The Corporate Sustainability Reporting Directive (CSRD) is an unprecedented piece of sustainability legislation and will have a huge impact across the world
The Corporate Sustainability Reporting Directive (CSRD) came into effect at the start of 2023. It is an unprecedented piece of sustainability legislation because although at first glance it seems only to be relevant to companies in the European Union (EU), its reach is far greater and scope wider.
It applies to any non-European business with more than €150 million in EU revenues, or with an EU subsidiary turning over more than €40 million and with more than €20 million in assets. Also the CSRD requires companies to report not only on their own operations but also on those of companies in their ‘value chain’.
Hence smaller businesses inside and outside Europe will have a cascade of indirect requirements related to CSRD in the coming years. In other words, companies around the world should take notice of this bold legislatory thrust by the EU.
And what’s more…
Adding to the tsunami of regulatory requirements from the CSRD, in the last few weeks the European Council and Parliament have reached an agreement on the Corporate Sustainability Due Diligence Directive (CS3D). This adds further force to the EU’s drive for transparency and more rigorous standards from overseas supply chains: the CS3D will mean thousands of European companies must conduct annual due diligence on a wide-reaching set of environmental and human rights harms and violations across global supply chains.
Although some final details are still being worked through, the CS3D will require companies to publish net zero emissions plans in alignment with a 1.5 degree global warming pathway. This provision effectively mandates aggressive carbon reduction targets that will oblige companies and suppliers to drastically cut greenhouse gas emissions across their global operations, reaching back to the deepest darkest corners of global raw material sourcing.
Clearly with the CSRD and CS3D, the EU is not simply seeking to gradually tighten sustainability standards in the same way that US legislators have sought to keep pace with topical issues through the US’ Uyghur Forced Labour Prevention Act (UFLPA) and the Securities and Exchange Commission (SEC) Climate Change disclosures. Far from it, with the CSRD and CS3D the EU is moving the goalposts so far that even companies that were previously seen as “leading lights” in sustainability have been scrambling to get ready.
Expanding across three dimensions
Even for large European companies, the CS3D and CSRD represent a major expansion of sustainability requirements across three dimensions – in terms of topical coverage, process rigour, and value chain scope. This includes the many which have already taken an initial step into sustainability disclosure and due diligence via existing EU and national legislation like the Non-Financial Reporting Directive (NFRD) and France’s Devoir de vigilance
Firstly, the topical coverage of the new legislation is much broader than any of its predecessors, with the CSRD reporting standards requiring up to 1,000 distinct disclosures across 10 topical areas of CSR. Many of them have never been reported on in detail in the past, such as biodiversity and circular economy. The CS3D extends topical coverage of due diligence obligations to 30 human rights conventions and nine environmental conventions, including a raft of additional legal protections.
Secondly, both CSRD and CS3D have significantly ratcheted up the level of rigour for the processes involved in compliance. CSRD disclosures are subject to “limited” assurance and at a future date, to “reasonable” assurance. This is the same level of audit applied to published financial accounts, meaning that companies must drastically increase reporting controls and capability to stand a chance of passing an audit on their sustainability data.
An obligation to prevent harm
With CS3D the standards are also much higher than anything that preceded it: companies will be obliged to follow a demanding risk assessment process based on their contribution to potential human rights and environmental violations. They must also go further in their attempts to prevent, mitigate and remediate harms, such as actively working with industry peers to prevent and mitigate key sectoral risks.
The third and most challenging shift of the goal posts is widening the scope to the value chain scope for reporting and due diligence. National legislation, like the German Supply Chain Due Diligence Act (LkSG), obliges companies to apply supply chain due diligence primarily to their direct suppliers (so-called “Tier 1” suppliers).To comply with the wider scope of the CS3D, companies need to identify risks across all tiers of their value chain, through Tiers 2, 3, 4 and beyond.
A European company sourcing a large amount of lithium-ion batteries for example, could be expected to trace its supply chain all the way back to the cobalt, copper and lithium mining operations feeding raw materials into the roots of its supply chain. It also must join relevant peers and associations to remediate harms such as human rights abuses.
Equally, the extension of corporate sustainability reporting (CSR) reporting to the wider value chain through CSRD will require much greater effort to drive transparency from suppliers. One example is new contract provisions whereby suppliers must measure and disclose the carbon footprint of products supplied to their European customers using credible methods, such as ISO14044 compliant product Life Cycle Assessment (LCA) studies.
Telecoms
For telecoms companies, many of which operate in Europe and have sprawling, complex supply chains that extend across the world, CSRD and CS3D represent a significant challenge. The good news is that telcos are ahead of the curve. Indeed, it could be argued that as a sector, they are at the forefront of corporate climate action.
As of June this year, just 31% of the world’s largest 2,000 companies had set a Scope 3 emissions target. By contrast, 88% of the Joint Alliance for CSR (JAC), an industry body made up of 27 leading telecoms players, had Scope 3 reduction targets in place. JAC’s 2023 survey also showed that 93% of JAC members had already committed to net-zero or science-based targets.
By comparison, according to CDP’s latest data, only 37% of companies in Europe say they have a climate transition plan in place.
Now both parts of the EU’s new legislation are a serious step-change that should not be underestimated, even by companies currently leading on sustainability. Just as most European telecoms companies are part-way through an 18 to 24 month CSRD preparation period, epi Consulting estimates that the CS3D will take at least 18 months of preparation to meet the expected compliance deadline of 2026.
Cooperation beyond competition
To comply successfully with CSRD and CS3D, epi expects that telcos will need to deepen their cooperation and collaboration not only with major suppliers like ICT companies, but also, despite their being competitors, with their peers across the industry.
Under the Joint Alliance for CSR (JAC) banner, audit sharing has worked well so far in the telco industry, acting as a single body, united under a single banner, to ease the audit burden on the telcos themselves and the suppliers in their supply chains. This type of collaborative model is one that can be extended to meet many of the requirements of CSRD and CS3D in a more economical and effective way.
In the same way, suppliers to the telecoms industry such as ICT companies would be wise to seriously consider the potential to collaborate with their peers in an effort to emerge unscathed from the coming deluge of regulation. Collective requests to their respective supply chains, such as printed circuit board (PCB) and application-specific integrated circuit (ASIC) manufacturers, could help members of organisations like JAC to accelerate decarbonisation, gain transparency on working conditions and other relevant activities within their upstream supply chains.
This would also help ICT companies to be ready for the requests about supply chain transparency and sustainability improvement as their customers grapple with CSRD and CS3D.
Transformation
The danger posed by climate change demands new solutions at every level. The CSRD and CS3D represent radical measures at the legislative level, imposing a burden on large companies proportionate to the scale of the climate challenge.
But it’s a burden that the telecoms community can achieve by working together and calling on suppliers to pre-emptively work towards greater sustainability, while better protecting workers’ rights and human rights across the globe. In doing so, they can set an example for other companies and sectors across the world.