“Traditionally, financial reports have been the main focus of corporate reporting,” explains fashion professional Melissa Wijngaarden.

Many companies compile annual reports that recount their activities over the last year. An integral part of this report is the financial statements, which summarize the company's financial situation. This allows companies to assess how they are doing, make strategic decisions, and ensure they comply with tax returns.

Financial transparency is mandatory for publicly traded companies. Financial information helps the public and investors who can buy and sell shares ("owned pieces of the company") understand how well the company is performing and how financially sound it is.

Listed companies are usually big brand names, for example, major fashion players LVMH, the French company that owns luxury brands Louis Vuitton and Christian Dior; the H&M Group; Inditex, the parent company of fashion giant Zara and PVH Corp, owner of Tommy Hilfiger and Calvin Klein.

Wijngaarden is the co-founder of Impactbytes, a company that specializes in ensuring information concerning a garment's sustainability credentials is visible.

Melissa Wijngaarden is also the co-founder of Project Cece (2019), an online shopping search engine for consumers featuring greener clothing from two hundred fashion brands.

Impactbytes is a sister organization of Project Cece. It is a Software as a Service (SaaS) platform that’s geared towards businesses.

"Impactbytes arose due to the greater challenge facing the sector. Namely identifying the sustainability credentials of products," says Wijngaarden. These are the 'references' that show how environmentally friendly and socially responsible a product is. Different materials are used in fashion collections, and different processing methods are used. Sometimes, there are quality marks that say something about sustainability or animal welfare, for example. "The problem is that every brand talks about its sustainability efforts in a different way, and there are no hard and fast rules about how to share this information," explains Wijngaarden.

Impactbytes helps online stores, platforms, and search engines with this challenge. The company acts as somewhat of a sustainability data provider. The company's customers include the online store Utopia, the online search engine Ecosia ('they call themselves the sustainable Google'), and sustainable clothing brands Mud Jeans and Kings of Indigo.

On its website, Impactbytes writes about the CSRD, among other things. "First, there was talk that the CSRD would also apply to all small and medium-sized businesses," says Wijngaarden, "so our customers also came to us with questions about the legislation." (More about the current scope of the CSRD later,ed.).

But this has changed. The Corporate Sustainability Reporting Directive (CSRD) requires brands and large companies to provide detailed information about their non-financial performance and, more specifically, sustainability aspects.

The CSRD will apply to approximately 52,000 companies in Europe and will be introduced in phases.

The first group that must comply with the 'Reporting Directive' are organizations of public interest with more than 500 employees,

Public interest organizations are companies or institutions that are very important to society and the economy, such as banks or large companies,

says Fleur van de Heuvel-Meerman, Senior Policy Advisor International CSR at the SER, the second expert we spoke to about the subject.

The SER, short for the Social and Economic Council, is the most important advisory body of the Dutch government. The organization plays an important role in formulating policy and guidelines, including the field of international corporate social responsibility.

Meerman is involved in the Corporate Sustainability Reporting Directive. She has worked with her colleagues on the practical implementation of this mandatory sustainability reporting, with the SER actively providing advice and information.

In addition to providing advice, the SER also plays a role in the execution and implementation of sector-specific RBC (International Responsible Business Conduct) agreements: collaborations between the government, businesses, trade unions, and civil society organizations aimed at achieving impact in international supply chains.

Furthermore, Meerman also serves on the open source database Open Supply Hub board. It is a supply chain data platform that anyone can search and contribute to for free. It shows production locations across the world and who is connected to them, making that data easy for anyone to work with. For example, information is provided on factories and which NGOs or organizations are active there. The goal is to increase the transparency of production locations and supply chains worldwide to promote sustainability.

Next year (in 2025), these companies must submit a sustainability report for the year 2024.

"These public interest organizations are already used to reporting on figures and other matters," says Meerman. "Since 2016, the EU Non-Financial Reporting Directive (NFRD) requires them to report on environmental performance, social responsibility, and how the organization is managed with regard to sustainability issues. "The CSRD expands these requirements and introduces stricter reporting standards," said Meerman. (And the scope of the CSRD is larger than the NFRD, but more about that in a moment, editor's note.)

The official term for this is ESG, short for Environment, Social (social and societal aspects), and Governance (board management).

What does the CSRD exactly require from companies? What does the CSRD entail? What are the main aspects of the CSRD?

