not owned or controlled by the reporting

entity and are often a result of activities associated with multiple customers or
processes. If the entity obtains secondary emissions data at a product or facility-
level, the emissions will need to be allocated among the outputs. Generally, the
allocation is performed by applying either a physical or economic allocation
process.
Physical allocation apportions the emissions from an activity based on the

physical relationship between inputs and outputs and the quality of emissions
generated, as depicted in Figure SRG 7-41. For example, a purchaser of finished
goods may allocate total emissions from a manufacturing activity based on the
number or volume of units purchased from a supplier as a percentage of the
supplier’s total number or volume of units produced.
U.S. EPA, EPA Supply Chain Greenhouse Gas Emission Factors for US Industries and
127
Commodities, Supply Chain Factors Dataset v1.2, supply chain emission factor with
margins for textile and fabric finishing mills, last modified April 20, 2023.

Figure SRG 7-41
Allocation of scope 3 emissions — physical method
=
Total
Allocated Number of
emissions
(CO2e)
units
purchased
÷ Total units
produced x product
level
emissions
Emissions may also be allocated using an economic allocation method. This

allocation methodology generally relies on a monetary or financial data as
opposed to physical input/output data. In applying an economic allocation model,
entities may allocate total emissions based on the market value of goods
purchased by the entity from a supplier as a percentage of the total market value
of all goods produced by the supplier as depicted in Figure SRG 7-42.
Figure SRG 7-42

Allocation of scope 3 emissions — economic method
=
Market Market Total
Allocated
emissions
(CO2e)
value of
units ÷ value of
total units
produced
x product
level
purchased emissions
Either of these methods may require estimation if the purchaser does not have
visibility into the output or market value of goods produced and is unable to obtain
data from its supplier.
Allocating emissions based on secondary data is not a commonly used practice

as it generally results in less precise results than calculating emissions using the
indirect measurement technique. We believe it should be avoided where possible.
Further, when primary data is available to calculate scope 3 emissions, allocation
is not necessary and must not be used. The Scope 3 Standard includes a decision
tree to help entities in selecting the allocation approach. 128
7.8 Establishing base year emissions

The concept of a base year or baseline amounts is used widely in sustainability
reporting as a reference point for disclosing progress against an entity’s
sustainability targets and goals. ESRS, the IFRS Sustainability Disclosure
Standards, and the SEC climate disclosure rules require entities to disclose
certain information about targets and goals, however, they do not require entities
to establish such targets and goals. As a result, notwithstanding the potential
importance and relevance of base year or baseline information, the guidance on
how an entity should determine these amounts is relatively limited, although more
guidance is provided in the area of greenhouse gas emissions than other topics.
Note that unlike the other frameworks, the GHG Protocol does require an entity to
establish base year emissions (see SRG 7.8.1.1).
This section addresses specific considerations for establishing and disclosing

base year and baseline amounts related to greenhouse gas emissions (SRG
7.8.1). It also discusses changes to the base year and baseline in periods after
they are initially established (SRG 7.8.2). See SRG 3.5.4 for general discussion of
the base year and baseline in the context of other metrics and targets.

7.8.1 Base year and baseline emissions
Reporting entities are increasingly demonstrating their commitment to lowering

emissions and reducing carbon footprint by establishing GHG emissions
reductions targets and goals. The base year and baseline value are foundational
to establishing targets and goals because they establish a benchmark point from
which progress is measured and emissions are compared over time.
ESRS E1 paragraph 75 defines a base year as follows:
ESRS 1 paragraph 75
A base year is the historical reference date or period for which information is
available and against which subsequent information will be compared over time.
ESRS also refers to the ‘baseline’ value as the quantity in the base year against
which progress is measured. The GHG Protocol generally uses the term ‘base
year’ or refers to ‘base-year’ emissions whereas IFRS S1 refers to the ‘base
period’ as the point of comparison and the SEC climate disclosure rules refer to a
‘baseline’ and ‘baseline time period’. These terms are generally used
interchangeably.
The concept of the base year is a critical component of monitoring changes in

emissions and in comparing to a set target or goal, although the requirements for
electing and reporting the GHG emissions base year vary among the reporting
frameworks as discussed in the following sections.
7.8.1.1 Base year emissions — GHG Protocol
Unlike the other frameworks which require base year disclosures only in the
context of established targets or goals, an entity reporting under the GHG Protocol
is required to establish and disclose a base year for which emissions data is
available and verifiable. The GHG Protocol allows an entity to elect one of two
base year approaches:
□ a fixed base year
□ a rolling base year — that is, a base year that shifts forward at regular
intervals of time
An entity’s approach will depend on many factors including its business model and
whether the entity structure changes frequently through acquisitions and
disposals. For example, an acquisitive or growing entity may elect a rolling base
year to ensure its base year values are realigned with its operational reality. In
contrast, many regulatory programs require entities to adopt a fixed base year
against which emissions are measured. Entities are required to disclose the base
year approach elected as well as the rationale for electing it. 129
In addition, the GHG Protocol requires an entity to disclose its chosen base year
and to present its emissions profile over time consistent with its base year
emissions. Practically, this means reporting entities are required to use the same
boundaries and methodologies in preparing base year and current period
emissions for comparability. See SRG 7.8.2 for discussion of changes to base
year emissions. In addition to reporting the current year and base year emissions,
the GHG Protocol also allows entities to disclose emissions in the intervening
period for comparative purposes, although disclosure of comparative information
or other intervals between the base year and current period is not required. 130

130 GHG Protocol, Corporate Standard, pages 63-64.

7.8.1.2 Base year emissions — ESRS
ESRS E1 requires disclosure of base year and baseline values if the entity sets
emission reduction targets or goals. The established baseline period must be
either (1) a fixed base year or (2) a base value derived from a three-year average,
if the entity deems that an average is more representative of its operations. ESRS
also requires entities to disclose how the baseline value is representative of their
emissions profile as well as other factors.
ESRS E1 AR 25(a)
The undertaking shall briefly explain how it has ensured that the baseline value
against which the progress towards the target is measured is representative in
terms of the activities covered and the influences from external factors (e.g.,
temperature anomalies in a certain year influencing the amount of energy
consumption and related GHG emissions). This can be done by the normalisation
of the baseline value, or, by using a baseline value that is derived from a 3-year
average if this increases the representativeness and allows a more faithful
representation.
Further, ESRS E1 AR 25 provides provisions for establishing a base year and

base line emissions: 131
□ for existing targets — currently applied base year
□ for new targets — either first year of application of the standard or a base year
that does not precede the first reporting year of the new target period by more
than three years — for example, for a target period from 2025 to 2030, with
2030 as the actual target year, the base year elected shall be between 2022
and 2025
□ after the initial period — an entity is required to update its base-year starting in
2030, and every five-year period thereafter
In addition, entities are required to disclose the base year and baseline value for
comparative purposes against the current period emissions. ESRS also permits
entities to optionally present information about milestones achieved — including
GHG emissions reductions — between the base year and the current period. 132
7.8.1.3 Base year emissions — IFRS S2
As part of the disclosure requirements for climate-related targets, IFRS S2

paragraph 33(e) requires entities to disclose the base year from which progress
towards a goal or target is measured. The IFRS Sustainability Disclosure
Standards, however, do not provide specific guidance on how to establish the
base year.
7.8.1.4 Base year emissions — SEC
The SEC climate disclosure rules also do not prescribe specific guidance for how
to establish or track progress against a base year. Given the flexibility in the SEC
rules, however, registrants could look to the GHG Protocol or another method and
provide transparent disclosure of the method used. See the discussion of base
year requirements under the GHG Protocol in SRG 7.8.1.1.
131 ESRS E1 paragraph 34; ESRS E1 AR 25(b) and AR 25(c).


7.8.2 Changing base year emissions
Because the base year is intended to provide a benchmark against which

progress is tracked over time, an entity may need to update its base year as a
result of changes in subsequent periods. The requirements for updating base year
emissions, however, vary among the sustainability reporting frameworks. See
discussion of considerations for updating base year emissions under the GHG
Protocol, ESRS, and the IFRS Sustainability Disclosure Standards in the following
sections.
Because there is no explicit guidance in the SEC climate disclosure rules related
to changing base year emissions, we believe an entity may look to the
considerations discussed with respect to changes base year emissions under the
GHG Protocol (see SRG 7.8.2.1).
7.8.2.1 Changing base year emissions — GHG Protocol
The GHG Protocol provides prescriptive guidelines as to when and how to

recalculate base-year emissions. In accordance with this guidance, entities are
required to recalculate base-year emissions in response to significant changes to
the entity's emissions profile including the following types of changes that would
affect GHG emissions:
□ Entity structure
Changes in the entity as a result of an acquisition or disposal will change the
comparability of current year emissions to the baseline value, thus, both the
base year and current year emissions should be updated for comparability
(see SRG 7.10.7). Further, an adjustment to the base year amount should be
made even if the acquisition or disposal was included in the target or part of
the entity’s plan.
For example, a merger or acquisition may converge operations with

significantly different GHG emissions profiles. Or, a disposal of an emissions-
heavy subsidiary would result in a significant reduction of the emissions
profile. In either case, the GHG Protocol would require calculation of base
year emissions to ensure comparability.
□ The organisational boundary approach

A change in how a reporting entity defines its organisational boundary (that is,
a change in its organisational boundary approach), may change the entities,
assets, and operations that are included in its organisational boundary. This is
akin to a structural change and would require revision of the base year if the
impact of the change in approach is material.
□ Measurement methodologies
A change in the entity’s calculation or measurement methodologies as a result
of an improvement of the quality of the information available to be used in
emission calculations. This type of change may impact reported emissions
even though there has been no change to the underlying emission sources.
Methodology changes related to scope 2 emissions, for example, may
include:
o A change from local grid emission factors to supplier-specific factors that

are newly available
o A change from internationally published emission factors, such as IEA, to

a regional factor which it deems to be more precise and representative of
its local energy grid, such as DESNZ and DEFRA

Either of these changes would constitute a change in measurement
methodology and would trigger recalculation of base year emissions if
material.
The Corporate Standard also provides certain exceptions to its baseline revision
guidelines, including instances when changes in emissions occur due to natural
organic growth or decline, or where changes in emissions factors are driven by
changes in the underlying activities generating emissions (for example, when
there is a change in the type of fuel or technology used in operations). The
Corporate Standard also emphasises that in certain instances when management
changes its calculation methodology to use more accurate data, such data may
not be available for past years, and as such, revision may not be practical. 133
The GHG Protocol requires that base year emissions be recalculated and revised
when a significant change occurs or when an error is identified, however, it does
not prescribe a significance threshold instead clarifying that it is a qualitative
and/or quantitative criterion used to define any significant change to the data,
inventory boundary, methods, or any other relevant factors. It is the responsibility
of the entity to determine and disclose the ‘significance threshold’ that triggers the
recalculation of base year emissions. 134
When the baseline is changed, the rationale should be documented, and the
nature and effect of the change must be transparently disclosed.
Question SRG 7-36
In accordance with the GHG Protocol, when should a structural change triggering
a revision of base year emissions be reflected in an entity’s GHG emissions
inventory?
PwC response
When reporting in accordance with the GHG Protocol, a significant change in
measurement methodology, organisational boundary approach, or structure (for
example due to mergers, acquisitions, or disposals), should be reflected as if it
had occurred at the beginning of the period in which it occurs (see SRG 7.10.7). 135
Similarly, an entity that acquires an operation should recalculate its base year
emissions as if such emissions from those operations were included for the
entirety of the base year.
The GHG Protocol does, however, permit recalculations of the current year and
base year to be reflected in a period subsequent to a structural change, if the data
is not available to recalculate the emissions profile for the change. This may occur
for example when data does not exist for a newly acquired company in the year of
change. 136
For example, Company A establishes its baseline emissions as of 20X1. In the

second quarter of 20X3, it acquires an operation which generates 10 metric
tonnes of CO2e emissions per year. Company A will include the additional 10
metric tonnes of CO2e emissions as if those operations had been acquired at the
beginning of 20X3. Company A will also revise its base-year emissions (20X1) to
reflect the effect of the acquisition.


