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Author: Laura Nodoph

Product Environmental Footprint vs. Life Cycle Assessment

Posted on by Laura Nodoph

If you’re working with LCAs, you have probably heard of the PEF, the Product Environmental Footprint. The PEF is a new methodology for environmental measurements. It was brought into place to generate a new, leveled standard. But how do PEF and LCA differentiate, and what do you need to apply when? The Makersite experts have collected all information you need.  

 

What is a Product Environmental Footprint (PEF)? 

The PEF was invented because the EU wanted to develop a common way to create product footprints. The footprint is generated by measuring the environmental performance of a product throughout its entire lifecycle – the so-called “from cradle to grave.” When calculating a PEF, products are put into different categories, which ensures that the environmental aspects that matter most for this specific product group don’t get overlooked. The PEF method also provides a database that was specifically developed to support it and functions as a new standard environmental database for EU industries.‍ 

 

What is a Life Cycle Analysis (LCA)? 

The definition of LCA software is quite similar to the one of PEFs. LCA is a method to identify the environmental impact of a product or organization throughout its lifecycle. Similar to the PEF, an LCA includes all essential information about the product or organization, from raw material extraction to disposal. LCAs are a widely used tool to identify environmental hotspots in the life of products or organizations and are already driving sustainable improvements for many companies.  

 

Differences and Similarities 

LCAs and PEFs are part of the lifecycle approach, which takes the entire lifecycle of a product into account and gives a holistic view. Like LCA, PEF takes a life cycle perspective but follows further product-specific requirements and standardized specifications that create greater comparability of results. While LCAs quantify all kinds of environmental impacts like greenhouse gas emissions, energy use, and water consumption, PEFs are a methodological framework with specific guidelines on how to perform an LCA. A PEF study, therefore, is a somehow standardized LCA study. 

 

Do you have to do PEFs? 

The PEF methodology is not yet put into action. The active pilot phase is planned to be completed by the end of 2024. Using the PEF methodology for your business is, therefore, not mandatory yet. 

On implementation, the PEF will likely have a significant impact on companies, creating standard environmental measurement rules for everyone. While it is yet unclear where the PEF will be mandatory, it is likely that some LCA reporting methods will become obligatory for most companies in the coming years. France, for example, already has a mandatory LCA in place.  

So why is it important to start preparing for mandatory climate reporting now? PEF, and other reporting methods, like the one discussed by the ISSB right now, will need companies to report on Scope 3 emissions. To be able to do this, you will need to look at the whole lifecycle of products. But most companies lack insights into the deep tiers of their supply chains. Organizations, therefore, need to focus on technology that measures the environmental impact of its entire supply chain instead of restricting it to its own four walls. The more downstream and complex your products, the more of your impact will sit in the supply chain. 

If you’re planning to invest in software to help you report on environmental data and give you actionable insights, choose one that can produce automated LCAs and extend your LCAs to different formats, like the PEF one. If you want to read more about how Makersite makes sustainability reporting easy, click here.

Interview: Understanding a product across its lifecycle

Posted on by Laura Nodoph
How can manufacturing companies truly enable change? If you ask Makersite founder Neil D’Souza his answer will be: “Only by looking at products from their cradle to their grave!” In this interview, we asked him everything about Scope 3, the lifecycle of a product, the challenges that lie in finding, evaluating, and making decisions based on data, and more.
Why is it important to look at the whole lifecycle of a product? 

Because up to 80% of emissions of a company come from its supply chain, organizations need to focus on technology that measures the environmental impact of its entire supply chain instead of restricting it to its own four walls. The more downstream and complex your products, the more of your impact will sit in the supply chain. But it is not just about the supply chain – for energy-consuming products like automotives, electronics, and others, the major impact most often comes from their use. Therefore, understanding a product across its lifecycle is key to identifying and reducing environmental impacts. 

 

What is the main challenge of gaining insight and acting on Scope 3 data? 

Understanding that this is a business opportunity rather than another report is one way to mobilize the resources that are needed. The framework provides an opportunity to understand your value chain, find cost reductions and hidden risks and build resilience in your supply chains. With almost $44 trillion deployed in ESG-related funds, this is becoming an increasingly important factor in access to capital. As deadlines for national climate targets approach, regulations are already catching up. All-in-all, besides being crucial to mitigate the extent of damage from climate change, it just makes good business sense.  

Measurement is hard, but action is harder. A company is its product, and a product is its supply chain. To reduce the Scope 3 impact of a company, you must address its products and supply chains. This responsibility sits squarely in product development and procurement – not sustainability. These teams need access to carbon information within the tooling environments that they use daily. High-level dashboards or expert tools are unhelpful in regard as they do not integrate into standard workflows. 

 

How granular does the insight need to be? 

Granularity matters, and not just because of accuracy. Change can only happen when you have actionable information in the hands of decision-makers. In manufacturing industries, this is the product development and procurement teams. For product teams, granularity means having information at the part or material level to give them the ability to compare alternative designs. For procurement teams, you need to increase that granularity to become supplier specific to give them the ability to compare materials from different suppliers. Granularity means vast amounts of information need to be managed, and this is not possible without modern technologies.  

 

Why should you never look at one isolated criterion? 

A multi-criteria approach is one more requirement to enable change. Decisions are never based on a single criterion, let alone having that criterion being an environmental impact. Information about criteria such as cost, risk, and regulatory compliance is crucial to enable the jump from having an insight to affecting change. Multi-criteria simulations are computationally intensive and rely on complex models with the need for vast amounts of background information, which means heavy reliance on modern technology architectures and data ecosystems. 

 

How can AI help with looking at the lifecycle of a product? 

The biggest barriers to scale eco-design are the speed of the process and expertise in sustainability. One cannot compromise accuracy for speed. Otherwise, it defeats the purpose of doing the exercise in the first place, which is to provide actionable data to enable change.  