The CSRD requires brands and companies to report in detail on their impact on people and the environment and how they are governed with regard to sustainability. "This must be done for the short (1 year), medium (5 years), and long term (5> years) and concerns both actual and potential impact," says Meerman.

In addition, companies must also explain how their business strategy, policy, and processes for managing risks related to sustainability are structured, including what they want to achieve in the field of sustainability, the SER advisor emphasizes.

“In the fashion industry, for example, there are companies that produce jeans in Bangladesh. It could very well be that they significantly impact people and the environment," illustrates Meerman. In Bangladesh people generally work under poor working conditions for low wages. Legislation in the country is not always enforced, and 'bribery and corruption commonly occur.' She gives an example to illustrate further her point: "The production waste might also be directly released into the surrounding water, contaminating the local population's drinking water."

"The CSRD also states that as a company, you must explain what climate plan you have in place to meet the Paris Climate Goals," says Meerman.

Double materiality is a very important aspect of new EU law: mandatory sustainability reporting works both ways

The CSRD also introduces the concept of double materiality. It means that companies must evaluate and detail their external impact on society and the environment and identify how sustainability issues and societal trends may or will affect their business. (read: their own operations or supply chain).

“Climate change is an example of the impact of sustainability on an organization,” says Meerman. “Due to global warming, Pakistan was faced with heavy rains for three months in 2022. That caused devastating floods. If you do business with a factory in Pakistan, floods can have major consequences for your business operations.”

Affected stakeholders should be involved in the double materiality analysis

“It is good to know that the CSRD requires reporting on the impact on people and the environment, and the European Sustainability Reporting Standards (ESRS) provides guidance on what needs to be reported,” says the SER policy advisor. These standards, including sector-specific aspects for textiles for example, are still being developed.

"The first set of ESRS standards have around 1200 data points," says Meerman. It does not mean a brand or company must report on all those data points. An organization must determine which economic, environmental, social and governance issues are material to its operations and stakeholders. To this end, companies will conduct a double materiality analysis, as the difficult term is called. This process helps companies prioritize and focus on the issues most important to their sustainability performance and risk management.

"When conducting a double materiality analysis, 'affected stakeholders' should be involved," emphasizes Meerman. "These are people who are directly influenced by the organization's activities. These are often employees or people in the supply chain, but you can also think of silent stakeholders in the field of the environment," explains Meerman. For example, people who live near a factory and have to deal with contaminated drinking water are considered to be 'affected stakeholders.'

By involving these stakeholders, a brand or company will arrive at a thorough and fair materiality analysis. It will improve current sustainability reporting, and the engagement can also achieve bigger matters, such as advancing the company's current sustainability efforts.

How exactly should the CSRD be reported? How should it ultimately be submitted, and who will approve the mandatory sustainability reporting? How and by whom will that Reporting Directive be assessed?

As described above, through the CSRD and ESRS, brands and companies will report uniformly, explains Wijngaarden.

"If you want to know how a clothing brand like Nike or Adidas deals with 'living wage', then it should be very easy to find because all reports are structured in the same way," point out the policy advisor from the SER. "Currently, finding specific details in companies' self-published CSR reports often requires using the search function." At times, certain matters or issues are missing in those reports. The CSRD will ensure complete and reliable sustainability information. "And thereby provide transparency," says Meerman.

The sustainability report will ultimately be a separate appendix to the management report, explains Meerman. "An external party must approve it." The audit is likely to be conducted by accountants, the same professionals who currently evaluate the financial reports, believes Wijngaarden.

"However, the SER advisor emphasizes: "The fact that stakeholders can also observe and hold companies accountable for their sustainability efforts will have a greater effect than this required independent assessment."

How easy or difficult will it actually be for companies to comply with the CSRD in the future?

To come up with such an analysis and report, companies must first gather all the necessary information.

"Some companies opt to set up internal teams for the CSRD," explains Wijngaarden, "but there are also other companies or consultants that can assist them with this."

“All this (setting up to comply with the CSRD directive, editor's note) takes time,” explains Wijngaarden. “The larger the company, the more complex the task.”

Because knowledge is needed from various departments, such as HR, procurement, sourcing, finance, etc., lists Meerman. The CSRD requires collaboration between people from these different departments, which will lead to enhanced connectivity. "Moreover, the CSRD demands attention to sustainability from top management," continues Meerman, "which will lead a company to take action (towards sustainability, editor's note) more quickly."

Because while the CSRD is primarily a reporting standard, the law aims to create an impact in the supply chains. "So that insight is gained, and systematic problems can be addressed. And ultimately, companies are held accountable."

