In 2019, the EU unveiled the European Green Deal, targeting a 55 percent reduction in emissions by 2030.
As part of this effort, two regulations that Parliament introduced in 2023 were: the Corporate Sustainability Reporting Directive (CSRD) and the Carbon Border Adjustment Mechanism (CBAM).
CSRD nudges companies to disclose information about their climate risks and opportunities that both the market and public can use to make informed decisions.
CBAM, on the other hand, guarantees that European companies can compete effectively against imports from nations with less rigorous carbon pricing systems.
It does this by modifying prices based on the carbon emitted during production of carbon-intensive goods imported into the EU. Also, these CBAM adjustments align with the EU's carbon market price.
Below, we’ll delve into the details of these regulations, how they’ll impact Asian companies with EU ties, and what you can do now to prepare.
What is CSRD?
The Corporate Sustainability Reporting Directive (CSRD) aims to standardize sustainability reporting across the EU, enhance transparency and improve accountability.
It builds upon existing ESG (Environmental, Social, and Governance) reporting frameworks like TCFD/ISSB and GRI, combining retrospective and forward-looking perspectives on sustainability.
A key element of CSRD is its focus on "double materiality." This approach considers a company's impact on the environment and communities, while also evaluating how the business will be affected financially by broader economy-wide actions related to sustainability.
Who does CSRD impact?
CSRD affects companies that operate within the EU, and requires annual reporting.
Across APAC in particular, there's a significant number of companies that have operations within the EU (e.g., subsidiaries and operational facilities), and will have to comply with CSRD if they meet the reporting thresholds.
How can I prepare for CSRD?
Preparation for CSRD mainly involves improving data quality and viewing compliance as a strategic opportunity for supply chain engagement and carbon reduction.
Companies must have a good understanding of their baseline position, impacts and anticipated sustainability performance.
For organizations to gain the most comprehensive insights into their current and future standing, it's crucial that they evaluate their existing data landscape, identify gaps to achieving meaningful data quality for informed decision-making, and anticipate future needs.
Also, their projected sustainability performance needs to be evaluated in light of expected sustainability policies and shifts in the wider economy and stakeholder attitudes.
The goal of this reporting is to indicate the company's positioning within an economic environment that continues to evolve toward decarbonization and sustainability.
Also, it's key to remember that the primary benefit of any type of sustainability reporting lies in the action it inspires, not just in meeting regulatory requirements. It encourages companies to critically assess both present and future performance, thereby enabling informed business decisions and enhancing attractiveness to potential investors.
At Unravel Carbon, some of the solutions we offer companies to help comply with CSRD include: emissions measurement, hotspot analysis, inventory assessments, supplier engagement, decarbonization strategies, and performance tracking.
What is CBAM?
The Carbon Border Adjustment Mechanism (CBAM)’s goals are to curb carbon leakage, and ensure that imported goods meet EU carbon pricing standards.
It does this by influencing the pricing of carbon-intensive materials that are imported into the EU—effectively through the introduction of a tariff.
When an imported item in a specific sector comes from a jurisdiction that doesn’t have a carbon pricing scheme, or has one that is weaker than the EU Emissions Trading System scheme, a tariff is applied to provide equivalency in pricing.
This ensures that EU manufacturers have a level playing field in which to compete, and should minimize incidences of EU manufacturers moving operations overseas to low-policy environments.
Who does CBAM impact?
CBAM affects companies that export products to the EU (and may affect those that import to the EU).
CBAM reports must be filed quarterly, which means that organizations should focus on being in regular contact with their suppliers regarding relevant data updates.
At the moment, these are the product categories that CBAM covers: cement, iron and steel, fertilizer, aluminium, electricity imports and hydrogen.
Though the exact schedule is yet to be announced, this list will likely expand to 10-12 different product categories in the near future.
How can I prepare for CBAM?
For Asian companies with EU ties, effective preparation for CBAM involves transparent emissions tracking, supplier engagement for data collection, and awareness of tariff impacts.
Without access to sound data, companies could mistakenly report producing more carbon than they actually are, and end up paying unwarranted penalties as a result.
For importers, we recommend engaging with your suppliers as soon as possible, as receiving the relevant data is often a time-intensive process.
Another key aspect of effective supplier engagement is segmentation. This means determining which suppliers have the biggest impact on you in light of CBAM, and prioritizing your collaborations with them.
For suppliers, we recommend working on getting transparency of your carbon footprint as soon as possible.
If you’re seen as a proactive partner on CBAM and have a carbon reduction roadmap in place, it’ll be much easier to continue selling to EU-based companies going forward.
At Unravel Carbon, we built our Supplier Module to streamline this type of supplier engagement, particularly for the collection of emissions data.
Conclusion
For companies across APAC, the key takeaway is that CSRD and CBAM aim to enhance sustainability transparency and incentivize carbon reduction strategies among businesses operating within or trading with the EU.
As a result of these regulations, we expect that EU companies will continue to favor suppliers who can provide sustainability data that’s both high-quality and audited.
Working together, importers and suppliers can take steps now to ensure that they’re well-prepared for the major business shifts that are on the horizon.
Interested in learning more about how Unravel Carbon can help you prepare for CSRD and CBAM? Get in touch with us here.
Watch our full discussion with RESET Carbon on the impacts of CSRD and CBAM below:
