ESRS E3 Water and E5 Resource Use: Collecting Data from Your Supply Chain
Introduction
In the European context, the European Sustainability Reporting Standards (ESRS) E3 on Water and E5 on Resource Use are pivotal regulations driving the sustainability agenda. A common misinterpretation of these standards includes the belief that they only apply to large corporations and can be overlooked by smaller entities. This is a dangerous misconception. According to the Corporate Sustainability Reporting Directive (CSRD), which builds on these standards, all large companies and all companies with significant operations in the EU are required to report on their sustainability impacts. This includes the management of water (E3) and resource use (E5) across their supply chains.
For European financial services, this issue is not merely about compliance; it’s about risk management, competitive advantage, and aligning with the European Green Deal’s objectives. Failure to adhere to these regulations can result in substantial fines, audit failures, operational disruptions, and irreparable damage to reputation. The stakes are high, and the time to act is now.
The Core Problem
The substantial challenge in addressing the ESRS E3 and E5 lies in the complexity of collecting accurate and comprehensive data from the supply chain. This is not merely a data aggregation issue but an operational one that stretches the capacities of most organizations. The actual costs of getting this wrong are significant; studies suggest that poor supply chain management can lead to losses amounting to millions of euros, wasted resources, and increased risk exposure.
What many organizations mistakenly believe is that they can manage their supply chain impacts with a surface-level understanding. However, the ESRS standards demand a deep dive into the environmental footprint of their entire supply chain. This includes not just their direct operations but also the indirect impacts of their suppliers and third parties.
For example, under ESRS E3.1.2, entities are required to disclose data on water consumption and water discharges. This necessitates detailed information not just from their own operations but also from their suppliers, which can span multiple tiers and industries. Similarly, ESRS E5.1.1 mandates the disclosure of resource consumption, which again extends beyond direct operations to include the broader supply chain.
The failure to recognize and act on this requirement often leads to incomplete or inaccurate reporting. This not only exposes organizations to regulatory risks but also undermines their efforts to drive sustainability within their supply chain. A recent study found that over 70% of companies failed to accurately report their supply chain impacts, leading to millions in potential fines and reputational damage.
Why This Is Urgent Now
The urgency of this issue has been heightened by recent regulatory changes and enforcement actions. The CSRD, which is set to apply from 2024 for large companies and from 2025 for all listed companies, significantly expands the scope of sustainability reporting requirements. It includes not just financial institutions but also digital companies, companies with significant public procurement, and companies with over 250 employees.
Moreover, market pressure is mounting. Customers and investors are increasingly demanding transparency and sustainability in the products and services they consume and invest in. Certifications such as the ISO 14001 environmental management system and ISO 26000 guidelines for social responsibility are becoming standard expectations.
However, many organizations are lagging behind. A recent survey found that only 30% of companies have a comprehensive understanding of their supply chain impacts, and less than 20% have effective mechanisms to monitor and manage these impacts. This gap between where most organizations are and where they need to be is not just a compliance issue but a significant operational and strategic risk.
In conclusion, addressing the ESRS E3 and E5 standards is not just about ticking boxes; it’s about understanding and managing the real-world impacts of your operations and supply chain. It’s about protecting your organization from regulatory risks, operational disruptions, and reputational damage. It’s about building a sustainable future that aligns with the objectives of the European Green Deal. The time to act is now.
The Solution Framework
Addressing ESRS E3 water and E5 resource use within a supply chain is a multi-tiered challenge. It requires a comprehensive solution framework to ensure compliance with the CSRD and the broader circular economy objectives. Below is a step-by-step approach to effectively managing these requirements.
Developing a Comprehensive Strategy
Understanding the Supply Chain: Begin by mapping out the entire supply chain, including all suppliers, their locations, and the main products or services they provide. This initial step is crucial as per Article 5 of the CSRD, which emphasizes the importance of understanding and controlling supply chain impacts.
Setting Clear Objectives: Establish clear environmental targets that align with ESRS E3 and E5 guidelines, focusing specifically on reducing water consumption and enhancing resource efficiency. According to Article 16 of the CSRD, companies must set targets that contribute to the transition towards climate neutrality and sustainability.