One of the most time-consuming tasks for experts is collecting data from different sources – internal PLM, ERP, procurement systems, external data from suppliers, and third-party data that enable the calculation of the impacts themselves – and then connecting them to create models of the products or processes they are evaluating. Certain kinds of AI are relatively good at automating these tasks, and this can tremendously reduce the amount of time for calculating impacts, but also, more importantly, reduce the dependence on experts for this unenjoyable step. 

Data is also never complete and consistent – supporting decisions from the early stages of developing an idea, where you have very little detail on the product or process, is crucial in guiding the development in the right direction. Filling gaps and identifying outliers quickly are also other areas where we have found a good use for AI. 

Another area where AI is immensely useful is finding patterns in data to identify improvement potentials. Developing insights is one of the most valuable tasks of experts, and AI can amplify their impact by, for example, identifying similar cases where their insight could have value.  

 

How can one make sure that the data quality is appropriate? 

Firstly, work with emissions data from leading providers and ensure that information is updated automatically and regularly. Data that is regularly updated will allow you to not just take advantage of information about newer technologies and improved electrical grid mixes etc. Still, more importantly, it enables you to design products that are optimized for the current understanding of the environmental impacts associated with products and processes. Transparency in your data model is crucial to validating accuracy and completeness. Being able to see what assumptions were made by the AI enables a certain level of automation in the quality control process. Spot-checks based on known information are another common approach to test if the AI model is trained sufficiently.

Interview: Scope 3 as a disclosure standard by ISSB

Posted on by Laura Nodoph

In 2021 the International Financial Reporting Standards Foundation (IFRS) announced the creation of the International Sustainability Standards Board (ISSB). The ISSB was then tasked with developing mandatory corporate ESG disclosures. The goal is to find a global baseline of sustainability disclosure standards by the end of 2022. The intention behind it is to standardize sustainability disclosures for investors. 

In October 2022, the IFRS Foundation stated that it had made significant progress on its draft requirements. The ISSB agreed that companies should disclose Scope 1, 2, and 3 emissions but will potentially have more time to report on Scope 3 disclosures and be supplied with “relief provisions” to help work out these disclosures. 

A mandatory Scope 3 disclosure is challenging for many companies. While Scope 1 and 2 emissions are company-owned and relatively easy to report, Scope 3 emissions occur upstream and downstream and are challenging to report on and even harder to improve. We talked to Sophie Kieselbach, Senior Implementation Engineer for Sustainability at Makersite, about the implications of the new requirements.  

How do you feel about the ISSB including Scope 3 into a global baseline for disclosure standards? 

I am happy that the ISSB includes Scope 3 reporting into their baseline for disclosure. Up to 90% of emissions are Scope 3 emissions. Any other decision would have been a drawback to GHG reporting and would not have given enough insights to investors to base investments. 

 

What companies will have to comply? 

The IFRS Foundation Trustees are committed to the International Sustainability Standards Board (ISSB) building on the work of existing investor-focused reporting initiatives—and ultimately becoming the global standard-setter for capital market sustainability disclosures. This effort includes further developing the Integrated Reporting Framework, which the International Accounting Standards Board (IASB) and the ISSB assumed responsibility for when the Value Reporting Foundation merged with the IFRS Foundation in August 2022. An integrated report is concise communication about an organization’s strategy, governance, performance, and prospects. Right now, the IRFS refers to the GHG reporting standard, so this is the first source to understand what to comply with (Standards | Greenhouse Gas Protocol (ghgprotocol.org))

 

In your opinion, how will the trend toward Scope 3 reporting continue? 

I find the word “trend” a bit unlucky as it implies that tracking and reporting on your Carbon footprint are only necessary now but might get less critical in the future. Companies must understand that it is not just an annoying task to tick off your checklist but a tool to optimize your products along the supply chain, which always comes with other, also financial benefits.  

I hope that with IFRS including it in the financial reporting standards, it gets once more the recognition it should get: Scope 3 reporting is a necessary tool to see if your company is future-proof and worth investing in.  

  

Are there companies that are already one step ahead? 

Yes. Several companies worldwide have employed sustainability teams for years and had the time to crunch their data and work on their goals. It isn’t easy to catch up with them, as they have already implemented knowledge and internal structures to comply with their plans. Companies still tend to underestimate the efforts behind a solid sustainability/GHG strategy. Nevertheless, it is never too late to join the party. 

  

And is it too late to be one of these companies? 

No, of course not. The good news is that the market to support you is growing, and getting the right help is easier and easier.  

Still, I cannot suggest pushing that task further down the timeline. It will be a standard task in your reporting, similar to reporting profit- and loss statements.  

  

How do you start reporting on Scope 3 emissions? 

  1. As already stated, the  GHG protocol is referred to by the IFRS, so this is the best start to understanding what should be reported.  
  2. I would always recommend asking for help to speed up the process: there are many consultants in the market with experience you can learn from 
  3. Crunching these numbers within Excel files is very old-school (and also slow, error-prone and horrible to update). To support reporting, I would always recommend using software applications to help make this task easier. 

 

What does this mean for suppliers? 

Questions about carbon footprint or, more generally, social, economic, and environmental impacts of products will increase.  

One can only advise that – if not already done – companies start now to get to know their product portfolio and to be able to provide these figures and set up their roadmap. It is a fact that if these figures cannot be provided and it cannot be credibly presented how they will be improved over time, companies will be at a competitive disadvantage.  

 

What are the seen and unseen benefits of reporting Scope 3 

There is a clear competitive advantage if one knows the numbers. 

Also, as soon as one starts digging deeper into the supply chain, it enables optimizations and is financially beneficial. Another benefit – most companies haven’t looked at their data in the way it is necessary for Greenhouse Gas reporting, so a company will likely gain new insights into their mechanisms.  

 

Any thoughts on the relief provisions? 

I hope these relief provisions will not lead to another delay in reporting Scope 3. Even though I understand the struggles with GHG reporting, the advantages outweigh the disadvantages. And as I said – one might be surprised by what insights can be gained. Wouldn’t you be curious about your impacts and the subsequent potential to perform better? 

