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[Textile Industry] Corporate Sustainability Reporting Directive (CSRD) for fashion, apparel and textile brands

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The European Commission has introduced a swath of regulations and directives intended to combat climate change. In addition to requiring many companies to alter their business practices, these regulations come with enhanced environmental reporting requirements. For an overview of all European textile regulations read this article and check out our textile regulations hub. 

For fashion and textile brands, the  Corporate Sustainability Reporting Directive (CSRD) will have a major impact.

Let’s look at who’s affected by the CSRD, what your brand will need to report on, and the biggest challenges (and opportunities) that lie ahead.

 What is the Corporate Sustainability Reporting Directive?

As part of the European Green Deal, the CSRD will standardize ESG (environmental, sustainability, and governance) reporting within the EU. By requiring regular disclosures on environmental and social matters, the CSRD aims to help investors, consumers, and other stakeholders understand and compare the sustainability performance of companies.

 You may already be aware of the Non-Financial Reporting Directive (NFRD), which introduced similar reporting requirements in the EU. These were deemed insufficient, and in 2021, the CSRD replaced and expanded the reporting requirements set in place by the NFRD.  

 The first CSRD reports will be due in January 2025, covering the 2024 financial year. See a full breakdown of who is required to report and when in the timeline below.

 But first…

 Who does the CSRD affect?

The NSRD covered approximately 11,700 companies and other entities across the EU. Once fully implemented, the CSRD will affect more than triple the number of companies as before. Fortunately for many, the European Commission recently adjusted the category sizes by 25% due to inflation. Companies responsible for CSRD reporting will now include:

  • Companies that are already required to complete NFRD reporting
  • Large companies that meet two of the three criteria:
    • More than 250 employees
    • More than €50M turnover
    • More than €25M in total assets
  • Medium Enterprises that meet one of the following criteria:
    • Less than or equal to 250 employees
    • Less than or equal to €50M turnover
    • Less than or equal to €25M in total assets
  • Small Enterprises (but not micro-enterprises) that meet one of the below criteria:
    • Less than or equal to 50 employees
    • Less than or equal to €10M turnover
    • Less than or equal to €5M in total assets
  • Non-European companies with branches of subsidiaries in the EU

 What is the timeline for CSRD reporting?

For many companies, the staggered deadline for CSRD reporting will enable them to implement carbon accounting and life cycle assessment tools and procedures in advance.  

The implementation of CSRD reporting will be released in four phases:

  • Phase 1, 2025: European and non-European companies currently subject to the NFRD will report on the 2024 fiscal year
  • Phase 2, 2026: Large companies (both European and non-European) will report on the 2025 fiscal year
  • Phase 3, 2027: Listed Small and Medium Enterprises (SMEs) will report on the 2026 fiscal year
  • Phase 4, 2028: Non-European companies with branches or subsidiaries in the EU will report on the 2027 fiscal year

It’s also worth noting that France recently became the first EU member state to transpose the CSRD into its national law. All member states will be required to do the same by July 2024.

The sector-specific requirements developed by EFRAG will be delayed by two years. This means that they will be published in 2026, instead of 2024.

Tip: If you are an SME, you might think that 2027 is still very far in the future, but remember: you will need to report on the 2026 fiscal year. That means, you must have all your systems setup and your data available by the end of 2025. When you put it that way, 2027 isn’t that far away! Connect with the Carbonfact team to learn how we can help your business prepare for CSRD reporting.

CSRD Vis2 

What will fashion and textile brands need to report on?

The CSRD establishes a baseline of ESG reporting for all companies using the 12 European Sustainability Reporting Standards (ESRS). We’ve condensed these into four groups: Cross-cutting, Environment, Social, and Governance.

CSRD Vis1

  • Cross-cutting, ESRS 1 & ESRS 2: These two standards encompass General Requirements and General Disclosures, which “cross-cut” different sectors and industries. ESRS 1 establishes general principles and core elements for sustainability reporting, while ESRS 2 focuses on sector-specific disclosure requirements for the unique characteristics of different industries.

    With a focus on climate reporting, the ESRS 1 stipulates that companies share their Scope 1, 2, and 3 emissions. On top of that, companies will be required to publish their prevention and mitigation strategies, as well as targets for emissions reductions. When reporting on greenhouse gas emissions, companies will need to follow the guidance and requirements provided by the GHG Protocol Corporate Standard.

    ESRS 1 also introduces the double materiality assessment, which emphasizes the consideration of both the external impacts of an organization’s activities on the environment and society, and the internal impacts of sustainability factors on the organization's financial performance. Double materiality assessments will present a major change for many fashion and textile brands, so we’ll explore this in greater detail below.  
  • Environment, ESRS E1-E5: These five standards require companies to disclose information on greenhouse gas emissions, air and water pollution, and impacts to biodiversity. The ESRS environmental standards also dig into resource usage and circularity. Remember, this is across the entire supply chain, so you’ll need to think about everything from where materials are sourced to end-of-life for each product.
  • Social, ESRS S1-S4: ESRS S1 to S4 represent the social indicators within the European Sustainability Reporting Standards, offering a structured approach for organizations to report on their social and human rights performance. These provide information on social matters, including employee-related aspects, human rights, and diversity policies. This includes company employees as well as workers across the value chain.
  • Governance, G1: The governance standard emphasizes corporate governance, including structures, processes, and policies that influence decision-making within an organization. It encourages transparency and accountability in disclosing information related to governance structures, the composition of boards, and measures taken to ensure ethical and responsible business practices.

