Overview of the regulation
The Corporate Sustainability Reporting Directive (CSRD) came into force on January 5, 2023. It is an update to the existing Non-Financial Reporting Directive (NFRD) and aims to enhance sustainability reporting by companies operating in the European Union (EU).
The CSRD builds upon the NFRD, which was introduced in 2014, as part of the EU’s efforts to promote corporate transparency and accountability regarding environmental, social, and governance (ESG) matters. The NFRD required public-listedto disclose certain non-financial information in their annual reports.
The new rules will ensure that investors and other stakeholders have access to the necessary information to assess investment risks arising from climate change and other sustainability issues. They will also create a culture of transparency about the impact companies have on society and the environment.
Key features and reporting standards
The CSRD expands the scope of sustainability reporting and introduces more stringent reporting requirements. Some of the key features include:
- Extended applicability: The CSRD applies to a wider range of companies, including all large EU companies and all listed companies regardless of their size – approximately 50 000 companies in total.
- Mandatory sustainability reporting standards: The CSRD mandates the use These standards have been developed by the European Financial Reporting Advisory Group (EFRAG) and endorsed by the European Commission. The aim is to ensure consistency and comparability of sustainability information across companies. For instance, the reporting on greenhouse gas emissions: Companies should disclose greenhouse gas emissions caused by their operations (such as carbon dioxide, methane, and nitrous oxide), including direct emissions from their own activities (Scope 1 emissions) as well as indirect emissions from purchased energy (Scope 2 emissions) and other relevant sources (Scope 3 emissions). On the Energy Consumption side, companies should report on their energy consumption status, including the type and amount of energy used within their operations. This could include details on electricity, natural gas, fuel oil, and other energy sources.
- Enhanced reporting content: The CSRD requires companies to report on a broader set of sustainability topics, including climate change, biodiversity, resource use, social issues, and governance matters. Companies will also need to report on their sustainability policies, due diligence processes, and related risks.
- Digitalization of reporting: The CSRD encourages the use of digital tools and technologies for reporting purposes. It promotes the use of Extensible Business Reporting Language (XBRL) format to facilitate electronic filing and accessibility of sustainability data.
Implication and challenges in complying with the new directive
While the CSRD means improved sustainability reporting practices, the implementation of the directive can also pose challenges for European companies, especially those with a larger presence in Asia.
- Supply chain complexity: Sourcing from Asia often involves complex and extended supply chains with multiple tiers of suppliers. Ensuring transparency and collecting accurate sustainability data from all suppliers can be challenging. Companies may face difficulties in obtaining comprehensive and reliable information throughout the supply chain, particularly from smaller suppliers or those located in remote areas.
- Variations in sustainability standards: Sustainability reporting and disclosure practices may vary across different countries and regions in Asia. European companies will need to navigate these variations and align them with the reporting requirements set by the CSRD. They may need to work closely with their Asian suppliers to understand local reporting practices and harmonize them with the CSRD standards.
- Language and cultural barriers: Communication and understanding can be hindered by language and cultural differences. European companies may need to bridge these gaps to effectively convey the requirements of the CSRD and ensure accurate reporting. This may involve investing in translation services, cultural training, or hiring local resources with knowledge of local reporting practices and languages.
- Data reliability and verification: Ensuring the reliability and accuracy of sustainability data from Asian suppliers can be a challenge. European companies may face difficulties in verifying the reported information due to geographical distances and limited access to on-site audits. Developing robust verification processes, engaging third-party auditors, or exploring innovative technologies like remote auditing can help address these challenges.
- Compliance of suppliers: Ensuring that Asian suppliers comply with the reporting requirements of the CSRD can be demanding. Suppliers may have limited awareness or resources to implement comprehensive sustainability reporting systems. European companies may need to provide guidance, training, and capacity-building support to suppliers, assisting them in understanding the CSRD’s expectations and aligning their practices accordingly.
- Legal and regulatory complexities: Compliance with local regulations in both the European Union and Asian countries adds complexity to the reporting process. European companies need to stay updated on the evolving regulatory landscape in both regions and understand how to navigate potential conflicts or overlapping requirements. Seeking legal counsel or consulting with experts in sustainability reporting and international trade can help address these complexities.
- Collaborative engagement: Driving sustainability improvements in the supply chain requires collaboration with Asian suppliers. However, cultural differences, power dynamics, and varying levels of sustainability maturity can pose challenges to effective engagement. Building strong relationships, fostering open communication, and providing incentives for suppliers to improve their sustainability performance can help overcome these challenges.
European companies sourcing from Asia will need to invest time, resources, and expertise to overcome these challenges and comply with the CSRD. Proactive engagement, effective communication, and continuous improvement efforts will be key to successfully navigate the complexities of sustainability reporting in global supply chains.
Example of a company supplying in Asia – Volvo Cars
Volvo Cars is a Swedish automotive manufacturer known for its commitment to sustainability and safety. Volvo Cars is proud to be a founding member of the UN Global Compact in 2000. The company also has a strong presence in China, both as a market for its vehicles and as a source of suppliers for components and manufacturing. In response to the EU sustainability reporting directive, Volvo Cars has been actively working towards improving its sustainability performance and reporting practices, including its operations and supply chain in China.
Volvo Cars has implemented robust sustainability reporting frameworks aligned with international standards and the EU directive. Volvo Cars published its first Environmental Report in 1992. It was expanded to a Sustainability Report in 2003 in line with the guideline of the Global Reporting Initiative (GRI). In recent years, Volvo’s annual report provides transparent information on its environmental impact, social initiatives, and governance practices. This includes reporting on carbon emissions, energy consumption, waste management, and supply chain sustainability.
