With the development of ever more powerful computers and smartphones, the multiplication of connected devices in our offices and homes, and the promises of Artificial Intelligence and 5G, digital technologies have us ever more dreaming of a "dematerialized" economy, freed from the physical limits of the real world.However, the digital sector is becoming increasingly resource-hungry, and not just in terms of fossil fuels. Dependent on raw materials such as copper, gold and lithium, digital technologies also rely on much lesser-known metals such as indium, tantalum and gallium to manufacture the equipment that enables it to exist (computers and smartphones, but also transmission networks and data centers).In this analysis, we explore the question of the sector's resource consumption. More specifically: are there any raw material supply risks for the digital sector ? While we don't expect to come up against geological constraints (i.e., "emptying the reserves") in the next 10 years, other issues are likely to restrict access to the raw materials on which the digital sector depends: competing uses, geopolitical risks, environmental and social risks, and the illusion of recycling.<h3>Context: the strong growth of the digital sector</h3>The digital sector alone accounted for 4% of global greenhouse gas emissions in 2019. With strong growth, the digital sector's carbon footprint could increase 60% by 2040<a class="footnoteLink" href="#footnote-1"><a class="footnoteLink" href="#footnote-1">[1]</a></a>. It also accounts for 4.2% of primary energy consumption and 0.2% of water consumption worldwide<a class="footnoteLink" href="#footnote-2">[2]</a>.But the environmental impact of digital technologies is not limited to greenhouse gas emissions or water consumption. The industry is &nbsp;also dependent on a growing number of critical resources.&nbsp;On average, a smartphone is made up of 50 to 70 chemical elements<a class="footnoteLink" href="#footnote-3">[3]</a>, used in minute quantities for highly precise and complex applications. These elements are essential to achieve the record performances and costs seen today in tech.

Demand has increased not only in volume - but also in diversity

The digital sector contributes to the exponential consumption of raw materials in our economy - particularly that of metals. Between 1980 and 2008, global demand for metals almost doubled (87% increase)<a class="footnoteLink" href="#footnote-4"><a class="footnoteLink" href="#footnote-4">[4]</a></a>. Demand has increased not only in volume - but also in diversity, as shown in Figure 1, which traces the increase in the number of metals used with successive technological evolutions. Between 1980 and 2010, the number of metals used was multiplied by 6, mainly due to the ICT (Information &amp; Communication Technologies) industry. By 2050, to meet projected demand, the quantity of metals required could represent 3 to 10 times current production volumes. This would mean producing more metal over the next 35 years than we have produced since Ancient history<a class="footnoteLink" href="#footnote-5"><a class="footnoteLink" href="#footnote-5">[5]</a></a>.

large_Matieres premieres numerique 1.png

medium_Matieres premieres numerique 1.png

small_Matieres premieres numerique 1.png

thumbnail_Matieres premieres numerique 1.png

Matieres premieres numerique 1.png

Figure 1 - Illustration of the increase in the number of metals used according to technological evolution.

small_Capture d’écran 2023-11-06 à 18.16.24.png

thumbnail_Capture d’écran 2023-11-06 à 18.16.24.png

Capture d’écran 2023-11-06 à 18.16.24.png

Figure 2 - iPhone 6 Composition (in grams)

Faced with this exponential consumption of raw materials, isn't the digital sector at risk of tensions over the raw materials on which it depends ? We explore this question in this article, focusing on a few critical raw materials for the digital sector, and the risks they face (economic, technological, supply, geopolitical, and environmental).<h3>Five critical raw materials for the digital sector</h3>Let's take a closer look at five critical raw materials for the digital industry : indium, gallium, tantalum, neodymium and germanium. By cross-referencing several studies (Bureau de recherches géologiques et minières - BRGM, European Commission, France Stratégie, etc.<a class="footnoteLink" href="#footnote-6">[6]</a>), these five elements stand out as critical for the digital sector, as they are at the crossroads of two factors :<ul><li>Demand : the use of these materials is essential if digital technology is to perform at current technological standards and costs. Alternatives to these materials would, for the most part, increase the production costs of digital equipment.</li><li>Supply : they face supply vulnerabilities, even though they are used almost exclusively in digital applications.</li></ul>

large_Diapo3.png

medium_Diapo3.png

small_Diapo3.png

thumbnail_Diapo3.png

Diapo3.png

Figure 3 - What is a "critical" raw material for the digital industry ?

