Carbon Neutrality | The Sustainability Strategy of Companies in the Light of the CSRD and Current Taxation in Portugal

Preparation and Adaptability as Pillars of Success

The importance of Preparation and Adaptability in the world of business is a fundamental principle for achieving long-term success in the execution of a corporate strategy.  

Sun Tzu, the famous Chinese military strategist and philosopher, emphasized the importance of good preparation and the ability to adapt to different environments in his classic work "The Art of War", written in the middle of the 5th century BC.  

Are companies prepared for the major challenge of becoming more sustainable and reducing their carbon footprint in the coming years? Are they also prepared for the new regulatory requirements and demands of the financial sector?

Sustainability 3.0 will require companies to review their medium and long-term strategy in order to be resilient, profitable and sustainable in the future.

And what is Sustainability 3.0?

In recent years, the word Sustainability has been used a lot by companies, and not always in the most correct way, giving rise to many cases of Greenwashing.  

In the beginning (version 1.0), Sustainability was only used by large companies, as a result of the need to communicate to the financial market, and in phase 2.0, by the majority of companies, but, as it turned out, in a way in which action did not go hand in hand with communication.

Sustainability 3.0 is about moving from words to action, it's about getting the whole company involved and not just a small group of people, it's about taking advantage of the fiscal framework to invest in reducing your carbon footprint, it's about leaving Excel sheets behind and starting to use Artificial Intelligence and IoT to measure the carbon footprint of your facilities and fleet, it's about being prepared for the new European and national regulatory framework.

I therefore identify three "Battles" for companies to achieve Carbon Neutrality:

1. How can we comply with all the legislation currently in force, as well as that which will be approved, in terms of sustainability?

2. What is the capacity to use the breadth of current taxation to increase the speed of the energy transition?

3. What is the capacity, through robust systems, to obtain and integrate data to accurately report ESG metrics in your operations and value chain?

‍

1. LEGISLATION  

The legislation in force on ESG, Environment and Climate issues is quite diverse, but I would identify two key pieces of legislation in the carbon transition process we are currently witnessing.

CSRD - Corporate Sustainability Reporting Directive

The CSRD is an amending directive of the European Parliament, approved on January 5, 2023, which establishes stricter requirements for sustainability reporting by companies and which stems from the EuropeanGreen Deal and the "Financing Sustainable Growth" Action Plan.

With the CSRD, the EU aims to make the reporting process more rigorous and transparent, allowing all stakeholders (customers, suppliers and others) to know the impact companies have on the environment and the measures they take to mitigate it. It reinforces the importance of environmental issues by obliging companies to include information on sustainability in their non-financial management reports, alongside their financial reports.

One of the main priorities for companies in relation to CSRD is to integrate sustainability into their business strategy. This involves not only disclosing ESG performance metrics and indicators, but also incorporating these aspects into corporate decision-making processes. Companies need to identify and understand the environmental, social and governance impacts throughout their value chain and implement measures to mitigate these impacts.

What are the impacts of CSRD?  

• It will require non-financial reporting alongside the financial reporting in the current Management Report.
• The non-financial report must be prepared in accordance with the European Sustainability Reporting Standards(ESRS).  
• Will require validation by a Chartered Accountant
• It must be drawn up in accordance with the European Single Electronic Format(ESEF).  
• It will incorporate the concept of Dual Materiality

• Dual materiality assesses both the impacts inside and outside the organization. Inward materiality: assesses environmental, social and governance issues in the company's performance. Outward materiality: assesses the impact of business activities on the environment and society.

But this effort will bring advantages for companies, such as:

1. New investment opportunities: Investorsare looking to bet on companies that incorporate a real commitment to sustainability into their strategy.  

2. New customers and new talent: Companies that adopt sustainable practices and publicize their efforts to do so achieve a greater competitive advantage, as it allows them to attract new customers and talent who value sustainability and social responsibility.  

3. Innovation and efficiency:Compliance with the CSRD can encourage companies to innovate and improve the efficiency of their operations, resulting in cost savings as well as more effective solutions to environmental and social challenges.

4. Creating long-term value:Companies that care about environmental, social and human issues are more resilient and better prepared to face future challenges.  

CSRD - Which companies does it apply to and when?