Volvo Cars has put in place a governance structure to monitor the progress of its sustainability strategy, ambitions, and initiatives. Committees such as the People and Sustainability Committee (PSC), Global Sustainability Committee (GSC), as well as Green Finance Committee (GFC), has been set up to safeguard the implementation of the sustainable development philosophy. To ensure sustainable practices across its supply chain, Volvo Cars collaborates closely with its suppliers in China. It requires its suppliers in China to comply with all applicable environmental laws, regulations and permits relevant to their operations. This includes adhering to emission limits, and waste management. The company has established sustainability requirements for its suppliers, including compliance with environmental regulations, responsible sourcing practices, and human rights considerations. Volvo Cars work hand in hand with its suppliers to promote sustainable manufacturing processes, reduce emissions, and improve resource efficiency.
Volvo Cars also supports its suppliers in China by providing them with training and capacity-building programs. These initiatives aim to enhance their understanding of sustainability principles, reporting methodologies, and best practices. Volvo Cars encourages its suppliers to align with the reporting requirements of the EU directive and continuously improve their sustainability performance.
Through these efforts, Volvo Cars exemplifies how the EU sustainability reporting directive has influenced European companies in the auto industry. By embracing transparency, engaging with suppliers, and promoting sustainable practices, Volvo Cars aims to drive positive change, ensure supply chain transparency, and enhance environmental and social performance throughout its operations, including its activities in China.
Guide for compliance with the directive
Complying with CSRD requires careful planning and implementation. Here’s a guide to help European companies ensure compliance with the directive:
- Understand the requirements: Familiarize yourself with the CSRD and its reporting obligations. Study the directive in detail to understand the scope, reporting standards, timelines, and disclosure requirements. Pay attention to any specific requirements applicable to your industry or company size.
- Assess current practices: Conduct an internal assessment of your current sustainability reporting practices. Identify gaps between your existing reporting and the CSRD requirements. Determine which areas need improvement or adjustments to align with the new directive.
- Establish a reporting framework: Develop a reporting framework that aligns with the CSRD. Consider the material ESG (environmental, social, and governance) topics relevant to your company and stakeholders. Define key performance indicators (KPIs) and reporting metrics that will capture the required sustainability information.
- Engage stakeholders: Identify and engage key stakeholders, both internal and external, to gather their input on sustainability reporting. Seek their feedback on materiality, reporting metrics, and data collection processes. Collaborate with stakeholders to ensure the reported information is comprehensive and relevant.
- Assess data collection and management: Evaluate your data collection and management systems to ensure they can capture the necessary sustainability information. Determine how data will be collected from internal sources and throughout the supply chain. Consider implementing digital solutions to streamline data collection, analysis, and reporting processes.
- Engage suppliers: If sourcing from Asia, work closely with your suppliers to align their reporting practices with the CSRD requirements. Provide guidance and support to help them improve their sustainability reporting capabilities. Encourage transparency and collaboration to ensure accurate and timely reporting of relevant data.
- Develop reporting procedures: Establish clear procedures for collecting, analyzing, and reporting sustainability data. Assign responsibilities within your organization for data collection, verification, and reporting. Create a reporting timeline to ensure compliance with reporting deadlines.
- Ensure data accuracy and verification: Implement robust verification processes to ensure the accuracy and reliability of reported data. Consider engaging independent third-party auditors to verify sustainability information. Implement internal controls and quality assurance mechanisms to minimize errors and ensure data integrity.
- Enhance internal capabilities: Invest in training and capacity-building initiatives to enhance your organization’s sustainability reporting capabilities. Ensure that relevant staff members are knowledgeable about the CSRD requirements and reporting standards. Develop internal guidelines and procedures to maintain consistent reporting practices.
- Communicate and disclose: Prepare clear and concise sustainability reports following the CSRD guidelines. Ensure that the reports are easily accessible to stakeholders through appropriate channels, such as websites or dedicated sustainability platforms. Communicate your sustainability efforts, progress, and goals.
- Monitor and improve: Continuously monitor and evaluate your sustainability reporting processes and outcomes. Regularly review and update your reporting practices to incorporate best practices and evolving requirements. Seek feedback from stakeholders to improve the relevance and effectiveness of your reporting.
Compliance with the CSRD is an ongoing process that requires dedication, collaboration, and continuous improvement. By following this guide, you can enhance your sustainability reporting practices and meet the obligations set forth by the directive. It’s important to note that the specific impact on Asian/Chinese suppliers will depend on various factors, including their existing sustainability practices, size, industry, and readiness to adopt enhanced reporting requirements. Suppliers that proactively adapt to the CSRD may have better prospects for long-term business relationships with European buyers, while those that lag may face increased scrutiny and potential challenges in the supply chain. ARC Consulting can be a good resource to bridge the gap and support your reporting and sourcing activity in Asia.
The EU’s CRSD has introduced a new reporting landscape for European businesses, especially those with supply chains in Asia. The directive requires enhanced transparency, collaboration with suppliers, alignment with reporting practices, and compliance with local regulations. Despite challenges, compliance with the directive presents an opportunity for European companies to foster sustainable practices, build stronger relationships with Asian/Chinese suppliers, and meet the growing demand for ESG reporting. Embracing these changes can lead to improved supply chain resilience, enhanced reputation, and long-term business success.