Carbon Credits in Sustainability Reports: A CSRD and ESRS Perspective

As companies move towards their net zero targets, carbon credits are increasingly coming onto the agenda as a complementary element of emission reduction strategies. However, how carbon credits should be treated in sustainability reports still constitutes a significant area of uncertainty, particularly within the scope of the European Union’s new reporting framework.

The Corporate Sustainability Reporting Directive (CSRD) and the European Sustainability Reporting Standards (ESRS) require companies not only to disclose quantitative emission data but also to present their climate strategies within a holistic, transparent and verifiable framework. This approach obliges companies to set out clearly their emission reduction pathways, their targets, and the instruments they use to reach those targets. In this context, carbon credits stand out as a sensitive area which, if not correctly positioned, may lead to reporting inconsistencies, to climate performance being perceived as better than it is, and to greenwashing risks.

Carbon credits: a reduction instrument, or a complementary mechanism?

Carbon credits represent greenhouse gas emissions whose release into the atmosphere has been prevented, or which have been removed from the atmosphere, through particular project types such as renewable energy, energy efficiency, methane capture, forestry or carbon capture. In this respect they are regarded as an important market mechanism contributing to emission reduction efforts on a global scale. From the perspective of sustainability reporting, however, a critical distinction needs to be made regarding the role of carbon credits.

Carbon credits do not actually eliminate the emissions arising from a company’s own operations; they merely represent reduction or removal activities carried out on a global scale in return for those emissions. For this reason the CSRD and ESRS approach positions carbon credits not as an instrument that takes the place of direct emission reduction, but as a complementary mechanism supporting the climate strategy. Within this framework, priority is given to the company genuinely and permanently reducing the emissions arising from its own activities — that is, to implementing structural transformations such as energy efficiency, the use of renewable energy, process improvements and the transition to low-carbon technologies.

In line with this approach, carbon credits should not be presented in sustainability reports as a substitute for emission performance. On the contrary, they should be treated as a supporting component of the company’s climate strategy, and the reasons for which they are used, the types of project from which they are obtained, and how they relate to emission reduction targets should be disclosed transparently. Presentation of this kind both strengthens alignment with CSRD and ESRS requirements and contributes to building a credible and consistent climate performance narrative in the eyes of stakeholders.

The place of carbon credits within the CSRD and ESRS

The use of carbon credits in emission calculations

The ESRS E1 (Climate Change) standard published under the CSRD requires companies to take a gross approach when reporting their greenhouse gas emissions. Under this approach, Scope 1, Scope 2 and Scope 3 emissions must be reported without any offsetting mechanism being taken into account — that is, without being netted off against carbon credits. In other words, carbon credits are not deducted from emission calculations, and reported emission data must always reflect pre-offset values.

This framework aims to ensure that companies’ real emission profiles are set out transparently, and to prevent emission performance from presenting an artificially improved appearance. Where concepts such as “net emissions”, “climate neutral” or “carbon neutral” are used, the assumptions, methodology and offsetting instruments on which these expressions rest must be explained in a clear, traceable and verifiable manner. Otherwise such statements can give rise to misleading perceptions and to greenwashing risks.

The fundamental purpose of this approach is to protect both the comparability of sustainability reports between companies and their credibility in the eyes of stakeholders. Taking gross emissions as the basis makes companies’ real reduction performance visible and allows the effectiveness of climate strategies to be assessed more soundly.

Disclosure in climate strategy and transition plans

The principal place of carbon credits in sustainability reports should be within the company’s climate strategy and transition plan narrative rather than in emission calculations. The ESRS standards published under the CSRD expect it to be set out clearly how carbon credits relate to the company’s long-term transformation approach, to its roadmap towards net zero or carbon neutral targets, and to its short-, medium- and long-term emission reduction targets. This approach aims to clarify the position and function of carbon credits within the company’s overall climate targets.

In this context, companies are expected to set out, in a clear and consistent narrative, which targets they use carbon credits to achieve, whether they position these credits as a temporary solution or as a long-term instrument, and what balance they strike between carbon credits and in-house emission reduction investments. Disclosures of this kind are critically important in showing whether carbon credits are merely a numerical offsetting instrument or a limited and complementary element of a broader transformation strategy.