<h4>Essential uses for the digital sector</h4>In terms of demand, our studied raw materials have a very specific use in user terminals. Although they are present in minute quantities - representing less than 100 mg<a class="footnoteLink" href="#footnote-7">[7]</a> of the total weight of a conventional smartphone - they enable high levels of performance to be achieved, both in terms of quality and cost. They are therefore poorly substitutable, as they have no equivalent in terms of cost and/or quality.&nbsp;

large_Diapo4.png

medium_Diapo4.png

small_Diapo4.png

thumbnail_Diapo4.png

Diapo4.png

Figure 4 - Use of critical raw materials in digital applications and examples of other uses

Figure 3 gives an overview of the five raw materials and their use in the digital sector. Indium, for example, used in the form of tin-doped indium oxide, enables the quality of touch screens and LCDs we have today. Zinc or tin oxides are possible substitutes, but they do not deliver the same performance<a class="footnoteLink" href="#footnote-8">[8]</a>. This is a material with which we interact on a daily basis, without realizing the complexity of its value chain and its environmental impacts (detailed later in this article).Furthermore, these five raw materials are used almost exclusively in the digital sector - which conditions and sizes their demand (the sector accounts for between 30 and 95% of their consumption)<a class="footnoteLink" href="#footnote-9">[9]</a>. With the frantic race to bring out the latest models and the increase in screen size (e.g.: at 31 cm in 2010, the average diagonal of flatscreen TVs is set to increase to 65 inches in 2025<a class="footnoteLink" href="#footnote-10">[10]</a>), the trend shows no sign of slowing down.<h4>Raw materials subject to supply tensions&nbsp;</h4>The value chains for these metals are complex, especially because of the way mining projects operate. These projects span decades and include several phases : mineral exploration to find exploitable reserves, extraction, refining, and manufacturing stages. Our five raw materials face several supply tensions :<ul><li>Co-products or by-products : Like most mining resources, these materials are co- or by-products, substances that are not present in sufficient quantities in the earth's crust to justify mining on their own. Their production therefore depends on the production of other metals. There is no such thing as a mine dedicated to a single material. Only a few main substances, such as copper, iron or zinc, can justify a mine. The existence of co- or by-products ensures economic profitability. For example, indium is produced during the zinc refining stage. However, zinc refineries also depend on other co-products to achieve economic profitability. The mining industry is therefore linked to multiple markets, making them all interdependent. Producing more indium means producing more zinc and co-products, and finding markets for each.</li><li>Production monopoly : The refining of these materials is almost entirely concentrated in China (in 2022, China produced 58% of the world's indium, 98% of gallium and 70% of rare-earth elements)<a class="footnoteLink" href="#footnote-11">[11]</a>. This Chinese monopoly makes our five raw materials vulnerable to geopolitical tensions. It should be noted that China's share of global production of these materials has been partly reduced as a result of the US protectionism implemented by the Trump administration against Chinese products, particularly for rare-earth elements<a class="footnoteLink" href="#footnote-12">[12]</a>.</li><li>Strong social and environmental impacts : In addition to GHG emissions, extraction and refining have a strong impact on environmental and human health. Open-pit mining alters the landscape, the soil and the local hydrological regime. Ore extraction and element separation generate chemical effluents (cyanide, arsenic, lead, sulfates, mercury, etc.)<a class="footnoteLink" href="#footnote-13">[13]</a>,<a class="footnoteLink" href="#footnote-14">[14]</a>. In addition to these materials, which are harmful to biodiversity and human health, the production of digital raw materials generates a colossal quantity of inert waste, resulting from the crushing of rocks<a class="footnoteLink" href="#footnote-15">[15]</a>. As we cross more planetary boundaries, how long will we accept these harmful impacts, which are accelerating with the increased consumption of these raw materials ? Raw materials are therefore subject to transition risks as well<a class="footnoteLink" href="#footnote-16">[16]</a>. This also applies to social issues. A non-negligible proportion of the supply comes from illegal child labor operations<a class="footnoteLink" href="#footnote-17">[17]</a>. In the Democratic Republic of Congo, one of the main producers of Tantalum, armed conflicts over the exploitation of natural resources have been raging for 20 years. How much longer will we accept this exploitation ?</li><li>Virtually zero recycling : Finally, in the face of these raw material supply challenges, recycling is no panacea either. Today, these raw materials are neither recycled nor recyclable. Their end-of-life recycling rates are below 1%<a class="footnoteLink" href="#footnote-18">[18]</a>. The minute, mixed quantities used in terminals prevent efficient recycling methods at viable economic costs. This difficulty in recycling terminals also comes with its share of environmental and social consequences. Some of this digital waste ends up in landfills on the other side of the world. The Agbogbloshie e-waste dump in Ghana is one of the largest in the world<a class="footnoteLink" href="#footnote-19">[19]</a>.</li></ul>

