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The CSRD: a potential game-changer for chemicals


The CSRD: a potential game-changer for chemicals

Not so long ago, companies were a black box – we knew little about what goes on behind their doors. This has been especially true for chemicals. Major new legislation from the EU is lifting the lid so we can peer inside. What will it tell us, and will it be enough?

Published on 28 May 2024

Are you looking at an image of happy families among trees and flowers? Then the chances are you are reading a corporate sustainability report. Everyone in business wants to show how green they are.

From early next year, photos of smiling children will not be enough. Companies will have to back up their sustainability claims with hard data, making greenwashing more difficult.

This is the intention of the EU’s Corporate Sustainability Reporting Directive, or CSRD, which aims to help investors, consumers and civil society evaluate the sustainability (or otherwise) of their activities.

While the Directive covers a wide range of sustainability issues, debate has focused mainly on carbon emissions and human rights. However, the CSRD is a potential game-changer for hazardous chemicals – it represents an opportunity for society to find out more about how, where and by whom these substances are produced and used.

“We are leaving the dark tunnel of secrecy at last”

The known unknowns

Chemicals are everywhere, modern societies cannot function without them. But some are harmful and can cause major costs to individuals and societies. You would think, therefore, that the companies manufacturing these substances would at least have to be open about what they produce in their factories. That is not the case.

Not so long ago, the outside world had little or no information about what was going on inside companies. Since the start of the millennium, the EU, USA and other countries have started to demand that manufacturers and importers register the substances they use. But in the EU, there are four main things the public still does not know:

  1. The quantities of hazardous chemical each company uses or produces
  2. The extent to which they rely on these substances for their revenue
  3. What hazardous chemicals they are producing or using outside the EU, USA etc
  4. Whether a company has purchased hazardous chemicals from another company within the same region to add them to their products.

By demanding that companies report the details of their production and use, the CSRD has the potential to fill some of these gaps.

“We are leaving the dark tunnel of secrecy at last,” says Sonja Haider, Senior Business and Investors Advisor for ChemSec. “Companies will have to be more transparent, but some will fight this all the way. CSRD is an opportunity to re-shape the way hazardous chemicals are reported.”

So: how do we get this right?

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What precisely does CSRD do?

It tells big companies to publish the details of everything they do that affects society or the environment. It covers all the hazardous substances that come into a company via procurement, all that are generated there and all that go out via sales – plus any waste and emissions created by the manufacturing process.

Companies must do this for the first time in the annual reports they publish early next year. Where chemicals are concerned, this means they must disclose:

“information on the production, use, distribution, commercialisation and import/export of substances of concern and substances of very high concern, on their own, in mixtures or in articles.”

Companies should also state what measures they – and their entire value chain – are taking both to reduce pollution and with respect to:

“substituting and minimising the use of substances of concern, and phasing out substances of very high concern, in particular for non-essential societal use and in consumer products.”

Companies must state:

  • The total amounts of chemicals they use
  • The share of net revenue they make from products and services that contain these substances.

Note that the Directive specifies “substances of concern” (SoC) – not just substances of very high concern (SVHC). While SVHCs are specified by REACH, SoCs are a broader category with more hazard classes.

In France, company bosses can face prison sentences if they do not comply

Which companies does this apply to?

The Directive has global impact. Foreign companies active in the EU will have to report on their chemicals, while European companies must reveal their global activities (just as they do currently for their finances). If they produce SVHCs in China, for example, they must say so.

The CSRD covers:

  • All EU companies with over 250 employees
  • Non-EU companies listed in the EU
  • Smaller EU companies (from 2026)
  • Non-EU companies not listed in the EU but which do substantial business here (from 2029).

What happens if a company does not comply?

That depends on how each EU member state translates the Directive into law. In France, for example, failure to comply could mean company bosses face up to five years in prison and a fine of €75,000. The information that companies disclose under the CSRD must be verified by an independent third party.

Can companies avoid accountability?

There are five areas where the Directive gives industry significant wiggle room:

  1. Companies don’t need to say which specific chemicals they use, only whether a chemical belongs to a “hazard class” (e.g. carcinogen, reproductive toxicity etc). This is a way to avoid objections to revealing what companies call “confidential business information”. In other words, the CSRD gives transparency with one hand and takes it away with the other.
  2. PFAS, which don’t break down in nature and many of which are toxic, are not yet included in the Directive (with just a few exceptions). There are so many thousands of PFAS substances, and only a handful have so far been classified under the EU’s harmonised classification and labelling scheme. Without a classification, it is unlikely that companies will report their use unless there is significant stakeholder pressure.
  3. The Directive is only about transparency – it does not specify any limits on the use of hazardous chemicals. A company can be fully compliant with the Directive but still be irresponsible in producing or using hazardous substances.
  4. Any new reporting standard, especially one as complex as the CSRD, is open to different interpretations. As yet, there is still no official guidance for chemical companies from EFRAG – an expert group developing these standards for the European Commission – on how to report hazardous substances. This will lead to a fog of confusion. [since publication of this article, EFRAG has issued guidelines here]
  5. Companies report what they themselves think is important, using the principle of “double materiality”. Something is “material” if omitting it from a company report would change an investor’s view of that company’s performance. Double materiality means they must disclose not only what might affect their performance, but also how they impact people and the environment, right through their value chain. The trouble is, it is up to each company itself to decide what is material, and therefore to decide what it discloses and what it does not disclose.

“Protecting information doesn’t make a whole lot of sense”

What needs to happen

For these reasons, ChemSec urges chemical companies to take a high-ambition approach to the CSRD that will future-proof their business from the outset. This means:

  • Treating all substances of concern as “material” (see above)
  • Disclosing volumes and revenue share from all PFAS substances.

Is it really such a big deal to expect companies to observe basic transparency like this? Some are already doing it. Norwegian fertiliser giant Yara is ahead of the game and has already applied double materiality to its operations. Saudi Arabian petrochemical giant Sabic not only discloses the whole portfolio of chemicals it produces, but also the volumes produced. Asked why chemical companies don’t need to hide this information, the company stated:

“We know what our competition does, we know their facilities, we know where they are producing products, we know their volumes. So calling that information confidential does not have a lot of weight. … Protecting those fundamental pieces of information doesn’t make a whole lot of sense.”

The time is ripe for companies to substantiate their sustainability claims with data. Indeed, a recent report on the chemical industry by management consultants McKinsey identified lack of transparency as a key obstacle to innovation.

“Our question to industry is this: do you want to be in the low-disclosure group, or among the leaders on transparency and sustainability?” ChemSec’s Sonja Haider says. “We expect companies to disclose all the information necessary for investors to understand the business, and to understand the risks that business is exposed to via the production or use of hazardous chemicals.

“We understand that chemicals reporting under the CSRD will be challenging at first, but the information it will provide is vital to safeguarding society, the environment, and ultimately businesses themselves.”