EU-Asia ESG Alignment Across the Value-Chain: The CSRD Catalyst

Identifying the ESG compatibility between your corporate headquarters and the Asian sector of your value chain goes beyond standard due diligence—it’s a call for proactive responsibility. As the EU’s Corporate Sustainability Reporting Directive (CSRD) expands its scope, it necessitates a comprehensive examination of ESG interactions globally.

“Is our global sustainability initiative thoroughly implemented in Asia?”

This is a common question among European Multinational Companies (MNCs). ESG performance transparency in the Asian value chain has become increasingly pertinent for European MNCs, especially as the EU’s CSRD now encompasses over 50,000 firms. The directive emphasizes the importance of transparent sustainability performance throughout the value chain, which highlights the significance of Asian suppliers.

What is CSRD & Who Does it Apply to

The CSRD represents the EU’s commitment to uniform sustainability reporting, affecting numerous companies within its jurisdiction. This directive is a successor to the EU’s Non-Financial Reporting Directive (NFRD), amplifying the ESG (Environmental, Social, and Governance) reporting requirements in phases from 2024 to 2029.

Affected companies include those who meet at least two out of three criteria in the following categories:

• Large Listed Entities
  • Total assets: Minimum EUR 350,000
  • Net turnover: Minimum EUR 700,000
  • Average workforce: 10 employees annually
• EU-Based Large Entities (Listed or Unlisted)
  • Total assets: Minimum EUR 20 million
  • Net turnover: Minimum EUR 40 million
  • Average workforce: 250 employees annually
• Third-Country Entities: EU subsidiaries of non-EU parent companies having:
  • Annual EU revenues of at least EUR 150 million over the recent two years, and
  • Either a large EU-based entity, or an EU-based subsidiary with securities listed on an EU-regulated market exchange, or an EU branch with a net turnover of at least EUR 40 million.

What Does CSRD Demand from Companies in the EU

CSRD necessitates eligible companies to:

• Establish a clear governance model for sustainability;
• Design a cohesive sustainability strategy that aligns with broader objectives;
• Evaluate and integrate sustainability impacts, risks, and opportunities into strategic decision-making; and
• Develop metrics and targets to monitor and improve sustainability performance over time.

Moreover, these organizations have to publicly report their sustainability performance annually, complying with a dual materiality standard that addresses both business and environmental, social, and governance concerns.

As CSRD further expands the narrative to cover the broader value chain, it mandates:

• Disclosing due diligence processes for identifying and mitigating ESG impact across the value chain; and
• Obtaining reliable sustainability data from direct suppliers for each sourced product.

Implications for companies in the EU

The CSRD prompts European MNCs to delve deeper into the ESG narrative across their global value-chain, including challenging markets such as Asia. Ensuring a seamless ESG dialogue with Asian suppliers, even extending to suppliers’ suppliers, is key. This not only entails obtaining reliable data but also fostering a culture where the ESG strategy is consistently upheld through the value chain.

Diligent monitoring and ongoing dialogue with Asian suppliers are key to ensuring that sustainability initiatives are well-articulated and diligently executed. This enhanced engagement promotes a robust, transparent, and accountable ESG framework, aligning the operational ethos across the geographies while resonating clearly with the CSRD mandates.

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