CSRD requirements may apply to companies based anywhere in the world
Changes are coming. Any business with significant operations in Europe will soon be faced with major new carbon reporting requirements—including Scope 3 emissions, which are notoriously difficult to track. The EU has recently enacted the Corporate Sustainability Reporting Directive, and for companies doing business in the European Union, it will require a major overhaul of carbon data collection methods in a comparatively short amount of time.
What is the CSRD and how and when will it affect your company? Here’s what you need to know.
In January of this year, the European Union enacted new legislation governing the reporting of carbon emissions for companies based in or doing significant business in the EU. The Corporate Sustainability Reporting Directive (CSRD) requires more comprehensive disclosure than many companies are currently used to, particularly in the United States.
Companies in the EU have up to now been subject to the Non-Financial Reporting Directive (NFRD). First adopted in 2014, it required EU-based companies with a staff of over 500 people to generate annual sustainability reports regarding their emissions. It encompassed nearly 12,000 companies and organizations.
The Corporate Sustainability Reporting Directive expands things considerably. Applied to large, medium, and small-sized companies, it will affect an estimated 50,000 companies based or doing business within the EU.
Even if a company isn’t based in the EU, it will now be subject to mandatory emissions reporting if it has a physical presence in the EU with at least €150 million in business per year for the last two years.
EU-based companies will need to begin tracking emissions data in 2024, to begin reporting in 2025, while non-EU companies won’t be affected until 2028 and will need to start reporting emissions in 2029. While that may seem like a lot of time, preparing for CSRD reporting will take time and resources, so leaders would be wise to start now.
The two factors in the CRSD likely to have the most significant impact on companies are double materiality and Scope 3 reporting. Even regular materiality has been the subject of debate in financial circles. It refers to factors that have an impact on a company’s bottom line which investors and potential investors should be made aware of, such as the risks that climate change poses to the business.
Double materiality refers to factors in an organization’s dealings which have an impact not just on the company itself, but also on the world at large—particularly with regards to environmental matters. In other words, companies must disclose not only the risks that climate change poses to the business, but also the company’s impacts on climate change.
This means mandatory reporting of Scopes 1, 2, and 3 emissions in addition to climate-related risks, making it much more rigorous than many companies are used to. Reporting under this kind of directive is different from voluntary reporting in that it must be digitized and auditable according to the European Sustainability Reporting Standards (ESRS) or equivalent.
Scope 3 reporting can be especially difficult to track and report. With the right software, tracking most Scope 1 and 2 emissions is relatively straightforward. Scope 3 emissions, however, are created by other entities either upstream or downstream of a company’s operations including suppliers, customers, and end users.
To get this right, companies across the value chain will need data that is:
Primary-source data collection is the best way to ensure each party’s data is trusted by auditors and by partners up and down the value chain. This typically involves installing real-time meters and sensors in each facility, in addition to collecting utility bills.
Companies will also need a modern software platform that can facilitate easy sharing of data across organizational boundaries. Moving from spreadsheets to a holistic system of record helps companies share trusted and auditable data easily and securely.
Finally, Scope 3 reporting is massively complex, so it must be built on a platform that is scalable across the enterprise. This is especially true for organizations who may be looking at acquisitions in the future. The last thing you want to do during reporting season is start over with a new data collection system.
The CSRD isn’t the only new legislation companies may need to worry about. Businesses selling certain products within the EU already need to be preparing for the EU Carbon Border Tax. While the tax itself doesn’t go into effect for several years, it carries with it a reporting requirement which goes into effect in October of this year and requires the reporting of Scope 1 and 2 emissions per unit produced.
Up until now, most reporting requirements have covered aggregated emissions data: how much carbon your facility produces as a whole over a given period of time. These new regulations will require far more detail, namely the emissions for every individual unit of the products you produce. This is more work and a higher level of scrutiny than most companies are prepared for at present.
There are also two significant proposed regulations in the U.S. which may take effect in the coming months. Federal contractors may soon be subject to the Federal Supplier Climate Risks and Resilience Rule. This will require all companies with federal contracts over $7.5 million annually to disclose Scope 1 and Scope 2 emissions, and companies with annual contracts over $50 million to disclose Scope 3 as well.
Finally, a proposed rule from the Securities and Exchange Commission would require all publicly traded companies in the U.S. to disclose Scope 1 and Scope 2 emissions, as well as any material Scope 3 emissions. The SEC Climate-Related Disclosures Rule may be scaled back in the wake of opposition, but some form of greenhouse gas disclosure for companies registered on the SEC could well be on the horizon.
These newer, more rigorous reporting regulations can be difficult to adhere to, especially for companies that have never had to think about Scope 3 or double materiality before. Fortunately, Ndustrial can help. We provide real-time, primary-source emissions tracking that assists companies in complying with various reporting directives. We also take a production-first approach to energy intelligence, helping industrial operations reduce CO2e per unit produced while actually improving productivity and boosting revenue.
Contact us at firstname.lastname@example.org to learn more!