Stop ignoring upcoming requirements, acquire knowledge, look at what and how companies in relevant industries are doing in Latvia and elsewhere, collect the necessary data, and find the best possible solutions through constructive discussions with stakeholders, all while domestic companies maintain and increase their competitiveness in the market.
These conclusions were voiced during the discussion “Sustainability reports, accountability in supply chain management” organised by the magazine “Dienas Bizness” and the Latvian forestry and related industries portal zemeunvalsts.lv.
Required from large companies
“The EU Corporate Sustainability Reporting Directive requires large companies to provide information on their business model, how it impacts social and environmental aspects, and what the impact of major external trends is on the company’s future development,” explains Agnese Alksne-Bensone, co-founder of the Latvian Corporate Social Responsibility platform (CSR Latvia), noting that companies are required to reflect data, processes, and achieved results (in relation to established goals).
“The directive can be viewed as a ‘big framework’ for disclosing sustainability information, which is significantly more detailed compared to previous attempts to request this type of information from large companies in order to understand what is happening within them and how,” continues A. Alksne-Bensone, adding that according to initial estimates, the directive’s requirements will apply to approximately 50,000 companies in Europe; in Latvia, this could be around 200 large companies, and in the longer term, around 5,000 small and medium-sized enterprises. The requirement to include a sustainability report in the annual management report from 1 January 2024 will apply to companies that meet two of three criteria – 500 or more employees; a net turnover of 40 million euros; and a balance sheet total of 20 million euros (these are the companies that were subject to the previous directive on non-financial information disclosure). The aforementioned companies must also prepare information for 2023. Meanwhile, from 1 January 2025, the relevant requirement will apply to companies meeting two of three criteria – 250 or more employees; a net turnover of 40 million euros; and a balance sheet total of 20 million euros, and from 1 January 2026 – to companies meeting two of three criteria – 10 or more employees; a net turnover of 0.7 million euros; and a balance sheet total of 0.35 million euros.
A. Alksne-Bensone acknowledges that preparations for complying with the requirements of the EU Corporate Sustainability Reporting Directive must begin immediately; even though no specific penalties are set for failing to comply with these requirements, non-compliance or failure to observe them risks the loss of clients. “Information will be mandatorily required regarding an organisation’s business model, governance, stakeholders, and also specific sustainability issues or aspects that are material to the company, such as CO₂ emissions within the company and its value chain, compliance with human rights (and violations thereof), diversity management, occupational safety, remuneration, tax payments, anti-corruption, and social issues,” A. Alksne-Bensone lists the requested information.
Need to collect data
“At a meeting abroad, I heard the question: is it even possible to achieve these goals within the socio-economic system we call capitalism?” reports Sabīna Alta, Director of Development at SIA “Laflora”. She admits that recent years have been spent in a relative war zone of various regulations and directives, with attempts made to prioritise documents, especially the goals and requirements set out in them. “The directive seems to have sorted everything into place and allows us to conclude that we are on the right path,” states S. Alta, pointing to a significant linking factor, namely, the interdependence within supply and value chains, because all stages must be involved in resolving sustainability issues. Naturally, small suppliers will also be affected, as information (data) will be requested from them as well.
“We have to collect data. The unclear question is how it will be obtained, how it will be verified, and (some of it) certified,” S. Alta says in assessing the situation. She recalls that when “Laflora” first began dealing with these issues, they first conducted a lifecycle analysis of their products at the extraction, processing, and sales stages. “That is how we understand the situation, understand what needs to be improved, and what strategic goals, which are important to our clients, we can set. For clients, product quality and safety are undeniably of primary importance, as are our company’s values; at the same time, clients want peat extraction and processing to be done responsibly and sustainably. Since the industry in Latvia is relatively strictly regulated, an environmental impact report is produced for every peat extraction site, defining what will happen in these areas after peat extraction is completed,” says S. Alta, adding that an environmental impact assessment will no longer be a 100% guarantee for the client, because a peat extraction site cannot be developed in one year; the process can last up to 75 years (in accordance with Cabinet of Ministers regulations).
Data-driven decisions
“I support the development and adoption of data-driven decisions. The more data we have, the better the decisions that are made. In this case, we should talk not about the established and correct goals, but about their implementation,” Guntis Gūtmanis, Chairman of the Board of the Farmers’ Parliament (LOSP), says in analysing the situation. He reminds us that the directive is a kind of guideline that points the way, but a great deal will depend on how we implement it in Latvia.
“Unfortunately, past experience shows that we are capable of demanding the impossible, or it is unclear who needs the relevant data because the requestors do not explain why,” G. Gūtmanis says critically, noting that the desire to ask for more than necessary is quite common. “What happens? Farmers say they have no time to engage in their primary work, or they have to hire a consultant to comply with the requirements, which increases costs,” the LOSP Chairman of the Board shares from his experience. In his opinion, there is another important issue – how data will be collected, and what programs and systems will be used to input them so that they are transferable. “Perhaps this is just a problem in Latvia, but we usually make everything mentioned above so complicated that it is difficult to accomplish without the help of a specialist, because it is unclear what is being asked, where, and how it should be entered. The consequences? At one point, the farmer will simply give up and leave the country, or at best, find a field where fewer reports are required,” G. Gūtmanis explains the essence of the problem.
The criteria of the EU Corporate Sustainability Reporting Directive make him concerned, because reporting obligations will not only apply to large companies, but also to relatively small agricultural enterprises. “It is interesting how a large dairy processing company will obtain data from every small milk supplier to prepare its report,” asks G. Gūtmanis. For now, it is unclear how this could be implemented. “Will it not end up that they prepare ‘something somehow’ just to formally fulfil what is required?”
Sabīna Alta draws attention to a significant issue – how much complying with these requirements will cost companies. “I know what research and verification costs. If research is not scientifically verified appropriately, it is not valid; there is also data verification and the work of audit firms. For example, a small farmer with two or five cows will not be able to afford it. How he will prove that he feeds his cows ‘greener’ is unclear,” S. Alta says in analysing the problem. A. Alksne-Bensone reminds us that a key word in the directive is “materiality,” which must be determined by the company itself – what are the critical areas, who are the critical suppliers, and what is the critical impact. “If we talk about impact, there is a big difference between a milk supplier with two cows and one with 1,000. The emphasis will be on the larger company. Building a report must be approached meaningfully, not formally,” explains A. Alksne-Bensone, stating that almost every farmer entrusts bookkeeping to a professional, and sustainability (reporting) could become a similar service.
“Over time, more economically viable and convenient solutions will be created that will allow servicing small and medium-sized farms and companies in other sectors.” In A. Alksne-Bensone’s view, the market will settle, but the root of the problem lies in the data that the public sector should be collecting, which should be verified and scientifically proven. “Not like now, when, while performing a CO₂ calculation for a company, one has to use an accounting modelling method (which is also permissible in the GHG Protocol), using coefficients from Lithuania, Germany, or Belgium, because those countries have done their ‘homework’,” explains A. Alksne-Bensone.
It is interesting that in studies conducted in Latvia on the volume of greenhouse gas emissions in peat extraction, the data obtained in the Nature Conservation Agency’s project under the EC LIFE REstore environment and climate program show significantly lower emission volumes – on average twice as low as those internationally determined and used in Latvia’s annual greenhouse gas emission inventory. “There is only one BUT – these results are not scientifically verified,” reminds S. Alta. She emphasises that verification must be performed by the institution that led the research – the research data must be submitted for a scientific publication.
“This is incomplete homework. For now, the European Commission allows the use of national-level measurements, but that will not be the case forever,” explains S. Alta. “We have missed deadlines; research should have been conducted much earlier so that we now had foundations to build on for further action,” concludes G. Gūtmanis, saying that work in this direction is happening, money has been allocated for research, but the research already conducted is not yet at a level where significant conclusions can be drawn.
“Box-ticking approach” will not work
“The European Commission declares that EU member states themselves assess what to request and what bureaucracy to ‘impose’. What do we see? Bureaucracy is growing every year – more documents and systems are being created for data collection, and they are becoming more complicated, which creates resistance, opposing even those created for good and noble purposes,” concludes G. Gūtmanis, noting that this path can lead to a situation where many people no longer want to fill out yet another form and abandon their existing field of activity. “This paper will be very expensive if we treat it that way,” A. Alksne-Bensone hastens to add. As soon as companies tackle these issues, a story about saving money and new potential sales markets emerges, while simultaneously identifying problematic issues that must be addressed, even if eyes were simply closed to them before.