7.8.2.2 Changing base year emissions — ESRS
ESRS E1 AR 25(b) states “the baseline value and base year shall not be changed
unless significant changes in either the target or reporting boundary occur”. When
a significant change occurs, ESRS E1 allows entities to recalculate and disclose
the new base year and baseline value. Entities are also required to disclose how
the new baseline value affects emissions reduction targets set. In addition, ESRS
E1 specifies that reporting entities must update their base year every 5 years,
beginning from 2030. 137
Refer to SRG 3.5.4 and SRG 3.5.5 for more information on baseline and
comparative information, respectively.
7.8.2.3 Changing base year emissions — IFRS Sustainability Disclosure

Standards
The ISSB standards do not prescribe guidance for how to incorporate changes in
the entity structure on sustainability information, including base year information.
Note, however, that the “Transition Implementation Group on IFRS S1 and IFRS
S2” (TIG) discussed the consequences of an acquisition or disposal on reporting
of GHG emissions in its meeting on 13 June 2024. As discussed in SRG 7.10.7,
the TIG clarified that the reporting entity should align with financial reporting for
purposes of reporting GHG emissions related to an acquisition or disposal. The
TIG meeting minutes, however, also stated that this clarification does not address
disclosures about targets or progress against the baseline. 138
In the absence of additional clarifying guidance, we believe entities may consider

factors similar to those discussed in SRG 7.8.2.1 in evaluating whether updates to
the base year are needed as a result of structural or other changes affecting
current period reporting.
7.9 GHG emissions reductions and removals

Strategies to reduce GHG emissions are evolving in response to stakeholder and
regulatory pressure to establish targets and commitments. GHG emissions
reductions may be achieved in a myriad of ways — including decarbonisation,
energy efficiency or sustainable product development, or through the purchase of
carbon offsets or credits.
An offset represents a reduction of one metric ton of CO2 emissions or an

equivalent amount of other greenhouse gas emissions, which occurs outside the
entity’s own emissions generating activities or operations. The term ‘offset’ is used
to refer to an instrument that reflects these reductions or removals. These
instruments are often referred to interchangeably as a ’carbon offset credit’, a
‘carbon credit’, or a ‘carbon offset’. We use ‘carbon offset’ or simply ‘offset’ to refer
to a tradable instrument that is used to support an entity’s claims in sustainability
reporting.
The use of voluntary carbon offsets as an emissions reduction strategy has

become more prominent in recent years and is currently one of the most popular
emission reductions strategies. Carbon offsets may be generated from a wide
variety of project sources and have varying levels of quality quantification and
verification. Given the lack of (1) transparency about many of these projects and
(2) standards to verify GHG emissions reductions, entities need to ensure
137ESRS E1 AR 25.
138Transition Implementation Group on IFRS S1 and IFRS S2, ‘Summary of Transition
Implementation Group on IFRS S1 and IFRS S2 meeting held on 13 June 2024’ (TIG June
Meeting Summary), paragraph 23(c)(i), page 11.

transparent disclosure of carbon offsets used as part of their emission reduction
strategies.
7.9.1 GHG emissions reductions and removals — general disclosure

requirements
All the reporting regimes require reporting of absolute or gross GHG emissions.
Entities are not permitted to net emissions reductions efforts against their GHG
emissions. Instead, these efforts would be disclosed separately including (1)
internal projects that reduce GHG emissions from own operations and (2) carbon
offsets. Figure SRG 7-43 summarises the disclosures required across the
frameworks.
Figure SRG 7-43

Summary of GHG reductions and carbon offset disclosure requirements
Framework Required disclosures
GHG Protocol □ No mandatory reporting requirements related to GHG reductions, including

carbon offsets
(Corporate
Standard, pages 60– □ Strongly recommended — but optional — reporting of internal GHG
61) reduction projects (that is, projects that reduce GHG emissions from its own
operations, within its own boundaries) separately from carbon offsets
generated outside the inventory boundary
□ Optional disclosures of information on whether and how tradeable carbon
offset credits have been verified
ESRS □ Separately disclose:

(ESRS E1 o GHG reductions or removals (in metric tonnes of CO2e) from projects
paragraphs 56–61 developed within its own operations or contributed to in its value chain
and AR 56–AR 64)
o GHG reductions or removals (in metric tonnes of CO2e) from projects
outside of its operations or value chain financed through the purchase of
carbon credits
□ Quantitative and qualitative information on carbon credits, including
verification information, source of offsets, timing of retirement, and
information on recognised quality standards
□ Qualitative information on the methodologies and calculations used specific
to the GHG removal or storage
□ Interplay of carbon credits with the entity’s climate change mitigation policy,
if applicable (note 1)
ISSB standards □ The type of credit (nature-based or technological based) as well as whether
offset achieved through reduction or removal
(IFRS S2
paragraphs 36(e) □ Which third-party scheme will verify or validate the credit
and B70–B71)
□ Other information necessary to understand the credibility and integrity of
carbon credits and how the entity plans to use them
□ The planned use of carbon offsets, if used to achieve any net greenhouse
gas emissions target, including how and to what extent used (note 1)

SEC climate □ Source and cost of the offsets, a description and location of the underlying
disclosure rules projects, as well as details of any registries or other authentication of the
offsets
(Regulation S-K Item
1504(d) and □ The amount of avoidance, reduction, or removal represented by carbon
Regulation S-X Item offsets, when used as a material component of a plan to achieve climate-
14-02(e)) related targets or goals (note 1)
□ Disclosure of information on the accounting for carbon offsets and the effect
on the financial statements
Note 1: Although entities are required to disclose the planned use of carbon offsets to
achieve emissions reduction targets, the reporting of actual scope 1, scope 2, and scope 3
GHG emissions must be presented gross and cannot include any carbon offsets.
Entities reporting in accordance with the GHG Protocol or ESRS should refer to
the discussion in the following sections. Further, given the relatively limited
disclosures required by IFRS S2 and the SEC climate disclosure rules, we
recommend entities consider supplementing their disclosures with the type of
information required by the GHG Protocol or ESRS as discussed in the following
sections.
7.9.2 GHG emissions reductions and removals — GHG Protocol

incremental disclosures
The GHG Protocol does not mandate disclosure of the use of carbon offsets and
other GHG reductions instead outlines “Optional information” to consider for
disclosure. 139 Although not required, we recommend entities reporting in
accordance with the GHG Protocol provide these disclosures given the
proliferation of carbon offsets and the current diversity in practice.
The GHG Protocol recommends inclusion of both of the following:
□ information on offsets that have been purchased or developed outside the

inventory boundary
□ information on reductions at sources inside the inventory boundary that have

been sold/transferred as offsets to a third party
Further, it recommends that entities subdivide disclosures between GHG

removals and emissions reduction projects and include information about
purchased offsets or credits, including whether they have been certified or verified
by an external program. 140
Additionally, although the GHG Protocol does not prescribe specific requirements
related to the timing of recognition or claiming of offsets in GHG emissions
reporting, we believe an entity should report offsets in the period in which it retires
the offset with the applicable registry.
7.9.2.1 GHG emissions reductions and removals — ESRS incremental

disclosure requirements
ESRS separates disclosure of GHG emissions reductions, removals, and carbon

offsets as follows: 141
139
GHG Protocol, Corporate Standard, pages 63-64.
141 ESRS E1 paragraphs 56–61.

□ Internally developed
An entity must disclose the amount of GHG removals for each type of removal
activity, disaggregated by removals that occur in its own operations and those
that occur in its upstream and downstream value chain; the disclosure must
also include description of calculation methodologies and assumptions used.
□ Financed outside own operations or value chain

An entity must separately disclose the total amount of carbon credits as well
as the amount of carbon credits that are verified by recognised quality
standards and retired or cancelled on behalf of the entity within the reporting
period. The entity is also required to disclose the amount of carbon credits
planned to be cancelled or retired on its behalf in the future, and whether such
credits are based on existing contractual agreements.
Further, ESRS do not permit an entity to include offsets in net zero or other
emissions reduction targets. 142 In cases where a reporting entity discloses a net-
zero target and GHG emissions reduction target, however, it is required to explain
how it will reduce the residual GHG emissions after 90-95% of the GHG emissions
reduction has been achieved and whether that will include GHG removals or the
use of carbon offsets. 143 Also, an entity is required to provide additional
disclosures if it has made a public claim involving the use of offsets to achieve
GHG neutrality. 144 This means that entities should be prepared to disclose why
resources have been directed toward purchases of offsets rather than emissions
reductions within their own boundaries.
7.10 Reporting GHG emissions

Effective greenhouse gas emissions reporting provides users with a transparent,
relevant, complete, and accurate picture of an entity’s emissions inventory. In
addition, where applicable, the disclosures should reflect the impact of an entity’s
actions taken to manage its emissions. The general form of GHG emissions
disclosures required by the sustainability standards and rules are underpinned by
the foundational concepts discussed in this chapter. The specific disclosures
required, however, will vary depending on which reporting framework is applied.
Each of the reporting regimes require entities to provide quantitative disclosures

as well as qualitative information to help users understand the assumptions,
limitations, and potential sources of uncertainties inherent in the GHG emissions
inventory. Common disclosures include the period covered, a description of the
entity’s GHG emissions reporting boundary — inclusive of both the organisational
and operational boundaries — and details around the methodologies, inputs, and
assumptions that underpin calculation and measurement.
Figure SRG 7-44 summarises certain general characteristics of GHG emissions

disclosure requirements:
Figure SRG 7-44

General qualitative GHG emissions disclosure requirements
ISSB GHG
General disclosure requirements ESRS standards SEC Protocol
A description of the reporting boundary, (note 1)   

including organisational and operational
boundaries
142 ESRS E1 paragraph 34(b).


ISSB GHG
General disclosure requirements ESRS standards SEC Protocol
Methodologies used to calculate or    

measure emissions
Total emissions, separately for each    

scope, presented gross and independent
of any GHG trades such as sales,
purchases, transfers, banking of
allowances, offsets, or credits
Disaggregate reporting of emissions data Disaggregate Disaggregate Disclose if 

for all seven GHGs in metric tonnes of as appropriate as appropriate material
CO2e (note 2) (note 3) (note 4)
Direct CO2 biogenic emissions (defined  

as CO2 from burning biomass/biofuels),
reported separately from the scopes
GHG emissions intensity metric based on 

total GHG emissions per net revenue
Note 1: Note that there is no requirement in ESRS to specifically disclose the organisational
boundary approach because all entities are required to follow a prescribed approach. See
discussion of the required approach in SRG 7.3.2.
Note 2: ESRS E1 AR 41 requires disaggregation of GHG emissions as appropriate,
although it provides for flexibility in the method used to disaggregate.
Note 3: IFRS S2 Accompanying Guidance on Climate-related Disclosures paragraph IE13
states that IFRS S2 does not explicitly require the disaggregation of GHG emissions by the
seven constituent gases. It provides examples of situations, however, when an entity may
need to provide disclosure by constituent gas to meet the general aggregation and
disaggregation requirements in IFRS S1 (see SRG 4.4.2.3 for more information).
Note 4: The SEC climate disclosure rules require disclosure of individual constituent gases
only if such gases are individually material.
Figure SRG 7-43 is not a comprehensive listing of all GHG-related reporting

requirements; additional reporting requirements are discussed in this section as
follows:
□ Quantitative GHG emissions disclosures (SRG 7.10.1)
□ Organisational boundary disclosures (SRG 7.10.2)
□ Measurement methodologies (SRG 7.10.3)
□ Metrics and targets (SRG 7.10.4)
□ Scope 2 emissions disclosures (SRG 7.10.5)
□ Scope 3 emissions disclosures (SRG 7.10.6)
Reporting entities should note that this section provides highlights of certain of the
required disclosures related to GHG emissions. For a complete list of disclosure
requirements, entities should refer to the relevant standards or rules.

Question SRG 7-37
What disclosures are required by California SB 253?
PwC response
California SB 253 requires in scope entities to measure and report their scope 1,
scope 2, and scope 3 emissions in accordance with the GHG Protocol. The law
does not include any incremental disclosures to those required by the GHG
Protocol. As such, entities preparing reporting for California SB 253 should follow
the disclosure requirements in the GHG Protocol. See SRG 7.2.5.1 for more
information on overall requirements of California SB 253.
Question SRG 7-38
What disclosures are required by California SB 261?
PwC response
California SB 261 requires in scope entities to provide scope 1 and scope 2 GHG
emissions as part of their broader report prepared in accordance with TCFD. It
also recommends entities consider disclosure of scope 3 emissions. Further,
TCFD generally requires an entity to follow the GHG Protocol for calculation of
GHG emissions, although national reporting methodologies may be used if
consistent with the GHG Protocol (see SRG 7.2.5.2). The GHG-specific disclosure
requirements in TCFD, however, are relatively scanty compared to those required
under the GHG Protocol or other frameworks.
Excerpt from TCFD, Strategy, Recommended Disclosure b), Guidance for all
Sectors 145
Organizations that have made GHG emissions reduction commitments, operate in

jurisdictions that have made such commitments, or have agreed to meet investor
expectations regarding GHG emissions reductions should describe their plans for
transitioning to a low-carbon economy, which could include GHG emissions
targets and specific activities intended to reduce GHG emissions in their
operations and value chain or to otherwise support the transition. [footnotes
omitted]
Excerpt from TCFD, Metrics and Targets, Recommended Disclosure b),

Guidance for All Sectors 146
Organizations should provide their Scope 1 and Scope 2 GHG emissions

independent of a materiality assessment, and if appropriate, Scope 3 GHG
emissions and the related risks. All organizations should consider disclosing
Scope 3 GHG emissions. …
As appropriate, organizations should consider providing related, generally
accepted industry-specific GHG efficiency ratios.
GHG emissions and associated metrics should be provided for historical periods
to allow for trend analysis. In addition, where not apparent, organizations should
provide a description of the methodologies used to calculate or estimate the
metrics. (footnotes omitted)
We would generally expect an entity to look to the GHG Protocol (or national
guidance, if applicable) for guidance in developing the relevant disclosures for
145 TCFD, Implementation Recommendations, October 2021, pages 18–19.

