New reporting standard - an unnecessary burden? - vdma.org

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The European Union has made few friends with its new sustainability reporting requirements. Most of the mechanical and plant engineering companies affected are particularly concerned about the great attention to detail and granularity of the list of topics in the Corporate Sustainability Reporting Directive (CSRD), which now presents companies with unexpected questions in the areas of environment, social affairs, and governance. Very few companies can master this huge challenge on their own. Instead, they are forced to acquire consulting services or new software tools. This bureaucratic burden hits small companies even harder. Almost all management teams doubt that the immense cost of reporting will ever pay off. Less would have been more. 

However: It would be short-sighted to dismiss the new reporting requirement as an unnecessary burden and cost. Dealing with sustainability issues can certainly provide valuable insights into the risks and opportunities of a company's business model. Most companies have learned a great deal about themselves and have changed processes in preparing for the reporting requirement. The VDMA offers its support with guidelines, benchmarks, webinars and in working groups. This is because when it comes to achieving sustainability goals, the mechanical and plant engineering industry sees itself as part of the solution - not just another problem.

Cross-reference matrix

The CSRD brings with it a new guideline for sustainability reporting in companies. The reporting requirements are specified in the European Sustainability Reporting Standard (ESRS). Companies are faced with the challenge of meeting these requirements. However, not everything that is required here is new for companies. A lot of information is already being collected and reports prepared in their management systems. Most companies already have a quality management system or an integrated management system in place. Therefore, it makes sense to mirror the individual ESRS reporting requirements to the management system standards. The cross-reference matrix clearly shows that information is already available for about 40 to 50 percent of the reporting requirements. The cross-reference table includes the five standards that are currently most commonly used in assessment. This cross-reference table is being continuously developed under the leadership of the VDMA's central Quality & Management working group.

Sustainable financing

The implementation of sustainability reporting obligations also includes sustainable financing. The EU taxonomy serves as a tool for financial market players to assess the sustainability of economic activities. At the same time, it is directly linked to the CSRD. Whenever a company prepares a sustainability report, it must also report on the EU taxonomy. This is a major hurdle for many engineering companies. The taxonomy provides technical criteria that companies must use to verify the proportion of their business activities and investments that qualify as sustainable. The criteria are problematic. They are restrictive, complex and in some cases do not go beyond what is technically feasible. Implementing the taxonomy in practice is therefore a key challenge. The VDMA calls for legal certainty and clear guidelines for the implementation of reporting requirements for existing and future technical criteria. These must include a feasible path for sustainable technologies.

Changed role

The CSRD creates new tasks for controlling. While its activities in the past - with the exception of reporting - were mainly internal, the impact of corporate activities on the environment (emissions of all kinds, impact of investments on biodiversity) and possibly on customers and employees must now be calculated regularly for all stakeholders. Traditional controlling cannot do this alone. As its numbers have expanded to include technical data, environmental metrics, and social impacts, controlling must work more than ever with all parts of the organization. In order to continue to obtain external capital, the positive, sustainable effects of a company's activities (investments) must be demonstrated to investors. Although the EU taxonomies are helpful for such a classification, they are very difficult to implement in practice, especially in mechanical and plant engineering. In addition, there are risk management aspects to ensure compliance.

Sustainable products

While historically companies have been driven primarily by economic considerations, sustainability will become increasingly important in all sales markets in the future. It is a key factor in purchasing decisions. Sooner or later, this change will affect all sectors and regions of the world as a result of globalization and the integration of different industries. Consideration of sustainability aspects in products is spreading from the end consumer along the global value chain. In the foreseeable future, it will be difficult for companies to avoid disclosing the product carbon footprint (PCF) in terms of greenhouse gas emissions if customers specifically ask for it - similar to performance data, price, and delivery time. It is important to note, however, that this data is not simply available, but must be actively collected by companies and their suppliers. This data exchange requires digital platforms and automated processes. PCF information will become a central part of the product information flow, without which products could become uncompetitive. The impact on product design is also significant, as it is here that decisions are made about which materials are used and what options the machine or system offers the user to save energy and reduce emissions.

Calculating emissions

Companies have been setting climate targets for years. In 2016, a consensus was reached in the Paris Agreement to keep global warming below 1.5 degrees Celsius. Scientists agree that only a limited amount of carbon can be emitted globally until the 1.5-degree threshold is reached. While some companies have set climate targets consistent with the 1.5-degree goal in recent years, the introduction of the CSRD is forcing more companies to take action. Before a company sets a climate target, it is essential that emissions are calculated across it's entire value chain. The Greenhouse Gas Protocol provides an international framework for calculating emissions. A company can then set its reduction target. The most widely used framework is the Science-Based Target Initiative (SBTi), which defines emission reduction pathways based on the 1.5-degree target. The SBTi validates these targets. The challenge for the engineering sector is the high level of emissions generated during the use phase of products - up to 98 percent of company-related emissions occur during the use phase of a product. The earlier a company starts calculating emissions, the more time it has to build internal knowledge and take a strategic approach to reducing emissions.