For many businesses that operate in the European Union, compliance with the Corporate Sustainability Reporting Directive (CSRD) will soon be a requirement. This new regulation will be more complex, comprehensive, and rigorous than prior sustainability disclosure laws.
In response, Worldly has put together a series of resources to help apparel and consumer goods brands understand what’s expected. In this article, we outline how your business can begin preparing for compliance.
Understanding the Sustainability Topics Covered by CSRD
As a first step, your business needs to understand which sustainability topics are covered by this regulation.
CSRD organizes topics into three categories:
- Cross-cutting standards;
- Topical standards (Environmental, Social, and Governance); and
- Sector-specific standards
It’s important to note that sector-specific standards are still forthcoming. For now, businesses should only focus on the overall ‘cross-cutting’ disclosures and the 10 topical standards (organized under Environmental, Social, and Governance).
For the 10 topical ESG standards, businesses only need to submit disclosures for those that they deem to be material. However, if a company does not disclose on a standard, it needs to explain why it made this decision. The threshold for not disclosing on ‘Climate Change’ is higher than any other topical area.
Determining Topics Relevant to Your Business
How does a business determine which topics are materially relevant to them? This is where the concept of ‘double materiality’ comes into play. Assessing topics through ‘double materiality’ requires a company to assess:
- The impacts it has on people and the environment related to a sustainability matter (“impact materiality”); and
- How that sustainability matter impacts the company financially (“financial materiality”).
From an impact perspective, CSRD considers a sustainability issue to be material when it “pertains to the company’s material actual or potential, positive, or negative impacts on people or the environment” — including those related to the company’s upstream and downstream value chain partners. This is especially important for fashion and apparel companies, where 90% or more of emissions generally come from upstream operations and downstream activities.
For a topical standard to be considered financially material for a business, the topic must trigger (or be likely to trigger) effects on the “company’s development, financial position, financial performance, cash flows, access to finance or cost of capital over the short-, medium- or long-term.” A sustainability matter is “material” when it meets the criteria for impact materiality, financial materiality, or both. Under CSRD, climate will almost always be considered a material issue.
Once a sustainability matter is determined to be material, businesses need to define metrics, set targets, and track the impacts of their actions towards meeting their targets. Specifically, businesses need to disclose “measurable, outcome-oriented and time-bound targets on material sustainability matters,” which must include 10 types of information. We’ll cover what those 10 types of information are in detail in a follow-up blog post.
How the Higg Index Can Support CSRD Compliance Efforts
While not regulatory compliance tools, the Higg Index tools (developed by the Sustainable Apparel Coalition and hosted on Worldly) have a crucial role to play in helping companies prepare for CSRD.
The Higg Index helps brands, retailers, and manufacturers gather primary data about their impacts at global scale — so they can understand their current performance and develop strategies to make improvements based on comparable, actionable, and verifiable primary data.
Within the context of CSRD compliance, the Higg Index helps companies:
- Ask many of the questions needed to understand double materiality;
- Develop metrics and targets that meet industry best practices;
- Collect and in some cases verify the quantitative and qualitative data required to establish, measure, and show progress towards meeting their impact reduction targets.
As an example, let’s look at the Higg Brand and Retail Module (BRM). The Higg BRM is a sustainability performance tool that can also help companies benchmark their existing environmental and human rights (social) policies, actions, metrics, and targets against apparel and footwear industry best practices. It is rooted in some of the same international frameworks as CSRD (namely the UN Guiding Principles on Business and Human Rights and OECD Guidance).
There is substantial overlap between the CSRD requirements and the questions included in the Higg BRM. In this way, the Higg BRM can be used as a checklist for CSRD readiness: if your business is answering Higg BRM questions affirmatively, you will be well-prepared to disclose and report under the topics required by CSRD.
Similarly, the Higg Materials Sustainability Index (MSI) and Higg Product Module (PM) provide environmental impact data that can help your business calculate some of the metrics you’ll need to disclose under CSRD. With more than 200 raw material options and a thousand process-level LCA data points, these tools are well-equipped to help companies measure the impacts of manufactured products as is required by several sections of CSRD.
We’re Here to Help
We know these requirements may be daunting for some businesses — but Worldly is here to help. Built by industry experts and relied on by market-leading brands and manufacturers, Worldly provides businesses with primary data needed for impact improvement, as well as to support compliance and disclosure strategies.
Get in touch with your customer support representative today to learn more about CSRD, get a copy of our CSRD white paper, and learn how Worldly can support your compliance efforts.