• As of January 1, 2024 , all companies with 500 or more employees that are already subject to the Non-Financial Reporting Directive (NFRD).  

Applies to reports to be submitted in 2025;

• As of January 1, 2025, all companies that meet 2 out of 3 requirements:  

1. Balance sheet total > 25,000,000 €;

2. Turnover > 50.000.000€;

3. 250 or more employees  

Applies to reports to be submitted in 2025;  

• From January 1, 2026, to all listed SMEs and other companies. Small and medium-sized companies can opt out until 2028.

‍

Applies to reports to be submitted in 2027

Voluntary Carbon Market

And because it won't be possible to completely eliminate the carbon footprint emitted by companies, the mechanism of compensation through carbon credits can and should be used by companies in Portugal, as is already done in Europe and the USA.

How will the Voluntary Carbon Market work in Portugal?

On January 5, 2024, the government published the law establishing the Voluntary Carbon Market in Portugal, which defines the rules for its operation and establishes the procedures for generating and using carbon credits, with the aim of promoting the mitigation of Greenhouse Gas (GHG) emissions by creating a market where companies and other entities can purchase carbon credits generated by emission reduction or carbon sequestration projects.

These projects must meet the following criteria:

• are independently verified to ensure their validity.
• must be developed on national territory.
• prioritize carbon sequestration projects with natural-based solutions, such as afforestation and reforestation projects, which not only capture CO₂ but also promote biodiversity and ecosystem resilience.

The management of this market is regulated by the Portuguese Environment Agency, guaranteeing the credibility, transparency and sustainability of the projects.

2. TAXATION

Taxation can also be a vehicle for accelerating carbon neutrality by encouraging companies to adopt sustainable practices through tax incentives for investments in green technologies. How?  

In the light of the current tax regime (State Budget 2024), there are a number of more favorable conditions for purchasing less polluting or even zero-emission vehicles.

IRC Code - Article 88 "Autonomous taxation rates"  

Under the CIRC (Corporate Income Tax Code), there are currently Autonomous Taxation (AT) rates, which positively differentiate less polluting vehicles.

It should be noted that the rates of autonomous taxation apply to all costs incurred with vehicles, from depreciation, rents or leases, insurance, maintenance and upkeep, fuel and taxes levied on their ownership or use.

‍

In order to assess the fiscal impact, the following table shows the TCO (Total Cost of Ownership) for 3 similar vehicles, but with different engines:

_{PHEV - Plug-in Hybrid Electric Vehicle}  

Assumptions:

48 months | 80,000 km

Company with no negative results for the year

Deductible VAT only applied to the agreement rental component  

Excluded from tax analysis:

a) Partial deductibility of VAT on diesel fuel and electricity

b) The amounts not accepted for tax purposes were not included in corporate income tax

The conclusion is that, under the current tax framework, the transition to an electric mobility solution is more economically advantageous when all the cost items borne by companies are taken into account, including the tax burden, and in some cases the actual savings can be used to purchase electric chargers.  

With this change, there is also a real gain for the "planet" with fewer gas emissions into the atmosphere.

3. DATA

Artificial Intelligence (AI) and Computer Systems play crucial roles in reading Data to achieve carbon neutrality and comply with the requirements of the CSRD.  

AI can help analyze large sets of climate data, predict trends, optimize processes and identify opportunities to reduce emissions.  

IT systems are essential for collecting, storing and processing data efficiently and provide valuable insights to guide policies and strategies for reduction, mitigation and compensation.  

Together, all these elements enable a more informed and effective approach to meeting the demands of all stakeholders in the value chain and achieving the much sought-after carbon neutrality targets.

Conclusion

The implementation of the CSRD represents a new challenge for companies, but also an opportunity to demonstrate leadership and innovation in sustainability. Taxation, generally seen as a burden, can be a lever for Carbon Neutrality, particularly in Mobility in companies.

Preparedness, Adaptability, Transparency and Collaboration were words written by Sun Tzu in the 5th century BC but, more than ever, they need to be actions that companies must adopt in order to position themselves for success in a world that is increasingly aware of environmental challenges.  

Now is the time to act with determination and strategic vision, because only companies that are prepared and agile will be able to thrive in this new paradigm of sustainable business.

"If you know your enemy and yourself, you need not fear the outcome of a hundred battles." Sun Tzu

‍