CSRD Explained: Why Value Chain Engagement Matters

The Corporate Sustainability Reporting Directive (CSRD) is a new EU law that’s shaking up the way large companies and publicly listed small and medium-sized enterprises (SMEs) report on their sustainability efforts. It’s set to fundamentally change how businesses handle non-financial reporting, driven by the growing pressure to meet environmental, social, and governance (ESG) standards. By standardizing sustainability reporting, the CSRD aims to help investors make smarter decisions. It will have a big impact not just in the EU, but all over the world.

With all these changes on the horizon, there’s a lot of confusion about what exactly needs to be done and by when, particularly with regard to double materiality assessments, the so-called “transitional provisions,” and the need to engage your value chain.

In this blog, we’ll cut through the noise and clarify what you need to know to stay compliant with the CSRD, avoid penalties, and keep your operations running smoothly.

Double Materiality Assessments Explained

To clear up the confusion around CSRD requirements, we need to start with double materiality assessments. These are the basis for sustainability disclosures. In alignment with the European Sustainability Reporting Standards (ESRS), businesses need to conduct these assessments to identify the important impacts, risks, and opportunities (IROs) they face. This helps determine which ESG topics they need to gather data on.

This concept might sound complicated, but it’s really about looking at your business from two key angles:

• Impact Materiality: A sustainability issue matters if it has a significant impact on people or the environment, whether good or bad, now or in the future. This includes effects from the company’s operations and its entire value chain, both suppliers and customers. These impacts aren’t limited to direct partnerships but include all business relationships.
• Financial Materiality: A financial materiality assessment pinpoints the essential information investors need to make informed decisions about funding the company.

By understanding both of these perspectives, you’ll be better equipped to meet the CSRD requirements and show your commitment to sustainability.

Untangling the Confusion Around Transitional Provisions

Now that you have an understanding of double materiality, let’s take a closer look at the transitional provisions and their impact on double material assessments. While these provisions are designed to give businesses a bit of breathing room, they can also be a source of confusion.

Paragraphs 132 and 133 of ESRS 1 (General Requirements) outline transitional provisions for the value chain that limit the amount of value chain information companies need to report or collect during the first three years. Basically, if you can’t use a double materiality assessment to get all the data you need from your value chain right away, you’re not alone, and there’s a plan for that.

The official text states:

“For the first 3 years of the undertaking’s sustainability reporting under the ESRS, in the event that not all the necessary information regarding its upstream and downstream value chain is available, the undertaking shall explain the efforts made to obtain the necessary information about its upstream and downstream value chain, the reasons why not all of the necessary information could be obtained, and its plans to obtain the necessary information in the future.”

This means that if you can’t get all the details from your suppliers and partners right off the bat, you need to document your efforts to gather this information, explain why it wasn’t possible to get everything, and outline your plans to collect the necessary data in the future.

This provision is all about making a genuine (reasonable, as later referenced in supporting material) effort and showing progress over time. It’s designed to ease the transition into full compliance, so you can focus on building a strong system for sustainability reporting without the pressure of needing to have every single piece of data at your fingertips.

What to Expect From the Transitional Provisions

Figuring out what the transitional provisions mean for your business can be challenging. Thankfully, the European Commission has provided some much-needed clarity with their recently published Frequently Asked Questions (FAQs) on sustainability reporting for the CSRD.

The FAQs address input from companies and cover important topics such as the scope of the directive, application dates, and various exemptions. They help break down complex issues like who owns the reports (individual or consolidated), language requirements, and more.

To help you make sense of the transitional provisions, let’s dive into two specific questions from the FAQ that are particularly relevant.

Question 29: What Constitutes “Reasonable Effort” to Obtain Value Chain Information?

“Reasonable effort” isn’t a one-size-fits-all term. It depends on your specific situation and the environment you’re operating in. Here’s how to figure it out:

• Size and Resources: Bigger companies with more resources are expected to try harder than smaller ones. For example, a large corporation with a complex supply chain should put in more effort than a small business with a simpler setup.
• Technical Readiness: If your company has experience and tools for collecting sustainability data, you’re expected to use them. If you’re new to this, the bar is lower, but it will rise over time as you get better at it.
• Tools Availability: Right now, there might be limited tools for sharing value chain information, but these will improve. Early on, estimates will be more common, but expect to use them less as better tools become available.
• Partner Resources: If your suppliers are small and not used to providing this info, it’s reasonable to rely on estimates. You’re not expected to demand more from them than they can realistically give.
• Influence and Buying Power: If you have a lot of control over a supplier, like owning part of the company or being a major customer, you should make a greater effort to get accurate data. Less influence means you can rely more on estimates.
• Proximity: It’s easier to get info from direct suppliers (tier one) than from those further down the chain. Early on, estimates will likely be used more for lower-tier suppliers.

In the first years, using estimates is more acceptable as everyone adjusts to these new requirements. But over time, as tools and readiness improve, the expectation from regulating bodies is that reliance on estimates should decrease. The key is that right now, you need to be making a genuine effort to gather accurate data while being transparent about any gaps.

Question 30: What Should an SME Expect in Terms of Requests for Sustainability Information?

If you’re a small or medium enterprise (SME), you might be wondering how much sustainability information you’ll need to provide under the CSRD and ESRS. Here’s a straightforward look at what to expect:

The transitional provisions in Paragraphs 132 and 133 of ESRS 1 (General Requirements) state that for the first three years, companies under the CSRD don’t have to report every detail about their value chain. This means SMEs will see relatively fewer requests for detailed information during this period.

However, it’s essential that you’re still prepared to respond to some requests. As described above, larger companies are required to make a “reasonable effort” to collect the necessary data from their value chain, and this includes SMEs. The extent of these requests will depend on several factors:

• Size and Resources: Smaller SMEs, especially those new to sustainability reporting, will face fewer expectations. Larger SMEs or those with previous experience might see more requests.
• Technical Readiness: SMEs that already have systems in place for reporting sustainability data will be more likely to receive detailed requests.
• Proximity in the Value Chain: First-tier suppliers (those directly connected to the larger company) will see more requests than those further down the chain.

The key takeaway for SMEs is to expect some level of data sharing requests, but these will be somewhat more manageable in the first three years due to the transitional provisions. Over time, as everyone becomes more accustomed to the new requirements and better tools become available, the process will become more streamlined.

Taking Action on CSRD Requirements

Understanding and complying with the CSRD can seem daunting, but it all comes down to making a “reasonable effort” to engage with your value chain and conduct double materiality assessments. The European Commission expects in-scope companies to make this effort, and while the transitional provisions may lessen the burden to some degree, they don’t exempt you from trying your best to meet the requirements.

The sooner you start taking action, the better positioned you’ll be to avoid any penalties or disruptions. Embracing these changes now means you’ll be ahead of the curve, with a more robust and transparent sustainability reporting process.

For more detailed guidance on how to navigate these requirements and mitigate any associated risks, check out our comprehensive guide on CSRD Risks.