Sustainability is no longer a choice but a necessity. With the European Union’s ambitious goal to become the first climate-neutral continent by 2050, regulatory frameworks like the Corporate Sustainability Reporting Directive (CSRD) are shaping the future of industries, particularly the construction sector. The CSRD is a critical development, pushing businesses to be more transparent about their environmental, social, and governance (ESG) impacts. But what does this mean for companies, especially in construction? Let’s explore.

What is the CSRD?

The CSRD, a successor to the Non-Financial Reporting Directive (NFRD), is the EU’s latest directive aimed at reinforcing the way companies report on sustainability. Having come into effect in January 2024, it requires companies to disclose extensive data about their ESG performance. More than just financial metrics, the CSRD shifts the focus towards double materiality, meaning companies must report both on how sustainability issues affect their business and how their business impacts the environment and society.

Under the CSRD, businesses must produce detailed reports covering three main categories:

• Environmental - Companies must disclose their strategies for mitigating climate change, conserving biodiversity, managing waste, and using resources efficiently.
• Social - This includes reporting on fair labor practices, human rights, and equal opportunity initiatives.
• Governance - Firms are required to detail how their governance structures ensure accountability, including ethical practices, anti-corruption measures, and transparency in business operations.

These reports must follow the European Sustainability Reporting Standards (ESRS), ensuring consistency, comparability, and reliability. Additionally, companies’ sustainability data will need third-party assurance to verify its accuracy, ensuring that investors and stakeholders can trust the information provided.

Which companies are affected by the CSRD?

The CSRD expands its scope significantly compared to the NFRD. While the previous directive applied only to large listed companies, financial institutions, and insurance firms with over 500 employees, the CSRD now covers:

• Large companies covering two criteria out of three (more than 250 employees, turnover of €50 million or more, balance sheet total of €25 million or more);
• Listed SMEs;
• Non-EU companies with a net turnover of €150 million in the EU and with either a subsidiary or branch within the EU meeting certain thresholds.

This means that over 45,000 companies across Europe will be required to comply, compared with 12,000 under the NFRD.

The impact of CSRD on the construction sector

The CSRD’s implications are profound for the construction industry, which has long been recognized for its substantial environmental footprint. This directive is a turning point for the sector, particularly regarding the need for carbon accounting and the reduction of Scope 3 emissions.

Transparency and carbon emissions: Scope 3 is key

One of the most significant ways the CSRD affects construction is through Scope 3 emissions reporting. Scope 3 refers to indirect emissions that occur throughout the supply chain and life cycle of a project. For construction companies, Scope 3 can account for 60% or more of their total greenhouse gas (GHG) emissions (according to ADEME). This includes emissions from the production and transportation of building materials, energy use during construction, and even the end-of-life demolition of buildings.

Under the CSRD, construction firms must now report these emissions in detail. This is not just a requirement but an opportunity. By providing a clearer picture of their carbon impact, construction businesses can identify inefficiencies, reduce waste, and ultimately contribute to net-zero targets. Moreover, reporting Scope 3 emissions in line with Lifecycle Assessment (LCA) methodologies helps companies demonstrate their commitment to circular economy principles - a key focus of both the CSRD and the EU’s broader Green Deal.

Partner accountability and business opportunities

The CSRD’s requirements extend beyond the companies directly subject to the directive. Suppliers, subcontractors, and other business partners within the construction value chain are now required to provide data on their own sustainability efforts. This creates a ripple effect across the industry, pushing smaller companies to align with sustainability goals to avoid losing critical business partnerships.

Banks, now subject to the EU's Green Taxonomy, increasingly prioritize environmentally friendly construction projects. This means that companies demonstrating a strong commitment to reducing carbon emissions can benefit from preferential rates or better access to financing for their projects.

Reaching carbon neutrality by 2050

European directives such as the CSRD, the EU Green Taxonomy, and the EPBD highlight the critical importance of Life Cycle Assessment (LCA) in the construction sector. By integrating LCA as a central pillar of their requirements, these directives aim to ensure a comprehensive and rigorous evaluation of the environmental impacts of buildings, from design to demolition.

With these regulations, it is clear that LCA is indispensable for achieving the EU's sustainability goals. Companies and stakeholders in the construction sector will need to systematically integrate LCA into their processes to meet regulatory requirements and contribute to a decarbonized economy.