Clear and consistent answers to these questions make visible how, and to what extent, carbon credits play a role in the company’s climate strategy, and strengthen the integrity of the report. At the same time they allow stakeholders to assess more soundly whether the company is substituting carbon credits for genuine emission reduction efforts, or using these credits only as a limited instrument for residual emissions.

Transparency and verifiability: critical reporting principles

At the centre of the reporting obligations set out under the CSRD, and of the ESRS standards that give them concrete form, lies the requirement that climate-related statements be transparent, traceable and verifiable. This principle carries particular importance in the reporting of carbon credits as well. Failure to set out clearly for what purpose, within what scope and how carbon credits are used can create serious credibility risks both in audit processes and in stakeholder perception. For this reason the reporting of carbon credits should not be reduced to a quantitative statement alone; it should be treated together with its qualitative dimensions.

Within this framework, companies are expected to state clearly whether the carbon credits they use are based on emission reduction or on emission removal, from which project types and sectors these credits are obtained, under which certification standard they were generated, and their verification status. In addition, the reporting period in which the credit volume was used, the permanence characteristics of the project, and any additional environmental or social co-benefits it provides should also be disclosed transparently.

Disclosure at this level ensures that carbon credits are assessed in reporting not merely as a numerical element but holistically, together with their characteristics. At the same time it contributes to the sound progress of independent audit processes and strengthens the credibility of the report in the eyes of investors, regulators and other stakeholders.

The CSRD is the framework directive defining the legal obligation and the general principles for sustainability reporting for companies; the technical content and application principles of that obligation are set out by the ESRS standards published under the CSRD.

Greenwashing risks and mistakes to avoid

Positioning carbon credits incorrectly in sustainability reports exposes companies to serious risks not only in terms of reputation but also in terms of regulatory compliance and audit processes. In particular, creating the perception that company emissions have actually been “eliminated” through carbon credits, or that the climate impact has been fully compensated, is incompatible with the principles of prudence, accuracy and transparency embedded in the foundation of the CSRD.

The reporting obligations set out under the CSRD, and the ESRS standards that give them concrete form, treat sustainability reports not as communication texts but, in the same way as financial reports, as evidence-based, traceable and auditable corporate statements. For this reason, information presented about carbon credits that is incomplete, vague or divorced from its context weakens the report as a whole and lays the ground for greenwashing allegations.

Problems encountered in practice mostly begin when carbon credits are put ahead of a company’s own emission reduction efforts. This approach causes real emission reduction performance to remain in the background of the report narrative and offsetting mechanisms to take on a more central role than they should. In addition, insufficiently clear presentation of the certification framework, verification processes and quality criteria relating to the nature of the carbon credits used weakens the traceability and credibility of the reported information. What makes this picture still more problematic is the inconsistency that arises between the technical and prudent language used in the sustainability report and the more assertive expressions found in the company’s corporate communications or marketing messages; this gives rise to question marks over the integrity of the climate strategy in the eyes of stakeholders.

A good-practice perspective

When advanced reporting examples are examined, carbon credits are seen to be treated within a clear logic of prioritisation. In this approach companies first set out in detail the emission reduction activities they have carried out across their own operations and value chain, their targets, and their progress towards those targets.

Following this, residual emissions that cannot be reduced in the short and medium term for technical, economic or structural reasons are clearly defined; carbon credits are then brought in at this point as a limited and temporary offsetting instrument. This form of use ensures that carbon credits are placed in a complementary role rather than at the centre of the main strategy.

This framework is aligned with the underlying logic of science-based targets, and directly supports the transparency, comparability and prudence principles of the ESRS standards published under the CSRD.

Assessment and conclusion

Carbon credits are highly sensitive instruments that need to be treated with care in sustainability reports. The CSRD and ESRS framework expects companies not to present carbon credits as a substitute for emission reduction, but instead to disclose them within a clearly bounded, transparent and verifiable framework.

A well-constructed reporting approach ensures that carbon credits are correctly understood as a secondary element supporting the company’s climate strategy. Otherwise, carbon credits can turn into an area of risk that damages the overall consistency and credibility of the report and leaves the company exposed both in audit and in reputational terms.