A Deep Dive into the EU’s Groundbreaking Corporate Sustainability Reporting Directive

Editorial TeamEditorial Team
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February 2nd, 2024

The EU's adoption of the Global Reporting Initiative (GRI) template ensures smooth compatibility with the Corporate Sustainability Reporting Directive (CSRD), streamlining reporting processes and fostering harmonization, thereby addressing challenges arising from heightened reporting requirements.

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In a landmark move, the European Union has ushered in a new era of corporate responsibility with the approval of the Corporate Sustainability Due Diligence Directive (CSDDD). Representing a shift from voluntary soft law to enforceable hard law, this directive is a pivotal step towards international regulation of labor and environmental practices in global supply chains, impacting major corporations worldwide.

Accompanying the CSDDD is the equally significant Corporate Sustainability Reporting Directive (CSRD), designed to provide regulators, investors, and stakeholders with comprehensive, comparable, and reliable information on the sustainability performance, risks, and impacts of companies. This reporting framework is set to play a crucial role in shaping due diligence regulations, influencing corporate behavior, and fostering accountability for environmental and labor-related harms.

 

Design and Scope

The CSRD builds upon the Non-Financial Reporting Directive (NFRD) established a decade ago, extending its reach to cover all listed companies in the EU and large non-listed companies meeting specific criteria. Notably, even non-EU companies with significant ties to the EU, including major entities like Nike and private firms like Patagonia, fall under its purview.

Expanding sustainability reporting requirements, the CSRD introduces the European Sustainability Reporting Standards (ESRS), comprising 12 standards organized into four categories: cross-cutting and topical standards for environmental, social, and governance considerations. Importantly, the directive addresses the ambiguous concept of "double materiality," emphasizing the need for companies to report on both financial materiality and impact materiality.

 

Challenges and Gaps

Despite its ambitious scope, the CSRD faces challenges that may limit its effectiveness in informing the CSDDD and holding lead firms accountable for due diligence failures. Firstly, reporting on environmental, social, and governance standards is optional; firms are only expected to report if they deem the risks material, leading to potential gaps in disclosure.

Secondly, reporting requirements for a firm's workforce are more stringent than those for workers along its value chain. This disparity raises concerns about the adequacy of monitoring and transparency regarding labor practices in the extended supply chain.

Thirdly, the focus on reporting policies and processes, rather than outcome-based measures, raises questions about the true impact of corporate sustainability initiatives. Clear outcome measures, akin to those required for a company's workforce, are essential to evaluating the effectiveness of these initiatives and ensuring meaningful change.

Companies frequently voice legitimate concerns about the substantial surge in reporting obligations imposed on them in recent years. However, there is a positive aspect to these new requirements—the familiarity they offer. The EU has generously incorporated the Global Reporting Initiative (GRI) template, emphasizing the seamless interoperability between the Corporate Sustainability Reporting Directive (CSRD) and the GRI reporting systems. This alignment not only streamlines the reporting process but also underscores the harmonization between these frameworks, potentially alleviating some of the challenges posed by the increased reporting burden.

 

Prospects for Improvement

To enhance the CSRD's efficacy, a shift towards mandatory reporting on outcome measures for supply chain workers is crucial. This should include clear, quantitative measures of labor and climate outcomes, resembling the data required for a company's workforce. For instance, reporting on minimum wages and gender pay gaps in the supply chain would provide tangible indicators of a company's commitment to ethical practices.

In conclusion, while the CSRD marks a significant milestone in advancing corporate sustainability reporting, addressing these gaps is essential for realizing its full potential in fostering transparency, accountability, and positive change in global supply chains. Continued scrutiny and evolution of these directives will be paramount in achieving their intended goals.

 

Bridging Gender Disparities Across Internal and Supply Chain Workers

These measures should mirror the data that the European Sustainability Reporting Standards (ESRS) mandates companies to disclose for their internal workforces. An illustrative example is the critical issue of not paying minimum wages within the supply chain, which poses a substantial risk for companies. Consequently, companies should report the variance between actual wages and the minimum wage applicable to supplier factories in each respective country.

Likewise, gender discrimination within the supply chain represents a significant risk for companies. While the ESRS demands that apparel firms like H&M and Bestseller report on gender pay gaps within their internal workforces, it does not extend this requirement to the women workers who contribute to the production of their goods.

To address this gap, a parallel outcome measure should be instituted for supply chain workers, particularly in sectors like apparel production where gender disparities persist. This is crucial, given existing evidence indicating that women workers in these sectors are often paid less than their male counterparts. Instituting comparable reporting standards for internal and supply chain workers ensures a comprehensive and equitable evaluation of companies' efforts to address gender-based disparities throughout their operations.