AI in Fashion: How AI Can Revolutionize Sustainability of Fashion?

Paul Polman, former CEO of Unilever and co-founder of Imagine, in an interview with HBR, said, “Companies are starting to understand that you need to be restorative, reparative, regenerative.” With increased awareness of climate change, sustainability, or corporate inequality, there is growing accountability and transparency from companies on environmental and social impact. 

Stats on CSR Impact 

Hence, for companies to disclose their actions supporting the environment, a crucial regulatory framework called the Corporate Sustainability Reporting Directive (CSRD has been adopted in Europe. This framework allows companies to be more honest and open regarding their sustainability efforts. It was put forward by the European Commission under the European Green Deal in 2019 to strengthen corporate liability. But what exactly is the CSRD, and how should fashion brands and retailers prepare to comply with it? 

What Is The Corporate Sustainability Reporting Directive? 

Implemented by the European Union, the Corporate Sustainability Reporting Directive (CSRD) aims to standardize, enhance, and modernize sustainability reporting among companies. CSRD replaces the Non-Financial Reporting Directive (NFRD), offering stakeholders more uniform, analogous, and trustworthy data on environmental, social, and governance (ESG) issues.

With the introduction of the new CSRD, the scope and scale of sustainability reporting bring in uniform, obligatory reporting criteria at the EU level. The number of companies mandated to report on sustainability will rise from 11,600 under the NFRD to about 49,000. 

The history of CSRD 

One thing that sets CSRD apart from NFRD is the type of information covered. While NFRD reports the standard environmental, social, and governance information, CSRD goes beyond by giving additional details like forward-looking insights, double materiality, alignment with the EU taxonomy, etc. 

CSRD Applicability And Timeline 

The scope for mandatory sustainability reporting by CSRD is extended to larger and listed companies regulated in EU markets, except micro-enterprises. By “larger companies” it means fulfilling two out of the three criteria, i.e., having a net turnover of over 50 million with 250+ employees and over €25 million worth of assets. Other small and medium-sized enterprises listed on the regulated market also encompass the same, but with a longer phase-in period and simplified reporting standards. 

CSRD Timeline 

April 21, 2021 - The European Commission approves the proposal for CSRD to replace the NFRD.

June 2022 - The European Commission and the Council reach a provisional agreement on the CSRD.

November 2023 - EFRAG publishes the first set of European Sustainability Reporting Standards (ESRS). 

January 1, 2024 - The CSRD comes into effect, focusing on large public-interest entities with over 500 employees for FY 2024 reporting in 2025. 

January 1, 2025 - The CSRD is also subjected to large companies not currently subject to NFRD, with reporting for FY 2025 in 2026. 

January 1, 2026 - The CSRD is extended to listed SMEs, small and non-complex credit institutions, and captive insurance undertakings, with reporting for FY 2026 in 2027. 

January 1, 2027 -   SMEs can opt out until 2028, with the start of full compliance for all applicable entities. 

January 1, 2028 - SMEs that opted out can begin reporting and complete the phased implementation of CSRD. 

CSRD Requirements

Companies must present comprehensive reports on ESG concerns, including specific targets and metrics. For detailed reporting standards, companies must invest in robust data collection and management systems that involve hiring trained personnel in sustainability reporting, training staff, upgrading IT systems, etc. CSRD further emphasizes governance and accountability by requiring the company’s board of directors to get actively involved to ensure the accuracy of these reports. 

Our RFP guide for carbon accounting and LCA covers a comprehensive list of parameters that companies must consider in evaluating software platforms and getting compliance ready for CSRD and other EU regulations. 

European Sustainability Reporting Standards (ESRS)

The Corporate Sustainability Reporting Directive includes certain mandatory requirements, providing a structured approach for companies to comply with for their sustainability reporting. These requirements are called European Sustainability Reporting Standards (ESRS). It was developed by the European Financial Reporting Advisory Group (EFRAG) and was adopted in June 2023. Apart from topical requirements, it consists of cross-cutting standards like ESRS 1 - General Principles and ESRS 2 - General Disclosure. 

Requirements for sustainability reporting 

ESRS 1 General Requirements

Under ESRS 1, a crucial concept is the Double Materiality Assessment. It demands that sustainability reporting must take place from two prospects : 

1. Impact Materiality

Preliminary impact materiality helps companies assess the scope, scale, and remediability of their impact on the environment, economy, and people. To calculate Preliminary impact materiality, companies should first measure the Scope of impact, Scale of impact, and Remediability. 

Scope Of Impact

The range of the impact across various areas or stakeholders and should be measured on the following scale: 

• 5 global/total
• 4 widespread 
• 3 medium 
• 2 concentrated
• 1 limited
• 0 none

Scale Of Impact

The intensity of the impact and should be measured on the following scale: 

• 5 absolute 
• 4 high 
• 3 medium 
• 2 low 
• 1 minimal 
• 0 none

Remediability

The extent to which the impact can be mitigated and should be measured on the following scale: 

• 5 non-remediable/irreversible
• 4 very difficult to remedy or long-term
• 3 difficult to remedy or mid-term
• 2 remediable with effort (time & cost)
• 1 relatively easy to remedy short-term
• 0 very easy to remedy

Preliminary Impact Materiality = Scope of impact + Scale of impact + Remediability 

Once calculated, the preliminary impact materiality should be described using the following table:

• ≥ 12 critical
• [10,12) significant
• [8,10) important
• [5,8) informative
• < 5 minimal

2. Financial Materiality 

Financial materiality allows companies to evaluate how sustainability issues impact their value-generating ability over the short, medium, and long term, affecting financial position and performance. 

Financial materiality should be described using the following results table:

• 4 critical
• 3 significant
• 2 important
• 1 informative
• 0 minimal

ESRS 2 General Disclosures

General Disclosure of ESRS 2 refers to the requirements demanding companies to disclose their information on the following aspects :

1. Governance

Provide details regarding how the company is managed on environmental and social policies. Companies must cover everything from board insights and stakeholder engagement to management structures and compliance mechanisms. 

2. Strategy

This requires companies to detail their overall strategic approach towards pressing environmental and social issues and future methods like energy efficiency, resource conservation, diversity and inclusion efforts, etc. to achieve them.

3. Impacts, Risks, and Opportunities

Communicating the social and environmental impact of a company’s operations and the risks and opportunities involved. This includes data on emissions, labor practices, water usage, cost savings through sustainability initiatives, human rights issues, etc. 

4. Metrics and Targets

Covers specific targets set by the company to assess and track performance in the social and environmental areas such as employee turnover rates, community investment spending, energy consumption, diversity statistics, etc. 

After the mandatory requirements, companies must also understand the topical requirements and tailor their reports accordingly. Under the ESRS, these topical requirements encompass various environmental, social, and governance (ESG) issues. 

ESRS Environmental Standards

These standards specify the requirements for environmental disclosure by the companies. Under this, many issues must be considered: 

E1. Climate Change

Energy consumption, emission reduction targets, greenhouse gas emissions, risks related to climate change, and strategies to adapt to these risks. 

E2. Pollution 

Soil contamination, wastewater discharges, emissions of pollutants like SOx, NOx, VOCs, etc. 

E3. Water 

Marine and coastal ecosystems, water usage, and discharge, and information regarding the water sources.  

E4. Biodiversity 

Initiatives to restore ecosystems and company actions and policies for biodiversity protection. 

E5. Resources and Circular Economy 

Raw material consumption, renewable material usage, recycling rates, waste generation, circular economy principles, designing products with minimal environmental impact, and longer lifecycles. 

ESRS Social Standards

Under the CSRD, the ESRS also specifies standards for disclosure related to social aspects of a company’s operations. Following are the requirements that fall under these aspects: 

S1. Own Workforce 

Average wages, wage equality, benefits, health measures, accidents, injuries, training programs, employee mental and physical health, policies to promote inclusion and diversity, etc. 

S2. Workers In Value Chain Metrics 

Forced labor, child labor, labor abuses, etc. along with the benefits provided like training and development opportunities, fair wages, working conditions, and hours for value-chain workers. 

S3. Consumers And End-Users Metrics 

Safety incidents, product recalls, marketing practices, consumer rights, product labeling, safety standards, data privacy, consumer awareness, etc. 

S4. Affected Communities' Metrics 

Local communities' concerns, investments to uplift them, jobs created, suppliers supported, setting up of grievance mechanisms, etc. 

ESRS Governance Standards

Finally, the ESRS for governance-related sustainability reporting focuses on a company’s policies and practices related to risk management, ethics, integrity, and structure. 

G1. Business Conduct 

Covers policies like anti-bribery or anti-corruption, code of conduct, mechanisms for reporting unethical behavior or violation of the code of conduct, how it is dealt with, number of reports received, actions taken, outcomes, etc. 

Additionally, it involves the composition and functioning of the board, its executive compensation, and stakeholder engagement. Risk management, including internal controls, audit, and compliance with the rules and regulations, are important to be vocal about with your audience.  

Key Performance Indicators For ESRS 

Companies must measure and monitor their sustainability performance to comply with CSRD. Key Performance Indicators (KPIs) are classified into environmental, social, and governance metrics under the CSRD and ESRS frameworks. 

Environmental Metrics 

Greenhouse gas emissions (Scope 1, Scope, and Scope 3), energy consumption (percentage of energy from renewable sources), water usage and withdrawal, waste generated, carbon pricing, carbon reduction, etc. 

Social Metrics 

Gender diversity (percentage of women in the workplace), number of accidents and fatalities, fair wages and working hours, average training hours per employee, employee satisfaction scores, labor standards, health and safety incidents among supply chain workers, data breaches, customer satisfaction, community consultations, etc. 

Governance Metrics 

Code of conduct violations, corruption incidents, board diversity, executive compensation, risk management, internal and external audits, fines for regulatory violations, etc. 

CSRD Audit And Assurance 

The reliability, credibility, and accuracy of sustainability reports are guaranteed through Audit and Assurance. The CSRD highlights the role of auditors and the significance of independent assurance in elevating the standards of these reports. 

The auditor verifies data collection methods, ensuring the data is efficient and consistent with the brand’s operations and complies with standards like ESRS. Assessing how effective the internal controls related to sustainability reporting are, Auditors evaluate how the company predicts, manages, and mitigates risks. The role of an Auditor is to ensure that all aspects of ESG are covered in the sustainability report with no omissions and that all the data aligns perfectly with the financial and non-financial information. 

Independent Assurance is also an important factor for the credibility and reliability of these reports, as investors depend on these assured reports for making decisions. These auditors provide an unbiased view of the report, with an objective assessment of a company’s performance. They ensure that the report aligns with the standards and practices, and their feedback can highlight areas for improvement. 

CSRD - Potential Challenges

However, the overall audit process faces challenges like ensuring the accuracy of diverse ESG data and metrics. The need to keep up with the changing standards and regulations and various interpretations of these guidelines can provoke inconsistencies. Audit reporting requires expertise and training, which may not be available at every firm. Therefore, companies must use systems that allow them to report their data in an audit ready format. 

Further, the auditing process can be costly and time-consuming for small companies with limited resources. During the audit reporting process, material assessment needs to be carefully considered, identifying ESG concerns. It is also critical to identify the scope and boundaries of the sustainability report, for example, which operations to include.  

CSRD Timeline For Report Submission  

Companies must submit these reports accurately and timely to maintain stakeholder trust and compliance. They must detail out the activities of the previous fiscal year and submit their reports annually. These reports can be combined with annual financial reports or can be submitted separately. Although every company has a specific deadline according to the country and regulatory standards, the report is to be submitted in the same timeframe as the financial report, a few weeks after the end of the financial year. 

The timeline for audit and assurance typically begins a few months before the report submission, giving enough time for data verification and assurance tasks. They finish their review and provide feedback just in time to be included in the report. 

Steps to prepare for CSRD reporting 

Non-Compliance With CSRD 

Companies that fail to comply with the Corporate Social Reporting Directive (CSRD) and the European Sustainability Reporting Standards (ESRS) related to the same may suffer significant losses, leading to financial, legal, or reputational troubles. Companies can be substantial fined by the regulatory bodies based on the duration and severity of non-compliance. They may also face higher audit and assurance costs if issues are found in the reports because additional rectifications may be required. Additionally, companies may get their credit ratings downgraded by the rating agencies, increasing borrowing costs.  

Conclusion

The Corporate Social Reporting Directive (CSRD) is a major milestone in the industry of corporate sustainability.  It mandates companies to disclose transparent and detailed information regarding their environmental, social, and governance (ESG) practices. 

To ensure compliance, fashion brands and retailers must focus on robust internal controls, honest reporting practices, and rigorous data collection. Software platforms like Carbon Trail can help in automating carbon accounting, adding transparency in emission calculations, gaps filling, audit-ready reporting as per CSRD standards. 

In the coming years, sustainability reporting is expected to get more thorough and rigorous. Companies must integrate sustainability into their core operations and become well-prepared for future regulations. By staying ahead of the game, businesses can enhance their ability to adapt, foster innovation, and make a positive impact on global sustainability goals and secure long-term success and sustainability.