The European Union (EU) has undertaken a range of efforts to battle climate change, from policy measures and climate targets to investments in low-carbon technologies and infrastructure. The Corporate Sustainability Reporting Directive (CSRD) was recently signed into law and took effect in January of this year.
What is the CSRD and what does it mean for supply chain management? We’ll be releasing a series of blogs to explain the CSRD offer insights on how to ready your business for the coming reporting standards.
What is the CSRD?
The CSRD is part of a larger regulatory puzzle, so bear with us as we look at the history of related legislation, unravel the requirements, and provide additional context on its importance.
In fact, ESG reporting is becoming increasingly important for businesses as sustainability becomes a key driver of performance and competitiveness. Transparent reporting allows companies to meet stakeholder expectations, improve reputation and trust, manage risk and opportunities, gain access to capital, and comply with regulations.
Understanding the CSRD
In 2014, the Non-Financial Reporting Directive (NFRD) was adopted and required certain large companies to disclose non-financial information, including ESG performance in their annual reports. However, the implementation of the NFRD varied across EU Member States, resulting in a lack of consistency in sustainability reporting.
In 2017, the EC launched a review of the NFRD and identified the need for a more harmonized and comprehensive approach.
In 2018, the Sustainable Finance Action Plan launched, mobilizing private capital towards sustainable investments, supporting the transition to a low-carbon, resource-efficient, and sustainable economy.
In 2020, the EC launched the European Green Deal, setting ambitious targets to become the first climate-neutral continent by 2050. It also set the goal to significantly reduce Europe’s greenhouse gas emissions by 2030.
In 2021, the European Commission proposed the CSRD to revise and expand the NFRD, including new reporting requirements.
In January 2023, the CSRD went into force and is regarded as a key component enabling the EU to better track progress towards its sustainability goals, improve the transparency and comparability of sustainability reporting, and enable investors and stakeholders to make more informed decisions on sustainability issues.
What is the scope of the CSRD?
The CSRD revises the sections of Directive 2013/34/EU (the "Accounting Directive") related to non-financial disclosures that were introduced by the NFRD. The new sustainability reporting requirements under Article 1 of the CSRD will apply progressively from 2024–2028 to four categories:
Category 1: Large EU public interest entities with more than 500 employees will be required to begin reporting in 2025 for financial years starting on or after 1 January, 2024.
Category 2: Large EU undertakings and parent undertakings, other than those in category 1, that have balance sheets exceeding €20 million and with net turnover exceeding €40 million and/or an average of 250 employees will be required to begin reporting in 2026 for financial years starting on or after 1 January, 2025
Category 3: EU small and medium sized undertakings (SMEs) that are listed on EU regulated markets with a total balance sheet of €4 million and net turnover of €8 million and/or an average of 50 employees will be required to begin reporting in 2027 for financial years starting on or after 1 January, 2026
Category 4: Non-EU parent company with an EU-established large subsidiary or large EU-branch with net turnover of €150 million in th eEU for each of the last two consecutive financial years and at least one subsidiary branch in the EU, which meets the criteria for categories 2 or 3 or for a branch with turnover of more than €40 million will be required to begin reporting in 2029 for financial years starting on or after 1 January, 2028.
The CSRD impacts about 50,000 companies reporting on their sustainability actions compared to 11,700 under the current Non-Financial Reporting Directive.
What are the key changes introduced by the CSRD?
The CSRD establishes a common set of sustainability reporting standards for companies operating in the EU. Some of the key provisions, reporting requirements, and implications of the CSRD include:
Non-financial reporting requirements: The CSRD requires companies to report on a wide range of sustainability issues, including climate change, biodiversity, and human rights. Companies would be required to provide more detailed and granular information on these issues than under the existing NFRD.
Digital reporting: The CSRD requires companies to report their sustainability information in a digital, machine-readable format to ensure comparability and usability of the data.
Assurance: The CSRD requires companies to obtain an independent third-party assurance on their sustainability reporting, to enhance the reliability and credibility of the information provided.
Reporting standards: The CSRD introduces the European Sustainability Reporting Standards (ESRS), which provides a framework for transparent and comparable reporting across organizations through a common set of requirements and guidelines.
