Are commodity traders ready for new sustainability standards?

At Gen10, we have been monitoring the growth of sustainability reporting requirements for many years already. Mandatory sustainability reporting is still not the global standard, particularly for SMEs and smaller corporates. But as we have explored before, many jurisdictions are putting new reporting requirements in place, and several are also expanding their existing requirements.

Focusing in on one new piece of legislation, the Corporate Sustainability Reporting Directive (CSRD) came into force in the EU in January, with the first data collection beginning in 2024. It expands sustainability reporting legislation to cover approximately 50,000 companies and strengthens the rules around what data the companies need to report on. The legislation states that sustainability information has financial relevance, and it brings sustainability reporting into greater alignment with financial reporting.

The Directive itself can be read here, but today we are instead focusing on the draft standards for this reporting information. The standards are developed by the EFRAG, previously the European Financial Reporting Advisory Group, and are based on 6 conceptual guidelines. Below, we discuss these conceptual guidelines and what they mean for commodity management systems.

1. Public Good

Standard-setting activities are expected to be conducted in the public interest. Trading companies that embark on sustainability projects are often acting in both their own and the public interest, making decisions for the long-term health of the company as well as people and the planet. And it can have shorter-term benefits too, including better risk management and preferential trade finance terms.

Commodity management technology can support your organisation’s sustainable growth by providing a complete overview of your operations, including sustainability metrics such as carbon emissions. A good commodity management system also allows you to create a better picture of your entire supply chain, allowing you to ensure better sustainability across each product’s value chain, with verifiable reporting for any external stakeholders that need further information.

2. Quality of information

Information needs to be relevant, accurate, understandable, and verifiable. This is true for any reporting and is the basis of commodity management systems, which are used not only for financial reporting, but to create a comprehensive overview of all positions and activity so that people can make the best decisions based on accurate, relevant data.

Commodity management software helps organisations manage all data (including sustainability data) in one single source of truth. Automation and digital audits ensure the information is accurate and verifiable, with a range of different mechanisms to ensure it is relevant and free of irrelevant data for whoever needs it, whatever their job role. Data is also securely stored and backed up, often in a cloud database which means that it is accessible anywhere your people need it, but is protected by teams of cybersecurity experts at the cloud provider as well as your software vendor.

3. Retrospective and forward-looking information

In the case of these sustainability standards, the forward-looking information is specifically around setting targets, creating action plans, and aligning goals with the relevant KPIs.

This is something that many commodities organisations are experienced in managing, alongside retrospective and current data reporting, and can be supported by a good commodity management system, the purpose of which is to simplify operational data.

Commodities sustainability is a journey along which the goals are constantly changing. And to meet these changing goals, your KPIs and progress towards them need to be visible and understood by relevant stakeholders; a data collection and visualisation process made much simpler with the correct commodity management software.

And the verification that a commodity management, or CTRM system, provides is a vital tool in demonstrating that the organisation is indeed making progress towards these goals whilst minimising the risk of greenwashing accusations.

4. Levels and boundaries of reporting

Sustainability reporting goes beyond the level of the organisation itself and any commodity traders subject to sustainability reporting regulations will also need to consider the impact of their value chain.

Again, commodity management technology is designed to support this objective by providing greater supply chain visibility and a range of supply chain management tools. A good commodity management system provides better traceability than a typical CTRM so that you can provide information on your products’ journeys through your value chain and report on any relevant sustainability metrics you choose to incorporate. The best commodity management systems such as Gen10’s CommOS will also allow you to record and manage carbon dioxide emissions through your supply chain operations.

5. Double materiality

Double materiality means that the legislation will need to account for both impact materiality and financial materiality when determining what needs to be reported on. Impact materiality covers sustainability matters that have a material impact on the organisation’s own operations and its value chain.

Financial materiality involves identifying sustainability matters that could have a financial impact on the organisation beyond what is already recognised in financial reporting. The standards also confirm that impacts can have “dynamic materiality” – they may become financially material over time.

One example of this dynamic materiality could be carbon emissions. If your organisation is not currently offsetting its carbon emissions, they are having a material impact on the environment, but could have a future financial impact if your organisation begins purchasing carbon credits, through either voluntary or compliance markets.

Carbon credits can themselves have positive material effects. Projects that create carbon credits for offsetting can have a range of other benefits; they may improve access to clean water, or provide high-quality jobs or sustainable infrastructure. Our ecosystem of commodity management tools includes options for managing carbon credit purchasing, trading and offsetting, allowing you to capture the full financial and material benefit of every credit.

6. Connectivity

All dimensions of corporate reporting need to be interconnected, rather than leaving gaps between sustainability and financial reporting. This connectivity should work both ways with anchor points in sustainability for financial reporting as well as vice versa.

Once again, commodity experts with modern commodity management systems could find themselves ahead of the curve when it comes to connectivity between diverse business units. One of the main differentiators between commodity management and CTRM systems is that commodity management aims to bring all your business data together, incorporating supply chain data alongside financial and risk management information for comprehensive reporting as well as operational efficiency.

Commodity management systems are designed to seamlessly connect the disparate teams within global operations so that all users have access to the data and reports that they need, whenever they need them. This connectivity means the business can operate as efficiently as possible, with all teams making data-driven effective decisions and automated systems sharing the information that others need in real-time. Commodity management systems automate and improve commodity processes across trading, operations, finance, and risk. And their connectivity and data reporting capabilities mean that your organisation can add sustainability to these joined-up operations at any time.

Summary

Sustainability reporting is coming to the commodities industry and may well one day be comparable to financial reporting. Commodity traders have a choice to make – whether to embrace sustainability reporting and the technology that can transform both this reporting and their operations, or wait until this reporting is forced upon them.

If you’d like to find out more about how commodity management technology can support your business, get in touch now.