Engaging with Suppliers: Actively engage with suppliers to understand their current water usage and resource management practices. Encourage them to adopt best practices and provide support where necessary. This aligns with the CSRD's emphasis on stakeholder engagement andsupply chain transparency.
Data Collection and Management: Implement a robust system for collecting, verifying, and managing data from the supply chain. This should include regular audits and third-party assessments to ensure data accuracy and reliability, as required by Article 8 and 11 of the CSRD.
Continuous Improvement: Regularly review and update the environmental objectives and practices based on the data collected and emerging best practices. This aligns with the CSRD's requirement for continuous improvement in sustainability reporting.
Actionable Recommendations
Training and Awareness: Provide training to all employees and suppliers involved in the supply chain on ESRS E3 and E5 requirements. Highlight the importance of responsible water and resource management.
Technology Integration: Utilize technology to streamline data collection and management. For instance, implementing a platform like Matproof can help automate compliance tasks, making the process more efficient and reducing the risk of human error.
Regular Reporting: Establish a regular reporting schedule to track progress against set objectives. This should be done in line with Article 14 of the CSRD, which mandates the publication of sustainability information annually.
What "Good" Looks Like
"Good" in this context means not just meeting the minimum requirements but exceeding them. It’s about proactively identifying areas for improvement and taking action before issues arise. It’s about setting ambitious targets and transparently reporting progress. It’s about integrating ESRS E3 and E5 principles into the company’s DNA, not just as a compliance checkbox.
Common Mistakes to Avoid
1. Insufficient Supply Chain Mapping
What They Do Wrong: Many organizations fail to comprehensively map their supply chain, especially for indirect suppliers. This results in incomplete data and a lack of visibility into the environmental impacts of their operations.
Why It Fails: This approach is inadequate as it does not fulfill the CSRD's requirement for supply chain transparency and understanding. It can also lead to missing critical information that is essential for effective water and resource management.
What to Do Instead: Use tools that can help map out the entire supply chain, including indirect suppliers. Regularly update the map to reflect any changes in the supply chain.
2. Lack of Engagement with Suppliers
What They Do Wrong: Some organizations do not actively engage with their suppliers on environmental issues. They may simply set expectations without providing support or resources.
Why It Fails: This approach fails to leverage the full potential of the supply chain for environmental improvement. It can lead to a lack of buy-in from suppliers, resulting in poor compliance with environmental objectives.
What to Do Instead: Engage with suppliers in a collaborative manner. Provide them with training, resources, and support to help them meet environmental objectives.
3. Inadequate Data Management
What They Do Wrong: Many organizations struggle with effectively managing the data they collect from their supply chain. This can lead to inaccuracies, inconsistencies, and a lack of trust in the data.
Why It Fails: Poor data management undermines the credibility of the sustainability reporting and can lead to incorrect decisions being made based on flawed data.
What to Do Instead: Implement a robust data management system that includes regular audits and third-party assessments to ensure data accuracy. Consider using technology like Matproof to automate and streamline the process.
Tools and Approaches
Manual Approach
Pros: A manual approach can be more flexible and can be tailored to the specific needs of an organization. It can also be more cost-effective for smaller organizations.
Cons: It can be time-consuming and prone to human error. It also requires significant manual effort to manage, especially for larger organizations with complex supply chains.
When It Works: It can work well for smaller organizations or for those that have a simple supply chain. However, for larger organizations with complex supply chains, a more automated approach is often more effective.
Automated Compliance Platforms
What to Look For: When selecting an automated compliance platform, look for one that can seamlessly integrate with your existing systems. It should also be able to handle the complexities of managing ESRS E3 and E5 compliance across a global supply chain.
Mention of Matproof: Matproof, for instance, is specifically designed for EU financial services and can automate compliance tasks related to ESRS E3 and E5. It offers AI-powered policy generation, automated evidence collection, and an endpoint compliance agent for device monitoring, all while ensuring 100% EU data residency.
In conclusion, addressing ESRS E3 water and E5 resource use in the supply chain requires a comprehensive and proactive approach. By following a structured solution framework, avoiding common mistakes, and leveraging the right tools, organizations can not only comply with the CSRD but also drive meaningful environmental improvements.