146 TCFD, Implementation Recommendations, October 2021, pages 21–22.

TCFD reporting. In addition to the GHG-specific disclosures outlined above, TCFD
also requires broader disclosures around governance, strategy, risk management,
and metrics and targets. These broader disclosures may also include some
disclosure of GHG-related information. See SRG 22, Jurisdictional reporting
requirements [coming soon], for more information.
TCFD industry-specific guidance
In addition to the general guidance for all industries, TCFD provides supplemental
guidance and disclosure recommendations for certain sectors. See further
discussion, including a list of the affected industries, in SRG 7.2.5.2.
7.10.1 Quantitative GHG emissions disclosures
Quantitative disclosure of gross GHG emissions information — with separate

disclosure of each scope, excluding the impact of offsets and credits — is
foundational to the completeness and accuracy of GHG emissions reporting.
Figure SRG 7-45 depicts disclosure of a GHG emissions inventory in a

quantitative tabular manner. Although this is not an exhaustive list of GHG
emissions reporting requirements, it highlights key quantitative data to be
presented. Additional scope 2 and scope 3 reporting requirements are addressed
in SRG 7.10.5 and SRG 7.10.6, respectively.
Figure SRG 7-45

Quantitative GHG emissions inventory example
GHG
General disclosure requirements (in tonnes of CO2e) ESRS ISSB SEC Protocol
Scope 1 emissions    
Scope 2 emissions (location-based method)   (note 1) 
Scope 2 emissions (market-based method)  (note 2) (note 1) 
Total scope 1 and scope 2 emissions (location-based 
method)
Total scope 1 and scope 2 emissions (market-based 

method)
Scope 3 category 1 emissions (note 3)   (note 4) 

Total scope 3 emissions (note 3)   (note 4) 
Total scope 1, scope 2, and scope 3 emissions (location- 
based method)
Total scope 1, scope 2, and scope 3 emissions (market- 

based method)
Carbon offsets or other GHG trades (sales, purchases,    

transfers, or banking of allowances)

Note 1: The SEC climate disclosure rules permit registrants to elect a protocol or standard
for measuring GHG emissions, including the market-based, the location-based, or both
methods for scope 2 emissions, as prescribed by the GHG Protocol.
Note 2: Separate disclosure of scope 2 emissions using the market-based method is not
required for entities reporting under the ISSB standards. Entities are, however, required to
disclose “information about any contractual instruments that is necessary to inform users
about the entity’s Scope 2 greenhouse gas emissions”. 147
Note 3: Disaggregation of significant scope 3 categories is required. For illustrative
purposes, only certain scope 3 categories have been presented, however, ESRS, the ISSB
standards, and the GHG Protocol require entities to present all significant categories of
scope 3 emissions.
Note 4: SEC registrants are not required to report scope 3 emissions (see SRG 7.7). There
may be instances, however, that an SEC registrant may need to report information about
scope 3 emissions as part of reporting a target or goal.
While there are foundational similarities in GHG emissions disclosures across the
standards and rules, there are some significant differences among the detailed
disclosure requirements, as highlighted in the following sections. Entities should
ensure they understand the applicable detail requirements in preparing their
disclosures.
7.10.1.1 Disaggregated disclosures
The standards differ in the level of quantitative disaggregation of greenhouse gas

emissions information required. The GHG Protocol, ESRS, and the IFRS
Sustainability Disclosure Standards all require, however, disaggregation of scope
3 emissions by category (see SRG 7.7 for discussion of the scope 3 categories).
Other disaggregated disclosure requirements are further discussed in the
following sections.
Disaggregation by type of gas
The standards and rules acknowledge that a complete GHG emissions inventory
includes emissions data for the seven identified gases, however, only the GHG
Protocol specifically requires entities to separately report GHG emissions by
constituent gas. The SEC climate disclosure rules require disclosure of individual
gases only if such gases are individually material. 148 ESRS and the IFRS
Sustainability Disclosure Standards include similar requirements to provide certain
disaggregated information. This guidance should be considered in assessing
whether disclosure by type of gas is necessary as further discussed below.
Question SRG 7-39
How many greenhouse gases are entities required to report under the GHG
Protocol, ESRS, the ISSB standards, and the SEC climate disclosure rules?
PwC response
Scientific understanding of the gases that contribute to climate change is
constantly improving. As a result, the gases that are the primary target of
regulators and others may also evolve. For example, based on the discovery by
the United Nations Framework Convention on Climate Change that the
atmospheric concentrations of nitrogen trifluoride were higher than initially
147
IFRS S2 paragraph 29(a)(v).
148 SEC, Climate disclosure rules, Regulation S-K Item 1505(a)(2)(i).

understood, in February 2013, the GHG Protocol published an amendment
requiring disclosure of nitrogen trifluoride in GHG inventories. 149
Thus, although the original text of the Corporate Standard has not been updated,
compliance with the GHG Protocol as well as ESRS, the IFRS Sustainability
Disclosure Standards, the SEC climate disclosure rules, and California SB 253
and SB 261 all require entities to consider all seven greenhouse gases listed in
Figure SRG 7-1 as part of their GHG emissions disclosures.
ESRS
ESRS 1 paragraphs 54 to 57 include requirements for entities to provide

disaggregated information “when needed for a proper understanding of [the
undertaking’s] material impacts, risks, and opportunities”. Methods of
disaggregation discussed in ESRS 1 include by country, by significant site or
asset, by subsidiary, or sector (see SRG 4.3.4.4).
ESRS E1 provides further guidance specific to the disaggregation of GHG

emissions.
The undertaking shall disaggregate information on its GHG emissions as

appropriate. For example, the undertaking may disaggregate its Scope 1, 2, 3, or
total GHG emissions by country, operating segments, economic activity,
subsidiary, GHG category (CO2, CH4, N2O, HFCs, PFCs, SF6, NF3, and other
GHG considered by the undertaking) or source type (stationary combustion,
mobile combustion, process emissions and fugitive emissions.)
In developing its disaggregation, the entity should consider what is appropriate in

its circumstances considering materiality, stakeholder needs, and relevance. 150
ESRS E1 also requires specific disaggregated information as follows:
□ “The percentage of Scope 1 GHG emissions from regulated emission trading

schemes.” 151
□ Separate disclosure of scope 1 and scope 2 emissions from both: 152
o “the consolidated accounting group (the parent and subsidiaries)”
o “investees such as associates, joint ventures, or unconsolidated

subsidiaries that are not fully consolidated in the financial statements of
the consolidated accounting group, as well as contractual arrangements
that are joint arrangements not structured through an entity (i.e., jointly
controlled operations and assets), for which it has operational control”
Reporting entities should also consider these disaggregated reporting

requirements in the context of their broader approach to disaggregated
disclosures.
149 GHG Protocol, Required Greenhouse Gases in Inventories, Accounting and Reporting
Standard Amendment, February 2013.
150
ESRS 1 paragraphs 55–56.
151
ESRS E1 paragraph 48(b).
152
ESRS E1 paragraph 50.

IFRS Sustainability Disclosure Standards
The IFRS Sustainability Disclosure Standards also require entities to aggregate

and disaggregate information. IFRS S1 paragraph B29 states that an “entity shall
not reduce the understandability of its sustainability-related financial disclosures
by obscuring material information … or by aggregating material items of
information that are dissimilar”. Methods of disaggregation discussed in the
standard include by geographical location or consideration of the geopolitical
environment. Entities should consider this guidance in assessing disaggregation
of GHG emissions. The illustrative examples to IFRS S2 also state:
IFRS S2 paragraph IE 13
Examples 3A and 3B illustrate the disaggregation of an entity’s absolute

greenhouse gas emissions by constituent greenhouse gases. Although IFRS S2
does not explicitly require such disaggregation, an entity is required to apply the
principles of aggregation and disaggregation set out in IFRS S1 (paragraphs B29–
B30).
Entities may consider the guidance in the illustrative examples in assessing

methods of disaggregation. Further, the approaches discussed in ESRS E1 AR 41
may be helpful in identifying meaningful approaches to disaggregation of
emissions.
In addition, IFRS S2 paragraph 29(a)(iv) requires an entity to disaggregate its

scope 1 and scope 2 emissions between the consolidated group (the parent and
consolidated subsidiaries) and other investees (which includes associates, joint
ventures, and unconsolidated subsidiaries).
7.10.1.2 Biogenic emissions
The GHG Protocol and ESRS require entities to bifurcate and separately report
biogenic CO2 emissions.
When preparing the information on gross Scope 1 GHG emissions required

under paragraph 48 (a), the undertaking shall: …
(c) disclose biogenic emissions of CO2 from the combustion or bio-degradation of
biomass separately from the Scope 1 GHG emissions, but include emissions of
other types of GHG (in particular CH4 and N2O).
ESRS E1 AR 45(e) and ESRS E1 AR 46(j) include similar requirements to

separately disclose CO2 biogenic emissions related to scope 2 and scope 3
emissions, respectively. The GHG Protocol includes similar requirements to
separately report direct CO2 emissions from burning biomass and biofuels for
each of the scopes. 153 There are no similar requirements in the ISSB standards or
SEC climate disclosure rules.
7.10.2 Organisational boundary disclosures
The acceptable organisational boundary approaches differ across frameworks as

discussed in SRG 7.3. Further, all the frameworks except ESRS allow an entity to
select among acceptable methods. Because there is no optionality in the ESRS
organisational boundary approach, no specific disclosure of the boundary is
153 GHG Protocol, Corporate Standard, page 63; GHG Protocol, Scope 3 Standard, page
62.

required. Under the other reporting regimes, however, the primary disclosure
objective related to the organisational boundary is transparency with respect to
the approach used. The required disclosures are summarised in Figure SRG 7-46.
Figure SRG 7-46

Organisational boundary disclosures by framework
GHG □ Description of organisational and operational boundaries,

Protocol 154 including the chosen consolidation approach (see SRG
7.3.2)
□ Material exclusions of sources, facilities, or operations
from the boundary
ESRS 155 □ No explicit disclosure of organisational boundary is

required because ESRS specifies the method to be used
(see SRG 7.3.3)
IFRS □ The approach used to determine the organisational

Sustainability boundary, either one of the acceptable approaches under
Disclosure the GHG Protocol or as required by a jurisdictional
Standards 156 authority or exchange (see SRG 7.3.4)
□ The reason why the approach was selected and how it
helps meet the entity’s disclosure objectives
SEC climate □ The method used to determine the organisational

disclosure boundary (see SRG 7.3.5)
rules 157
□ Brief explanation of the difference, if the organisational
boundary materially differs from the scope of entities and
operations included in the registrant’s consolidated
financial statements
See SRG 7.3 for more information about the determination of the organisational
boundary approach.
7.10.3 Measurement methodologies
Because direct measurement is often not available, GHG emissions are frequently
calculated using indirect measurement techniques. The accuracy and reliability of
the results will depend on the measurement techniques and models utilised, the
quality of the data and inputs, and reasonableness of assumptions (including
emission factors and global warming potentials).
As a result, transparent disclosure of the measurement methodologies used is an

important element of understanding the GHG emissions inventory as summarised
in Figure SRG 7-47:

155 ESRS E1, paragraph 50; ESRS E1 AR 40.
157 SEC, Climate disclosure rules, Regulation S-K Item 1505(b)(1)(i).

Figure SRG 7-47
Measurement methodology disclosures by framework
GHG Protocol 158 □ Methodologies used to measure emissions, including references to any
calculation tools used (for example, whether the entity uses direct
measurement or calculation-based approaches)
ESRS 159 □ Measurement methodologies, including details of significant assumptions

and inputs (for example, emission factors and GWP factors used)
□ Reasons for selecting measurement methodologies, assumptions, and
emission factors
□ Reference or link to any calculation tools used
IFRS Sustainability □ Measurement approach, inputs, and assumptions

Disclosure
□ Entities should consider the guidance in IFRS S2 Appendix B in selecting the
Standards 160
approach, inputs, and assumptions (note 1)
SEC climate □ Disclosure of the protocol or standard used for measurement

disclosure rules 161
□ Measurement methodology, including the calculation approach, the type and
source of any emission factors used, and any calculation tools used
Note 1: The IFRS Sustainability Disclosure Standards require measurement of emissions in

accordance with the GHG Protocol and incorporate the additional measurement guidance
in Appendix B.
Consistent with financial reporting disclosures about the selection of accounting

principles, sustainability reporting requires disclosures about the measurement
and calculation methodologies used in calculating GHG emissions, including the
inputs and assumptions used. Refer to SRG 7.5, SRG 7.6, and SRG 7.7 for
further guidance on measurement of scope 1, scope 2, and scope 3 emissions,
respectively.
7.10.4 Metrics and targets
GHG emissions reduction targets and goals are an effective way for an entity to
communicate its commitment to sustainability to its stakeholders. Although none
of the standards and regulations require an entity to establish emission reduction
targets or goals, an entity may choose to do so. If an entity elects to establish
targets or goals, however, it generally must provide transparent disclosures about
the target or goal, as well as information on its performance against it. The
specific disclosures required vary by reporting regime, as further discussed in the
following sections.
7.10.4.1 Metrics and targets — GHG Protocol
The GHG Protocol recommends disclosure of GHG emissions reductions targets,

including the target type, base year, completion date, length of commitment
period, and outline of chosen boundaries. 162 Furthermore, if the target includes

159 ESRS E1 AR 39.

scope 2 emissions, a reporting entity should disclose whether the target or goal is
based on location-based or market-based scope 2 emissions. 163
Although these disclosures are only recommended by the GHG Protocol, we

believe transparent disclosure of this information is an important element of GHG
reporting. Reporting entities may also want to consider the types of disclosures
required by ESRS, the IFRS Sustainability Disclosure Standards, and the SEC
climate disclosure rules as discussed in the following sections. Including robust
disclosure of targets and goals in a report prepared in accordance with the GHG
Protocol will also enhance interoperability with other reporting requirements.
7.10.4.2 Metrics and targets — ESRS
ESRS E1 paragraph 34 requires entities that have implemented a GHG emissions

reduction target to report certain information about those targets as follows:
□ Target amount in absolute value

Targets must be reported in absolute value (either as tonnes of CO2e or as a
percentage of its base-year emissions). 164 Entities must also explain how
consistency has been established between the target and the GHG inventory
boundary. 165
□ Target amount in intensity value, when relevant

When relevant, an entity is required to disclose a GHG emissions reduction
target in intensity value. 166 If only an intensity reduction target has been
established, the entity must also disclose the target in absolute terms for the
target year or period — even if the absolute target results in an increase of
total emissions. 167
□ Separate disclosure by scope

An entity is required to disclose any targets separately for each scope of
emissions, or if the scopes are combined, the entity must attribute a share of
the target to each respective scope of emissions.
□ Intensity ratio based on net revenue, where relevant

Entities must disclose a GHG emissions intensity ratio based on net revenue,
where relevant. The requirement calls for total GHG emissions expressed in
CO2e relative to net revenue, as defined by IFRS 15 Revenue from contracts
with customers or local GAAP. 168 A similar metric is not required by the other
sustainability reporting frameworks.
□ Decarbonisation levers
The reported targets should exclude any GHG removals, carbon credits, or
avoided emissions (that is, reduction targets should be gross targets). 169 An
entity, however, is required to describe its decarbonisation levers and
quantitative contributions to achieve the GHG emission reduction targets. 170
For example, this would include disclosing the use of renewable energy or
phasing out a particular product or process.

