Legislation update
7 minute read
In recent years, the fashion industry has faced increasing scrutiny over it's environmental and social impact. Traditional business models often lack transparency, with supply chains shrouded in secrecy and sustainability efforts often more rhetoric than reality. However, the era of “supplied by supplier” and opaque operations is coming to an end. A new wave of regulations, particularly under the EU Green Deal, is pushing companies towards more sustainable and transparent practices.
This article delves into two key regulations at the forefront of this transformation: the EU Taxonomy and the Corporate Sustainability Reporting Directive (CSRD).
EU Green Deal: A Catalyst for Change
The EU Green Deal is a comprehensive plan aimed at making the EU's economy sustainable by turning climate and environmental challenges into opportunities. One of its primary goals is to achieve net zero carbon emissions by 2050, which requires significant changes across all sectors, including fashion. To ensure this, the EU is introducing stringent rules that will compel companies to adopt more transparent and sustainable business practices. These rules are not just about compliance but also about fostering fairer and more sustainable growth within society.
EU Legislation Overview: Navigating the Implications
Staying informed about the various legislations impacting the European market is crucial for ensuring your business remains aligned with the evolving regulatory landscape. This overview is particularly important given the varying impact these laws have on companies of different sizes. “This is what we see companies struggling with the most—keeping track of it all,” says Anja Padget, Head of ESG & Communications. The so-called “tsunami” of legislation is real, and it’s creating significant challenges, especially for those in the fashion design industry. The sheer volume and complexity of these regulations can be overwhelming.
These regulations are interconnected, reinforcing each other to create a comprehensive framework. On one hand, there are reporting regulations like the CSRD and the EU Taxonomy, which focus on transparency and disclosure. On the other hand, there are the "acting" directives, which dictate the specific actions companies need to take. The new legislation not only imposes reporting requirements but also drives companies towards concrete actions.
The EU’s goal is clear: to push companies toward better practices and facilitate a smooth transition to sustainability. To achieve this, they’ve set three overarching targets, all of which require businesses to integrate these necessary actions into their core strategies.
The EU Taxonomy: Defining Sustainable Activities
The EU Taxonomy is a classification system that establishes a list of environmentally sustainable economic activities. For the fashion industry, this means a clear framework for determining whether a company's activities align with the EU’s environmental objectives, such as climate change mitigation and adaptation, the transition to a circular economy, and the protection of ecosystems.
Under the EU Taxonomy, companies are required to assess and disclose the environmental impact of their activities. This includes evaluating the sustainability of their entire supply chain—from raw material sourcing to production processes, and even the lifecycle of the products they produce. This level of scrutiny is unprecedented in the fashion industry, where supply chains are notoriously complex and often opaque.
The EU Taxonomy Regulation is a classification system that provides a common, standardized EU language for sustainable activities. Its purpose is to promote green investments and prevent greenwashing, thereby directing capital towards sustainable solutions.
In addition to the classification system, the regulation imposes reporting requirements on large publicly listed non-financial companies with more that 500 employees regarding the sustainability of the economic activities.
Corporate Sustainability Reporting Directive (CSRD): Enhancing Transparency
The CSRD builds upon the existing Non-Financial Reporting Directive (NFRD) but significantly expands its scope and depth. While the NFRD required only large public-interest companies to report on non-financial issues, the CSRD extends this requirement to a broader range of companies, including listed SMEs in high-risk sectors like fashion.
Under the CSRD, companies must report on a wide array of sustainability factors, including environmental, social, and governance (ESG) metrics. This not only involves tracking carbon emissions and resource usage, but also looking into labor practices, human rights issues, and supply chain transparency. Moreover, the CSRD mandates that reported data be audited, ensuring that the information provided is accurate and reliable.
The CSRD reporting shall be presented as a separate, coherent section of the management report. The reporting shall cover the three ESG areas: Environmental, Social and Governance. The following shall be disclosed in the management report, and shall cover both the company’s own activities and the upstream and downstream value chain.
Strategy and Business Model
Include aspects such as stakeholder engagement, strategy fit with climate targets (Paris agreement), and a description of sustainability policies.
Metrics and Targets
Set up sustainability related targets and monitor progress made towards achieving them. Must include absolute targets for GHG emission reduction by at least 2030 and 2050.
Governance - Board Oversight, Audit Comittee and Management Roles
Describe the role and competencies of the administrative, management and supervisory bodies with regards to sustainability, and any related incentive schemes for management.
Material Sustainability Impacts, Risks and Opportunities and Their Management
Describe the sustainability risks and opportunities and the way they are managed to build resilience, based on a Double Materiality Assessment covering the full value chain perspective.
Due Diligence
Include the due diligence process implemented with regard to sustainability matters to identify and address both actual and potential negative impacts.
Methodology
For identification of material ESG topics (short, medium and long term) in the double materiality process, and accounting practices used.
Assurance Requirements
Limited assurance of the reported information is required.
The Trickle-Down Effect
Even if your company isn’t directly impacted by the new regulations, many of your partners and clients are or will be. We're all part of someone’s value chain, which means that the demands for data and transparency will inevitably be passed down. This is already happening—companies are adapting, and we’re seeing the first signs of this shift. Larger companies are starting to send out extensive spreadsheets to their smaller suppliers, requesting detailed information and data to create transparency and mitigate risks.
This push for data is closely tied to the requirements of the Corporate Sustainability Due Diligence Directive (CSDDD). Larger companies must demonstrate that they’ve performed the necessary due diligence to manage risks within their value chain. To meet these obligations, they rely heavily on gathering information from their suppliers. As a result, they are distributing these detailed data requests throughout their networks, seeking to gather as many data points as possible.
This new reality means that your supply chain partners become crucial players in providing the necessary data. Their cooperation is essential to navigating the significant changes the textile industry is currently undergoing. Success in this new regulatory landscape will depend on the ability of every link in the chain to adapt and provide the required transparency.
Implications for the Fashion Industry
The introduction of the EU Taxonomy and CSRD marks a significant shift in how the fashion industry will operate moving forward. Companies can no longer afford to take a passive approach to sustainability. Instead, they must actively monitor, collect, share, and report data on their sustainability practices. This transparency is not just a regulatory requirement but a competitive advantage in a market increasingly driven by consumer demand for ethical and sustainable products.
Moreover, compliance with these regulations will require fashion companies to rethink their entire business model. They will need to build more resilient and transparent supply chains, invest in sustainable materials and processes, and adopt circular economy principles. The costs associated with these changes may be significant, but the long-term benefits, including enhanced reputation, customer loyalty, and alignment with global sustainability goals, will outweigh the initial investment.