Challenges faced and strategies employed in early ESRS E5 Resource use
and circular economy implementation
A qualitative analysis within the manufacturing industry in Sweden
Master degree project
Graduate School
Spring term 2024
Supervisor: Lana Sabelfeld
Authors: Anton Lundgren & Victor Lindén
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Acknowledgements
We would like to extend our gratitude to the once that has helped us complete this thesis. We
would first like to thank our supervisor Lana Sabelfeld. With valuable guidance, relevant
feedback and continuous support, Lana has helped us throughout this thesis project. We also
want to thank the seminar group for the constructive criticism raised and the interesting
conversations had surrounding the thesis.
Lastly, we would like to present an appreciation to the five respondents and the firms
involved in this study. Without their knowledge and insights, this study would not be
possible.
Gothenburg, 2024-05-23
Anton Lundgren Victor Lindén
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Abstract
Title: Challenges faced and strategies employed in early ESRS E5
Resource use and circular economy implementation
Authors: Anton Lundgren & Victor Lindén
Supervisor: Lana Sabelfeld
Program: Master in Accounting and Financial Management
University: School of Business, Economics and Law at the University of
Gothenburg
Key words: Sustainability reporting, CSRD, ESRS E5, Circular economy,
Resource use, Institutional theory, Organizational learning.
Background: In response to growing concerns over sustainability, the EU has
introduced the Corporate Sustainability Reporting Directive (CSRD)
to enhance transparency in sustainability reporting. This directive
mandates compliance with European Sustainability Reporting
Standards (ESRS), notably ESRS E5, focusing on resource use and
circular economy. However, the implementation presents challenges
for large Swedish manufacturing firms due to increased reporting
requirements and complexities of implementation.
Purpose: This thesis aims to explore the early stage implementation of the
ESRS E5 standard in large Swedish manufacturing companies. The
study focuses on the challenges faced by these companies during the
implementation process and identifying the strategies employed to
address these challenges.
Method: A qualitative research approach was adopted for this study, utilizing
semi-structured interviews complemented by document reviews.
Five qualitative semi-structured interviews were held with
appropriate personnel at five large manufacturing firms in Sweden in
order to gather the empirical results.
Conclusion: The analysis of the study highlights four main challenges connected
to the early implementation stage of ESRS E5 in large Swedish
manufacturing companies. These challenges are, uncertainties
surrounding the new regulation, the more extensive nature of the
CSRD, value chain complexities, and external pressures.
Organizational strategies mostly connected to knowledge acquisition
were observed as responses to these challenges. It was discovered
that firms make use of both external and internal sources for gaining
new knowledge.
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Table of Contents
Acknowledgements 3
Abstract 4
1. Introduction 7
1.1 Background 7
1.2 Problem discussion 8
1.3 Purpose 10
1.4 Delimitations 10
2. Theoretical framework 11
2.1 Development of sustainability reporting over time 11
2.1.1 GRI 11
2.1.2 Mandatory sustainability reporting for swedish state-owned companies 12
2.1.3 Integrated Reporting Framework 13
2.1.4 NFRD 13
2.2 CSRD 15
2.2.1 ESRS 1 & ESRS 2 15
2.2.2 ESRS E5 16
2.3 Implementation of sustainability reporting standards 17
2.4 Circular economy reporting 19
2.5 Institutional Theory 20
2.5.1 Institutional theory and sustainability reporting 21
2.6 Organizational Learning 22
2.7 Analytical Model 23
3. Research Methodology 25
3.1 Research approach 25
3.2 Research design 26
3.2.1 Manufacturing industry and companies 26
3.2.2 Semi structured interviews 27
3.2.3 Interview process 28
3.2.4 Document review 30
3.3 Analytical process 31
3.4 Reflection on research quality and method 32
3.5 Ethical considerations 33
4. Results 35
4.1 Challenges 35
4.1.1 Uncertainties related to CSRD and ESRS E5 35
4.1.2 Gap between CSRD/ESRS E5 and current sustainability reporting practice 36
4.1.3 Value chain - limited data 37
4.1.4 External pressure 39
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4.2 Organizational learning strategy 41
4.2.1 Building knowledge 41
4.2.2 Early start 43
4.2.3 Supply chain collaboration 44
5. Analysis and discussion 45
5.1 Challenges 45
5.1.1 Uncertainties related to CSRD and ESRS E5 45
5.1.2 Gap between CSRD/ESRS E5 and current sustainability reporting practice 47
5.1.3 Value chain - limited data 48
5.1.4 External stakeholder pressure 49
5.2 Organizational learning process 50
5.2.1 Acquisition 50
5.2.2 Dissemination 52
5.2.3 Implementation 52
5.3 Updated analytical model 53
6. Conclusion 55
6.1 Key findings 55
6.2 Implications 56
6.2.1 Implications for research 56
6.2.2 Implications for practice 57
6.3 Limitations and future research 58
7. References 59
Appendix 66
A1. Interview guide 66
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1. Introduction
The first chapter in this study starts with a background of the studied area and some
information regarding key concepts. Following that is the problem discussion where the gap
that this research seeks to fill is presented and problematized. Thirdly, the overall aim and
purpose of the study is presented in conjunction with the research questions that the study
seeks to answer. Lastly, the delimitations of the study are presented and discussed.