164 ESRS E1 paragraph 34(a).
166 ESRS E1 paragraph 34(a).
167 ESRS E1 AR 23.
168 ESRS E1 AR 53.
170 ESRS E1 paragraph 34(f).

□ Framework or methodology used
An entity must specify the framework or methodology used to determine the
target, and whether the emissions reduction target is science-based and
compatible with limiting global warming to 1.5°C. 171
When setting a GHG emissions reduction target, ESRS E1 paragraphs 34(c) and
(d) also prescribe specific requirements with respect to monitoring its progress
against emissions reduction targets, relative to a base-year emissions (see SRG
7.8 for further information on base year emissions).
7.10.4.3 Metrics and targets — IFRS Sustainability Disclosure Standards
IFRS S2 requires reporting entities to disclose material climate-related targets,

including how such targets were informed by the “latest international agreement
on climate change” (currently the Paris Agreement). 172 The standard requires
disclosure of whether the targets are gross or net of any carbon offsets, and
requires disclosure of a gross target if an entity discloses a net target. 173 Reporting
entities must also disclose quantitative and qualitative information about the
target, including: 174
□ the objective of the target
□ the metric used to set the target
□ the part of the entity to which the target applies (for example, the entity in its
entirety, a specific business segment, or geographical region)
□ the period to which the target applies
□ the base period or base year from which the progress is measured against
(see SRG 7.8 for more information regarding base year emissions)
□ any milestones or interim targets
□ if the target is quantitative, the entity must report whether it is an absolute

target or intensity target
The standard also requires specific disclosure around the planned use of carbon
offsets to achieve any net emissions target (see SRG 7.9.1).
Further, IFRS S2 requires an entity to disclose certain information about its

process for setting and monitoring targets, including whether the methodology or
target itself have been validated by a third party. 175 For example, an entity that
establishes and validates its targets in accordance with the Science Based
Targets Initiative (SBTi) would be required to disclose that fact, as well as its
process for reviewing the target, any metrics used to monitor progress and any
revisions made to the target, along with rationale thereof. 176
171 ESRS E1 paragraph 34(e).

172
IFRS S2 paragraph 33(h).
173
IFRS S2 paragraphs B68 and B69.
174
IFRS S2 paragraphs 33 and 36(c).
175
IFRS S2 paragraph 34.
176
The Science Based Targets Initiative is a widely recognised organisation that defines
best practices in emissions reductions to align with climate science and provides technical
assistance in the form of target validation to entities that are setting science-based targets.
Validation of an entity’s emission reduction targets by SBTi is not required under the GHG
Protocol (or other frameworks as described below) but has become a norm for many
entities.

7.10.4.4 Metrics and targets — SEC
The SEC climate disclosure rules do not mandate specific methodologies for
setting or measuring progress against targets or goals. Entities are, however,
required to disclose details relating to climate-related targets or goals, if those
targets are reasonably likely to have a material effect on the business, results of
operations or financial condition. 177
If an entity has determined it has a material climate-related target or goal, it must

disclose: 178
□ a detailed description of the scope of activities included in the target
□ the unit of measurement
□ the defined time horizon to completion and whether the time horizon is based
on one or more goals established by a climate-related treaty, law, regulation,
policy, or organisation
□ the defined baseline, the means by which progress is tracked, and a

qualitative description of how it intends to meet the target or goal
□ usage of carbon offsets or renewable energy credits or certificates that are a

material component of its plan to meet its targets or goals (note that this
requirement differs from ESRS requirements, which prohibit the inclusion of
carbon offsets or avoidances in its GHG emissions reduction targets) 179
Each year, entities will have to update the disclosure to describe actions taken to
meet the target set. 180
7.10.5 Scope 2 emissions disclosures
Although ESRS, the ISSB standards, the SEC climate disclosure rules, and the
GHG Protocol all require reporting of gross scope 2 emissions, they differ as to
the required calculation method (location-based and/or market-based) as well as
to the detailed components of required disclosures as summarised in Figure SRG
7-48.
Figure SRG 7-48

Scope 2 quantitative disclosure requirements
GHG
General disclosure requirements ESRS ISSB SEC Protocol
Dual reporting of scope 2 emissions, separately  Only location- Flexibility in 

for each of the location-based and market- based selecting
based methods (see SRG 7.6) required method
Methodologies used to measure or calculate    

scope 2 emissions
Information about contractual instruments   
177
SEC, Climate disclosure rules, Regulation S-K Item 1504(a).
178 SEC, Climate disclosure rules, Regulation S-K Item 1504.
179 SEC, Climate disclosure rules, Regulation S-K Item 1504(d); ESRS E1 paragraph 34(b).
180 SEC, Climate disclosure rules, Regulation S-K Item 1504(c).

GHG
General disclosure requirements ESRS ISSB SEC Protocol
For the market-based method, if a residual mix 

emission factor is not available, disclose that an
adjusted emission factor is not available or has
not been estimated
For any reduction goal or a scope 2-specific 

reduction goal, disclose whether the goal is
based on the location-based or market-based
method
Each of the frameworks requires a reporting entity to disclose the methodologies

used to calculate or estimate scope 2 emissions. Further, as discussed in SRG
7.6, there are two generally accepted methods of accounting for scope 2
emissions — location-based and market-based. The GHG Protocol, ESRS, and
California SB 253 all require dual-reporting of emissions under both the location-
based and market-based methods.
In contrast, the IFRS Sustainability Disclosure Standards only require disclosure

of scope 2 emissions measured using the location-based method, although
market-based scope 2 emissions may be disclosed voluntarily. In addition, IFRS
S2 paragraphs B30–B31 require disclosure of information “about any contractual
instruments the entity has entered into that could inform users’ understanding of
the entity’s scope 2 emissions” (refer to Figure SRG 7-28). 181
The SEC climate disclosure rules do not prescribe a specific calculation

methodology for scope 2 emissions, but an entity is required to disclose the
protocol or standard used, as well as other details about its calculations.
Practically, this means an entity reporting under the SEC climate disclosure rules
will have the flexibility to elect a recognised protocol or standard for measuring
and reporting GHG emissions, including the GHG Protocol and its two prescribed
methods for reporting scope 2 emissions — the market-based and location-based
methods. 182
Incremental disclosures required by the GHG Protocol and ESRS are further
discussed below. See also SRG 7.6 for discussion of the calculation
methodologies related to scope 2 emissions.
7.10.5.1 Incremental scope 2 disclosures — GHG Protocol
The GHG Protocol requires separate disclosure of scope 2 emissions calculated

using both the location-based and market-based methods. It also requires
presentation of two separate measures of total emissions to reflect each of the
location-based and market-based scope 2 methods.
Alternatively, the GHG Protocol permits an entity to present total emissions using
one method only if the method disclosed reflects the method used in goal setting.
In such instances, the GHG Protocol requires disclosure of which method has
been used in the total and in goal setting. 183
The GHG Protocol also provides an exemption from the dual-reporting

requirement for entities that only operate in markets where the market-based
method is not applicable (for example, in markets where renewable energy is not
available). Further, if an entity has a mix of operations across different markets,
181
IFRS S2 paragraph B30.

including those where the market-based method does not apply, the entity should
report the location-based method and separately disclose the percentage of the
overall electricity consumption reported under the market-based method that
reflects actual markets with contractual information.
Disclosures related to the scope 2 market-based method
The GHG Protocol requires reporting entities to provide supplemental disclosures

under the market-based method related to contractual instruments and residual
mix emission factors. Although these disclosures are specific to an entity’s
reporting under the GHG Protocol, we believe disclosures required by the Scope 2
Guidance may enhance transparency for other entities reporting emissions using
the market-based method. See also required disclosures under ESRS in SRG
7.10.5.2.
Contractual instruments
Entities reporting scope 2 emissions using the market-based method are required
to disclose information on the types of contractual instruments from which the
emission factors were derived, and where possible, the energy generation
technologies utilised. For example, a reporting entity that has purchased EACs
should disclose whether the EACs are unbundled or bundled with the related
power and whether conveyed through a power purchase agreement or a supplier-
specific factor. 184 Further, reporting entities must disclose that the scope 2 quality
criteria have been met for the contractual instruments used in their calculations.
Refer to SRG 7.6.5 for further discussion of the market-based calculation
approach, including the quality criteria for contractual instruments.
Residual mix emission factors
Entities reporting scope 2 emissions using the market-based method are also
required to disclose instances where a residual mix emission factor is not
available.
7.10.5.2 Incremental scope 2 disclosures — ESRS
Similar to the GHG Protocol, ESRS E1 requires separate disclosure of gross

scope 2 emissions, using both the location-based and market-based methods. It
also requires two separate inventory totals to be presented, inclusive of scope 1,
scope 2, and scope 3 emissions, to reflect scope 2 emissions calculated under
both location-based and market-based methods.
In addition, ESRS E1 AR 45 requires disclosure of certain information about

contractual instruments including:
□ the share of market-based scope 2 GHG emissions linked to purchased

electricity bundled with instruments (such as Guarantee of Origins or RECs)
□ the share and types of contractual instruments used for the sale and purchase
of energy bundled with attributes about the energy generation or for
unbundled energy attribute claims
Further, an entity is not permitted to include any removals, or any purchased, sold
or transferred carbon credits or GHG allowances in the calculation of scope 2
emissions. 185
184 GHG Protocol, Scope 2 Frequently Asked Questions, question 6. The GHG Protocol
released these frequently asked questions in July 2024 as a supplemental resource.
185 ESRS E1 AR 45(f).

One notable difference between the frameworks is that while the GHG Protocol
recommends optional disclosure of annual electricity consumption, ESRS E1
specifically requires entities to disclose consumption of energy, disaggregated by
fossil, nuclear and renewable sources, subject to further disaggregation based on
type of renewable activity. 186
7.10.6 Scope 3 emissions disclosures
Reporting of scope 3 emissions is required by ESRS, the IFRS Sustainability

Disclosure Standards, the GHG Protocol, and California SB 253. The general
scope 3 requirements are aligned among the standards and the Protocol. Each
require disclosure of:
□ total gross scope 3 emissions (that is, excluding any GHG reductions or
offsets)
□ gross scope 3 emissions bifurcated by each significant category
□ measurement methodology, including significant inputs, assumptions and

information about data quality (including the types and sources of data as well
as information on emission factors, GWP values and calculation tools used)
□ information from suppliers and value chain partners, including information

about the characteristics of data inputs and information on emissions
calculated using primary data (refer to SRG 7.7.4 for further information on
collecting value chain data, including primary data)
In addition, entities should consider the general guidance for disaggregation

discussed in SRG 7.10.1.1. While the reporting generally aligns among the
sustainability reporting frameworks, reporting entities should evaluate the
reporting requirements of each standard carefully to ensure complete disclosures.
Certain incremental disclosures for reporting scope 3 emissions across the
frameworks are highlighted below.
7.10.6.1 Incremental scope 3 disclosures — GHG Protocol and ESRS
ESRS E1 requires an entity to disclose gross scope 3 emissions in metric tonnes

of CO2e for each significant scope 3 category (that is, any category that it
considers a priority). 187 ESRS E1 provides guidance for the determination of
significant scope 3 categories as follows:
ESRS E1 AR 46(d)
Identify and disclose its significant Scope 3 categories based on the magnitude of
their estimated GHG emissions and other criteria provided by GHG Protocol
Corporate Value Chain (Scope 3) Accounting and Reporting Standard (Version
2011, p. 61 and 65-68) or EN ISO 14064-1:2018 Annex H.3.2, such as financial
spend, influence, related transition risks and opportunities or stakeholder views.
Beyond the general scope 3 disclosure requirements identified in SRG 7.10.6,

both ESRS and GHG Protocol require entities to disclose a list of — as well as
justification for — any categories or activities excluded from the scope 3
emissions inventory. 188 Although this is a provision permitted by ESRS and the
GHG Protocol, we would generally not expect an entity to omit material scope 3
categories in reporting prepared for regulatory requirements (for example,
California SB 253). Furthermore, both of these frameworks require separate
186 ESRS E1 paragraph 37 and ESRS 1 AR 34.

