The Corporate Sustainability Reporting Directive (CSRD) has expanded reporting requirements for the European Union’s (EU) large businesses and means more detailed reporting on sustainability efforts. However, what does this mean for global supply chains, who will feel the ripple effects as greater compliance demands more data from suppliers?
Considered a critical part of the European Green Deal’s aspirations to make the EU climate neutral by 2050, the CSRD requires large and EU-based businesses to disclose their sustainability performance to inform investors and other stakeholders.
Around 50,000 businesses will be covered, with large businesses required to embed environmental disclosures in their annual report from 2024. The mandate will then extend to smaller businesses in phases through to 2026, but the impact is likely to be more significant.
But CSRD has broader implications yet.
“I think we’re looking at a very big deal,” says Nick Henderson-Mayo, head of compliance and solutions at VinciWorks. “Because CSRD is global, some companies who are not even in the EU will be captured specifically by it, but [there is] also the knock-on effect on global supply chains that large companies in the EU are going to have to start paying attention to.”
“Most organisations are part of someone else’s supply chain, and they will need that data ready for when their larger customers start demanding that data from them for their own CSRD reports,” he adds.
Putting this idea into perspective, research from McKinsey & Company suggests that an average auto manufacturer has around 250 tier-one suppliers, but 18,000 suppliers across its full value chain. Aerospace manufacturers have an average of 200 tier-one suppliers and 12,000 suppliers across all tiers, and technology companies have an average of 125 tier-one suppliers and more than 7,000 suppliers across all tiers.
So, while around 50,000 businesses will directly face impact from CSRD reporting requirements, the broader impacts are likely to be much more significant.
CSRD is more than just compliance
But despite these upcoming challenges, Henderson-Mayo suggests that CSRD, and ultimately ESG initiatives, shouldn’t just be seen as another burden or investment, despite what many overstretched and under-resourced compliance managers may be feeling.
“Supply chain disruption is one of the biggest risks that have crept up,” Henderson-Mayo says. “We’ve seen time and time again that this has a real life impact on everyday customers too. CSRD is going to make us think about suppliers more and, in particular, what impact an organisation has on their own supply chain.”
Increased scrutiny of supply chains not only allows businesses to report on their sustainability efforts, argues Henderson-Mayo, but also to identify and mitigate risks throughout their chain.
“Once you understand the risks, you can understand how the elements of your own products and services move through that supply chain, and what the risks are at each of those stages,” he says. “This will help you immeasurably.”
This not only reduces the direct business risks associated with supply chains, but also provides investors and other stakeholders with greater confidence in the long-term potential of the organisation.
But what about those companies that are not directly affected by the regulation, for example, small or micro businesses? Henderson-Mayo also says, “thinking green” presents an opportunity here too, and that opportunity is competitiveness.
“When it comes to doing tenders, or when it comes to doing PQQs (pre-qualifying questionnaires), businesses who have that [sustainability] information at a touch of a button are going to be in a much better position than someone who has to start searching through filing cabinets for their accident data from five years ago.
“That can really be the difference between winning your next tender, losing out, and getting left behind.”
Henderson-Mayo believes sustainability is “no longer just a nice-to-have” for businesses, and for British businesses who he says “are dealing with all the impacts of Brexit,” it’s very difficult to stay competitive anyway. “To stay competitive in the global marketplace with these kinds of difficulties that so many companies and Britain are experiencing, it’s a must-do, it’s a must-have.”
The devils in the data
But for large reporting companies, achieving CSRD compliance is unlikely to be easy. Supply chains and Scope 3 challenges are likely to become considerable challenges.
“The phrase ‘supply chain’ can be quite scary to hear and to think about,” says Henderson-Mayo. “It feels like this amorphous grey area that you don’t really know how to figure out, it has so many tiers – there’s so many layers and levels.
“It’s no wonder really that managing all that data can feel like such a challenge.”
A recent VinciWorks survey highlights this, finding that, despite an impending CSRD deadline, over three-quarters of businesses have not yet started preparing, citing the supply chain as the main barrier.
So, where does Henderson-Mayo recommend starting with this process?
“First of all, take a deep breath. It doesn’t have to be scary,” he says. “You can start very simply by mapping out your supply chain. Figure out all those moving parts: who’s who, and where is where. That’s half the battle.”
“Look at your spending to get a lot of the supply chain data, that’s going to be really helpful for you.”
Next is managing your supplier relationships and keeping CSRD at the forefront of what you do. “Get all your existing suppliers onto the same system, as well as having a good system for onboarding new ones, it will help you get to know those suppliers better. You’ll be able to easily communicate with them.”
After this, the risk assessment process can begin. “Start with the biggest [suppliers], and go down the list. This will give you a good sense of your priorities,” this will allow you to determine who may need auditing for their ESG credentials.
Finally, take all of this information and feed it into your annual report and your CSRD report. Investors and the marketplace want to know what your risks are and how you are dealing with them. You can have a whole list of mitigation measures that you’ve put in place, or you can say, “We decided to move suppliers for this reason or that reason.”
The CSRD and its underlying reporting standards, the European Sustainability Reporting Standards (ESRS), mark a significant shift in how governments are working towards a more sustainable future. For businesses, this will likely require a significant change in their approach to reporting, but the burden of reporting also comes with the benefits of oversight.
Only time will tell how businesses will fare under the new requirements, but the CSRD is a positive step forward for sustainability.
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