large_Diapo5.png

medium_Diapo5.png

small_Diapo5.png

thumbnail_Diapo5.png

Diapo5.png

Figure 5 – Critical aspects of the value chains

<h4>Sufficiency&nbsp;as a means of action</h4>The current digital consumption model seems unlikely to be sustainable, given the nature of the tensions on raw materials. According to CISCO, the number of terminals connected to an IP address will be three times greater than the world's population in 2023<a class="footnoteLink" href="#footnote-20">[20]</a>. Structural changes will have to be considered to mitigate the sector's impact. With this in mind, several solutions can be considered, starting with user terminals:&nbsp;<ul><li>Influencing demand : Promote rational screen consumption (restrain the increase in the number of screens per person), promote longer lifespans, increase the operational life of applications and software, and encourage the use of refurbished devices rather than buying new ones.</li><li>Influencing supply (less resource-hungry) : Design devices with lower performance levels to reduce the material footprint, design devices that promote recycling at end-of-life.</li></ul>Moreover, this desirable sufficiency is not limited to terminals alone. We also need to question the models of other digital components such as data centers and network infrastructures (deployment of 5G across an entire territory, programmed obsolescence of 2-3G, growth in the number of data centers, etc.).&nbsp;Beyond questioning supply risks, digital technology must stop representing an ideal of conspicuous consumption, which hides the physical and geological realities. This is the paradox of the sector: the promise of digitalization as a means of optimizing other sectors of activity comes up against a lack of awareness of the unsustainable materiality of digital technology.&nbsp;

large_eirik-solheim-mWTOR3Rx8l8-unsplash.jpg

medium_eirik-solheim-mWTOR3Rx8l8-unsplash.jpg

small_eirik-solheim-mWTOR3Rx8l8-unsplash.jpg

thumbnail_eirik-solheim-mWTOR3Rx8l8-unsplash.jpg

eirik-solheim-mWTOR3Rx8l8-unsplash.jpg

Arcep, Pour un numérique soutenable, <a href="https://www.arcep.fr/la-regulation/grands-dossiers-thematiques-transverses/lempreinte-environnementale-du-numerique.html">https://www.arcep.fr/la-regulation/grands-dossiers-thematiques-transverses/lempreinte-environnementale-du-numerique.html</a>, 2020

GreenIT, Empreinte environnementale du numérique mondiale, <a href="https://www.greenit.fr/empreinte-environnementale-du-numerique-mondial/">https://www.greenit.fr/empreinte-environnementale-du-numerique-mondial/</a>

SystExt, Des métaux dans mon smartphone ?, <a href="https://www.systext.org/node/1724">https://www.systext.org/node/1724</a>, 2017

SystExt, Les métaux de la révolution 4.0, <a href="https://www.systext.org/node/1568">https://www.systext.org/node/1568</a>, 2019

Olivier Vidal. Impact de différents scénarios énergétiques sur les matières premières et leur disponibilité future. Annales des mines - Série Responsabilité et environnement, 2020, N°99 (3), pp.19-23. ff10.3917/re1.099.0019ff. ffhal-03426222f

Commission européenne, Critical Raw Materials for Strategic Technologies and Sectors in the E: A Foresight Study; France Stratégie, La consommation de métaux du numérique : un secteur loin d’être dématérialisé, 2020 ; Commission européenne, Critical Raw Materials and the Circular Economy, 2018; ONU, Digital economy growth and mineral resources:&nbsp; Implications for Developing Countries, 2020&nbsp;; The Shift Project, Lean ICT - Pour une sobriété numérique, 2018

Senate, 100 millions de téléphones portables usagés&nbsp;: l’urgence d’une stratégie, 2016

BRGM, L’indium (In) – éléments de criticité, <a href="https://www.mineralinfo.fr/sites/default/files/documents/2020-12/fichecriticiteindium170921.pdf">https://www.mineralinfo.fr/sites/default/files/documents/2020-12/fichecriticiteindium170921.pdf</a>, 2017

<a href="https://lelementarium.fr/">https://lelementarium.fr/</a>

USGS, Mineral Commodity Summaries 2023, <a href="https://pubs.usgs.gov/periodicals/mcs2023/mcs2023.pdf">https://pubs.usgs.gov/periodicals/mcs2023/mcs2023.pdf</a>

Jacques Delors Institute, Le protectionnisme assumé des Etats-Unis, <a href="https://institutdelors.eu/publications/le-protectionnisme-assume-des-etats-unis/">https://institutdelors.eu/publications/le-protectionnisme-assume-des-etats-unis/</a>, 2020

Ademe, Terres rares, énergies renouvelables et stockage d’énergies, <a href="https://librairie.ademe.fr/energies-renouvelables-reseaux-et-stockage/492-terres-rares-energies-renouvelables-et-stockage-d-energies.html">https://librairie.ademe.fr/energies-renouvelables-reseaux-et-stockage/492-terres-rares-energies-renouvelables-et-stockage-d-energies.html</a>, 2020

Environmental Law Alliance Worldwide, Guide pour l’évaluation des EIE de projets miniers, <a href="https://www.elaw.org/files/mining-eia-guidebook/Full%20French%20Guidebook.pdf">https://www.elaw.org/files/mining-eia-guidebook/Full%20French%20Guidebook.pdf</a>, 2010

Of the quantities of material extracted, the proportion recovered in equipment represents a small percentage. As an example, the production of a 300g smartphone requires the extraction of 220kg of material. (source: ADEME, Modélisation et évaluation des impacts environnementaux des produits de consommation et biens d'équipement, 2018). This ratio of 1/7 (220/300) is what is commonly referred to as the "ecological rucksack" or "hidden footprint" of an object, in this case the smartphone.

Transition risks for an organization are defined as "the financial consequences for the company of transforming the economy towards a low-carbon world. To comply with the Paris agreements, organizations must effectively reduce their greenhouse gas emissions. The consequence of this reduction is to call into question their initial business model by putting the decarbonization of their value chain at the heart of their strategy". (<a href="https://www.carbone4.com/article-2types-risques-climatiques">https://www.carbone4.com/article-2types-risques-climatiques</a>); In the case of raw materials, a high environmental impact can be seen as a risk to their long-term use, in a world that is keen to limit the extent to which planetary limits are exceeded.

Le Monde, En finir ou pas avec les supplices du Tantale, <a href="https://www.lemonde.fr/afrique/article/2017/03/25/en-finir-ou-pas-avec-les-supplices-du-tantale_5100708_3212.html">https://www.lemonde.fr/afrique/article/2017/03/25/en-finir-ou-pas-avec-les-supplices-du-tantale_5100708_3212.html</a>, 2017

UNEP, Recycling rates of metal. A status report, 2011

Franceinfo, La décharge de déchets électroniques d’Agbogbloshie, véritable défi économique et environnemental pour le Ghana, <a href="https://www.francetvinfo.fr/monde/afrique/societe-africaine/la-decharge-de-dechets-electroniques-dagbogbloshie-veritable-defi-economique-et-environnemental-pour-le-ghana_3863287.html">https://www.francetvinfo.fr/monde/afrique/societe-africaine/la-decharge-de-dechets-electroniques-dagbogbloshie-veritable-defi-economique-et-environnemental-pour-le-ghana_3863287.html</a>

CISCO, Annual Internet Report (2018-2023), 2020

Materials of the dematerialized:  are there raw material supply risks for companies in the digital sector ?