For that, by the way, more laws and regulations are on the way. Like the Corporate Sustainability Due Diligence Directive (CSDDD, pronounced ‘C S triple D’) that’s forthcoming. This Due Diligence directive will soon require companies to address malpractices related to environmental and human rights violations in the supply chain.

The latest news is that the CSDDD is on shaky ground: there is no agreement yet. Germany, Italy, France, Finland, and Austria did not accept the current draft of the law. The text of the draft needs to be revised, and the involved parties must return to the negotiation table. The new negotiations must be concluded before half March to get the proposal through quickly; otherwise, it may face months or even years of delays.
[Source: FashionUnited.nl article 'Due diligence law seems further away than ever: Several EU member states are bothered' [in Dutch], from February 28, 2024]

The CSRD, just like the CSDDD, is part of the European Green Deal. “It's actually an entire package of measures aimed at making Europe's economy more sustainable,” explains Meerman.

Wijngaarden puts it this way: "The Green Deal simply demands more accountability and transparency from companies."

Last but not least: Which companies will the CSRD apply to next? Are there companies that don't need to do anything yet?

The second group for whom the sustainability reporting obligation starts, the large enterprises, includes family-owned businesses, explains Meerman.

“For large enterprises, the CSRD scope has just been adjusted,” says the policy advisor. A company is considered large if it meets two of the following three criteria: 25 million euros in balance sheet total ('total assets'), 50 million euros in (net) turnover, and 250 employees.

"The law is most novel and exciting for this group," asserts Meerman, simply because there was no reporting obligation before. Many of these enterprises are engaged in sustainability and measuring operational impact, but it often happens 'that nothing is put on paper.'

Large enterprises must report on the (fiscal year) 2025. “An example is the family-owned business Zeeman. They must issue a report in line with the CSRD for the first time in 2026.”

And what about SMEs?

Listed SMEs are required to report by 2026.

Non-listed SME businesses are outside the scope.

But that doesn't mean they have nothing to do. The CSRD also has an indirect effect. Many SMEs are part of the supply chain of large organizations. "For example, if you are a small fashion brand or wholesaler supplying to a large department store or multibrand retailer," as Henk Hofstede, Sector Banker Retail at ABN Amro, previously illustrated to FashionUnited.nl.

"And that means that small and medium-sized enterprises will have to start providing information to their customers: the larger enterprises to which the CSRD applies," emphasizes Meerman. "That's why it's advisable for them to set up a system now to collect data on how they affect people, climate, and the environment, and how these factors can influence their business operations."

"Currently, two new, simplified standards are being developed specifically for small and medium-sized enterprises," shares Meerman. These standards are intended to make it easier and more appropriate for these businesses to provide sustainability information when requested. “Moreover, they are designed to support SMEs in their role in promoting and advancing a more sustainable economy.”

Meerman also mentions that it's 'not impossible' for the CSRD to be further expanded to include SMEs in the future since, as you now know, much of the sustainability information comes from supply chains, where the most significant impact can be made. "Take the production of denim jeans, for example. If you want to reduce CO2 emissions, it can't be done from the headquarters - it must be addressed along the supply chain. Consider the factories where fabrics are dyed or jeans are washed and faded to give them their characteristic look," says Meerman.

It's important to know that the CSRD legislation is still being updated. Additionally, not all aspects of the directive have been determined.

Official documents on the Corporate Sustainability Reporting Directive and the latest information on the European Sustainability Reporting Standards can be found on the EU legislation website.

The SER has a special page dedicated to the topic 'CSRD: EU Sustainability Reporting,' available under the 'themes' > 'sustainability' section, available in English. In this section, you can watch webinars on the new legislation and find a comprehensive FAQ document on the CSRD, which is regularly updated. You can also submit additional questions about the reporting obligation for the organization to answer.

Sources:
- Interview with Melissa Wijngaarden, co-founder of Impactbytes and Project Cece, on January 25, 2024,
- Interview with Fleur van de Heuvel-Meerman, Senior Policy Officer for International CSR at the SER and board member of Open Supply Hub, on January 29, 2024,
- FashionUnited article ' Experts on entrepreneurship in 2024 and key themes for fashion and retail' from January 13, 2024
- Parts of this article text were generated by an artificial intelligence (AI) tool and then edited
- European Commission website 'Corporate sustainability reporting'
- European Commission annex 'European Sustainability Reporting Standards (ESRS) from July 31, 2023.