188
ESRS E1 AR 46(i); GHG Protocol, Scope 3 Standard, page 119.

disclosure of any biogenic emissions (refer to SRG 7.10.1.2 for further information
on disclosure requirements related to biogenic emissions).
7.10.6.2 Incremental scope 3 disclosures — IFRS Sustainability Disclosure

Standards
The IFRS Sustainability Disclosure Standards also require reporting of gross

scope 3 emissions. Categories included in the scope 3 emissions shall be those
relevant categories from the 15 scope 3 categories defined by the Scope 3
Standard.
Beyond the general scope 3 disclosures highlighted in SRG 7.10.6, IFRS S2

requires additional disclosures on ‘financed emissions’ for reporting entities
participating in asset management, commercial banking, or insurance activities. 189
The additional disclosures for reporting entities participating in these activities
require financial information in addition to further information on the related
emissions.
7.10.7 Effect of changes in the entity structure on GHG emissions reporting
The effect of acquiring or disposing of an entity, asset, or operation (collectively

referred to as an ‘acquisition’ or ‘disposal’ as applicable) during the reporting
period may impact GHG emissions reporting.
The GHG Protocol includes requirements for reporting of acquisitions and

disposals as discussed below. ESRS, the IFRS Sustainability Disclosure
Standards, and the SEC climate disclosure rules, however, do not provide any
specific guidance related to the effect of an acquisition or disposal on
sustainability reporting. SRG 3.6.1 discusses a general model that entities may
apply under these frameworks. In the absence of specific guidance, we believe an
entity should also apply this approach to its reporting of greenhouse gas
emissions.
Note that the “Transition Implementation Group on IFRS S1 and IFRS S2”
discussed the effect of an acquisition or disposal on reporting of GHG emissions
in its meeting on 13 June 2024. As highlighted in the meeting summary, the TIG
concluded that the reporting entity for purposes of sustainability reporting should
align with financial reporting and that entities should look to the applicable GAAP
to determine the consolidation requirements. 190 An entity should not follow the
guidance of the GHG Protocol but should instead follow the general approach
discussed in SRG 3.6.1.
7.10.7.1 Effect of changes in entity structure on GHG emissions reporting —

GHG Protocol
Entities reporting in accordance with the GHG Protocol are required to follow
specific guidance with respect to acquisitions and disposals as set forth in the
Corporate Standard.
The GHG Protocol addresses the effect of significant changes in entity structure
on emissions reporting in connection with its guidance on tracking emissions over
time and baseline requirements. During the year of significant structural change,
such as acquisition or disposal, entities are required to recalculate current year
emissions as if such change occurred at the beginning of that year. 191
Entities that established an emissions reduction target and a base year, are also
required to recalculate baseline value. See SRG 7.8.2.1 and Question SRG 7-36.
189
IFRS S2 paragraphs B589–B63.
190 TIG June Meeting Summary, paragraph 22(a), page 9.

7.10.8 Presentation of comparative GHG information
[Coming soon]
7.11 Transitional provisions

ESRS, the IFRS Sustainability Disclosure Standards, and the SEC climate
disclosure rules have certain transitional provisions to ease first time application.
Note, however, that there are no transitional provisions applicable to reporting for
purposes of compliance with California SB 253 and SB 261.
This section discusses the application of the transitional provisions specifically

related to GHG emissions reporting. In addition to the provisions discussed in this
section, entities are permitted to exclude comparative information in the first year
of application of these standards and rules. See SRG 3.8 for a general discussion
of transitional provisions applicable to first time application of ESRS, the IFRS
Sustainability Disclosure Standards, and SEC climate disclosure rules.
7.11.1 GHG emissions transitional provisions — ESRS
ESRS 1 paragraphs 132 and 133 provide transitional provisions to take into
account the difficulties in obtaining information from an entity’s value chain in the
first three years of application. These transitional provisions relate to qualitative
and quantitative data gathering, and disclosure of policies, actions, targets, and
metrics related to the value chain and permit an entity to:
□ limit value chain information in the disclosure of policies, actions, and targets
to information available in-house
□ omit value chain information from metrics, except for datapoints listed in
ESRS 2 General disclosures Appendix B “List of datapoints in cross-cutting
and topical standards that derive from other EU legislation”
As further discussed in SRG 3.7.1.2, however, entities are still required to include
value chain information — including GHG emissions — in the identification of
material sustainability-related impacts, risks, and opportunities (as applicable); In
addition, the entity is required to provide certain minimum disclosures if not all
information about its value chain is available, including its efforts to obtain that
information and the reasons why it is not available.
Further, the disclosure requirements in ESRS E1-6 Gross Scopes 1, 2, and 3 and
Total GHG emissions (that is, the ESRS disclosures discussed in this chapter) are
listed in ESRS 2 Appendix B. As such, these disclosures are not eligible for the
three-year transitional provision permitting omission of value chain information of
metrics. 192 As outlined in ESRS 2 Appendix B, there are other regulatory reporting
mandates over GHG emissions information under the Sustainable Finance
Disclosure Regulation (SFDR), Capital Requirements Regulation (CRR) Pillar 3
disclosures, and Benchmark regulations. 193 See further discussion of transitional
provisions related to the value chain in SRG 3.8.1.2.
Entities that do not exceed an average of 750 employees during the financial
year
ESRS also provides certain phased-in provisions to entities that do not exceed an
average of 750 employees during the financial (fiscal) year (see SRG 3.8.1.4)
Notwithstanding the exclusion of GHG emissions from the overall transitional
reliefs related to information about entities in the value chain, reporting entities
ESRS 1 paragraphs 132–135; ESRS 2 Appendix B.

192
Regulation (EU) 2019/2088; Regulation (EU) No 575/2013; Commission Delegated

193
Regulation (EU) 2020/1818.

that meet the employee threshold may omit ESRS E1-6 scope 3 emissions and
total greenhouse gas emissions datapoints in the first year of application of
ESRS. 194
7.11.2 GHG emissions transition provisions — IFRS Sustainability

Disclosure Standards
IFRS S1 provides general transition reliefs for first-time application of the IFRS
Sustainability Disclosure Standards (see SRG 3.8.2). In addition, IFRS S2
provides specific reliefs related to reporting of greenhouse gas emissions.
Excerpt from IFRS S2 paragraph C4
(a) if, in the annual reporting period immediately preceding the date of initial
application of this Standard, the entity used a method for measuring its
greenhouse gas emissions other than the Greenhouse Gas Protocol: A
Corporate Accounting and Reporting Standard (2004), the entity is permitted
to continue using that other method; and
(b) an entity is not required to disclose its Scope 3 greenhouse gas emissions
(see paragraph 29(a)) which includes, if the entity participates in asset
management, commercial banking or insurance activities, the additional
information about its financed emissions (see paragraph 29(a)(vi)(2) and
paragraphs B58–B63)
Therefore, in the first year of application of IFRS S2, a reporting entity may
continue to apply the greenhouse gas measurement method used in the
immediately preceding year. In addition, the entity may exclude scope 3 emissions
from their first annual report, including the additional information on financed
emissions from entities participating in asset management, commercial banking or
insurance activities.
Although these transition provisions are included in the standards, individual

countries or regulators may adopt a different transition approach. As such, a
reporting entity preparing sustainability reporting to comply with country-specific
— or other regulatory — reporting requirements should ensure that it considers
any applicable additional or modified transition provisions.
7.11.3 GHG emissions transitional provisions — SEC climate disclosure

rules
The SEC climate disclosure rules provide two forms of relief related to the GHG
emissions disclosure requirements as follows:
□ Exemption of certain filers

Only large accelerated and accelerated filers are required to provide the GHG
emissions disclosures, although other filers may disclose some GHG
emissions information as part of their disclosures of targets and goals. See
Figure SRG 2-6 in SRG 2.4.1.3 for further information.
□ Delays in timing of reporting

Initial disclosure of scope 1 and scope 2 emissions information is not required
until one year and two years after the initial compliance dates for large
accelerated and accelerated filers, respectively. Based on the published
compliance dates, the GHG emissions disclosures would be required for fiscal
years beginning in 2026 and 2028 for large accelerated and accelerated filers,
194 ESRS 1 Appendix C.

although these dates may change as a result of the stay of the rules (see
footnote 5 in SRG 7.2).
The SEC also provides additional time for initial compliance with the requirements
to obtain assurance over the GHG emissions disclosures. See Figure SRG 2-6 in
SRG 2.4.1.3 for a summary of the compliance dates under the SEC climate
disclosure rules.
Acknowledgements
Carolina Cosby
Peter Flick
Heather Horn
Andreas Ohl
Marcin Olewinski
Kelsey Pizza
Olivier Scherer
Katie Woods

Chapter 19:
Introduction to EU
Taxonomy reporting
19.1 Introduction to EU Taxonomy reporting —
chapter overview
The Taxonomy Regulation is a key component of the European Commission’s
1
Action Plan: Financing Sustainable Growth published in March 2018. It
represents an important step in the European Union (EU)'s pursuit of meeting the
goals of the Paris Agreement and achieving climate neutrality by the EU by 2050.
The Sustainable Finance Action Plan aims to, among other objectives, reorient
capital flows towards a more sustainable economy and foster transparency and
long-termism in financial and economic activities. Such a shift of capital flows
needs to be underpinned by a shared understanding of what constitutes
‘environmentally sustainable’ activities. The Taxonomy Regulation is unrelated to
XBRL and other digital tagging taxonomies; however, Taxonomy disclosures also
need to be tagged electronically under the Corporate Sustainability Reporting
2
Directive.
The Taxonomy Regulation establishes a unified classification system that

supports the evaluation of economic activities to determine those that can be
considered ‘environmentally sustainable’ based on science-based technical
screening criteria contributing to six different environmental objectives.
Environmentally sustainable activities are also referred to as ‘taxonomy-aligned’.
The six environmental objectives and the sections within this chapter where each
is discussed are detailed in Figure SRG 19-1.
Figure SRG 19-1

Index to descriptions of environmental objectives
Relevant
Environmental objectives section
Climate Change Mitigation SRG 19.3.1
Climate Change Adaptation SRG 19.3.2
Sustainable Use and Protection of Water Resources and SRG 19.3.3

Marine Resources
Transition to a Circular Economy SRG 19.3.4
Pollution Prevention and Control SRG 19.3.5
Protection and Restoration of Biodiversity and Ecosystems SRG 19.3.6
Initial plans were to expand the designated objectives to consider social and
governance matters in separate Taxonomies. The timeline for such expansion is
currently unclear.
The Taxonomy Regulation provides a framework to determine which of an entity’s

economic activities are taxonomy-aligned. How to apply that framework to
designated eligible economic activities is detailed in several delegated acts (see
SRG 19.2.2 for a description of the relevant delegated acts). Figure SRG 19-2
illustrates the required criteria for an eligible activity to be considered taxonomy-
aligned.
1 Regulation (EU) 2020/852; Sustainable finance: Commission's Action Plan for a greener
and cleaner economy, March 2018.
2 Directive (EU) 2022/2464.
PwC | Introduction to EU Taxonomy reporting (as of 30 June 2024) 19-1

Figure SRG 19-2
Taxonomy alignment criteria
Provides a
substantial Causes no
= + +
Performance
contribution significant
complies with
Taxonomy to one or more harm to any of
specified
alignment of the six the remaining
minimum
stated environmental
safeguards
environmental objectives
objectives
The taxonomy-aligned economic activities are used as a basis to calculate

specific key performance indicators (KPIs). At a high level, this is a filtering
system, as illustrated in Figure SRG 19-3.
Figure SRG 19-3

Illustration of the Taxonomy filtering process
This chapter (1) provides an overview of the delegated acts, which detail the legal
requirements of the Taxonomy Regulation, (2) explains each of the environmental
objectives of the Taxonomy Regulation, and (3) introduces a five-step approach to
determining KPIs. The required KPIs to be reported differ depending on whether
the entity is a financial undertaking or not.
The following are identified as financial undertakings: 3
□ asset managers
□ credit institutions
□ investment firms
□ insurance and reinsurance undertakings
A non-financial undertaking is an undertaking that is not a financial undertaking. 4
See SRG 20, EU Taxonomy reporting for non-financial services entities [coming
soon], for details regarding the application of the Taxonomy Regulation by non-
financial undertakings and SRG 21, EU Taxonomy reporting for financial services
entities [coming soon], for application by financial undertakings.
3 Commission Delegated Regulation (EU) 2021/2178, Article 1, paragraph 8.