The year 2023 marks a major change in environmental reporting in Europe, with the arrival of the Corporate Sustainability Reporting Directive (CSRD).The CSRD replaces the previous European climate reporting standard, the Non-Financial Reporting Directive (NFRD), which had been adapted in France to create the DPEF (“Directive de Performance Extra Financière'').The CSRD, adopted by the European Commission at the end of 2022, substantially expands the number of companies covered, as well as the information they will be required to disclose on various environmental and social indicators, including climate. &nbsp;

large_CSRD_artilce1_image1.png

medium_CSRD_artilce1_image1.png

small_CSRD_artilce1_image1.png

thumbnail_CSRD_artilce1_image1.png

CSRD_artilce1_image1.png

This article, written by Carbone 4's Regulatory Expertise team, appears after the publication of the CSRD’s delegated act by the European Commission<a class="footnoteLink" href="#footnote-1">[1]</a>. This delegated act, which specifies the information to be reported, substantially reduces the scope of this law compared to the ambitious standard proposals published by EFRAG<a class="footnoteLink" href="#footnote-2">[2]</a> in November 2022<a class="footnoteLink" href="#footnote-3">[3]</a>. The content of the CSRD are deciphered <a href="https://www.carbone4.com/en/article-csrd-opportunity">in a second article.</a>

This article comes after an amendment by the European Commission, modifying the thresholds and timetables for certain companies (large companies not yet subject to the NFRD and listed SMEs). Adopted by the Commission on October 17, 2023, but not yet final at the time of writing. This amendment is taken into account in this article.

In this first article, we focus on the who and when: which companies will be subject to CSRD in Europe, and by when? We zoom in on French companies.

<h3>1. Who is affected by the CSRD? What changes will take place?&nbsp;&nbsp;</h3>The implementation of the CSRD and its transposition into national laws will shake up the European regulatory landscape in terms of climate reporting. Prior to this new regulation, 11,700 European companies were subject to non-financial reporting obligations. This figure will rise to around 50,000 once the CSRD comes into force (depending on the thresholds adopted)<a class="footnoteLink" href="#footnote-4">[4]</a>. So, who are these new companies or legal entities subject to the regulations? How do these new obligations fit into the regulatory context of EU countries? How can we anticipate these changes? We will examine these questions through the prism of French regulation. As the EU's second largest economy<a class="footnoteLink" href="#footnote-5">[5]</a>, France also has its own particularities in terms of extra-financial obligations, which we will decipher in this article.&nbsp;Application of the CSRD will begin in fiscal 2024 and extend over time. The Council of the European Union, the European Parliament and the European Commission<a class="footnoteLink" href="#footnote-6">[6]</a> have established the following timetable:&nbsp;<ul><li>Declarations in 2025 regarding the 2024 financial year for companies already subject to the NFRD;</li><li>Declarations in 2026 regarding the 2025 financial year for other large companies;</li><li>Declarations in 2027 regarding the 2026 financial year for listed SMEs, with a 2-year deferral option;</li><li>Declarations in 2029 regarding the 2028 financial year for foreign companies with a European subsidiary.</li></ul>The diagram below shows whether a company (or legal entity) is concerned by the CSRD and from when. &nbsp;