“For these reasons, it cannot be done just to tick a box; that can be a very expensive tick,” says A. Alksne-Bensone. G. Gūtmanis hopes that Latvia will not adopt a law or decision that enters into force in three months while entrepreneurs do not understand what and how to do. “There will be a learning time both for companies, in order to produce a relevant report, and for auditors, who will have to check it. At the moment, auditors are still learning; additions to standards are being developed, after which checks can be performed,” concludes A. Alksne-Bensone. She reminds us that the European Commission President had four opportunities to stop the Green Deal, it was not done, and it will not disappear anywhere, so we must think about the next steps. “Perhaps data verification at the state level is not happening because the directive applies to companies,” S. Alta speculates.
We need dialogue, not monologues
“Perhaps in the daily rush, we have forgotten an important concept – balance, when we should be talking to all stakeholders – industry associations, non-governmental organisations, nature lovers, public administration, and politicians. At least until now, such conversations have not taken place; instead, in place of discussion and seeking solutions, a label is often attached – ‘black, bad, old-fashioned’. The question is not whether someone doesn’t love nature, but rather what to do and how. To reach or fulfil the established goals, it is not necessary to ‘shut down’ a sector or sectors, even more so if they can help others reach the established goals,” reflects S. Alta.
G. Gūtmanis adds that the interrelationships between industries are debatable – whether we are a green country or not, but... there is no goal-oriented data-based calculation that would prove these claims. “Everyone is trying to prove their own rightness rather than jointly finding evidence of what we are actually like in Latvia,” G. Gūtmanis is critical.
“If each of us pulls the blanket in our own direction, the public sector has a schedule, reports, and a methodology for how they can show what has been done. But... it is impossible to do that effectively without industry involvement and open conversation, for example, about pollution, how much it costs to reduce it, and what would be needed from the state to complete these measures. Pretending that there are no problems because we are a very green country is wrong, because there are spheres in which we have excellent results, while at the same time, there are those in which we cannot reach even the minimum required,” says A. Alksne-Bensone. She admits that the public sector sometimes simply waits, which is occasionally a diplomatically correct solution. However, talk that “we are small and don’t influence anything” will not help; namely, Latvian companies are part of European and global supply chains. “Exporting companies will have to pay for that,” emphasises S. Alta.
Could exclude import competitors
The new requirements can, in a sense, curb imports and promote the consumption of analogous local products. “In Latvia, about 80% of the population has low purchasing power, which is why they choose cheaper products from third countries, about which we know little – how it was grown, how it was harvested, what labour was used, how it was brought in, etc. At the same time, there is safe local produce on the market, about which we know absolutely everything,” G. Gūtmanis says in analysing the situation, adding that Europe is very good-natured, resulting in a paradoxical situation – in Latvian shops, one can buy food products on which it is written in very small letters: “Does not comply with EU requirements”. “Most consumers do not notice this, but the product is cheaper than the local equivalent. How does that look from the perspective of food safety?” continues G. Gūtmanis.
Food – an exception
“I recently heard the conclusion that at a gut level, European politicians understand that their own set goals are not realistically achievable and implementable, which is why the generation of new plans in this direction is slowing down, but the ‘ship’ has a large inertia and continues on its course,” evaluates G. Gūtmanis. In his opinion, precisely for these reasons and precisely for Latvia, the question is important: “By going ahead of the others, won’t we ‘cut off our own legs that will be hard to sew back on?’” “A high-quality discussion is needed: what, how, and in what direction the state should act, where it is worth hurrying from an economic perspective, and where to pause,” G. Gūtmanis is convinced. For example, regarding emissions, for several years now in the European Milk Board, there has been discussion and debate about excluding food supply from emission calculations, because the supply of food (feeding ourselves) is a matter of national security. “The question is very significant – what happens if at some point we simply ‘throw out’ part of the food chain, what do we do when borders are closed, as we experienced in the first months of the C19 pandemic, when food could not be imported,” evaluates G. Gūtmanis.
S. Alta hastens to add that such a question also applies to peat substrates (as is known, their alternatives are not very healthy for humans). “There is no discussion about the value chain, for example, what happens in the country from which we receive raw materials, what happens to it after that, and what ends the lifecycle of the raw material – the product. Legal acts have been ‘mass-produced’. When we arrive at reality, this data is missing, and there is no supply chain security, which would meaningfully include human health (if there were relevant data, the situation would be different),” A. Alksne-Bensone is critical.
Discussion video: https://www.youtube.com/watch?v=KScw7eU5TdQ&t=4s