Getting Started: Your Next Steps
Embarking on the journey to address ESRS E3 Water and E5 Resource Use and integrating supply chain water reporting is a critical step in aligning with the CSRD. Here is a practical five-step action plan to get you started this week:
Conduct an Initial Assessment: Begin by conducting a thorough assessment of your current practices concerning water management and resource use. Identify key areas where improvements can be made and map out your supply chain to understand where water and resources are being used.
Engage Stakeholders: Communicate with suppliers and stakeholders to understand their current water usage and resource management strategies. This engagement will be crucial in setting collective goals and in driving improvements throughout the supply chain.
Develop or Review Policies: Refer to official EU/BaFin publications such as the “Non-Financial Reporting Directive” and the “Sustainable Finance Disclosure Regulation” for guidance on reporting practices. Develop or review your policies to reflect these standards and ensure they integrate ESRS E3 and E5 requirements.
Implement Tracking Systems: Utilize technology to track water and resource usage across your operations and supply chain. This can include software solutions that automate data collection and reporting, which will ease compliance with CSRD.
Create a Reporting Framework: Establish a framework for reporting water usage and resource management. This should align with ESRS standards and should be designed to evolve as your data collection methods improve.
For quick wins, consider implementing Matproof's compliance automation platform. Matproof offers AI-powered policy generation and automated evidence collection, which can help your organization achieve immediate compliance and reporting improvements.
Resource Recommendations
Here are some key resources to guide your efforts:
European Single Electronic Format (ESEF) Technical Guidelines: These guidelines provide detailed instructions on the format and content of financial reports, including non-financial information.
ESRS E3 and E5 Reporting Guidelines: Official guidelines published by EFRAG offer a comprehensive understanding of what is expected in terms of water and resource use reporting.
CSRD Articles 5 and 6: These articles outline the scope and requirements of non-financial reporting, which includes environmental and social aspects like water and resource use.
Frequently Asked Questions
Question 1: How do I ensure that my supply chain partners are also compliant with ESRS E3 and E5 standards?
Answer: Encourage and assist your supply chain partners in their compliance journey by sharing best practices and offering support where needed. This could include sharing resources, providing access to tools (like Matproof), and conducting periodic audits to verify compliance.
Question 2: What are the specific non-financial performance indicators that ESRS E3 and E5 focus on?
Answer: ESRS E3 focuses on water use and management, including metrics such as water withdrawal, water consumption, and water discharge. ESRS E5 covers resource use, focusing on resource efficiency, waste, and recycling. Both standards emphasize the importance of reducing negative impacts and increasing circular economy practices.
Question 3: How does the CSRD influence the way we report on water and resource use?
Answer: The CSRD extends the scope of non-financial reporting, requiring companies to disclose information on environmental, social, and governance factors, including water and resource use. This means companies must collect and report this information transparently and consistently.
Question 4: Can we use third-party data for our water and resource use reporting? If so, how do we ensure its accuracy?
Answer: Yes, third-party data can be used, but the CSRD requires significant scrutiny over the data’s accuracy and relevance. This includes obtaining data from reliable sources and conducting due diligence to ensure the data meets the required standard.
Question 5: How can I align our water and resource use reporting with the circular economy principles?
Answer: To align with circular economy principles, focus on reducing waste, increasing recycling, and promoting sustainable resource management. This includes setting targets to reduce water and resource consumption, and monitoring progress towards these targets.
Key Takeaways
Align with ESRS Standards: Ensure your policies and reporting align with ESRS E3 and E5 standards for water and resource use.
Engage Your Supply Chain: Actively engage with your supply chain to manage and reduce environmental impacts.
Leverage Technology: Utilize technology like Matproof to automate policy generation and evidence collection, streamlining your compliance efforts.
Continuous Improvement: Regularly review and update your practices to reflect changes in regulation and best practices.
Matproof Can Help: For a comprehensive compliance solution, consider Matproof, which is built specifically for EU financial services and offers 100% EU data residency.
For a free assessment of your current compliance posture and to see how Matproof can assist, visit Matproof’s contact page.