'Companies take their financial reporting very seriously and they’ll have to take this just as seriously'
Madeleine Murray and Tara Shine, co-founders of consultancy firm Change by Degrees that works with companies in various different sectors including retail, hospitality, life sciences and health.
Ireland provides a base for some of the largest companies in Europe and, especially being an island economy, the relationships they maintain with firms within their supply chain are vital for operations.
However, these relationships will come under pressure as these firms will eventually have to comply with mandatory EU regulations that will shine a light on corporate sustainability standards across their entire business, including their supply chain.
“It is crucial that big businesses do not alienate their supply chains as they prepare for regulation. Big business shouldn't aim to just rewire their supply chains, they should work with them,” said Madeleine Murray, co-founder and chief product officer at consultancy firm Change by Degrees which works with companies in various sectors including retail, hospitality, life sciences and health.
The EU's Corporate Sustainability Reporting Directive (CSRD), part of the European Green Deal, aims to make it compulsory for large firms to report their environmental, social and governance standards to show proof of viability to investors and customers.
Firms with an annual net turnover exceeding €50m, assets exceeding €25m or at least 250 employees on average throughout the year will be on the hook to comply with the CSRD.
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“As part of the CSRD process, the companies that are compliant will have to have complete transparency across their entire value chain,” said Ms Murray.
Small and medium-sized companies that fit within the supply chain operations of larger companies will be on the hook to comply with EU mandatory sustainability regulations as well.
Ms Murray said:
Ms Murray said she is finding that some of these firms are “nervous about not being able to win work and they understand the need to build a sustainability strategy in order to have the appearance of being ready to do business with”.
“They need to get their house in order in terms of their sustainability credentials, their policies and their procedures” in order to retain and secure new contracts.
However, managing director of EcoMerit Phil Walker said there is “a danger is that buyers will take the lazy way out.”
“Instead of going to the bother of engaging positively with their suppliers, they may just insist that their suppliers, of whatever size, adopt expensive and onerous ISO certifications,” he said.
ISOs are International Organisation for Standardisation certifications that help organisations ensure they meet customer and other stakeholder needs within statutory and regulatory requirements.
“Ironically, these certifications don’t, in themselves, achieve anything very much. Already it is looking like EU public procurement policy is going down this road,” he said.
Mr Walker added that he believes the EU move towards mandatory ESG reporting by businesses is “a very positive step overall”.
He said:
Mr Walker is an engineer by trade who started his career in the UK shipbuilding industry. Later he was based in South Korea, then China, developing businesses for an international certification body.
Before becoming managing director at EcoMerit, a business which provides environmental support to organisations in all sectors, he spent four years as the environmental advisor to Waterford Chamber. In this role, he assisted more than 30 Irish companies to improve their environmental performance and achieve environmental certification.
Ms Murray echoed Mr Walker's sentiment that the measure is a large step forward in terms of responsible corporate monitoring but indicated that it may also be costly.
She said the task of efficiently reporting ESG standards and practices “could be a full-time job for quite a large organisation” as data will need to be gathered from various departments in a firm including finance, human resources and procurement.
“It will be seen as a burden, without a shadow of a doubt, because the data haul required is so immense,” she continued.
Ireland's chronic skills shortage and record-low unemployment rate in Ireland are expected to become additional challenges for SMEs faced with this responsibility.
“If you hand the job of CSRD to one or two people in your organisation, they’ll flounder because it’s an impossible task,” she said.
“There’s overwhelming uncertainty about the scale of the task ahead and we see a lot of lone rangers in organisations struggling to manage the volume of work that is required to get ready for CSRD,” said Ms Murray.
She urged caution that SMEs do not have a “knee-jerk” reaction to this new requirement in an “ever more regulatory” world and indicated that it may hurt supply chain businesses in the long run.
Supply chain operations have been battered in recent years from covid disruptions to volatile prices driven by inflationary pressures and high interest rates while they have also had to comply with other regulatory demands, including the digital transition.
Meanwhile, the last few years have caused investors and companies to become more careful with their cash and who they enter into new agreements with.
While the CSRD may be costly to comply with, experts suggested it may give third parties confidence in a company’s operations.
“Companies take their financial reporting very seriously and they’ll have to take this just as seriously,” said Ms Murray.
SMEs did get some relief earlier this year though as the European Commission made a decision to delay the CSRD administrative deadline for SMEs, but this could be seen as simply kicking the can down the road.
The Commission reached an agreement with the European Parliament and the Council to postpone, by two years, the deadline for adopting sector-specific European Sustainability Reporting Standards (ESRS). The CSRD includes provisions for the adoption of sector-specific ESRS.
This was among the proposals included in the 2024 Commission Work Programme to reduce the administrative burden for companies and to cut reporting requirements by 25%.
The agreement reached effectively pushed the deadline for these sector-specific standards from mid-2024 to mid-2026. The Commission said that this will give companies more time to comply with the “horizontal standards adopted in July 2023, which apply to all companies, irrespective of their economic sector.”
“This decision shows that we hear the concerns of businesses and we are responding. Sustainability reporting by companies is critical for the green transition and for transparency towards investors,” said Fine Gael MEP and commissioner for financial services, financial stability and capital markets union Mairead McGuinness.
“In the medium- and long-term standardised reporting requirements means less burden on companies — not more. But we understand that the pace of change can be challenging for many companies,” she said.
Politicians, both in the Republic and the EU, have already come under increasing pressure from businesses and lobbyists ahead of looming elections but global counterparts still expect them to comply with upcoming regulations in a timely manner.
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