large_CSRD_Article1_image2en.png

medium_CSRD_Article1_image2en.png

small_CSRD_Article1_image2en.png

thumbnail_CSRD_Article1_image2en.png

CSRD_Article1_image2en.png

<h3>2. France: pioneer in the publication of extra-financial and climate data by companies</h3>In France, the culture of extra-financial data transparency goes back a long way. Since as early as 2010, Article 75 of the Grenelle II law introduced a tool for measuring and monitoring the greenhouse gas emissions of organizations and local authorities, the Bilan des Émissions de Gaz à Effet de Serre (BEGES). Companies with over 500 employees in mainland France are required to report their direct emissions (scope 1 and 2), and for certain companies, significant indirect emissions<a class="footnoteLink" href="#footnote-7">[7]</a>. France is thus the only country in the world to require reporting of both direct and indirect emissions (Scopes 1, 2 &amp; 3)<a class="footnoteLink" href="#footnote-8">[8]</a>. France is therefore one of the most advanced countries in terms of climate reporting regulations<a class="footnoteLink" href="#footnote-9">[9]</a>. Furthermore, many French and international companies have taken the lead, and not waited for regulations to start sharing their climate strategies.In 2017, France transposed the European NFRD into national law through the DPEF (Déclaration de Performance Extra Financière). The transposition includes the obligation to report Scope 3 greenhouse gas emissions, thus going beyond the requirements of the initial European directive, the NFRD. Today, the CSRD, which replaces the NFRD, will further flesh out and structure climate reporting, and significantly increase the number of companies concerned.&nbsp;The diagram below describes the differences and complementarities in application between the BEGES<a class="footnoteLink" href="#footnote-10">[10]</a> (reporting standard in force in France, in green) and the upcoming&nbsp; CSRD, over the next few years (dates in blue).&nbsp; While some 5,000 private and public-sector companies are currently required to publish a regulatory BEGES, it is estimated that a total of some 8,000 companies will be subject to reporting following the introduction of the CSRD and its transposition into French law (variable depending on the final company thresholds adopted)<a class="footnoteLink" href="#footnote-11">[11]</a>. &nbsp;

large_CSRD_Artcile1_image3en.png

medium_CSRD_Artcile1_image3en.png

small_CSRD_Artcile1_image3en.png

thumbnail_CSRD_Artcile1_image3en.png

CSRD_Artcile1_image3en.png

In conclusion, the new European climate reporting standard, CSRD or "Corporate Sustainability Reporting Directive", not only brings significant changes to the information to be disclosed, but also extends the number of companies required to share (and therefore collect) their climate data.&nbsp;According to the adopted thresholds, around 50,000 companies in Europe will have to disclose climate information, compared to around 12,000 at present.&nbsp;Our next article will focus on the content of the standards - analyzing the nature of the substantive changes brought about by the CSRD, and particularly on the climate aspect. Indeed, European companies will be required to better understand their impact on the climate, as well as the impact that climate change will have on their operations. &nbsp;

large_alexandre-lallemand-Pcs3mOL14Sk-unsplash.jpg

medium_alexandre-lallemand-Pcs3mOL14Sk-unsplash.jpg

small_alexandre-lallemand-Pcs3mOL14Sk-unsplash.jpg

thumbnail_alexandre-lallemand-Pcs3mOL14Sk-unsplash.jpg

alexandre-lallemand-Pcs3mOL14Sk-unsplash.jpg

<a href="https://finance.ec.europa.eu/regulation-and-supervision/financial-services-legislation/implementing-and-delegated-acts/corporate-sustainability-reporting-directive_en">European Commission. (2023, 31 juillet). Implementing and delegated acts - CSRD.</a>

European Financial Reporting Advisory Group

<a href="https://www.efrag.org/lab6">EFRAG. (2022, novembre). First Set of draft ESRS</a>

<a href="https://www.europarl.europa.eu/news/en/press-room/20221107IPR49611/sustainable-economy-parliament-adopts-new-reporting-rules-for-multinationals#:~:text=New%20EU%20sustainability%20standards&amp;text=The%20CSRD%20introduces%20more%20detailed,of%20standards%20by%20June%202023.">Yasmina Yakimova. (2022, 10 novembre). &nbsp;Sustainable economy: Parliament adopts new reporting rules for multinationals. European Parliament</a>

<a href="https://donnees.banquemondiale.org/indicator/NY.GDP.MKTP.CD?locations=EU&amp;most_recent_value_desc=true">La Banque Mondiale. PIB ($ US courants) - European Union | Data</a>

&nbsp;<a href="https://www.europarl.europa.eu/legislative-train/theme-a-european-green-deal/file-review-of-the-non-financial-reporting-directive">European Parliament. Corporate Sustainability Reporting Directive (CSRD) | Legislative Train Schedule</a>