    Companies will be asked to describe their business model and how sustainability considerations are integrated into their strategy. There is also a requirement to report on how the company identifies and manages sustainability-related risks.

Finally, the EU plans to adopt sector-specific reporting requirements and we anticipate textiles to be among them. Currently, the EU has proposed moving the adoption of these standards from summer 2024 to summer 2026.

ESRS Reporting framework and methodology

Which reporting standard can I use to comply with the CSRD?

  • Focus on carbon reporting: The ESRS E1/ Climate Change standard stipulates that companies must share their absolute emissions in scope 1, 2 and 3 (absolute value and intensity if deemed relevant), as well as their strategy for preventing, mitigating or remedying their impact (including identifying their decarbonization levers). They will also be required to publish their emission reduction targets and their actual progress against these targets.
  • Scope: The regulation provides for the publication of non-financial information in accordance with 12 standards (ESRS or European Sustainability Reporting Standards) developed by EFRAG (European Financial Reporting Advisory Group). In addition to the Climate Standard (ESRS E1) and the publication of Scope 1, 2, and 3 emissions information, the CSRD provides for the publication of information relating to water, pollution, biodiversity, and circularity, as well as social information concerning workers and consumers. EFRAG will also be developing specific standards for the most impacting industries, including textiles.
  • There is in the ESRS E1 a clear reference to GHG protocol as one of the approaches that can be used.

What are the biggest challenges (and opportunities) presented by the CSRD?

The CSRD presents challenges for businesses in terms of increased reporting obligations and the need for robust data collection systems. That said, it simultaneously offers opportunities for fostering transparency, aligning corporate strategies with sustainable practices, and enhancing stakeholder trust. For fashion and textile brands, this includes:

  • Double materiality: This encompasses both impact materiality, referring to the effects on people and the environment (e.g. carbon emissions), and financial materiality (e.g. cash flow), which pertains to how sustainability issues financially impact the business undertaking. It assesses how business actions affect or may affect sustainability and financial aspects. This is a new reporting requirement presented by the CSRD and may be more complex and strenuous for companies. 

    Simply explained, for each of the twelve categories in the ESRS, companies will need to conduct a materiality assessment, determining what data points are relevant (i.e., “material). If not relevant—or material—companies will not be required to report on them.

    That said, EFRAG proposed several mandatory materiality reporting requirements, including the cross-cutting standard in General Disclosures from ESRS 2 and the climate standard, which means that any company has to report on them.
  • Targets: Beyond disclosing ESG policies and initiatives, the Corporate Sustainability Reporting Directive mandates organizations to establish targets, choose a baseline, and report their progress in achieving these specified objectives.
  • Audit assurance requirement: The CSRD introduces an audit assurance mandate for its reporting. This begins with limited assurance in 2026, followed by reasonable assurance two years later. While this is a rigorous undertaking for many companies, the end result will help curb greenwashing and ensure ESG reporting meets the same standards as financial reporting.

 How can my company prepare for CSRD reporting requirements? 

CSRD reporting deadlines are around the corner, with thousands of companies already obligated to submit reports on the 2024 fiscal year. It’s essential that fashion and textile brands of all sizes start performing their first full-scope Carbon Accounting.

We recommend:

  1. Getting up to speed with the ESRS reporting requirements. The twelve new standards will impact every company differently. Fully understanding how the CSRD affects your business ensures you can implement new reporting procedures and source the necessary data to remain compliant.
  2. Conducting a materiality assessment. As mentioned above, double materiality is a new reporting requirement, which will likely present unforeseen challenges for many companies. The first step in a materiality assessment is identifying what data points are considered “material” and will need to be reported on.
  3. Updating business and reporting procedures now. Following a materiality assessment, companies will need to ensure they have the data, processes, and expertise to report on topics that may be new to them, such as biodiversity or the circular economy. This includes preparing for the audit assurance requirement in 2026.

As mentioned above, even if your company’s reporting deadline isn’t until 2026 or 2027, you will need to begin tracking this data within the next two years.

How can Carbonfact help your business comply?

Carbonfact is a CSRD Reporting Software tailored to fashion and textile brands. Our solution helps brands and suppliers track, measure, and report in accordance with the ESRS, ensuring they can accurately report on the CSRD. Because our team specializes in the fashion and textile industries, we are uniquely positioned to help companies navigate new EU and U.S. regulations around environmental sustainability.  

Not only does Carbonfact help apparel companies stay compliant and report their environmental footprint, but we also minimize your manual effort with our intelligent tools such as automated data collection, “smart filling” to overcome data gaps, and real-time life cycle assessments to understand and respond to challenges at the moment.

 


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