New supply chain law in Germany

Posted on by Laura Nodoph

Das Lieferkettensorgfaltspflichtengesetz

Around 80 % of world trade is based on global value chains. (Source: https://unctad.org/press-material/80-trade-takes-place-value-chains-linked-transnational-corporations-unctad-report) Still, companies mostly fail to meet their obligations with regard to supply chains. Because enterprises have massive supply chains for their products, it’s easy to lose track and insights into human rights and environmental risks in the supply chain. While this is hardly compatible with modern companies’ self-image and ESG criteria, they are often unaware of how much of an influence they have on changing these conditions. In Germany, legislation has now reacted to this: In 2023, the Supply Chain Sourcing Obligations Act (Lieferkettensorgfaltspflichtengesetzor short LkSG) will come into force in Germany.  

What is the new LkSG (German supply chain law)? 

The LkSG aims to improve the protection of human rights and the environment in the supply chain. The law states that companies must identify risks of human rights violations and environmental damage in their direct suppliers and partly even with deep-tier suppliers. If they discover irregularities, they must take countermeasures and document them to the German Federal Office of Economics and Export Control (BAFA). The law outlines reporting, prevention, and countermeasures.  

 

What companies have to comply with LkSG? 

The LkSG affects all companies based in Germany with more than 3,000 employees. The law comes into place in January 2023. From January 2024, the threshold will drop to 1,000 employees.  

 

Human rights and sustainability in the LkSG 

The new German LkSG is primarily about identifying human rights risks in the supply chain. While there is no explicit climate-related due diligence obligation, the LkSG does allow it to be interpreted that way. Environmental protection is taken into account insofar as companies have to report on environmental risks that can lead to human rights violations. The decisive factor here is how the concept of air pollution, mentioned in the LkSG, is interpreted. Companies must ensure that air pollution from their suppliers can neither impair the natural basis for the preservation and production of food nor cause damage to human health. This is broad wording, and companies will likely interpret this very differently.  

 

Plans for a European supply chain law 

While other European countries already have a supply chain law in place, the EU Justice Commission is also planning a European supply chain law. The interesting thing here is that the draft of the European version looks at human rights and the environment in equal parts. The European Parliament’s draft of the EU supply chain law clearly states that the duty of care should also cover a company’s environmental impact, including its contribution to climate change. In the best case, the European supply chain law will combine the best of the due diligence laws of the member states, e.g., the definition of the entire value chain from the Netherlands, strong regulatory enforcement from Germany, and civil liability from France. 

“The fact that companies slowly become responsible not only for what happens behind their own doors but also for the actions of their suppliers is a good thing through and through. What most of them don’t suspect right now is how much they will profit from it. Providing transparent information about ALL business activities is a competitive average and will be liked by customers and partners. In my opinion, the German LkSG should have been stronger on the environmental side, but I’m confident that the European supply chain law will make up for that. In any case, I would refer enterprises to get a good overview of what’s happening in their supply chain, even in the deep tiers. If not, the supply chain law will make this obligatory; other laws about compulsory reporting on Scope 3 emissions are soon to be expected. I’d recommend everyone to start investing in this now.”

Fabian Hassel

Fabian Hassel

VP of Services at Makersite

Sustainability Reporting: Asia Pacific

Posted on by Laura Nodoph

Companies underlie various regulations about what they must report depending on where they are located and selling their products. Changing rules for each country can be irritating and hard to oversee. In our series, we’ll give an overview of what sustainability reporting is already and what will be becoming mandatory. Today we’re covering the region, Asia Pacific: 

As in other parts of the world, environmental, social, and governance reporting (ESG) has become increasingly critical for companies. While part of the reason lies in the risks of climate change, health and safety measures, and reputation, many companies have now understood that sustainability is a way to gain an advantage over their competitors.  

Also, investors and governments now include ESG in their decision-making and regulations. More and more mandatory sustainability reporting measures are emerging worldwide – the Asia Pacific is no exception. 

Non-financial ESG reporting

In most countries located in the Asia Pacific, non-financial ESG reporting has evolved a lot in the past years. Non-financial means businesses disclose certain information unrelated to their finances, including information on human rights, the environment, etc.  

Today, all Asian stock exchanges have implemented some ESG reporting as a listing requirement. The definite requirements for reporting vary between countries, which affects the reports’ effectiveness. Before we look at the different reporting requirements in the Asia Pacific, we will briefly introduce the two most used reporting frameworks in the region.  

 

Global Reporting Initiative (GRI) Standards

Both the standards of the Global Reporting Initiative (GRI) and the Task Force on Climate-Related Financial Disclosures (TCFD) are voluntary reporting frameworks. They were put into place to help companies report on their non-financial disclosures.  

The GRI standards enable organizations, no matter their size, to understand and report on their impacts on the economy, environment, and people comparably and credibly.  

In countries with high overall disclosure rates, a large share of companies is using the GRI framework. In Japan and Taiwan, around 60 percent of the largest 250 publicly listed companies are referencing the GRI framework; in China, it’s nearly a third of companies.   

 

Task Force on Climate-Related Financial Disclosures (TCFD)

The Financial Stability Board created the TCFD in 2015 to develop international climate-related financial risk disclosures. Companies, banks, and investors are supposed to use them to provide critical information to stakeholders.  

Today, TCFD reporting frameworks are highly valued in climate reporting. Especially as many governments are planning to make sustainability reporting on TCFD-basis mandatory, companies like to choose the framework to be prepared.  

ESG reporting by country

Hong Kong

Hong Kong Exchanges and Clearing Limited (HKEX) 

  • What? Guidance on climate disclosures  
  • Who? All HKEX-listed companies 
  • Reporting method? TCFD framework 
  • By? Annual reporting by 2025 

 

Hong Kong Monetary Authority (HKMA)  

  • What? Supervisory policy manual for climate risk management 
  • Who? Financial institutions 
  • Reporting method? TCFD framework 
  • By? First reporting by 2025 

 

Singapore 

Singapore Exchange (SGX) 

  • What? Climate disclosure rules 
  • Who? All SGX-listed companies 
  • Reporting method? TCFD framework 
  • By? Annual sustainability report by 2023, some companies by 2024 

 

Japan

Corporate Governance Code 

  • What? Sustainability reports  
  • Who? Prime Market-listed companies 
  • Reporting method? TCFD framework 
  • By? April 2022 

 

Australia

Australia does not currently have any mandatory sustainability reporting rules in place. The corporate governance codes recommend publicly listed companies disclose environmental and social risks. 

 

India 

Securities and Exchange Board of India 

  • What? Business Responsibility and Sustainability Reports 
  • Who? Top 1000 listed companies 
  • Reporting method? Based on GRI, SASB, and TCFD 
  • By? 2021 

 

China 

China Securities Regulatory Commission  

  • What? Guidelines for environmental and social topics in their annual reports 
  • Who? Publicly listed companies 
  • Reporting method? GRI framework 
  • By? To become compulsory by the end of 2022 

 

How has sustainability reporting in the Asia Pacific evolved during the last years? Sustainability reporting rates across Asia-Pacific have improved notably over the last years. It must be said that many of these improvements start from a very low base. However, big enterprises from the Asia Pacific are partly reporting more than North America and Europe.  

Why you better start early

The primary difficulty with ESG reporting is gathering and analyzing the necessary data. Companies struggle to get the information they require, particularly when disclosures are expanded to the Scope 3 category of emissions (read more on Scope 3 reporting here). To have an accurate view of their impact and risks, organizations must collaborate with an extensive network of stakeholders inside and outside the organization. Digital tools, however, provide solutions to this issue by enabling organizations to centralize data management efforts and utilize cutting-edge technology to process, analyze, and report this data.

Sustainability Reporting: US

Posted on by Laura Nodoph

Sustainability reporting in the US is a key aspect of ESG reporting

Companies underlie various regulations about what they must report depending on where they are located and/or selling their products. Changing regulations for each country can be irritating and hard to oversee. In our series, we’ll give an overview of what sustainability reporting is mandatory and becoming mandatory in the following years and the most significant industries. Today we’re covering the US:   

Sustainability reporting is part of the so-called ESG reporting. ESG stands for environmental, social, and governance factors. In the US, companies of all sizes have been encouraged to produce ESG reports in the past – to guide their own decisions and to help investors get further company insights, leading to a more sustainable and socially responsible future.  

Up to now, there is no stand-alone mandatory sustainability reporting in the US. The United States Securities and Exchange Commission (SEC) only requires companies to report on information that may be material to investors, which includes ESG-related risks.  

In the past, the US has relied on voluntary reporting, hoping for it to be driven by competition and engagement. Even though this strategy worked out quite well (in 2015, approximately 81% of S&P 500 companies issued a sustainability report, compared to less than 20% in 2011 (source: Governance and Accountability Institute)), since the beginning of the Biden administration mandatory sustainability reporting comes more into focus.  

What is the ESG Disclosure Simplification Act? 

 In June 2021, the House of Representatives passed landmark legislation titled the ESG Disclosure Simplification Act. The legislation would make several ESG-related reportings mandatory for public companies in their SEC filings. The SEC would be directed to adapt its disclosure rules accordingly and define the metrics for the reporting.  

The required disclosures cover five topics: 

  • ESG Metrics 
  • Political Spending 
  • Pay raises 
  • Climate disclosures 
  • Tax havens and offshoring 

The passing of the legislation is still very unsure, as the House of Representatives approved the landmark legislation only by a slim margin. But even if the bill does not pass, there are various developments toward mandatory sustainability reporting in the US (see below). 

United States Securities and Exchange Commission proposal

On the 21st of March 2021, the United States Securities and Exchange Commission (SEC) proposed a new regulation, which has sparked many discussions since then. While the SEC has always encouraged companies to disclose their climate-related risks, publishing this data has been voluntary. The new regulation will change this.  

What does the regulation entail? 

The regulation would require U.S.-listed companies to disclose their Scope 1 and 2 emissions, including an auditing requirement. But the detail that sparked the most interest was the mention of Scope 3 emissions. The proposal would oblige companies to disclose the greenhouse gasses generated by suppliers and partners, known as Scope 3 emissions if they are material or included in the company’s emission targets. 

Whom will the regulation affect? 

The new regulation would be mandatory for all public companies with an existing SEC reporting requirement. But as many private companies are already on the path to an initial public offering (IPO), they often begin filing in preparation. They will, therefore, likely be asked to include this data by their investors.

What is sustainability reporting?

Sustainability reporting is a method used by companies to disclose their environmental, social and governance (ESG) practices and impact. This information is made public in annual reports or through separate sustainability reports. The purpose of sustainability reporting is to provide stakeholders with transparent and comprehensive information regarding a company’s sustainability initiatives and performance. It allows stakeholders, such as investors, employees, customers, and the public, to assess a company’s sustainability efforts and hold them accountable for their impact on society and the environment.

The importance of sustainability reporting

Sustainability reporting is gaining significance as consumers seek greater transparency and accountability from businesses. With heightened awareness of environmental and social concerns, consumers are increasingly choosing products based on a company’s sustainability efforts. By focusing on sustainability, companies not only appeal to socially conscious customers but also gain a competitive edge in the market.

Sustainability reporting enables companies to pinpoint areas for enhancement and adopt more sustainable practices. This not only aids the environment but also cuts costs and boosts efficiency in the long term. It further empowers companies to monitor their journey towards sustainability objectives and highlight their commitment to stakeholders.

Types of sustainability reporting

Organizations commonly use different types of sustainability reporting to communicate their sustainable practices and impacts. Corporate social responsibility (CSR) reports examine a company’s social and environmental aspects, while environmental reports focus solely on environmental impacts and mitigation efforts. Integrated reports combine financial data with sustainability information, offering stakeholders a comprehensive view of a company’s performance.

Who benefits from sustainability reporting? Various stakeholders gain from it, such as investors seeking socially responsible investments, employees looking for companies with strong values, and customers concerned about their purchases’ impact. Regulators and policymakers also benefit by monitoring companies’ sustainability efforts to make well-informed decisions.

Challenges in sustainability reporting

While sustainability reporting has numerous benefits, there are also challenges associated with it. One major challenge is the lack of standardized reporting methods, making it difficult to compare the sustainability performance of different companies. Another challenge is obtaining accurate and reliable data, especially from global supply chains.

Sustainability reporting plays a crucial role in promoting sustainable practices and creating a more transparent business environment. Companies that prioritize sustainability reporting not only benefit themselves but also contribute to building a better and more sustainable world for future generations. With continued efforts towards standard

The importance of sustainability reporting

Sustainability reporting is gaining significance as consumers seek greater transparency and accountability from businesses. With heightened awareness of environmental and social concerns, consumers are increasingly choosing products based on a company’s sustainability efforts. By focusing on sustainability, companies not only appeal to socially conscious customers but also gain a competitive edge in the market.

Sustainability reporting enables companies to pinpoint areas for enhancement and adopt more sustainable practices. This not only aids the environment but also cuts costs and boosts efficiency in the long term. It further empowers companies to monitor their journey towards sustainability objectives and highlight their commitment to stakeholders.

Types of sustainability reporting

Organizations commonly use different types of sustainability reporting to communicate their sustainable practices and impacts. Corporate social responsibility (CSR) reports examine a company’s social and environmental aspects, while environmental reports focus solely on environmental impacts and mitigation efforts. Integrated reports combine financial data with sustainability information, offering stakeholders a comprehensive view of a company’s performance.

Who benefits from sustainability reporting? Various stakeholders gain from it, such as investors seeking socially responsible investments, employees looking for companies with strong values, and customers concerned about their purchases’ impact. Regulators and policymakers also benefit by monitoring companies’ sustainability efforts to make well-informed decisions.

Is ESG reporting mandatory in the United States?

There is currently no federal mandate for ESG (Environmental, Social, and Governance) reporting in the United States. However, there are various initiatives and regulations that require companies to disclose certain ESG information.

When will the regulation come into place? 

The SEC is planning a phased implementation. Larger organizations would have to comply with the regulation by 2023, while smaller ones would have time until 2024 to follow.  

Do you want to know what you’ll need to be ready for the SEC proposal? Find out more here.

 

International Sustainability Standards Board (ISSB)

In 2021 the International Financial Reporting Standards Foundation (IFRS) announced the creation of the International Sustainability Standards Board (ISSB). The ISSB was then tasked with developing mandatory corporate ESG disclosures. The goal is to find a global baseline of sustainability disclosure standards by the end of 2022. The intention behind it is to standardize sustainability disclosures for investors. The ISSB disclosure standards will be based on the Sustainability Accounting Standards Board (SASB) standards. The SASB Standards identify the subset of sustainability issues most relevant to financial performance in 77 industries with numerous reporting elements under each. The ISSB sustainability standards will likely involve a significant amount of sustainability-related disclosure requirements, with the mandate of collecting company-wide information every quarter and controls to ensure the accuracy of the data. 

It’s unclear when the ISSB standards will come into place. For 2022 a public consultation on the proposal is planned. What is also unsure is if the US will use the ISSB’s standards. It seems likely, though, looking at the fact that most sustainability reporting updates in the US are investor-focused. 

Ways to comply with growing sustainability regulations

Sustainability is a crucial aspect of business operations in today’s world. With the increasing concern for the environment, governments and organizations are implementing strict regulations to promote sustainable practices. Compliance with these regulations has become essential for businesses to stay competitive and avoid penalties.

Here are some ways that businesses can comply with growing sustainability regulations.

What does this mean for you?

We’re still far from having a global standard for sustainability reporting and its methods. But one thing is for sure: mandatory disclosure of sustainability information will happen in the coming years. Companies should be prepared and advised to establish ESG reporting already today.  

Especially Scope 3 reporting poses a challenge for many enterprises, as they lack data, insights, and ways to get actionable insights. If you want to learn more about the difficulties of Scope 3 reporting and how to overcome them, make sure to read our article.

Sustainability Reporting: UK

Posted on by Laura Nodoph

Companies underlie various regulations about what they must report depending on where they are located and/or selling their products. Changing regulations for each country can be irritating and hard to oversee. In our series, we’ll give an overview of what sustainability reporting is mandatory and becoming mandatory in the following years and the most significant industries. After covering the EU in the first part of our series, today we’re following with the UK:  

In the United Kingdom, sustainability reporting is not mandatory for companies. The only exception is that UK-quoted companies (publicly traded) must report on their greenhouse gas emissions and global energy use as part of the annual Directors’ Report. While there is no stand-alone sustainability reporting, the government announced new Sustainability Disclosure Requirements (SDR) in October 2021. We explain how the new SDRs could impact your business and how they align with the Task Force on Climate-Related Financial Disclosures (TSFD) recommendations and the UK Green Taxonomy plans.  

 

Task Force on Climate-Related Financial Disclosures (TCFD)

The TCFD is the Task Force on Climate-Related Financial Disclosures. The Financial Stability Board created it in 2015 to develop international climate-related financial risk disclosures. Companies, banks, and investors are supposed to use them to provide critical information to stakeholders.  

While you could call TCFD another reporting framework, there is one key difference. Its use is not to find out about a company’s impact on the world and climate change but to reveal the effects of climate change on the company itself and the resulting financial risks. 

The final recommendations by the TCFD were published in 2017. The four recommendations relate to governance, strategy, risk management, and metrics: 

  • Governance: disclose the organization’s management of climate-related risks and opportunities 
  • Strategy: disclose the actual and potential impact of climate-related risks and opportunities on the organization’s operations, strategy, and financial planning 
  • Risk management: disclose how the organization identifies, assesses, and manages climate-related risks 
  • Metrics and targets: disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities 

The overall goal of the TCFD was to strengthen the financial system’s stability, contribute to a greater understanding of climate risks, and support financing the transition to a more stable and sustainable economy. 

 

Sustainability Disclosure Requirements (SDR)

The UK has set up the goal to be the first country to make the alignment with TCFD mandatory across the economy. They recently set out new Sustainability Disclosure Requirements (SDR) to get there. The SDRs are intended to create an integrated and streamlined framework that brings together sustainability-related reporting requirements.  

Designed to broaden the UK’s sustainability reporting, SDRs are supposed to give deeper insights into companies’ environmental and social impact, especially to investors. While SDRs are planned to be based on the TCFD recommendations, they go beyond the TCFD requirements  by looking at other environmental impacts and risks on top of climate change and requiring double materiality.  

What is double materiality? Double materiality means that disclosures should show how sustainability issues impact companies and how companies’ activities impact sustainable development in society and the environment beyond their primary operations. 

Still, SDRs are neither final nor in action yet. There’s a high probability of a long wait for legislative approval and further changes to the legislation. However, companies shouldn’t take this lightly. As soon as the SDR comes into place, enterprises will have to deal with the lack of data, especially in the deep tiers of your supply chains. Enterprises need to act now to be readily prepared for the challenges of reporting tomorrow. 

 

UK Green Taxonomy

Following the EU Taxonomy (read more about it here), the UK government is implementing a UK Green Taxonomy. Its use is to define which economic activities count as environmentally sustainable. This way, it aims to create consistency, improve understanding of companies’ contribution to environmental impact and provide a reference point for companies to develop and communicate Net Zero and capital investment plans. Same as EU taxonomy, it is supposed to improve sustainable investment and create security for investors, protect from greenwashing, motivate companies to be more sustainable, diminish market fragmentation and help shift investments to more sustainable options.  

The UK taxonomy will be compatible with international frameworks based on the EU taxonomy. To be aligned with UK taxonomy, same as EU taxonomy, company activities will need to meet three criteria:  

  • a substantial contribution to one of the six environmental criteria 
  • no significant harm to the other objectives 
  • complete a set of minimum safeguards 

Like the EU taxonomy, each environmental objective will be substantiated by detailed standards or the so-called Technical Screening Criteria (TSC). The finalization of the first two objectives, climate change mitigation, and adaptation, is planned for the end of 2022. The remaining objectives are supposed to follow in 2023.  

 

What does this mean for you?

The bottom line is that in the future sustainability reporting will be mandatory for UK companies. Trying to wait it out is a dangerous bet. Your company being accused of greenwashing will likely cost you more than investing in accurate reports now.   

The way out: invest in transparency and corporate sustainability. 

Sustainability reporting: EU

Posted on by Laura Nodoph

Companies underly various regulations about what they must report on depending on where they are located and/or selling their products. Changing regulations per country can be irritating and hard to oversee. In our series, we’ll go through the world’s continents and parts with the most significant industries and give an overview of what sustainability reporting is mandatory or becoming mandatory in the next years. We’re starting the series with the EU:  

As part of the Green Deal, the EU has committed to being the first climate-neutral continent by 2050. The European Union aims for a cleaner environment, affordable energy, smarter transport, new jobs, and a better quality of life. The first plan was presented in 2019. Today, many of the pledges have become regulatory actions. What data do companies in the EU have to report on? These are the four main reports:  

 

Corporate Sustainability Reporting Directive (CSRD)

Currently: Non-Financial Reporting Directive (NFRD) 

When talking about reporting, financial and non-financial reporting is differentiated. The NFRD, or soon to be CSRD, is a non-financial report, as the name suggests. Large and listed companies must report on how they operate and manage social and environmental challenges. While the NFRD concentrates on social factors like 

  • social matters and treatment of employees 
  • respect for human rights 
  • anti-corruption and bribery 
  • diversity on company boards (in terms of age, gender, educational and professional background) 

the CSRD, which was approved by member states in November 2022,  

  • introduces more detailed reporting requirements and a need to report according to mandatory EU sustainability reporting standards 
  • extends the scope to all large companies and all companies listed on regulated markets  
  • requires the audit of reported information 
  • requires companies to digitally ‘tag’ the reported data, so it is machine-readable and feeds into the European single access point 

Through standardizing the collection and analysis of the reported ESG data, the reporting is supposed to improve the flow of capital towards sustainable activities across the EU. At the same time, the CSRD enables civil society organizations, trade unions, and other stakeholders to evaluate the non-financial performance of large companies and encourages these companies to develop a responsible approach to business. Companies are first expected to report on the new CSRD in 2024.

In June 2023, the European Commission proposed changes to the European Sustainability Reporting Standards (ESRS) and the upcoming Corporate Sustainable Reporting Directive (CSRD). The proposed amendments aim to ease the burden on smaller companies and first-time reporters by extending phase-in times for certain sustainability factors and allowing companies to focus on material sustainability factors.

The Commission’s draft considers concerns about the challenging nature of reporting requirements, especially for first-time reporters, and aims to reduce compliance costs. Key proposals include allowing companies with fewer than 750 employees to omit certain data in the first year, providing an extra year for disclosing information on non-climate environmental issues, and introducing materiality assessments to focus on reporting on relevant sustainability factors.

In October 2023, the Commission announced further CSRD changes. Announced alongside the Commission’s release of its 2024 Commission Work Programme, the statement outlines their intention to postpone the adoption date for the sector-specific ESRS by two years. Additionally, it recommended delaying the adoption of rules for large non-EU companies that operate in the EU to provide sustainability reporting by 2 years.

As the Commission notes in its proposal, the postponement of these two key rules has arisen in order to allow “companies to focus on the implementation of the first set of ESRS,” “ensure that EFRAG has time to develop sectoral ESRS that are efficient,” and “limit the reporting requirements to the minimum necessary.”

 

EU taxonomy

The EU taxonomy is a classification system that was implemented in July 2020. It was designed to support the EU Green Deal objectives. The classification system defines which economic activities can be deemed environmentally sustainable, meaning actions that substantially contribute to at least one of the EU’s environmental objectives while not harming any other objectives and meeting minimum social safeguards. By classifying environmentally sustainable actions, EU taxonomy is supposed to improve sustainable investment and create security for investors, protect from greenwashing, motivate companies to be more sustainable, diminish market fragmentation and help shift investments.  

The system is built on Technical Screening Criteria (TSC), which define requirements for the EU environmental objectives. These are:  

  • Climate change mitigation 
  • Climate change adaptation 
  • Sustainable use and protection of water and marine resources 
  • Transition to a circular economy 
  • Pollution prevention and control 
  • Protection of healthy ecosystems 

Right now, only one TSC is finished and approved. It defines sustainable activities for climate change adaptation and mitigation objectives and has been applied since January 2022. The classification for the remaining objectives is supposed to follow later in 2022. All financial market participants, large companies, and listed SME businesses must report against the Taxonomy. 

 

Sustainable Finance Disclosure Regulation (SFDR)

The Sustainable Finance Disclosure Regulation is a financial report. It requires financial market participants and advisers to state how they report sustainability risks and impacts concerning their financial products. Investment product suppliers must disclose how sustainability concerns are communicated to customers. If products are promoted to comply with ESG characteristics, so to a part sustainable, they also must adhere to the taxonomy regulation of not harming other sustainability objectives. 

 

Product Environmental Footprint (PEF)

The Product Environmental Footprint (PEF) is a planned methodology based on Life Cycle Assessment. The European Commission wants to use it to show the environmental impact of single products over their whole lifecycle. It differs from LCAs by following more stringent and product-category-specific rules, determined by the European Commission. These category rules are making sure that the aspects that matter the most in each product category are not ignored. The approach, which ran through a test phase with more than 300 companies and 2000 contributing stakeholders in different fields of activities, has the goal to provide a common way of measuring environmental performance. Right now, the PEF system is in the transition phase, which will pave the way for policy development and wider industry rollout. PEF rollout is expected by 2024.

 

What does this mean for you?

The bottom line is that you must report if you’re a big company. Trying to wait it out is a dangerous bet. Your company being accused of greenwashing will likely cost you more than investing in accurate reports now.  

Although there is no immediate threat of a fine, neglected climate risks are reputational risks for your company. The way out: invest in transparency and urgently in corporate sustainability. 

Sustainability SaaS for manufacturers: A market overview 

Posted on by Laura Nodoph

Are you a sustainability manager and have been allocated the task of finding a solution for Scope 3 reporting and Life Cycle Analysis? Inevitably you will be on Google and see: There are (too) many options. When searching for the right tool, it can be difficult to get a clear picture of what they are offering and if they fit what you and your company need. To make life easier, we prepared a table of the most prominent players in the manufacturing industry and the most used functions in sustainability tools. If you want to enter deeper into the topic, you can scroll down and drop us a message for an in-detail market overview to be sent to you.  

Scope 3 reporting

What it is:

Scope 3 emissions result from assets not owned or controlled by a company. Therefore, scope 3 emissions are a consequence of a company’s activities but occur from sources outside of an organization. Examples of scope 3 activities are purchased materials, products and services, and employee business travel.

Why it is needed:

Reporting on scope 3 allows companies to assess their entire value chain emissions and identify where to focus reduction activities. Research shows that scope 3 emissions represent up to 90% of emissions for most companies. Companies that ignore scope 3 emissions will never reach an actual Net Zero state. The SEC has also taken up on this and discusses making scope 3 reporting mandatory.

Who does what?

Vendors of scope 3 reporting solutions fall into three groups. Consultancies do the reporting manually, while software solutions do scope 3 reporting automatically. Most of the software on the market takes a spend-based approach to scope 3 calculation. That means they’re estimating the emissions by collecting data on the economic value of the purchased goods and services and multiplying it by industry average emission factors. Right now, only Carbmee, Ecochain, and Makersite can do a more accurate scope 3 reporting by joining external emission and product data with a company’s product data.

Learn more about the benefits of scope 3 reporting with Makersite here.

Life Cycle Assessment

What it is:

The life cycle analysis (LCA) of a product is precisely what the name says: A technique that assesses the impact of a product, from the materials used to make it to its ultimate disposal. The LCA method evaluates the environmental impact from extraction and processing of the raw materials to the manufacturing, distribution, use, recycling, and final disposal.

Why it is needed:

Typically, LCAs are used to identify opportunities to decrease the environmental impact of a product by changing aspects of the design or formulation – by looking at the entire value chain from cradle to grave. Still, LCAs were not used heavily in the past because the manual creation required a massive amount of time and effort to be done for one product. Unfortunately, these LCAs also did not enable actionable insights. That means that companies could see the environmental impact over the life cycle of their current product, but not how the LCA and other categories like costing, compliance, and risk would be affected when changing things.

Who does what?

The automation of LCAs changed how businesses approach their products’ sustainability. While traditional LCA software (SimaPro, iPoint) still requires experts to take over core parts of the analysis, others can do a complete LCA modeling, including the product’s supply chain, without needing subject matter experts (Sphera, Makersite). Still, without a Multi Criteria Decision Analysis (see next point), LCAs alone are of limited use to decision makers in procurement and product teams.

Find out more about how Makersite offers complete product LCA across the entire lifecycle with 100% PLM integration here.

Multi Criteria Decision Analysis

What it is:

The Multi Criteria Decision Analysis (MCDA) evaluates multiple conflicting decision-making criteria. MCDA appears in business as well as in daily life. For producing companies’ examples of measures can be cost, compliance, supply chain risk, sustainability, etc.

Why it is needed:

MCDA is essential for emission reduction. To efficiently save emissions, products must consider sustainability a critical factor when designed. Following this, the departments of product design and procurement are in the driver’s seat to deliver carbon-neutral products and reduce emissions from the supplier base. Yet, they need a multi criteria view on not only sustainability criteria but also cost, compliance, supply chain risk, etc., to make impactful decisions without including experts in every step. Sustainability will only thrive if other product factors don’t lose to it.

Who does what?

The challenge that product designers, procurement, and sustainability managers share is that no tool gives them the whole picture. They need experts in each field of sustainability, cost, risk, etc., to move forward on their topics. MCDA changes this.  It does not only help you understand your emissions and where they are coming from but provides the tools for decision-making. Makersite is currently the only SaaS-sustainability tool that offers MCDA. We are reporting on climate change impacts and across more than 40 other dimensions, e.g., cost, compliance, risk, etc.

Read more on our MCDA and how we use digital twins to enable true ecodesign and sustainable procurement here.

 

*This comparison is researched on the basis of publicly available data and assessments by market experts.

How to find the right software for your needs

The functionalities

When trying to find the right fit for sustainability software for your company, it is essential to determine what you want to use it for. At this step, consider how you want your company to evolve in the coming years and not only the current need for – for example – obligatory Scope 3 reporting. Sustainability software can be an excellent chance for your company to report on your emissions and be more sustainable and, therefore, more relevant in today’s market. Our tip: Ask across departments (sustainability, product engineering, design, procurement) what tools they would need to be more sustainable and write down all the functionalities you could use in your company and its departments.

The maturity

Once you’ve found some companies that fulfill your needs in functionalities, make sure not to forget to look at their maturity. How long have they been on the market?  Can you ask for a reference call with a current customer? How is their team built? Do they have experts in their teams that can help you with specifics? Will you be able to use the tool independently after you got an overview, or will you always need support in using it? These and more questions should be answered so you decide on a tool that is ready to be used and not one which is still in development.

Reports vs. Action

As said in the first bit: Emission reporting is the easy part. Meaningful change can be made once you get actionable insights into your product data and supply chains. Therefore, for every tool, ask yourself: Will this enable actual change, or will this tool give me reports on the current situation? Remember that allowing real change means more than showing possibilities to be more sustainable. It also means that you need to be able to evaluate these possibilities on other levels like cost and risk. This is why our MCDA is so valuable. Change happens in product and procurement-, not expert teams.

Digital twins explained

Posted on by Laura Nodoph

Digital twins: We’ve all heard of them at some point, but do you really know what’s the technology behind it? In 2018, Gartner conducted a survey about the use of digital twins from 599 organizations with annual revenue of more than 50 million dollars and a plan to deploy at least one-use case of IoT. Out of 599 participants from six countries, 13% stated that they already use digital twins. 62% reported that they’re either in the process of establishing it or planning to do so in the following year. Research shows: Digital twins are becoming more mainstream. But what exactly is a digital twin, what are their use cases and how could digital twins benefit your company?  

 

What is a digital twin?

Simply put, a digital twin is a digital representation of a physical product or system. It mirrors an object, process, or organization. The digital twin does not only show the current state of the product or system but starts with the creation and ends with the disposal of its twin – therefore shows you the entire lifecycle. It is updated from real-time data and uses things like simulation, machine learning, and artificial intelligence to help with decision-making in the “real world”. The digital twin can help to identify problems early and can be used to analyze, simulate and control an asset from design to manufacturing, maintenance, and decommissioning. 

 

The history of digital twin technology

The beginnings of digital twin technology already started in 2000. In relation to product lifecycle management, Michael Grieves of the University of Michigan invented an early stage of the digital twin in 2002. His model contained three components: The real space, the virtual space, and a linking mechanism for the flow of data between the two. Grieves named the model “Mirrored Spaces Model”. Even though the model already contained today’s idea of the digital twin technology, in 2002 the further evolution of the model was not possible due to low computing power and low to no connection to the internet.

 

The difference between digital twins and simulations

Both simulations and digital twins use digital models of products and processes. But what is the difference between the two and why is the digital twin so much more innovative than a simulation? While a simulation mostly looks at one single process, a digital twin runs several simulations in order to look at multiple processes. At the same time, simulations have a “one-time” data input, while for digital twins the data flow is ongoing and in both directions. Summarized, digital twins have far more potential to help improve products and processes.

 

What are use-cases for digital twins?

One reason why digital twin technology is hard to grasp is that it has many different ways of use. From predictive maintenance for a factory, extended reality to see inside the walls for plumbing, urban planning of a smart city, virtual stress tests on products, especially cars, and many more the digital twin technology has only started to change the way we are working.  

Right now, the most use cases of digital twin technology happen in the following industries:  

  • Manufacturing 
  • Industrial IoT 
  • Healthcare 
  • Smart cities 
  • Automobile 
  • Retail 

The greatest advantage of digital twins right now is the capability to foresee problems at any stage of a product or process. Remember? The digital twin does not only show the current state but the whole lifecycle. Therefore, Digital Twins have a substantial influence on the design of products and their manufacturing and maintenance.

 

What could digital twins do for you?

What we can grasp from this article is that digital twins are a modern use of data management. They enable industrial companies to improve operational efficiency and innovate new products, services, and business models on top of their data. From the examples mentioned above, you might have already gotten some ideas on how you could make use of digital twins for your company.  

The Makersite digital twin is based on products and their supply chain, all the way upstream. Still, our integrated databases are what make our software special. Only they enable you to make informed decisions about your product by changing materials, and suppliers in our platform and seeing the outcome in your digital twin across categories such as cost, sustainability, compliance, and risk. This way, your product data, the live digital twin, and our integrated databases work together. 

Currently, the Makersite digital twin technology is heavily used in product engineering, design, procurement, and sustainability. Because you can look at the whole lifecycle of a product (or a product design) Makersite enables improvements from the first moments of designing a product. No need for experts or never-ending feedback rounds. Instead, the time to market for products is accelerated by 10%+.  

Still, this article was not written to praise our own digital twin solution – even though we’re quite proud of it – but instead to show the variety of digital twins’ uses in all kinds of industries and forms.