The EU’s Corporate Sustainability Reporting Directive, CO2 footprint, and packaging management

European regulations on carbon footprint

Anthropogenic activities are having a significant impact on the environment, causing climate change that will continue to affect businesses and citizens as well as biodiversity in the long term.

An important component driving climate change is the 'carbon footprint'. This refers to the total amount of CO2 and other greenhouse gas emissions ('GHG emissions'), directly or indirectly generated by a product or activity or associated with activities carried out by an individual or organisation. The GHG emissions are usually calculated as carbon dioxide equivalent (CO2e), taking into account their different global warming potential.

1. The European legislation regarding the carbon footprint

According to the European Commission's proposal, namely the 'European Green Deal', GHG emissions must be reduced by 55% by 2030 and by 100% ('Net Zero') by 2050 to be in line with the 1.5°C global temperature limitation targets of the Paris Agreement.

To reduce the GHG emissions generated, companies need to have access to real information, databases, and specific scientific coefficients, to quantify their 'carbon footprint'.

At the European Union (EU) level, although the Non-Financial Reporting Directive (NFRD), including sustainability and environmental data reporting obligations, is in force, companies lack a structured and clear framework for publishing concrete climate and GHG emissions data to financial market participants and civil society.

Thus, in December 2022, the EU's Official Journal published the Sustainability Reporting Directive, called the 'CSRD - Corporate Sustainability Reporting Directive', which establishes a mandatory reporting framework for the following entities:

• Companies defined as 'large companies', which at the balance sheet date exceed at least two of the following three criteria:

- balance sheet total: €20m;

- net turnover: €40m;

- average number of employees during the financial year: 250.

• Small and medium-sized public interest enterprises (EU or non-EU), which are defined as entities whose securities are admitted to trading on a regulated market of any EU Member State and if at least 2 of the 3 criteria are met:

- 10 < employees ≤ 250;

- €700,000 < net turnover ≤ €40m;

- €350,000 < balance sheet total ≤ €20,000.

• Third-country companies (non-EU entities) that generate a net turnover of more than €150m in the EU and have a subsidiary or branch (with a turnover of more than €40m) in the EU should be subject to sustainability reporting requirements.

Both large and small companies, to which the provisions of the CSRD apply, will be required to include sustainability information (i.e. climate change mitigation, adaptation to climate change, water resources, resource use and circular economy, pollution, biodiversity, and ecosystems) in the directors' report, according to specific standards to be published in June 2023 by the European Commission - „European Sustainability Reporting Standards” or ESRS.

2. The most widely used method of classifying carbon footprint

In 1998, the World Resources Institute, in partnership with NGOs, companies, and academic institutions, developed an international standard for accounting and reporting GHG emissions in an internationally accepted format to promote a low-emission economy worldwide (GHG Protocol).

According to the CSR Directive and the GHG Protocol, companies will report information, among others, on how they are taking the necessary measures to mitigate climate change, including greenhouse gas emissions. Thus, three scopes have been considered for the calculation of GHG emissions (as per), as follows:

• Scope 1 for GHG emissions from direct emission sources such as combustion installations of various fuels;
• Scope 2 for GHG emissions from indirect sources, i.e. as a result of electricity consumption;
• Scope 3 for GHG emissions are all indirect emissions within a company's value chain (upstream and downstream emissions from its operations).

The published information should include a description of the GHG emission reduction targets with precise compliance deadlines for at least 2030 and 2050. All data submitted should demonstrate the use of sound scientific calculations.

According to the GHG Protocol, activities within a company's value chain (i.e. Scope 3) can have the largest share in generating GHG emissions.

Indirect Scope 3 emissions can be those specific to the activity of resource extraction, processing of purchased raw materials, transport of purchased fuels, and/or subsequent use of products sold or services provided.

Given the complex process of calculating the CO2 footprint, especially for companies with multiple locations, subsidiaries, or a diverse value chain, Mazars has implemented a structured digital solution that can ensure traceability both in terms of operational information (e.g. energy, water, fuel consumption, etc.) and the scientific indicators allocated (e.g. conversion factors applied to convert this data into CO2 equivalents).

3. Challenges and opportunities for packaging and packaging waste

An important category to consider when determining Scope 3 specific emissions is packaging and packaging waste.

Packaging is designed to protect the products it contains and to facilitate and streamline the transport, handling, and/or storage of products. However, packaging has a short shelf-life and, in addition to the benefits it brings, generates packaging waste found in both the municipal and industrial streams.

