As sustainability continues to become a critical factor in business operations, companies across the European Union (EU) are grappling with new reporting requirements set forth by the Corporate Sustainability Reporting Directive (CSRD). Implemented to enhance transparency on environmental, social, and governance (ESG) performance, the CSRD expands on the Non-Financial Reporting Directive (NFRD) and requires more comprehensive, comparable, and reliable sustainability disclosures.
One area that presents unique challenges in this context is supply chain management. The supply chain plays an essential role in a company’s overall sustainability, affecting everything from carbon emissions to human rights practices. But disclosing the necessary information for CSRD compliance, especially across complex and global supply chains, is no easy feat. This article explores the crucial role the supply chain plays in CSRD reporting, the barriers companies face in making full disclosures, and strategies for overcoming these challenges.
The Role of Supply Chain in CSRD Reporting
The CSRD aims to foster a more sustainable economy by mandating that companies report on a wide range of ESG issues. These include environmental impact (e.g., carbon emissions, waste management), social considerations (e.g., labour practices, human rights), and governance factors. Crucially, many of these factors are closely tied to supply chain activities, especially for companies that source raw materials or manufacture products in multiple locations around the world.
Supply chains account for a significant portion of a company’s carbon footprint, environmental impact, and social responsibilities. For example:
- Environmental Impact: Raw material extraction, transportation, and manufacturing activities within supply chains can contribute significantly to greenhouse gas (GHG) emissions. Companies are required to disclose not just their direct (Scope 1) and indirect (Scope 2) emissions, but also Scope 3 emissions, which include supply chain emissions.
- Social and Human Rights Practices: Many organisations source materials or products from countries where labour conditions and human rights practices may not meet EU standards. Ensuring that suppliers adhere to fair labour practices is a key part of sustainability reporting.
- Resource Efficiency and Waste Management: The supply chain can also be a source of inefficiency, waste, and unsustainable resource usage, which need to be disclosed under CSRD.
Given this, supply chain transparency is not just an add-on for companies aiming for CSRD compliance—it’s a central element.
Barriers to Full Disclosure in CSRD Reporting
Despite the importance of the supply chain in sustainability, there are several significant barriers companies face when trying to make full disclosures under the CSRD.
1. Lack of Visibility in Complex Supply Chains
One of the most substantial challenges is the sheer complexity of modern supply chains, which often span multiple countries and involve numerous tiers of suppliers. Companies frequently have limited visibility beyond their direct suppliers, making it difficult to gather accurate data about second, third, or even fourth-tier suppliers. This lack of transparency hampers their ability to accurately assess and disclose environmental and social impacts.
2. Inconsistent Data and Reporting Standards
The data needed to fulfil CSRD requirements—such as emissions, labour conditions, and resource usage—often varies widely in quality, availability, and format. Suppliers in different regions may be subject to different reporting standards or may not track the data at all. Inconsistent data from various parts of the supply chain makes it hard for companies to compile a reliable and comprehensive sustainability report.
3. Supplier Resistance or Inability to Comply
Many suppliers, especially small and medium-sized enterprises (SMEs), may lack the resources or technical know-how to track and report on sustainability metrics. Others may be unwilling to share this information due to concerns about confidentiality or fears of losing business if their practices do not align with sustainability goals. This creates an additional barrier for companies trying to gather complete and accurate data.
4. High Costs of Data Collection and Verification
Collecting and verifying supply chain data for CSRD reporting can be both time-consuming and costly. For companies with extensive, global supply chains, the cost of auditing suppliers, tracking data, and ensuring compliance can be prohibitive, especially if systems for real-time data collection are not already in place. Furthermore, third-party audits or certifications may be required to validate data, adding to the overall expense.
5. Regulatory Uncertainty and Evolving Standards
The CSRD is still relatively new, and as such, companies are grappling with uncertainty regarding the specifics of compliance. Reporting standards and regulations continue to evolve, meaning that companies may invest in certain data collection or reporting mechanisms only to find they need to adjust their approach as rules change. This evolving regulatory landscape adds another layer of complexity to supply chain disclosure.
Strategies for Overcoming Barriers to Supply Chain Disclosure
Despite these challenges, there are strategies companies can adopt to improve supply chain transparency and ensure compliance with CSRD reporting requirements.
1. Building Strong Supplier Relationships
To overcome resistance from suppliers, companies can focus on building long-term, collaborative relationships. By working closely with suppliers, companies can help them understand the importance of sustainability data and provide support where necessary, such as training on data tracking or sustainability best practices. Establishing these relationships also helps in negotiating more detailed disclosures over time.
2. Leveraging Technology for Better Data Collection
Advanced technologies like blockchain, IoT (Internet of Things) sensors, and AI-powered data analytics can be used to track and monitor sustainability performance in real time throughout the supply chain. These technologies allow for greater transparency and accuracy in reporting by enabling companies to monitor everything from emissions to labour practices remotely and consistently.
3. Collaborating with Industry Initiatives
Many industries are developing sustainability frameworks and certifications that can help companies collect and report data more consistently. Participating in these initiatives, such as the Science-Based Targets initiative (SBTi) or CDP’s Supply Chain program, can provide standardized methodologies and tools for data collection. These initiatives also help create a level playing field across industries, ensuring that suppliers face uniform expectations from all customers.
4. Implementing Supplier Codes of Conduct
To ensure alignment on sustainability goals, companies can implement supplier codes of conduct that outline clear expectations regarding ESG practices. These codes should include requirements for data tracking and reporting and can be incorporated into contracts with suppliers. Over time, companies can audit compliance with these codes and adjust their supply chain relationships accordingly.
5. Using Third-Party Audits and Certifications
Third-party audits and certifications can help validate the sustainability performance of suppliers and provide independent verification of the data that companies use in their CSRD reporting. This is where EcoVerify can help, EcoVerify supports organisations in achieving sustainability goals by providing expert carbon footprint verification, validation, and tailored training services. As Ireland’s leading sustainability assurance provider, EcoVerify ensures credibility in environmental claims and equips teams with the skills for effective GHG management and reporting. Contact us today at [email protected] to learn how EcoVerify can help you reach and showcase your sustainability milestones.
Conclusion
Supply chain management is a vital component of CSRD reporting, as it directly influences a company’s environmental and social impact. However, companies face numerous barriers to full disclosure, including supply chain complexity, inconsistent data, and supplier resistance. By leveraging technology, building strong supplier relationships, and engaging with industry initiatives, businesses can overcome these challenges and meet the stringent requirements of the CSRD. As sustainability continues to rise in importance, investing in supply chain transparency will not only help companies achieve compliance but also foster greater trust and resilience in the face of future challenges.