<a href="https://www.ecologie.gouv.fr/sites/default/files/methodo_BEGES_decli_07.pdf">Ministère de la transition écologique, ADEME. (2022, juillet). Méthode pour la réalisation des bilans d’émissions de gaz à effet de serre.</a>

Scope 1: direct greenhouse gas emissions | Scope 2: indirect greenhouse gas emissions linked to energy consumption | Scope 3: indirect greenhouse gas emissions

<a href="https://www.carbone4.com/analyse-reporting-carbone-entreprises-faut-il-augmenter-les-exigences">Juliette Decq et Hélène Chauviré. (2022, 9 mai). Crise des approvisionnements et du climat. Carbone 4</a>

&nbsp;Ministère de la transition écologique, « Méthode pour la réalisation des bilans d’émissions de gaz à effet de serre ».

&nbsp;Clarelis, « La directive CSRD »

Corporate Sustainability Reporting Directive (CSRD): Who is affected, and when?

The European Union is stepping up its efforts on environmental reporting with its new Corporate Sustainability Reporting Directive (CSRD). Adopted at the end of 2022, this demanding regulation will come into force in 2024, with the first reporting due at the beginning of 2025 for concerned companies<a href="https://www.carbone4.com/en/article-csrd-who-is-affected">, as we mentioned in our first article on the subject.</a>In this article, Carbone 4 takes a closer look at the regulation, to help you make sense of it and understand the benefits of following the CSRD. In particular<ul><li>What is the CSRD?</li><li>What does the CSRD require? Particularly when it comes to the climate!</li><li>What do companies need to do to prepare? What's in it for them?</li></ul>&nbsp;While many companies haven’t waited for regulations to come into force to communicate on their environmental strategy, this new legal obligation will make reporting an unavoidable requirement.&nbsp;<h3>Background: What is the CSRD? Why does it exist?</h3>The CSRD requires companies to share information on their risks, opportunities and impacts on various environmental (climate, biodiversity, water, etc.) and social (employees, workers in the value chain) issues.&nbsp;Compared with previous regulations <a class="footnoteLink" href="#footnote-1">[1]</a>, the CSRD concerns a larger number of companies, and requires more detailed and comprehensive reporting: it specifies precise information and indicators to be disclosed, on a larger number of subjects.&nbsp;The first objective of the CSRD is to help external stakeholders (notably investors, but also customers and the general public) gain a clearer understanding of the risks faced by companies, and to compare companies with each other in terms of their vulnerability and readiness for the transition. This information enables investors to protect themselves against the risk of <a href="https://www.lse.ac.uk/granthaminstitute/explainers/what-are-stranded-assets/">"stranded assets".</a>&nbsp;The CSRD also aims to create a more environmentally-virtuous economy. By requesting information on the environmental impact of companies, the regulation aims to create favorable conditions for good performers (i.e. companies that are less emissive and more compatible with a low-carbon world - or prepared to be). It should, in reverse, complicate conditions for low performers, for example through more costly access to capital or debt. &nbsp;In simple terms, the CSRD uses a double materiality approach to :<ul><li>understand the company's impact on planetary limits (e.g. climate, biodiversity, water) and social issues;</li><li>understand and "monetize" the impact of ecological upheavals on the economic sustainability of companies.</li></ul>Another major benefit of CSRD is that it enables companies to better understand their risks and opportunities with regard to environmental and social issues, and thus better prepare for them.&nbsp;&nbsp;<h3>What does the CSRD require? In general and on climate</h3>The CSRD is comprised of 12 standards: the ESRS (European Sustainability Reporting Standard)<a class="footnoteLink" href="#footnote-2">[2]</a>. These include :<ul><li>2 transversal standards (mandatory)</li><li>10 thematic standards on various sustainability topics (conditionally mandatory)</li><li>sector-specific standards (to come) &nbsp;</li></ul>

large_CSRD_Article2_image4.png

medium_CSRD_Article2_image4.png

small_CSRD_Article2_image4.png

thumbnail_CSRD_Article2_image4.png

CSRD_Article2_image4.png

CSRD Content: European Sustainability Reporting Standards (ESRS)

