In the ever-evolving landscape of climate change mitigation, the Consumer Goods industry in Asia faces a paradigm shift with the upcoming introduction of new EU legislation. As businesses grapple with the complexities of aligning with these regulations, the impact will be far-reaching. In this article, we unpack three key pieces of legislation poised to reshape the industry.
Legislation in focus: what’s on the horizon?
● The Corporate Sustainable Reporting Directive (CSRD) will comprehensively revise and enhance the existing non-financial reporting rules established by the 2014 Non-Financial Reporting Directive (NFRD). It aims to elevate sustainability reporting to the same level of importance as financial reporting; providing reliable and structured sustainability information for diverse stakeholders, fostering transparency.
● The Corporate Sustainability Due Diligence Directive (CSDDD) mandates businesses to actively identify, mitigate, monitor, and report on human rights and environmental impacts throughout their operations. It aims to promote sustainable and responsible behaviour across global value chains.
● The Carbon Border Adjustment Mechanism (CBAM) serves as a ground-breaking tool designed to establish a fair price for carbon emissions associated with the production of carbon-intensive goods entering the European Union (EU). It aims to incentivize cleaner industrial practices in non-EU and non-EFTA countries by imposing a carbon levy on specific imported product groups.
CBAM, CSDDD and CSRD as part of the European Union’s Green Deal
See below for a forecasted overview of the legislation roll-out
Why is the legislation being introduced?
The EU is committed to achieving climate neutrality by 2050, with ambitious targets for reducing greenhouse gas emissions and transitioning to a circular economy. The new regulations align with addressing this goal; the CSRD and CBAM promote corporate transparency and accountability on environmental issues, while the CSDDD plays a crucial role in fortifying these efforts by requiring companies to actively manage environmental risks throughout their supply chains.
What does it mean for companies in Asia?
Although the legislation is enforceable inside the EU, its impact will be global. EU-based companies wishing to import goods from Asia will need to report according to the CSDDD and CBAM regulations, and therefore demand higher transparency from Asia-based suppliers. Additionally, Asia-based companies with a significant subsidiary in Europe will need to report on EU subsidiaries’ activities based on the CSRD. Given that many Asian businesses have not yet invested significant resources in sustainability data gathering or management, they will need to accelerate far more quickly than their European counterparts.
4 reasons it matters for the Consumer Goods industry
- Consumer Goods industries, whether hard or soft goods, typically boast extensive global supply chains with a high number of end-products and multiple supply tiers. The import of a diverse mix of semi-finished and finished goods further complicates reporting in accordance with border adjustment mechanisms.
- The challenge of achieving transparency in supply chains – crucial for accurate reporting – is particularly complex for Consumer Goods industries. They require additional time to gather data and establish reporting/data management systems compared to companies in more consolidated sectors.
- Hard goods brands importing a high number of small aluminium and steel components are particularly vulnerable to restrictions related to the CBAM.
- Brands sourcing materials in countries with limited legal oversight face increased vulnerability to supplier-related human rights or environmental violations compared to other sectors. These brands must exercise heightened vigilance in addressing these concerns.
Connecting the dots: Understanding the interplay between new regulations
The three regulations operate in tandem, each complementing the other; they signal a call for businesses to review them collectively and address the challenges of climate change through a holistic approach. CBAM necessitates an in-depth data collection on product carbon data within the supply chain, and this collected information undergoes scrutiny in alignment with CSDDD requirements. This process aims to identify underlying risks, guiding mitigation measures and process development. Finally, CSRD steps in to regulate companies, mandating the reporting of supply chain emission data and the implementation of risk management and mitigation policies.
Taking action: 3 key steps for corporates to take
- Conduct a gap analysis to map your business’ current practice against legislative requirements and identify areas for improvement.
- Implement consistent data collection methods across your organisation and value chain to ensure accurate and compliant data is available for assessing risks and reporting.
- Improve sustainability literacy throughout your organisation, ensuring you are able to make sourcing decisions in a way that factors in CBAM and CSDDD requirements.
As sustainability evolves from an optional consideration to a mandatory force impacting costs and regulatory risk, now is the time for corporates across Asia to decarbonize their supply chains. It’s an opportunity to drive real impact, enhance sustainability performance, bolster brand reputation, and cultivate trust with stakeholders.
Keen to find out more on the topic? Keep an eye out for part two of our regulatory series coming soon where we will dive into which companies will be most affected by the regulations, the risks of non-compliance and steps businesses can take to respond to these regulations.
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