ESRS principles are changing how you do business

The ESRS E1 environmental standard promotes rigorous, forward-looking disclosure on climate-related targets, data, and action plans, encouraging businesses to adopt a longer-term perspective that assesses impacts through 2030 and beyond. It also specifies that targets should be revisited at least every five years, ensuring that strategies remain adaptable and forward-looking over the next decade and beyond. As many investors can still prioritize short-term returns, clear communication will be essential to make the case for a longer term approach to climate investment.

Stakeholder expectations for transparency on long-term climate action are increasing significantly. According to Deloitte Global’s 2024 CxO Sustainability Report, 90% of executives believe the world can achieve economic growth with reaching climate change goals. However, 27% of organizations have taken minimal or no action on climate, and the CSRD is expected to help drive further action.

To align with ESRS E1, businesses should expand their approach to climate impact, shifting from a narrow focus on emissions targets to a comprehensive strategy that considers the future impact and the company’s long-term role in a low-carbon economy. Many companies will also have to reevaluate how moving from preferred intensity targets to absolute targets should best be communicated to stakeholders. Although climate impact is already on the agenda at the board level, achieving these objectives may require chief financial officers to assume shared responsibility with sustainability leaders, fostering board-level advocacy and guiding a transformative, organization-wide approach to sustainable growth.

How to navigate this pragmatically?

Proactive planning for a low-carbon transition

ESRS E1 requires business leaders to adopt a more proactive approach, creating a transition plan that integrates their business and financial strategies to support the move to a low-carbon economy. This involves understanding the company’s impact on the environment and the effects of the climate transition on business resilience – a dual perspective that is essential for business leaders to adopt to help drive sustainable transformation.

This broader perspective can help organizations to anticipate how the climate transition may shape business operations, and to define resilience and embed actions that strengthen it. The Carbon Disclosure Project (CDP) is a not-for-profit charity that runs the global disclosure system for investors, companies, cities, states and regions to manage their environmental impacts. CDP recently published ‘The State of Play’ which looked at 2023 Climate Transition Plan Disclosures and found that while 44% more companies adopted transition plans last year, this represents only a quarter overall, and few are fully equipped for detailed disclosure across all relevant metrics. ESRS standards support organizations in identifying, assessing and managing climate-related risks while providing a framework for spotting and capitalizing on new opportunities and innovations. Some physical risks – such as disruptions from extreme weather – may already be part of risk assessments, yet some events, previously considered rare, are now increasingly frequent. Given the recent rise in these climate events, quantification of the financial repercussions is still limited. To adapt to this changing risk landscape, businesses should continually refresh resilience assessments, ensuring preparedness for both immediate impacts and long-term environmental shifts.

Transition risks are becoming increasingly prominent as the business environment shifts toward a low-carbon economy. These risks, which may be less familiar to some companies, include potential legal and reputational damage, particularly for organizations claiming climate neutrality without fully accounting for scope 3 emissions (indirect emissions from suppliers). Although ESRS E1 requires Scope 3 disclosures, it does not mandate a 1.5°C-aligned reduction target for these emissions. However, a clear and comprehensive approach to Scope 3 can help businesses mitigate ‘greenwashing’ risks by enhancing transparency. Insurability of assets will also become a critical business concern as insurers continue to update their risk models – some decades old – to reflect evolving climate-related risks.

Deloitte Global’s 2024 CxO Sustainability Report indicates that 70% of companies now expect climate change to affect their strategy and operations, up from 61% in 2023. With climate increasingly acknowledged as a significant risk factor, ESRS E1 can serve as an early warning system, helping businesses identify physical and transition risks. This framework supports the development of mitigation strategies, including diversified supply chains, climate-resistant infrastructure, and low-emission processes, potentially providing a foundation for managing these emerging challenges.

Unlocking opportunities beyond compliance

Turn transition plans into a market differentiator

The climate transition is not only about risk management; it can also unlock new growth opportunities. As investor focus shifts toward Environment, Social and Governance (ESG) and customer demand increasingly favors sustainability, companies that proactively pursue these opportunities can position themselves as leaders in a changing marketplace.

For example, the automotive industry appears to be accelerating toward low-carbon production to meet rising consumer expectations and fleet operators’ Scope 3 emission targets. Several steel suppliers have responded to this shift by producing low-carbon steel, capturing market share and gaining a price premium – an early move likely to reap further benefits as initiatives such as the Carbon Border Adjustment Mechanism (CBAM) make high-carbon products less competitive. This trend suggests that more specific regulations may soon follow today’s broad CSRD obligations, potentially amplifying the benefits for early movers.

Deloitte Global’s 2024 CxO Sustainability Report reflects this trend, showing that 85% of leading businesses are now developing lower carbon products or services – a shift that indicates the potential value of turning climate challenges into strategic opportunities.

Crafting compelling vision statements

Senior leaders should grasp this opportunity to help craft and articulate a compelling vision for a sustainable future. The current CSRD obligations offer a platform to demonstrate a company’s environmental commitment and tell a brand story rooted in sustainability.

Strong leadership and a clearly defined vision are important for embedding transition plans and climate targets into core strategic planning. Instead of treating the transition plans and climate targets as isolated add-ons, business leaders should consider how integrating them as central business objectives could ensure they help drive meaningful change. By developing dynamic, adaptable transition plans and regular reviews, organizations can position themselves to benefit from ongoing developments in science, policy, and technology.

Given the long-term nature of the climate transition, celebrating each sustainability achievement can help maintain momentum, fostering a culture that is inspired to build on progress and continue advancing toward a low-carbon future.

Embracing the climate transition

Approached strategically, the climate transition holds transformational potential for businesses. Adopting a broad, long-term perspective can support risk management and resilience and potentially highlight where opportunities and innovations can create the most significant business advantage.

Deloitte understands the complexities of the climate transition including how the regulatory framework varies across industries. We can assist in developing forward-looking transition plans, guiding business transformation, and crafting a compelling vision to help position companies as market leaders.

Discover how the insights gained from CSRD can be pragmatically navigated to drive business value.