All companies subject to the CSRD must report on the two mandatory cross-functional topics, and must identify which of the 10 thematic topics they are concerned with. To do this, companies are asked to identify the double materiality of each of the 10 topics on their business: i.e. whether they have an impact on the topic, and/or whether it is likely to have a financial impact on the company. It should be noted that, for the climate topic, companies must justify their finding of non-materiality. &nbsp;

large_CSRD_Article2_image2.png

medium_CSRD_Article2_image2.png

small_CSRD_Article2_image2.png

thumbnail_CSRD_Article2_image2.png

CSRD_Article2_image2.png

If we zoom in on the climate topic, the CSRD asks companies to understand and report on their governance, strategy, risks and opportunities, and metrics in the face of climate change. These rigorous demands are an opportunity for any economic player to ask themselves vital questions. What is the company’s relevance and likelihood of durability in a world already facing the physical impacts of climate change; and within a society seeking to rapidly mitigate its environmental impact to maintain a habitable world.&nbsp;An overview of the important information requested by the CSRD on climate is presented below. &nbsp;

large_Article2_csrd_image5.png

medium_Article2_csrd_image5.png

small_Article2_csrd_image5.png

thumbnail_Article2_csrd_image5.png

Article2_csrd_image5.png

The content of the CSRD is largely inspired by the philosophy of the TCFD <a class="footnoteLink" href="#footnote-3">[3]</a> and incorporates best practices for defining a climate strategy, on which Carbone 4 has relied for many years to support its corporate clients. Europe has sought to harmonize reporting requirements to a large extent with existing standards, including the TCFD but also the ISSB <a class="footnoteLink" href="#footnote-4">[4]</a>. The main difference lies not in content, but in the dual materiality approach: the ISSB recommends an analysis of simple materiality (i.e., financial materiality).&nbsp;<h3>How to prepare?&nbsp;</h3>To respond to the CSRD on climate, companies need to :&nbsp;<ul><li>Better understand their current impact and dependence on greenhouse gas emissions, by carrying out a carbon footprint,</li><li>Understand how <a href="https://www.carbone4.com/en/publication-strategy-scenario-analysis">to adapt their business model </a>for a low-carbon world, by projecting themselves into trajectories that limit temperature rise to 2°C, and</li><li>Identify their physical risks and adaptation needs in the face of current and future climate change.</li></ul>&nbsp;While the CSRD requires transparency, and guides reflection on the definition of a climate strategy, the relevance, ambition and success of this strategy depends heavily on the level of engagement within the company. Responding to the CSRD is therefore not just another extra-financial reporting gesture, but an opportunity to re-define one's strategy in the face of climate change, rallying management teams, in-house climate experts, as well as operational teams trained on these issues.&nbsp;The CSRD can therefore be seen either as an additional constraint for economic players (and therefore an additional transition risk), or as a fantastic tool to improve the relevance of their corporate strategy and make it compatible with a low-carbon world. &nbsp;

large_wind-3283496_1280.jpg

medium_wind-3283496_1280.jpg

small_wind-3283496_1280.jpg

thumbnail_wind-3283496_1280.jpg

wind-3283496_1280.jpg

NFRD, Non-Financial Reporting Directive, adoptée en 2018.

The CSRD is the framework directive that obliges companies to report, and the ESRS are the standards that define the 'what', i.e. what to report.

Task Force on Climate-related Disclosure

International Sustainability Standards Board

The CSRD: an opportunity to build a robust environmental strategy

Luce is a senior consultant at Carbone 4 in the climate change mitigation practice. Within the firm, she develops carbon footprints and action plans for companies in various industries.Luce has 5 years of experience in consulting. Prior to Carbone 4, she specialized in sustainable mobility and energy efficiency in the consulting firm: Dunsky Energy + Climate. She worked mainly with governments (ministries, regions, and municipalities) and energy providers on the analysis and development of energy-climate programs in North America.Previously, Luce worked for 2 years in KPMG Canada’s management consulting practice. She contributed to assignments in various industries (aviation, financial services, insurance), including in change management.Luce is also a certified mediator, specialized in conflict resolution and non-violent communication.&nbsp;

Luce Engérant

Education

Areas of expertise

Resources by this author

Join us