4 Commission Delegated Regulation (EU) 2021/2178, Article 1, paragraph 9.

19.2 Legislation overview
The Taxonomy Regulation establishes the legal framework for determining
whether an economic activity qualifies as environmentally sustainable; that is, the
degree to which an investment is environmentally sustainable.
19.2.1 Scope
The Taxonomy Regulation requires financial and non-financial entities in scope to

disclose how and to what extent the entity’s activities are associated with
environmentally sustainable economic activities. The scope generally aligns with
the Corporate Sustainability Reporting Directive. See SRG 2, Applicability of
sustainability reporting requirements, for details on entities in scope.
19.2.2 Delegated acts
The Taxonomy Regulation provides the overarching legal framework and broad
requirements but does not specify the technical screening criteria or the
disclosures. Several delegated regulations (referred to as ‘delegated acts’)
supplement the Taxonomy Regulation and provide fundamental information
necessary for applying the principles established by the Taxonomy Regulation.
The delegated acts specify the criteria against which to evaluate an entity’s
economic activities (referred to as ‘technical screening criteria’) and the
disclosures to be made. The delegated acts, prepared by the European
Commission, are subject to scrutiny by the European co-legislators — the
European Council and the European Parliament. During the scrutiny period, either
of the co-legislators can reject the proposed delegated acts. If no objections are
made, the delegated act enters into force after publication in the Official Journal.
Figure SRG 19-4 illustrates the relevant delegated acts.
Figure SRG 19-4

Taxonomy-related delegated acts
The main delegated acts are:
□ The Disclosures Delegated Act, as amended

Specifies reporting requirements on Taxonomy KPIs and related qualitative
disclosures — sometimes referred to as the Article 8 Delegated Act 5
□ The Climate Delegated Act, as amended

Defines economic activities and technical screening criteria for ‘Climate
Change Mitigation’ and ‘Climate Change Adaptation’
5Although referred to this way, it should not be confused with Article 8 of Regulation (EU)
2019/2088 on sustainability-related disclosures in the financial services sector.

□ The Environmental Delegated Act
Defines economic activities and technical screening criteria for the remaining
four environmental objectives — ‘Sustainable Use and Protection of Water
and Marine Resources’, ‘Transition to a Circular Economy’, ‘Pollution
Prevention and Control’, and ‘Protection and Restoration of Biodiversity and
Ecosystems’ 6
The main delegated acts and their annexes have and will be amended. For
example, amendments to the Climate Delegated Act have already been made
through the gas and nuclear delegated act and the delegated act amending the
Climate Delegated Act. 7
Given the large number of economic activities and the complexity of the technical
parameters of each activity, the Taxonomy is regularly undergoing reviews and,
as such, it continues to evolve. The European Commission has prioritised the
most environmentally impactful activities for each environmental objective for
which science-based technical screening criteria could be determined. New
activities continue to be analysed and will be added as economic activities to the
delegated acts. In this process, the European Commission is advised by the
Platform on Sustainable Finance (see SRG 19.2.4).
As the content of the delegated acts continues to expand and evolve, an entity will
need to ensure it is relying on the latest information as the Taxonomy Regulation
and the delegated acts are legally binding.
In this chapter, the term ‘Taxonomy’ is used to refer to the whole classification
framework, inclusive of the Taxonomy Regulation and the related delegated acts.
19.2.3 Commission guidance
Since the Taxonomy introduces an entirely new concept — determining whether

economic activities are sustainable — stakeholders asked for clarifications on how
to apply the provisions of the Taxonomy Regulation and the different delegated
acts. The European Commission has issued several Commission notices with
frequently asked questions (FAQs) and answers on different aspects of the
Taxonomy Regulation and its delegated acts. The FAQs aim to clarify the content
of the different delegated acts supplementing the Taxonomy Regulation to aid in
its implementation. The following FAQs have been issued by the European
Commission:
□ Disclosures Delegated Act — first Commission notice

This Commission notice contains 33 FAQs that address different topics within
the Disclosures Delegated Act relevant to the eligibility reporting of both
financial and non-financial entities.
□ Disclosures Delegated Act — second Commission notice

This Commission notice contains 34 FAQs that address general topics within
the Disclosures Delegated Act relating to eligibility and alignment reporting
particularly relevant to non-financial entities.
□ Disclosures Delegated Act — draft third Commission notice

This Commission notice contains 71 FAQs that provide interpretive and
implementation guidance on the reporting under the Disclosures Delegated
Act by financial institutions and insurers. This Commission notice has yet to
be published in the Official Journal.
6 The Environmental Delegated Act also amended the Disclosures Delegated Act with
regard to the mandatory reporting templates.
7 Commission Delegated Regulation (EU) 2022/1214; Commission Delegated Regulation
(EU) 2023/2485.

□ Climate Delegated Act — Commission notice
This Commission notice contains 187 FAQs that address various topics within
the Climate Delegated Act. The FAQs provide guidance on the application of
the substantial contribution criteria for a wide range of economic activities
while also outlining how to apply the ‘do no significant harm’ criteria.
□ Minimum safeguards — Commission notice

This Commission notice contains 4 FAQs that provide clarification on how an
entity should consider compliance with minimum safeguards under Article 18
of the Taxonomy Regulation. The FAQs clarify how the minimum safeguards
are linked to the principal adverse impact (PAI) indicators pursuant to the
Sustainable Finance Disclosure Regulation (SFDR; Regulation (EU)
2019/2088) following Article 18, paragraph 2 of the Taxonomy Regulation.
The FAQs are not authoritative and do not introduce new guidance. The status of
the FAQs is addressed in common language preceding the FAQs in each of the
Commission notices listed above.
Standard disclaimer regarding the FAQs in each Commission notice
The FAQs do not extend in any way the rights and obligations deriving from such
legislation nor do they introduce any additional requirements for the operators
concerned and competent authorities. The … FAQs intend to assist financial and
non-financial undertakings in the implementation of the relevant legal provisions.
Only the Court of Justice of the European Union is competent to authoritatively
interpret Union law. The views expressed in European Commission FAQs cannot
prejudge the position that the Commission might take before the Union and
national courts.
Although the Commission FAQs are not legally binding, the European Securities
Markets Authority (ESMA) “strongly encourages issuers to consider [the FAQs]
when preparing their disclosures as they provide guidance which supports the
consistent application of the Taxonomy requirements”. 8 There may be instances
when the FAQs may be perceived to contradict or exceed the requirements of the
legal text in the Taxonomy Regulation and related delegated acts.
In addition, Commission Staff FAQs, published in December 2021 and updated in

January 2022, provide guidance on the content of the Disclosure Delegated Act.
These FAQs contain the views of Commission staff but, unlike the later FAQs,
they have not been published in the Official Journal as a Commission notice.
These staff FAQs were released early and generally cover high-level questions
which were further clarified by the FAQs subsequently released in Commission
notices. As a result, an entity may find the staff FAQs less useful than the other
FAQs referred to above.
19.2.4 Platform on Sustainable Finance
The Platform on Sustainable Finance is the European Commission’s official expert

group consisting of different stakeholders representing a wide range of expertise.
It is designed to facilitate the development and implementation of sustainable
finance policies, including the Taxonomy Regulation, within the European Union. 9
Its primary purpose is to advise the Commission on various aspects of sustainable
finance and contribute to the ongoing efforts to align financial flows with
8 ESMA Public Statement, European common enforcement priorities for 2023 annual
financial reports, 25 October 2023.
9 Regulation (EU) 2020/852, Article 20.

environmentally sustainable, socially responsible, and economically viable
activities.
The Platform on Sustainable Finance’s responsibilities include the following:
□ advising on technical screening criteria for economic activities
□ ensuring consistency across different sustainability-related regulations
□ promoting transparency and disclosure of sustainable finance information
The Platform on Sustainable Finance also monitors and reports on capital flows
into sustainable investment, recommends measures to improve data quality, and
provides guidance on the usability of technical screening criteria.
As part of its activities, the Platform on Sustainable Finance published a report on

how to apply the minimum safeguards as outlined in Article 18 of the Taxonomy
Regulation. 10 Although this report is not authoritative, it provides helpful
interpretations that have been generally accepted and are referred to in the
Minimum safeguards — Commission notice.
The Platform on Sustainable Finance continues to gather questions and

suggestions through the Stakeholder Request Mechanism, which are provided to
the European Commission to inform their consideration of new or amended
economic activities.
19.3 Environmental objectives

Article 9 of the Taxonomy Regulation defines six environmental objectives. The
subsequent articles and delegated acts describe which activities are eligible and
how an entity can make a ‘substantial contribution’ and ‘do no significant harm’ to
each objective. These descriptions and parameters allow an entity to identify
taxonomy-eligible activities and to assess their alignment. These assessments
might be challenging in practice; it is therefore vital that the entity understands the
purpose and spirit of each of the environmental objectives.
In each section below, we describe what is encompassed by each environmental

objective, the manner in which each can be achieved, and where relevant, the
primary regulations that help interpret them.
19.3.1 Climate Change Mitigation
The Taxonomy Regulation states that an economic activity pursuing the

environmental objective of Climate Change Mitigation should contribute
substantially to the stabilisation of greenhouse gas emissions by avoiding or
reducing them or by enhancing greenhouse gas removals. This should be
consistent with the long-term temperature goal of the Paris Agreement, and the
environmental objective should be interpreted in accordance with relevant
European Union law.
Taxonomy Regulation, Article 2, paragraph 5
‘Climate change mitigation’ means the process of holding the increase in the
global average temperature to well below 2°C and pursuing efforts to limit it to
1,5°C above pre-industrial levels, as laid down in the Paris Agreement.
10 Platform on Sustainable Finance, Final Report on Minimum Safeguards, October 2022.

In broad terms this can be achieved by at least one of the following: 11
□ generating, transmitting, storing, distributing, or using renewable energy
□ improving energy efficiency
□ increasing clean or climate-neutral mobility
□ switching to the use of sustainably sourced renewable materials
□ increasing the use of environmentally safe carbon capture and utilisation and
carbon capture and storage
□ strengthening land carbon sinks
□ establishing energy infrastructure required for decarbonisation
□ producing clean and efficient fuels from renewable or carbon-neutral sources
□ enabling any of the activities listed above in the sense of an enabling

economic activity
The Taxonomy Regulation explains that the term ‘energy efficiency’ is defined
broadly and should be interpreted taking into account relevant European Union
law; it specifies, among others, the Energy Efficiency Directive (Directive
2012/27/EU) and the different EU energy efficient products regulations.
An economic activity can substantially contribute to Climate Change Mitigation if it

aids the transition to a climate-neutral economy, even if there is no technologically
or economically feasible low carbon alternative (see definition of transitional
activities in SRG 19.4.2). Such activity should aim to limit global warming to 1.5°C
above pre-industrial levels, phase out greenhouse gas emissions, especially from
solid fossil fuels, and must be an activity that has or does all of the following: 12
□ has greenhouse gas emission levels that are the best in its sector or industry
□ does not hamper the development and deployment of low-carbon alternatives
□ does not lead to a lock-in of carbon intensive assets, considering their

economic lifetime
The specific activities identified in the Taxonomy, alongside criteria for

determining their substantial contribution to Climate Change Mitigation, are
detailed in Annex I of the Climate Delegated Act. Activities that help transition to a
climate-neutral activity are marked as such in the Climate Delegated Act. For
details see SRG 20, EU Taxonomy reporting for non-financial services entities
[coming soon].
19.3.2 Climate Change Adaptation
An economic activity that pursues the environmental objective of Climate Change

Adaptation should contribute substantially to reducing or preventing the adverse
impact of the current climate or expected future climate, or the risks of such
adverse impact, without increasing the risk of adverse impact on people, nature,
or assets. This environmental objective should be interpreted in accordance with


relevant European Union law and the Sendai Framework for Disaster Risk
Reduction 2015–2030. 13
‘Climate change adaptation’ means the process of adjustment to actual and

expected climate change and its impacts
All of the environmental objectives detailed in the Taxonomy Regulation, except

for Climate Change Adaptation, focus on the impact of the entity on the
environment — an inside-out perspective. Climate Change Adaptation is unique
insofar as it addresses how the environment (climate) can affect the entity — an
outside-in perspective. For this reason, the Taxonomy assessment of Climate
Change Adaptation activities can differ conceptually from how all other activities
are evaluated. For details, see SRG 20, EU Taxonomy reporting for non-financial
services entities [coming soon].

determining their substantial contribution to Climate Change Adaptation, are
detailed in Annex II of the Climate Delegated Act.
19.3.3 Sustainable Use and Protection of Water and Marine Resources
An economic activity qualifies as contributing substantially to the Sustainable Use

and Protection of Water and Marine Resources when that activity either
contributes substantially to (1) achieving the good status of bodies of water,
including bodies of surface water and groundwater, and marine waters or (2)
preventing the deterioration of bodies of water or marine waters that are already in
good environmental status.
The Taxonomy Regulation refers to several other directives for the definition of
relevant terms.
Directive 2000/60/EC, Article 2
(1) ‘Surface water’ means inland waters, except groundwater; transitional waters
and coastal waters, except in respect of chemical status for which it shall also
include territorial waters.
(2) ‘Groundwater’ means all water which is below the surface of the ground in the
saturation zone and in direct contact with the ground or subsoil.
Directive 2008/56/EC, Article 3, paragraph 1
‘Marine waters’ means:

a) waters, the seabed and subsoil on the seaward side of the baseline from
which the extent of territorial waters is measured extending to the outmost
reach of the area where a Member State has and/or exercises jurisdictional
rights, in accordance with the Unclos [United Nations Convention on the Law
of the Sea], with the exception of waters adjacent to the countries and
territories mentioned in Annex II to the Treaty and the French Overseas
Departments and Collectivities; and
13 The Sendai Framework includes four priorities: understanding disaster risk;

strengthening disaster risk governance to manage disaster risk; investing in disaster risk
reduction for resilience; and enhancing disaster preparedness for effective response, and
to "Build Back Better" in recovery, rehabilitation, and reconstruction.

