EU Action on Climate Change

EU Action on Climate Change

The European Union has been a leader in global efforts to combat climate change and promote sustainability. Recent legislation has made these initiatives increasingly central to business strategy by making sustainability and environmental compliance a legal requirement.

For businesses running SAP, these regulations require the addition of SAP’s tools to their systems for facilitating environmental compliance and sustainable practices, in order to meet these new regulations.

This article from IgniteSAP looks at the changes in the environmental responsibilities of companies in the EU, and explores how those running SAP can implement solutions to meet those legal requirements.

The Need for Businesses to Comply

Non-compliance with EU regulations can result in severe penalties, including substantial fines and restricted market access, which can severely impact a company's reputation and financial performance. The regulatory requirements demand rigorous due diligence, accurate reporting, and verifiable traceability of supply chains to ensure products meet the deforestation-free criteria and other sustainability standards.

For businesses, this necessitates a significant overhaul of current practices, from sourcing and procurement, to production and distribution. It also requires the integration of advanced data management systems to track, validate, and report ESG data accurately. Given the complexity and scope of these requirements, businesses must use technological solutions that facilitate efficient and effective adherence to regulatory standards.

EU Regulation on Deforestation-free Products

The EU Regulation on Deforestation-free Products, formally known as Regulation (EU) 2023/1115, came into force on June 29, 2023. It mandates that products placed on the EU market or exported from it must not originate from land that has been deforested after December 31, 2020.

The regulation aims to significantly lower the EU’s impact on global deforestation by ensuring that the listed commodities are sourced sustainably.

By promoting the consumption of products that don’t contribute to deforestation, the EU expects to reduce greenhouse gas emissions by at least 32 million metric tonnes annually.

The regulation also seeks to protect biodiversity by preventing the destruction of primary forests and other ecosystems.

The regulation provides an 18-month adaptation period for large companies to comply with the new rules, while small and medium-sized enterprises (SMEs) are given additional time.

Compliance involves due diligence, including traceability and proof of adherence to relevant legislation, such as human rights laws. Companies must conduct risk assessments, maintain detailed records, and provide geolocation data to prove that their products are not leading to deforestation.

Corporate Sustainability Reporting Directive (CSRD)

The CSRD represents a major overhaul of the existing Non-Financial Reporting Directive (NFRD), significantly expanding the scope and depth of sustainability reporting requirements.

The directive demands large and medium-sized companies provide comprehensive ESG disclosures. This aims to standardize sustainability reporting across the EU, for better transparency and comparability for investors and other stakeholders.

Companies must disclose detailed information about their business models and sustainability policies.

Reports must include the outcomes of these policies and any sustainability-related risks the company faces.

Detailed KPIs are required to measure and track the company’s sustainability performance over time.

EU Taxonomy and Sustainable Finance Disclosure Regulations (SFDR)

The EU Taxonomy and SFDR are integral parts of the EU's sustainable finance framework.

The EU Taxonomy establishes a classification system for environmentally sustainable economic activities, which is needed for consistent sustainability reporting. The SFDR complements this by requiring financial market participants to disclose how they integrate sustainability risks in their investment processes and products.

The classification system defines criteria for activities to be considered environmentally sustainable. Companies must report the proportion of their turnover, capital expenditures (CapEx), and operational expenditures (OpEx) that are aligned with the taxonomy.

The Sustainable Finance Disclosure Regulation (SFDR), increases transparency in finance by mandating disclosures on how sustainability risks are factored into investment decisions. It aims to guide investments towards sustainable projects and activities, so encouraging a more sustainable economy.

Businesses need to evaluate their suppliers' practices and ensure that their sourcing methods are sustainable and compliant with the regulation. This involves detailed investigations into the origins and production practices of relevant commodities such as cattle, cocoa, soy, and palm oil (see the section on SAP Business Network).

Companies are now required to produce daily Due Diligence Statements (DDS). These statements must include geolocation data of production sites, ensuring traceability and transparency of the supply chain.

Maintaining detailed records and ensuring the integrity of these documents is crucial. The EU regulations require that businesses retain this documentation to substantiate their compliance efforts during audits and inspections.

Diverse data sources must be integrated into a unified reporting framework. This means that all relevant ESG data is collected, processed, and reported consistently, for transparency and comparability across the industry.

How SAP Solutions Assist in Compliance

SAP Green Token

SAP Green Token is a tool that provides daily Due Diligence Statement (DDS) reporting capabilities, supporting compliance with the EU Regulation on Deforestation-free Products (EUDR). It helps trace and verify the sustainability of commodities using innovative technologies like digital twins and blockchain.

By utilizing blockchain, SAP Green Token ensures that records of product origins are immutable and transparent. This technology promotes trust within the supply chain by providing verifiable proof that commodities do not originate from deforested lands.

Blockchain’s capability to provide secure, tamper-proof records helps companies verify compliance with environmental and human rights standards, as mandated by EU regulations.

SAP Sustainability Control Tower

The SAP Sustainability Control Tower is designed to manage ESG data, ensuring compliance with the Corporate Sustainability Reporting Directive (CSRD) and other regulatory standards. This tool integrates with SAP S/4HANA Cloud, for real-time insights and automating the compliance reporting process.

SAP consultants can assist businesses in integrating various data sources into the SAP Sustainability Control Tower. This ensures accurate and real-time management of ESG data, which is critical for audit readiness and compliance.

Setting up credible and reliable data validation workflows within the Control Tower helps in maintaining the integrity and accuracy of ESG data, making sure that it meets all regulatory standards.

The Control Tower can be configured to automate the generation of compliance reports that align with CSRD, EU Taxonomy, and SFDR. This significantly reduces the administrative burden on companies, ensuring timely and accurate reporting.

SAP Sustainability Data Exchange

The SAP Sustainability Data Exchange facilitates the sharing of carbon emissions data across the value chain. This tool is essential for tracking Scope 3 emissions and ensuring comprehensive sustainability reporting.

SAP consultants can implement systems within the SAP Sustainability Data Exchange to gather accurate data from across the supply chain. This data is crucial for tracking and reporting Scope 3 emissions, which include indirect emissions from both upstream and downstream activities.

Ensuring that emissions data is standardized and interoperable across the value chain is vital. The SAP Sustainability Data Exchange promotes the use of standardized formats, facilitating easier compliance with regulations and enhancing overall transparency.

SAP Business Network

A critical component for each business to act on is ensuring that suppliers adhere to the same standards. This involves a thorough due diligence process to gather necessary data and verify compliance with sustainability criteria.

Businesses should begin by conducting assessments of their suppliers. This includes evaluating their sourcing practices, environmental impact, and adherence to human rights standards.

SAP Business Network includes features that allow companies to check if their suppliers' green credentials align with their sustainability goals. Through the network, companies can access detailed information about their suppliers' environmental practices and certifications. This includes data on carbon footprints, adherence to environmental standards, and other sustainability metrics.

Ensuring that suppliers are aware of and compliant with the EU’s sustainability regulations can be achieved through regular audits, compliance training, and the implementation of corrective action plans for those yet to be compliant.

EU Legislation and the SAP Services Market

These new regulations, which are driven by public awareness of the need to change business practices, are driving significant changes in the SAP services market.

As businesses prepare to comply with stringent climate and sustainability regulations, the demand for related SAP services is rising. SAP consultancies can develop and offer targeted solutions that address specific regulatory requirements.

There is also an increasing need for advisory services that guide businesses through the implementation of sustainability initiatives. SAP consultants can provide expert advice on integrating sustainability into business strategies, optimizing supply chains for reduced environmental impact, and using SAP tools for effective compliance management.

The demand for training and support services is also on the rise. Businesses require comprehensive training programs to educate their staff on new compliance requirements and the use of SAP sustainability tools. SAP consultancies can offer these services during implementations, ensuring that businesses are well-prepared.

Shifts in SAP Implementation Projects

Implementation projects now often include the integration of modules specifically designed for sustainability management.

Projects are increasingly tailored to meet the unique sustainability needs of each business. SAP consultants work closely with clients to develop customized solutions that align with their specific regulatory obligations and sustainability goals.

Ensuring that businesses can generate comprehensive and accurate sustainability reports is now a critical aspect of SAP implementations. This involves configuring SAP tools to automate reporting processes, integrate diverse data sources, and provide real-time insights into sustainability metrics as part of a wider digital transformation.

Evolution of SAP Careers

The evolving regulatory environment is also reshaping careers in the SAP ecosystem.

As businesses prioritize sustainability, the demand for SAP professionals with deep knowledge of ESG issues is increasing. These experts are essential for guiding businesses through the complexities of compliance and helping them achieve their sustainability objectives.

The evolving nature of sustainability regulations and also SAP technology requires SAP professionals to continuously update their skills and knowledge. Ongoing education and training in the latest regulatory developments, SAP tools, and sustainability practices are necessary for staying relevant and effective.

The future of business sustainability requires proactive strategies and the effective use of technology to ensure compliance with evolving regulations, and SAP consultants must guide these changes.

Strategic Planning and Target Setting

Consultants must help clients integrate sustainability into their core business strategy. This means that sustainability goals should not be separate from business objectives but should be a fundamental part of the strategy. Companies should identify key areas where sustainability can drive value and align these with regulatory requirements.

They must also establish clear, measurable targets for sustainability performance. These targets should be aligned with the company’s strategic goals and regulatory requirements.

Another task is to implement systems for continuous monitoring of sustainability metrics, so consultants should regularly review and adjust strategies to ensure compliance with changing regulations and to address new sustainability challenges as they arise.

Helping Businesses To Be Greener

The European Union’s climate and sustainability regulations will contribute to global efforts to combat environmental degradation and promote sustainable business practices. The ability to meet these requirements can enhance a company’s reputation, improve its operational efficiency, and contribute to broader environmental goals.

SAP consultants have a vital role in this process, guiding businesses through the complexities of regulatory compliance and helping them integrate sustainability into their core strategies.

This is already increasing the need for consultants with the skills to prepare businesses to fulfill their environmental responsibilities, within a context of increasing demand for other services like S/4HANA Cloud migrations, in the face of a severe SAP skills gap.

Those who can help customers excel in meeting their ethical and legal requirements will be well-placed to flourish in the SAP services market, and at the same time, help to substantially mitigate the adverse affects of business activity on the environment for the benefit of all.

If you are an SAP professional looking for a new role in the SAP ecosystem our team of dedicated recruitment consultants can match you with your ideal employer and negotiate a competitive compensation package for your extremely valuable skills, so join our exclusive community at IgniteSAP .