A large amount of raw material, including energy, is used to manufacture packaging, and the carbon footprint of packaging could be even comparable to that of the products it contains, given, in some cases, the type and number of packaging layers used to deliver products.

In the EU market, the packaging uses 40% virgin plastics and 50% virgin paper, representing 36% of municipal solid waste.

At the end of their use, packaging waste can often not be recycled due to the different types of materials contained, especially plastic packaging.

Most companies that are obliged to report on the packaging they use to deliver their products report the quantities of packaging used in an extended producer responsibility scheme to ensure that it is recycled when it becomes waste (through contracts with organisations implementing extended producer responsibility - 'OIREP'). However, companies will need to analyse the environmental impact of packaging from the time of manufacture until it becomes waste and is recycled or disposed of, as appropriate.

Economic operators using packaging are required to identify and keep records of all types of packaging they use, including packaging purchased for over-packaging or repackaging.

Producers of packaged products must keep monthly records by type of material (cardboard, plastic, PET, metal, aluminium, glass, wood) and by type of packaging (retail, primary, secondary, and transport).

In November 2022, the European Commission published a proposal for a Regulation on packaging and packaging waste. It proposes a series of measures that will aim to move towards a low-carbon and circular economy, such as reusing packaging, providing recyclable materials, reducing over-packaging, banning certain types of packaging that cannot be recycled, and replacing plastic packaging with biodegradable materials.

According to the Assessment Report accompanying the proposal for a Regulation on packaging and packaging waste, plastic packaging is the most carbon-intensive material, with a total of 1.8 tonnes of CO2 equivalent emitted over the life cycle of one tonne of plastic packaging. This is followed by paper/cardboard and glass, with emissions of 809 kg and 565 kg CO2e per tonne respectively. Wood packaging has net emissions of 19 kg CO2e per tonne, while steel and aluminium have negative values.

Companies should regularly assess the types of packaging they use and have up-to-date information on the weight and type of packaging they use so that they can report real data on the impact that the company has when they do this work. Companies that can meet their recovery targets individually with their own packaging waste can recycle more than the 65% minimum percentage set by legislation.

Companies reporting under extended producer responsibility receive monthly reports from their partner organisation on the quantities of packaging they manage, where the percentages allocated for recycling and/or energy recovery can be verified. Companies can request from OIREP the amount of CO2 reduced as a result of the recycling of packaging waste under contract from these organisations.

From 2023 onwards, producers of packaging products bear full responsibility, together with OIREP and collectors/recyclers, for the quantities of packaging waste that are not recycled. The Administration of the Environment Fund ('AFM') will be able to issue tax decisions to producers for quantities of packaging waste for which minimum recovery targets have not been met, according to the legislation in force. This means that economic operators will have to participate actively in the management of packaging waste, in relation to OIREP, rather than paying a fee for the management of packaging waste.

According to the draft Regulation on packaging and packaging waste, different rates may be introduced in the future for certain types of materials (i.e. those that are recyclable, those that are easy to collect separately, clean, lower rates than those that cannot be recycled and whose management involves the use of additional financial and logistical resources) to discourage the use of materials that have a significant environmental impact, taking into account the whole value chain.

At the local level, companies can establish reliable collaborations with OIREPs that can ensure transparency in the management of packaging waste at any time and can search together with OIREPs for appropriate packaging waste management solutions to avoid possible penalties issued by the AFM.

At Mazars, we work with companies with packaging and packaging waste obligations to regularly review their activities and propose measures to reduce the risk of being penalised for not meeting recovery targets. We also check with economic operators, by weighing, the weight of packaging by type of material and by type of packaging and propose measures to reduce their weight where appropriate. In addition, we have the necessary expertise to carry out waste audits and draw up the annual programme to prevent and reduce the quantities of waste generated from our own activities. All these measures can contribute positively to the reduction of GHG emissions.

The various recent developments, both at the EU and local level, aim to improve the way companies work and therefore the impact of their activities on the environment and people.

The CSRD sets out a framework to guide companies in aligning their business to climate change which is directly influenced by the level of greenhouse gas emissions. Therefore, performing a CO2 emissions calculation can present a new opportunity for companies to reassess the costs involved and actively contribute to reducing carbon emissions.

In conclusion, in the area of packaging and packaging waste, following an assessment of the internal situation, companies can take decisions on the re-use of packaging, the reduction of quantities of single-use packaging, the use of a return guarantee system for certain types of packaging and the use of packaging materials only from sustainable sources that generate low GHG emissions and can be easily returned or recycled by the final consumer.