b) coastal waters as defined by Directive 2000/60/EC, their seabed and their
subsoil, in so far as particular aspects of the environmental status of the
marine environment are not already addressed through that Directive or other
Community legislation
Activities qualify as providing a substantial contribution to this environmental

objective by: 14
□ protecting the environment from the adverse effects of urban and industrial
waste water discharges
□ protecting human health from the adverse impact of any contamination of

water intended for human consumption
□ improving water management and efficiency
□ ensuring the sustainable use of marine ecosystem services or contributing to

the good environmental status of marine waters

economic activity
The Taxonomy Regulation states that the environmental objective of the

Sustainable Use and Protection of Water and Marine Resources should be
interpreted in accordance with relevant European Union law and communications
by the European Commission and specifies, among others, the directives listed in
Figure SRG 19-5.
Figure SRG 19-5

Referenced water-related directives
Topic addressed
Directive 2000/60/EC A framework for community action in the field of

water policy
Directive 2006/118/EC Protection of groundwater against pollution and

deterioration
Directive 91/271/EEC Urban waste water treatment
Directive 91/676/EEC Protection of waters against pollution caused by

nitrates from agricultural sources

determining their substantial contribution to the Sustainable Use and Protection of
Water and Marine Resources, are detailed in Annex I of the Environmental
Delegated Act.
19.3.4 Transition to a Circular Economy
According to the Taxonomy Regulation, an economic activity can contribute

substantially to the environmental objective of Transition to a Circular Economy in
several ways. It can, for example: 15


□ increase the durability, reparability, recyclability, upgradability, and reusability
of products
□ reduce the use of resources through the design and choice of materials,
facilitating repurposing, disassembly, and deconstruction in the buildings and
construction sector and promote the re-use of materials
□ increase the use of secondary raw materials and their quality
□ substantially reduce the content of hazardous substances and substitute

substances of very high concern in materials and products throughout their
life cycle
□ develop ‘product-as-a-service’ business models and circular value chains,

with the aim of keeping products, components, and materials at their highest
utility and value for as long as possible
□ reduce food waste in the production, processing, manufacturing, or

distribution of food
□ increase the development of the waste management infrastructure needed for

prevention, preparing for re-use, and recycling, while ensuring that the
recovered materials are recycled as high-quality secondary raw material input
in production, thereby avoiding downcycling
□ minimise the incineration of waste and avoid the disposal of waste
□ avoid and reduce litter
□ enable any of the activities listed above in the sense of an enabling economic
activity
‘Circular economy’ means an economic system whereby the value of products,

materials and other resources in the economy is maintained for as long as
possible, enhancing their efficient use in production and consumption, thereby
reducing the environmental impact of their use, minimising waste and the release
of hazardous substances at all stages of their life cycle, including through the
application of the waste hierarchy
The environmental objective of the Transition to a Circular Economy should be

interpreted in accordance with relevant European Union law in the areas of the
circular economy, waste, and chemicals; it refers to, among others, the
regulations and directives listed in Figure SRG 19-6.
Figure SRG 19-6

Referenced directives and regulations related to a circular economy
Directive Topic addressed
Regulation (EC) No Registration, Evaluation, Authorisation and

1907/2006 Restriction of Chemicals (the REACH Regulation)
Regulation (EU) Persistent organic pollutants

2019/1021
Directive 94/62/EC Packaging and packaging waste

Directive 2008/98/EC Waste

and Regulation (EU)
No 1357/2014
Directive 2012/19/EU Waste electrical and electronic equipment (the

WEEE Directive)

determining their substantial contribution to Transition to a Circular Economy, are
detailed in Annex II of the Environmental Delegated Act.
19.3.5 Pollution Prevention and Control
The Taxonomy Regulation provides a broad definition of ‘pollution’ as used in the

description of the Pollution Prevention and Control objective. The definition refers
to other directives that provide more detail specifically in the context of marine and
water environments. Those descriptions are similar to how the Taxonomy
Regulation defines ‘pollutant’ in that they refer to substances that interfere with the
use of the environment.
Excerpt from the Taxonomy Regulation, Article 2
(10) ‘Pollutant’ means a substance, vibration, heat, noise, light or other

contaminant present in air, water or land which may be harmful to human health
or the environment, which may result in damage to material property, or which
may impair or interfere with amenities and other legitimate uses of the
environment; …
(12) ‘Pollution’ means:
a) the direct or indirect introduction of pollutants into air, water or land as a
result of human activity;
b) in the context of the marine environment, pollution as defined in point 8 of
Article 3 of Directive 2008/56/EC;
c) in the context of the water environment, pollution as defined in point 33 of
Article 2 of Directive 2000/60/EC.
An economic activity qualifies as contributing substantially to Pollution Prevention

and Control when that activity contributes substantially to environmental protection
from pollution by doing at least one of the following: 16
□ preventing or, where that is not practicable, reducing pollutant emissions into
air, water, or land, other than greenhouse gases
□ improving levels of air, water, or soil quality in the areas in which the
economic activity takes place whilst minimising any adverse impact on human
health and the environment or the risk thereof
□ preventing or minimising any adverse impact on human health and the

environment of the production, use, or disposal of chemicals
□ cleaning up litter and other pollution

economic activity
The environmental objective of Pollution Prevention and Control should be

interpreted in accordance with relevant European Union law; it specifies, among
others, the directives listed in Figure SRG 19-7.
Figure SRG 19-7

Referenced directives related to pollution
Directive 2004/35/EC Environmental liability with regard to the prevention

and remedying of environmental damage
Directive 2008/50/EC Ambient air quality and cleaner air for Europe
Directive (EU) The reduction of national emissions of certain

2016/2284 atmospheric pollutants

determining their substantial contribution to Pollution Prevention and Control, are
detailed in Annex III of the Environmental Delegated Act.
19.3.6 Protection and Restoration of Biodiversity and Ecosystems
The Taxonomy Regulation explains economic activities that can play a significant
role in achieving the environmental objective of protecting, conserving, and
restoring biodiversity and ecosystems.
Excerpt from the Taxonomy Regulation, Article 2
(13) ‘Ecosystem’ means a dynamic complex of plant, animal, and micro-organism

communities and their non-living environment interacting as a functional unit; …
(15) ‘Biodiversity’ means the variability among living organisms arising from all
sources including terrestrial, marine and other aquatic ecosystems and the
ecological complexes of which they are part and includes diversity within species,
between species and of ecosystems;
The protection, conservation, and restoration of biodiversity and ecosystems in

turn enhances ecosystem services. The four categories of services are (1)
provisioning services (such as food and water); (2) regulating services (such as
climate control and disease prevention); (3) supporting services (such as nutrient
cycles and oxygen production); and (4) cultural services (such as spiritual and
recreational benefits). 17
An economic activity qualifies as contributing substantially to the Protection and

Restoration of Biodiversity and Ecosystems when that activity contributes
substantially to protecting, conserving, or restoring biodiversity, achieving the
good condition of ecosystems, or to protecting ecosystems that are already in
good condition, through at least one of the following:
□ nature and biodiversity conservation
□ sustainable land use and management
17 Regulation (EU) 2020/852, Recital 31.

□ sustainable agricultural practices
□ sustainable forest management

economic activity
As described in Taxonomy Regulation, the term ‘sustainable forest management’

refers to practices and uses of forest and forest land that contribute to enhancing
biodiversity and preventing degradation of ecosystems, deforestation, and habitat
loss. 18 The description emphasises the importance of stewardship and use of
forests in a way that maintains their biodiversity, productivity, regeneration
capacity, and vitality and their ability to fulfil ecological, economic, and social
function at local, national, and global levels. It also highlights the need to avoid
causing damage to other ecosystems.
This objective should be interpreted in accordance with relevant European Union

law; it specifies, among others, the regulations and directives listed in Figure SRG
19-8.
Figure SRG 19-8

Referenced directives related to biodiversity and ecosystems
Regulation (EU) No The obligations of operators who place timber and

995/2010 timber products on the market
Regulation (EU) No The prevention and management of the introduction

1143/2014 and spread of invasive alien species
Directive 2009/147/EC The conservation of wild birds
Regulation (EC) No The protection of species of wild fauna and flora by

338/97 regulating trade therein
Directive 92/43/EEC The conservation of natural habitats and of wild

fauna and flora

determining their substantial contribution to Protection and Restoration of
Biodiversity and Ecosystems, are detailed in Annex IV of the Environmental
Delegated Act.
19.4 Applying a 5-step approach

As introduced in SRG 19.1, there are several steps necessary to determine which
economic activities are sustainable activities that can be included in an entity’s
key performance indicators. A 5-step approach, illustrated in Figure SRG 19-9,
may be used to fulfill the disclosure requirements of Article 8 of the Taxonomy
Regulation.
18 Regulation (EU) 2020/852, Recital 32.

Figure SRG 19-9
The 5-step approach
The substantial contribution criteria and the do no significant harm (DNSH) criteria
are together referred to as the ‘technical screening criteria’. An activity must meet
the technical screening criteria and the minimum safeguards to be considered
taxonomy-aligned (also referred to as ‘environmentally sustainable’).
The outcome of the taxonomy assessment is presented in the form of KPIs,

representing an entity’s share of sustainable activities. The KPIs differ depending
on whether the reporting entity is a financial undertaking or a non-financial
undertaking; disclosure is required in prescribed templates. See SRG 19.1 for a
list of the entities that are financial undertakings.
Refer to SRG 20, EU Taxonomy reporting for non-financial services entities

[coming soon], for detailed application guidance of the 5-step approach for non-
financial undertakings. Refer to SRG 21, EU Taxonomy reporting for financial
services entities [coming soon], for financial undertakings.
Question SRG 19-1
Does the evaluation of whether activities are taxonomy-aligned need to be

performed in a specific order?
PwC response
No. Although the order in Figure SRG 19-9 presents a logical process to assess
taxonomy-alignment, it may be effective to first focus on any of the criteria an
entity does not expect to be able to meet. As soon as one criterion is not met, the
economic activity is not taxonomy-aligned. Other approaches may also be
effective.
19.4.1 Step 1: Identification of eligible activities
An activity must meet the description of an economic activity within the Climate
Delegated Act or the Environmental Delegated Act to be taxonomy-eligible.
Assessing eligibility is the first step to determining taxonomy-alignment. That an
activity is eligible, however, is not indicative of any specific environmental
performance or the sustainability of that activity. Activities that are not eligible,
cannot, by definition, be taxonomy-aligned.
The Taxonomy is subject to continuous review and development by the European

Commission whereby eligible activities will be amended or added. An entity must
continue to monitor the list of eligible activities (the relevant delegated acts) for
new additions. Conceptually, the European Commission has prioritised the
identification of the most environmentally impactful activities (such as energy
production, transport, and manufacturing for the objective of Climate Change
Mitigation) in developing the lists of eligible activities to date.

In most cases, the description of eligible activities references NACE codes which
indicate the sectors most likely to have the referenced activity. 19 An economic
activity might still be eligible even if the respective NACE code is not mentioned.
Refer to SRG 20, EU Taxonomy reporting for non-financial services entities,
[coming soon], for additional information about the effect of NACE codes on
taxonomy eligibility.
The annexes of the Climate Delegated Act and Environmental Delegated Act that
list all eligible economic activities are structured by sector. Section headings are
not intended to imply, however, that the eligible activities apply exclusively to
entities operating in a specific sector. Rather, an entity needs to follow the
description of the activities to assess whether their activities are taxonomy-
eligible. In addition, the role or importance of an activity for the business model is
not relevant. That is, an activity does not need to be an entity’s core activity or
generate revenue to be relevant under the Taxonomy.
The excerpt below is an example of how eligible activities are described in the
delegated acts.
Excerpt from the Climate Delegated Act, Annex I, Activity 7.1
7.1 Construction of new buildings

Description of the activity
Development of building projects for residential and non-residential buildings by
bringing together financial, technical and physical means to realise the building
projects for later sale as well as the construction of complete residential or non-
residential buildings, on own account for sale or on a fee or contract basis.
The economic activities in this category could be associated with several NACE
codes, in particular F41.1 and F41.2, including also activities under F43, in
accordance with the statistical classification of economic activities established by
Regulation (EC) No 1893/2006.
Activity descriptions further indicate whether an economic activity is considered

enabling or transitional. This categorisation of the type of economic activity is
needed in connection with the disclosures related to the calculation of KPIs when
the activities are reported in the prescribed templates (see SRG 20, EU
Taxonomy reporting for non-financial services entities [coming soon] for
information regarding the templates). How the activity is characterised is based on
the type of substantial contribution an economic activity potentially provides. That
is, does it allow other activities to make a substantial contribution to an
environmental objective (enabling) or is it an activity for which low-carbon
alternatives are not yet available that meets certain criteria (transitional). 20 Refer
to SRG 19.4.2 for details on these activity categories.
19.4.2 Step 2: Assess the substantial contribution criteria
Step 2 is to assess the substantial contribution criteria. That is, whether the
eligible activity substantially contributes to at least one of the environmental
objectives listed in the Taxonomy Regulation. Substantial contribution is assessed
as part of the technical screening criteria, which are specific to each individual
activity. The prescribed criteria for each activity can be found in Annex I and
19 NACE codes (Nomenclature des Activités Économiques dans la Communauté

Européennean, translated as Nomenclature of Economic Activities in the European
Community) are used to identify various statistical classifications of economic activities in
the European Union.
20 Regulation (EU) 2020/852, Article 10, paragraph 2 and Article 16.

