CSRD Directive: Why almost all mechanical and plant engineering companies are affected
Since the beginning of 2023, almost 50,000 companies in the EU have had to report more on their sustainability performance. The Corporate Sustainability Reporting Directive (CSRD) obliges them to disclose relevant information on environmental, social and governance (ESG) issues. However, many companies underestimate the scope of this directive.
Sustainability is in. Not only in terms of environmental and climate protection, but also with regard to social aspects and good corporate governance. "ESG" is what insiders call it - and the topic has potential: even on the otherwise rather less picky stock exchanges, financial products that fulfil ESG criteria have long been a must. To prevent greenwashing and promote corporate sustainability, the EU Commission adopted the CSRD Directive in January 2023, which will become national law in July 2024.
As a further development of the Non-Financial Reporting Directive (NFRD) from 2014, the CSRD significantly tightens the requirements for sustainability reporting. The aim is to put sustainability information on an equal footing with the financial information published by companies.
Sustainability report and supply chain law
In Germany, the CSRD will be supplemented in future by the CSR Supply Chain Act, which also regulates human rights due diligence obligations for companies along the entire supply chain. One aspect in particular is causing a stir: The directive applies to a large number of companies. This includes companies with more than 250 employees and an annual turnover of more than 40 million euros or companies with a balance sheet total of more than 20 million euros. However, smaller companies can also be affected if they are part of a large group of companies that are subject to the directive or if they are commissioned by large companies as suppliers or customers. The latter in particular applies to almost all small and medium-sized enterprises (SMEs) in the mechanical and plant engineering sector. And the clock is ticking!
"Companies of public interest" that employ more than 500 people must already prepare a sustainability report for the 2024 financial year. From 2025, all large corporations and commercial partnerships will be affected. In addition, capital market-oriented SMEs will have to report from 2026.
The starting point for companies facing the new reporting obligation is to analyse it from two perspectives: Firstly, they shed light on the impact of their activities on people and the environment (inside-out), and then on the impact of sustainability issues on the company's financial position (outside-in). Companies must explain in detail how their activities affect the environment, including air, water and soil pollution as well as impacts on biodiversity and ecosystems. They must also disclose their use of resources. Social aspects relate to the impact on their own workforce and on external people, including the social environment and the supply chain. Measures to counter negative impacts should also be addressed. The governance aspect of ESG reporting covers the company's compliance structure and shows how sustainability aspects are monitored and integrated into the company's day-to-day operations.
Greenwashing can damage a company's reputation
Although not all key figures and report content are mandatory, experts warn against frivolous reporting: if a company is accused of greenwashing, this can severely damage its reputation. And because ESG indicators are increasingly becoming the basis for financing decisions, there is a risk of penalties similar to those for incorrect financial reporting. In the case of CSRD, such offences are also quickly punished personally - not only the company, but also the management and executive board are responsible here. On the other hand, a proper sustainability report helps to reduce liability risks.
It is clear that the obligation to produce a sustainability report will lead to greater transparency with regard to the consequences of corporate actions for the environment, society and company management. And because all affected companies are dependent on upstream supplies, this also affects SMEs: their customers will request key figures on individual or all ESG aspects. Companies that are obliged to report on CSRD often need information from smaller companies in order to prepare their reports completely and accurately. This mainly concerns suppliers and partners in the value chain. Small and medium-sized enterprises (SMEs) that are not directly affected by CSRD may still need to fulfil requirements indirectly in order to meet the demand for data from reporting companies. This can be done through voluntary reporting in accordance with the ESRS for SMEs or through specific contractual agreements. In this way, entire supply chains are gradually being scrutinised. It is therefore worth taking on this task!
ESPR guideline and digital product passport can help
In line with the sustainability reporting obligations, another new regulation is on the horizon for manufacturers of machinery and equipment: The EU's future Ecodesign Directive, the so-called ESPR Directive (Eco-design for Sustainable Products Regulation). This is due to come into force as early as 2026 and goes significantly further than the EU Ecodesign Directive that has been in force since 2009. Whereas previously the focus was on the energy requirements of a product, it is now about the sustainable design of products in general. This is intended to achieve the EU's goal of climate neutrality. This includes creating a circular economy and improving the reparability and recyclability of products. As a great deal of information about product properties needs to be passed on from the manufacturer to the recycler, the ESPR is calling for the introduction of a digital product passport - DPP for short. The DPP must provide comprehensive information on the lifespan of products, including composition, origin and recyclability, as well as data on the materials used, energy consumption and ecological footprint. Digitalisation is the method of choice here - for example, by using a QR code on the product or type plate to access information in a database or even a digital twin. In this way, it will also be possible to automatically read out information for sustainability reports in the future.
Companies that fall under the CSRD Directive will have to record relevant data as early as 2024. Now is the time to clarify questions of interpretation and document reporting decisions in a comprehensible manner. It is not only "authorised representatives" who are required to do this; sustainability reports are clearly a matter for the boss - if only because of the far-reaching liability obligations! Good data management and clarification of data protection issues are also important in order to correctly collect and consolidate metrics and KPIs.
Conclusion
The transposition of the CSRD into national law poses a considerable challenge for companies in the mechanical and plant engineering industry as well as plant operators in the chemical, pharmaceutical and food industries. At the same time, it offers the opportunity to raise sustainability standards and promote transparency in reporting. Companies should prepare for the new requirements at an early stage in order to fulfil the complex legal requirements and benefit from the advantages of comprehensive sustainability reporting.
