CSRD: the implications for manufacturing industries

CSRD

CSRD is set to have a major impact on the way large manufacturers operate audit and report and companies have just 12 months to prepare.

CSRD, the new Corporate Sustainability Reporting Directive, will require large companies to audit and disclose information on the way they operate and manage social and environmental challenges. It is an all-new legal accounting framework and the biggest change in corporate reporting for two decades.

Companies could have up to 30 new standards to report on each setting out underlying guidelines, quantitative metrics and qualitative disclosure reporting requirements and all will be subject to mandatory assurance. ESG information will now need to be treated with the same rigour as financial information with CSRD reporting certified by an accredited independent auditor or certifier.

“For corporates, CSRD provides insights on environmental matters, social matters and treatment of employees, respect for human rights, anti-corruption and bribery, diversity on company boards,” says Veronika Thieme, associate director ICT & enablement at the Carbon Trust. “It supports transparency and connects existing frameworks including the EU taxonomy, SFRD, TCFD, GRI and SASB. It also allows investors to better assess and compare a companies’ performance and channel investment into the right areas.”

CSRD will replace the existing Non-Financial Reporting Directive (NFRD) in 2023 and is part of a major trend aimed at driving future investment into eco-friendly business. If you’re a large company and you’re not CSRD-compliant it could be harder to get investment.

“The CSRD marks a major step change in corporate reporting with far-reaching implications for businesses as well as for the future of sustainability reporting globally,” says Jamie Pitcairn, technical director, circular economy & sustainability at Ricardo. “Companies will need to devote significant time and resources to prepare for implementation of the directive within a short timescale.”

CSRD: Who does it apply to?

CSRD will impact large companies in manufacturing and retail including dairy co-ops, grocers, high street retailers and manufacturers across a range of key sectors. Major companies in UK’s top manufacturing centres of Burnley, Derby, Telford, Sunderland, Hull, Blackburn, Barnsley, Huddersfield, Plymouth and Mansfield will need to comply with CSRD if they already, or plan to, do business in the EU.

“For manufacturing, the reporting challenges will be greater than for other sectors because they will have to understand and report emissions and impacts associated not just with the products but also the market in which products are sold – the ‘activity’ their products support,” Pitcairn says. “Companies must report on what proportion of their revenue is derived from specific ‘activities’ and what proportion of their activities are ‘aligned’ with the UK Green Taxonomy. Manufacturers will have the greatest challenge in complying with CSRD as they have larger emissions (because they make things) they will have impacts throughout the value chain (because they buy and sell things) and their products will support an ‘activity’ or end use which will also have an impact.”

CSRD applies to large companies and their subsidiaries listed and operating in the EU and will also apply to companies with more than 250 employees, assets of more than €20m or annual turnover of over €40m. Around 50,000 companies will have to be CSRD-compliant. For the first time companies in Ireland including subsidiaries of overseas multinationals will face ESG reporting and will need to be CSRD-compliant.

“Technologically, CSRD will require more knowledge and diversified understanding of sustainability, rather than just climate,” Thieme adds. “Financially this will require resourcing for both support on measuring and mandatory third-party assurance. Companies will need to provide qualitative and quantitative information, forward-looking and retrospective information, plus information covering short, medium and long-term goals. They need to start measuring in 2023 to submit in 2024.”

CSRD will not put any new reporting requirements on small companies, SMEs will report according to simpler standards and an opt-out is possible for some SMEs that will be exempted from CSRD until 2028.

Companies and individuals will be held accountable for their CSRD compliance says Jamie Pitcairn. “Companies and directors will be held to account on the commitments they make in the transition plans and the short-term nature of targets to be set coupled with staged assessments during that timeframe will require a continual monitoring of all disclosures.”

CSRD and the value chain

Up to 80 per cent of a company’s environmental footprint comes from its value chain. CSRD will cover the entire value and supply chain including: Upstream – environmental impact can come from your suppliers (e.g. producing products/ingredients/materials they deliver) and Downstream – impact from end-users (e.g. electricity required for using your products).

Carbon footprints – will have to be reported in the CSRD and follow the Greenhouse Gas Protocol. A company’s carbon footprint can be calculated by a Life Cycle Assessment.

Complete company environmental footprints – will be required as CSRD follows the EU Taxonomy’s requirements covering all environmental impacts a company has (15+)- including its carbon emissions. It’s calculated by performing a Life Cycle Assessment. 

Some suppliers contribute most to your footprint and form impact hotspots’ vital for measuring your company’s footprint. Under CSRD companies must ensure Tier 1 suppliers perform environmental footprint measurements of their own product(s). This ‘product footprint’ can be fed back into your own CSRD measurements.

The cost of CSRD compliance

Current SEG costs are magnified by overlapping standards, frameworks and inconsistent information requests. CSRD aims to standardise ESG audit and reporting and ultimately reduce the cost of compliance. “CSRD aims to reduce unnecessary costs of sustainability reporting but preparers will incur significant one-off costs and recurring annual costs of compliance,” Pitcairn says. “CSRD highlights the fact companies already face costs to provide sustainability information due to increasing stakeholder demand.”

CSRD: are we ready?

CSRD will come into force in three stages: 1 January 2024 for companies already subject to the NFRD; 1 January 2025 for large companies not currently subject to the NFRD and 1 January 2026 for listed SMEs. According to KPMG research, the vast majority of firms will not be ready for CSRD and are underestimating the scale of change that faces them. The volume of information required covers areas companies have never reported on before, let alone measured. It will be a challenge for organisations as they build the governance architecture, reporting processes and controls frameworks required.

Major manufacturers such as those in the pharmaceutical industry already have a range of ESG reporting strategies in place and are working with regulators to develop clarity and ensure compliance with the new requirements.

“There will be a sector-specific layer of mandatory ESG reporting standards under CSRD being developed by the European Financial Reporting Advisory Group that will determine how sustainability reporting will be conducted,” says Steve Hoare, director of regulatory science & safety policy at the Association of British Pharmaceutical Industry. “A consultation on this is expected in 2023.”

CSRD is not just about compliance and reducing industry’s impact on the environment, it’s about money… the top 300 pension funds worldwide represent $18.1 trillion in managed assets and an industry-wide shift to embed ESG into default funds would be a major step on the road to a net zero economy. CSRD will go along way to achieving this.

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