Annex II to the Climate Delegated Act and in Annex I to Annex IV to the
Environmental Delegated Act.
There are three basic types of economic activities based on the substantial
contribution the respective activity can provide:
□ Enabling activities
Activities that indirectly contribute to a given environmental objective by
enabling others to make a substantial contribution to an environmental
objective
An example is activity 3.3 Manufacture of low carbon technologies for

transport under Climate Change Mitigation. By manufacturing electric
vehicles, an entity enables the transportation and other sectors to provide
transport services with zero direct tailpipe CO2 emissions.
□ Transitional activities
Activities that provide a substantial contribution to Climate Change Mitigation

by supporting the transition to a climate-neutral economy under specific
circumstances when there is no technologically or economically feasible low-
carbon alternative for the respective activity
This type of activity is exclusive to the Climate Change Mitigation objective.

An example is activity 3.7 Manufacture of cement, which is a greenhouse gas
emission-intensive activity but for which there is currently no low carbon
alternative.
□ Own performance activities
Activities that directly contribute to a given environmental objective and are

neither enabling, nor transitional
The specific contribution depends on the objective in question. An example is

activity 4.3 Electricity generation from wind power under Climate Change
Mitigation. By generating electricity from wind power, the operator of a wind
power plant directly contributes to Climate Change Mitigation by generating
renewable energy.
Specific to the Climate Change Adaptation objective, enabling activities are further
differentiated between enabling and adapted-enabling activities. This distinction
takes into account the specific design of this environmental objective.
See SRG 20, EU Taxonomy reporting for non-financial services entities [coming
soon], for details on how eligibility and alignment are assessed under Climate
Change Adaptation.
The following excerpt is an example of how the substantial contribution criteria are
described in the annexes to the delegated acts.
Construction of new buildings for which:

1. The Primary Energy Demand (PED), defining the energy performance of the
building resulting from construction, is at least 10% lower than the threshold
set for the nearly zero-energy building (NZEB) requirements in national
measures implementing Directive 2010/31/EU of the European Parliament
and of the Council. The energy performance is certified using an as built
Energy Performance Certificate (EPC).

2. For buildings larger than 5,000 m2, upon completion, the building resulting
from the construction undergoes testing for air-tightness and thermal integrity,
and any deviation in the levels of performance set at the design stage or
defects in the building envelope are disclosed to investors and clients. As an
alternative; where robust and traceable quality control processes are in place
during the construction process this is acceptable as an alternative to thermal
integrity testing.
3. For buildings larger than 5,000 m2, the life-cycle Global Warming Potential
(GWP) of the building resulting from the construction has been calculated for
each stage in the life cycle and is disclosed to investors and clients on
demand.
Question SRG 19-2
How does an entity determine whether activities are enabling or transitional?
PwC response
Whether an economic activity is enabling or transitional is not within the entity’s
discretion. If an activity is enabling or transitional, it will be noted within the activity
description in the respective annexes to the Climate Delegated Act or
Environmental Delegated Act. If an activity is not enabling or transitional, it is
considered to be an own performance activity.
19.4.3 Step 3: Assess the ‘do no significant harm’ criteria
An entity should ensure that the activity does not significantly harm any of the
other five objectives to which it does not provide a substantial contribution by
assessing whether the activity complies with all established DNSH criteria.
The DNSH criteria are also assessed as part of the technical screening criteria,
which like the substantial contribution criteria, is specific to each individual activity.
The prescribed criteria for each activity can be found in Annex I and Annex II to
the Climate Delegated Act and in Annex I to Annex IV to the Environmental
Delegated Act.
The purpose of this step is to ensure that the substantial contribution to one
environmental objective does not come at the expense of any of the other
objectives. Depending on the economic activity in question, the European
Commission may have decided that the activity does not present a risk to the
other objectives. In these cases, it is possible that no DNSH criteria are defined.

The following excerpt is an example of how DNSH criteria are described in the
delegated acts.

Do not significant harm
(2) Climate change The activity complies with the criteria set out in Appendix A to this Annex.
adaptation
(3) Sustainable use Where installed, except for installations in residential building units, the
and protection of specified water use for the following water appliances are attested by product
water and marine datasheets, a building certification or an existing product label in the Union, in
resources accordance with the technical specifications laid down in Appendix E to this
Annex:
a. wash hand basin taps and kitchen taps have a maximum water flow of 6
litres/min;
b. showers have a maximum water flow of 8 litres/min;
c. WCs, including suites, bowls and flushing cisterns, have a full flush volume
of a maximum of 6 litres and a maximum average flush volume of 3,5
litres;
d. urinals use a maximum of 2 litres/bowl/hour. Flushing urinals have a
maximum full flush volume of 1 litre.
To avoid impact from the construction site, the activity complies with the
criteria set out in Appendix B to this Annex.
(4) Transition to a At least 70 % (by weight) of the non-hazardous construction and demolition
circular economy waste (excluding naturally occurring material referred to in category 17 05 04
in the European List of Waste established by Decision 2000/532/EC)
generated on the construction site is prepared for reuse, recycling and other
material recovery, including backfilling operations using waste to substitute
other materials, in accordance with the waste hierarchy and the EU
Construction and Demolition Waste Management Protocol. Operators limit
waste generation in processes related to construction and demolition, in
accordance with the EU Construction and Demolition Waste Management
Protocol and taking into account best available techniques and using selective
demolition to enable removal and safe handling of hazardous substances and
facilitate reuse and high-quality recycling by selective removal of materials,
using available sorting systems for construction and demolition waste.
Building designs and construction techniques support circularity and in
particular demonstrate, with reference to ISO 20887 or other standards for
assessing the disassembly or adaptability of buildings, how they are designed
to be more resource efficient, adaptable, flexible and dismantleable to enable
reuse and recycling.
(5) Pollution Building components and materials used in the construction comply with the
prevention and criteria set out in Appendix C to this Annex.
control
Building components and materials used in the construction that may come
into contact with occupiers emit less than 0,06 mg of formaldehyde per m3 of
material or component upon testing in accordance with the conditions
specified in Annex XVII to Regulation (EC) No 1907/2006 and less than 0,001
mg of other categories 1A and 1B carcinogenic volatile organic compounds
per m3 of material or component, upon testing in accordance with CEN/EN
16516 or ISO 16000-3:2011 or other equivalent standardised test conditions
and determination methods.

Where the new construction is located on a potentially contaminated site
(brownfield site), the site has been subject to an investigation for potential
contaminants, for example using standard ISO 18400.
Measures are taken to reduce noise, dust and pollutant emissions during
construction or maintenance works.
(6) Protection and The activity complies with the criteria set out in Appendix D to this Annex. The
restoration of new construction is not built on one of the following:
biodiversity and
a. arable land and crop land with a moderate to high level of soil fertility and
ecosystems
below ground biodiversity as referred to the EU LUCAS survey;
b. greenfield land of recognised high biodiversity value and land that serves
as habitat of endangered species (flora and fauna) listed on the European
Red List or the IUCN Red List;
c. land matching the definition of forest as set out in national law used in the
national greenhouse gas inventory, or where not available, is in
accordance with the FAO definition of forest.
19.4.4 Step 4: Assess compliance with the minimum safeguards
Eligible activities also need to comply with specified minimum safeguards to be

taxonomy-aligned. The minimum safeguards are based on international standards
and guidelines addressing human rights, anti-corruption and bribery, taxation, and
fair competition. As the objectives delineated by the Taxonomy Regulation to date
only address the environment, the minimum safeguards serve to ensure the social
and governance elements of ESG are also considered. The minimum safeguards
are consistent among all of the environmental objectives and require alignment
with the following:
□ OECD Guidelines for Multinational Enterprises on Responsible Business

Conduct
□ UN Guiding Principles on Business and Human Rights, including the

principles and rights set out in the eight fundamental conventions identified in
the Declaration of the International Labour Organisation on Fundamental
Principles and Rights at Work
□ International Bill of Human Rights
The Taxonomy Regulation refers to the OECD Guidelines for Multinational

Enterprises (2011 edition); however, entities should consider the 2023 version
listed above.
19.4.5 Step 5: Calculate and report KPIs
Once an entity has identified its taxonomy-eligible and taxonomy-aligned

activities, it needs to calculate and disclose specific KPIs based on these activities
in its sustainability statement.
The KPIs for a non-financial undertaking are based on net turnover, capital
expenditures, and operating expenditures. The KPIs for financial undertakings
focus on generated income and investments and vary by type of financial
undertaking.
The Disclosures Delegated Act requires the mandatory use of standardised

reporting templates to present the KPIs, ensuring comparability among entities
and sectors.

These templates must be reported along with qualitative disclosure including, for
example, an entity’s policy on how the KPIs are determined, explanations of how
the technical screening criteria are met, and contextual information, such as
disaggregated information about the components of the KPIs.
Acknowledgements
Rasmus Evensen
Peter Flick
Heather Horn
Nina Schäfer
Andreas Ohl
Dennis Pietzka
Mikael Scheja
Olivier Scherer
Martin Wolfgang Schönberger
Hugo van den Ende
Valerie Wieman
Katie Woods

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Sustainability reporting guide

□ European Sustainability Reporting Standards (ESRS) adopted by the European

□ IFRS® Sustainability Disclosure Standards issued by the International

SRG 1: Introduction to sustainability reporting

Additional chapters will be issued addressing environmental, social, and governance

About the Sustainability reporting guide

This publication contains copyright material of the IFRS® Foundation in respect of

1.1 Introduction to sustainability reporting — chapter overview .................................................. 1-1

Chapter 2: Applicability of sustainability reporting

2.1 Applicability of sustainability reporting — chapter overview................................................... 2-1

Chapter 3: Boundaries of sustainability reporting

3.1 Boundaries of sustainability reporting — chapter overview ..................................................... 3-1

Chapter 4: Materiality for sustainability reporting

4.1 Materiality for sustainability reporting – chapter overview..................................................... 4-1

Chapter 5: Foundations of sustainability reporting

5.1 Foundations of sustainability reporting — chapter overview ................................................... 5-1

Chapter 6: Pillars of sustainability reporting

6.1 Pillars of sustainability reporting — chapter overview ............................................................. 6-1

Chapter 7: Greenhouse gas emissions reporting

7.1 Greenhouse gas emissions reporting overview ......................................................................... 7-1

Chapter 19: Introduction to EU Taxonomy reporting

19.1 Introduction to EU Taxonomy reporting — chapter overview ............................................... 19-1

□ European Sustainability Reporting Standards (ESRS) adopted by the

□ IFRS® Sustainability Disclosure Standards issued by the International

See SRG 2, Applicability of sustainability reporting requirements, for discussion of

□ Understanding the sustainability reporting frameworks (SRG 1.2)

□ Approach to sustainability reporting (SRG 1.3)

This overview provides an introduction that should be supplemented by the

1.1.1 Navigating the Sustainability reporting guide

This Sustainability reporting guide (SRG) serves as a compendium of the

PwC | Introduction to sustainability reporting (as of 30 June 2024) 1-1

Figure SRG 1-1

This guide is intended to support an entity throughout its sustainability reporting

1.1.2 About this chapter

Throughout this SRG, we use common terms to describe aspects of the

The sustainability reporting landscape continues to rapidly evolve. The content of

Impacts, risks, and opportunities (as applicable)

Sustainability reporting is intended to provide material information about an

□ ESRS — sustainability-related impacts, risks, and opportunities

□ IFRS Sustainability Disclosure Standards — sustainability-related risks and

□ SEC climate disclosure rules — climate-related risks

PwC | Introduction to sustainability reporting (as of 30 June 2024) 1-2

Disclosure and application requirements for ESRS

Interpretive guidance for ESRS and the ISSB standards

In addition to releasing the reporting standards, standard setters are actively

□ EFRAG IG 1 Materiality Assessment (EFRAG IG 1)

□ EFRAG IG 2 Value chain (EFRAG IG 2)

□ EFRAG ESRS Implementation Q&A Platform — the EFRAG Q&A Platform is

Although EFRAG’s guidance is non-authoritative, it provides a helpful perspective

In addition, the IFRS Foundation has established a task force to assist in

Interoperability among frameworks

PwC | Introduction to sustainability reporting (as of 30 June 2024) 1-3

The first section of the guidance discusses interoperability in relation to general

□ Common climate-related disclosures

□ ESRS to IFRS S2 (climate): information that an entity starting with ESRS

1.1.3 Exclusions from this chapter

Additionally, entities in scope of the CSRD would also be subject to the EU

1.2 Background of the sustainability reporting