CSRD & CBAM: The Impact of the Shifting Regulatory Landscape on Asian Suppliers
The focus of the Corporate Sustainability Reporting Directive (CSRD) and the Carbon Border Adjustment Mechanism (CBAM) often lies on European companies. However, the impact of the shifting regulatory landscape is also felt further afield and suppliers in Asia need to act quickly to get (and stay) ahead.
Shift in reporting requirements: The Corporate Sustainability Reporting Directive (CSRD)
The CSRD is a new EU regulation which bundles and modernizes the rules regarding social and environmental disclosures required from specific EU companies. Enforced in 2023, it requires companies to consider not only the financial materiality of their activities, but also their broader environmental and social impacts. Under the framework they must disclose external impacts (such as climate change impacts) as well as internal contributions (how their business operations affect people and planet) — a concept referred to as ‘double materiality.’
Recent change to CSRD broadens companies’ reporting obligations
While in the past it was larger, mostly listed companies that had to provide non-financial reports, the update to the regulation widens the net of companies (including SMEs) obligated to comply.
As part of the reporting obligations, companies must achieve transparency regarding their own emissions as well as those of their supply chain.
Recent change to CSRD broadens companies’ reporting obligations
While in the past it was larger, mostly listed companies that had to provide non-financial reports, the update to the regulation widens the net of companies (including SMEs) obligated to comply.
As part of the reporting obligations, companies must achieve transparency regarding their own emissions as well as those of their supply chain.
Carbon pricing policy: Carbon Border Adjustment Mechanism (CBAM)
While CSRD is a reporting directive, CBAM is a EU mechanism aimed at reducing carbon leakage (the outsourcing of production outside of the EU due to lower climate policy standards or carbon pricing). Its objective is to ensure that the carbon price of imports is equivalent to the carbon price of domestic production, and it works by enforcing EU importers to declare the embedded carbon of a specific product and retire/ purchase CBAM certificates based on that figure. The price of CBAM certificates will be determined based on weekly average of the EU ETS allowances (EUR/ton).
Did you know?
Carbon prices paid during the process of production (i.e. outside of the EU) can be deducted.
CBAM impacts Asian suppliers on three key fronts
Asian suppliers exporting to EU clients should expect to be prepared for the following:
1. Increased requirements for carbon accounting and disclosure.
2. Potential additional costs for carbon-intensive products. Why? Products imported into the EU with a higher emission footprint than the European equivalent will successively be hit by a cost premium. This can lead to a competitive disadvantage for suppliers in Asia because the emission footprint of their products is usually higher than those produced in the EU.
3. Higher European demand for low carbon-intensive alternatives (in an effort to keep costs down).
Implementation timeline: Carbon-intensive goods targeted in first phase
CBAM implementation will be rolled-out in waves. In the first phase, CBAM will only apply to goods with a high risk of carbon leakage: iron and steel, cement, fertiliser, aluminium, hydrogen and electricity. The implementation timeline includes a transitional period from 2023 to the end of 2025, which requires all CBAM reporting requirements for EU importers, though without any financial adjustment. From 2026 onwards, EU importers need to buy and retire CBAM certificates and have full reporting obligations. The increase of CBAM coverage will gradually increase to 100% by 2033, coinciding with the phase-out of the free allocation of ETS allowances and extending to sectors aligned with the Emission Trading Schemes (ETS) roll-out.
Our 4 top steps for navigating CBAM
In the short- and mid-term, Asian suppliers should look to do the following:
1. Get your carbon inventory correct – now!
2. Assess your exposure to CBAM and talk to your EU clients
3. Set ambitious carbon reduction targets to remain competitive
4. Develop a transition strategy and reduce emissions
Simply put, suppliers that fail to act will be left behind, whereas those who effectively navigate regulations position themselves for competitive advantage.
Simply put, suppliers that fail to act will be left behind, whereas those who effectively navigate regulations position themselves for competitive advantage.
act renewable has a long-standing track-record supporting companies with their decarbonization efforts, including recent work supporting Asian suppliers (e.g. multiple adidas suppliers like New Wide Group, EP Group) in the face of increasing sustainability requirements from EU clients. Our expertise spans from conducting impact assessments and assessing CBAM compliance to building an emissions reduction plan, and our approach ensures that challenges are addressed strategically with customized solutions.
For more insights into CBAM, see our overview here
If your company is seeking to limit future risk and capitalize on the potential that EU clients see in cleaner, greener suppliers, connect with felix.fink@actrenewable.net to learn more.
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