Enforcement: The CSRD would establish a harmonized enforcement mechanism across the EU, including the imposition of administrative sanctions for non-compliance with reporting requirements.
The CSRD and supply chain management
The CSRD is expected to have significant implications for supply chain management. While supply chains are a critical component of many businesses, they are also a source of environmental, social, and governance (ESG) risks. Why? Because supply chain emissions are a consequence of the activities of the company but occur from sources and assets not owned or controlled by it - referred to as scope 3 emissions. What then are the implications for supply chain management?
Risk assessment and management
Risk assessment and management are critical components of supply chain management under the CSRD. Organizations will need to identify and disclose the ESG risks associated with their supply chains, including environmental impact, labor practices, human rights violations, and corruption. Companies will be required to assess these risks, develop mitigation measures to address them, and report on the effectiveness of those measures.
ESG integration and reporting
Compliance with the CSRD will require a more comprehensive approach to supply chain management, integrating ESG risks and performance into the procurement and supplier management processes. This may involve developing new policies and procedures, setting new standards for supplier performance, and engaging more closely with suppliers to improve their ESG performance.
Sustainable procurement practices
Organizations will need to more closely evaluate suppliers based on their sustainability performance and prioritize suppliers that have strong sustainability practices, including those that ethically source products and who reduce waste. Collaboration will be a key component to identify opportunities for continuous improvement.
Green supply chains and a circular economy
When combined, green supply chains and the circular economy can help companies to create more sustainable and efficient business models and reduce environmental impact throughout the entire value chain by promoting the use of recycled materials and the development of new business models that prioritize sustainability.
How will the CSRD impact road freight logistics?
While the CSRD is not specific to any industry or sector, it is expected to have implications for the road freight logistics industry. It’s no secret that road freight logistics is a significant contributor to scope 3 emissions and the CSRD will require improvements in sustainability performance.
What would this mean? Implementing green logistics and sustainable transportation practices that reduce or eliminate greenhouse gas emissions. In the immediate-term, solutions like full truck load shipping, low-carbon fuels such as HVO, and technology and processes that deliver the ability to track data and accurately report on those reductions will make an immediate impact. It also means that road freight logistic players should be making investments in future sustainability initiatives, such as hybrid and electric vehicles.
The business benefits of CSRD
If you are required to comply with CSRD – and let’s be honest, many of you reading this will – it will take time, diligence, and resources to prepare. However, there are a number of benefits to the effort outside of meeting regulatory requirements.These include, but are not limited to:
Improved insights into company performance, risks, and opportunities
Attracting capital by minimizing risk, maximizing returns and creating trust
Creating value through innovation and adaptability to regulatory environments
Reducing unnecessary cost by removing the need for selecting voluntary reporting frameworks and ad hoc reporting to different parties
Leveraging sustainability as a competitive and brand advantage, supporting real climate change action, and instilling ESG as a cultural foundation
How can you prepare for CSRD compliance?
The CSRD rules will apply for the first time in the 2024 financial year for reports published in 2025. We’ve pulled together a list of best practices that you can use to start getting CSRD-ready:
Early preparation is key. Start planning now to ensure adequate time to develop and implement effective ESG reporting processes.
Identify ESG issues that are material to your business, including business model, risks, and opportunities to ensure reporting is relevant, meaningful, and useful to stakeholders.
Integrate ESG into business strategy and decision-making processes, establishing ESG considerations are integrated into the process of getting business objectives and targets.
Engage with stakeholders, including investors, customers, employees, and regulators to discuss needs and expectations.
The ability to address sustainability challenges continues to increase in importance in a rapidly evolving market. The specific impact of the CSRD on ESG reporting will depend on how it is implemented and enforced, as well as how companies respond to the new requirements.Overall, the expectation is that the CSRD will increase the transparency and reliability of ESG reporting, making it easier for investors and other stakeholders to assess companies’ performance and make informed decisions. With many other governing bodies considering mandatory sustainability reporting, taking time now to prepare will keep you ahead of the curve as new regulations are put in place.