1.1 Background
In recent years, the demand for increasingly sustainable business models amongst
manufacturing firms has grown significantly, driven by factors such as resource depletion,
economic stagnation, the pursuit of higher life quality and stricter regulations (Eslami,
Dassisti, Lezoche & Panetto, 2019). The manufacturing industry contributes to 20-25% of
Europe's GDP (Rise, n.d). However, manufacturing also accounts for approximately 30% of
the total global energy consumption and 38% of direct and indirect CO2 emissions (Rise,
n.d). With the escalating importance of sustainability, manufacturing firms have to pay
attention to their resource efficiency and circular economy opportunities. As a result of the
increasing importance of sustainability and the lack of a fully developed sustainability
standard, it has become evident that a new regulation is required in order to increase the
transparency and comparability regarding Corporate Social Responsibility (CSR)
performance (IBM, n.d). The EU has tried to do this by creating a new regulation called the
Corporate Sustainability Reporting Directive (CSRD).
The new EU CSRD directive entered into force in 2023, replacing the earlier Non-Financial
Reporting Directive (NFRD). CSRD mandates certain companies to adhere to standards
known as European Sustainability Reporting Standards (ESRS) starting from the financial
year 2024, while other companies are scheduled to adopt these standards in subsequent years
(KPMG, n.d; European Commission, n.d). One of the specific ESRS standards is the ESRS
E5 which aims to regulate the reporting of resource use and circular economy (EFRAG,
2022). Resource use and circular economy refer to the efficient and sustainable management
of resources, products, and materials throughout their life cycle, aiming to minimize waste,
reduce environmental impact, and maximize resource value through practices such as
reusing, recycling, and regenerating resources and materials (EFRAG, 2022). The anticipated
impact is significant for major manufacturing firms due to their extensive and complex
supply chains (Jaeger & Upadhyay, 2020). The implementation of ESRS E5 introduces an
escalation in the volume of information these firms are required to report, presenting
challenges for large manufacturing firms.
The previous directive ,NFRD, and the sustainability reporting standard Global Reporting
Initiative (GRI) were criticized for their lack of specific reporting requirements, guidelines
and methods when implementing them in reporting practice (Moneva, Archel & Correa,
2006; Johansen, 2016). The quality of the information provided by the firms therefore varies
a lot which makes it difficult for stakeholders to use the information when making decisions.
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The CSRD directive advanced its guidance by providing more specific requirements and
methodologies for non-financial reporting (Hao, Dragomir & Radu, 2023). Thus, more
attention from the EU politicians and regulators is being paid towards sustainability reporting
which also shows that stakeholders change how they see companies and their social
responsibilities (Baumüller & Sopp, 2022). Accounting researchers discuss that the
mandatory implementation of CSRD will lead to a better quality of the non-financial
information and increase the company's credibility towards investors (Hao et al., 2023).
The aim of the CSRD directive is to increase the comparability of sustainability measures
between firms and at the same time increase firms efforts towards creating meaningful and
informative sustainability reports for its stakeholders (European Commission, n.d). One of
the focus areas of CSRD is circular economy and resource use (ESRS E5) which is a new
concept for corporate reporting, exposing companies to challenges related to its
implementation in reporting practice (Falkenberg, Schneeberger & Pöchtrager, 2023).
Implementation of a new topic and standard (ESRS E5) is usually a time- and resource
consuming project (Borglund, Frostenson, & Windell, 2010). Some of these challenges
include increased costs because of the complexity of implementing the standard, lack of
clarity within the standard, over-regulation, previous experience and more (Villiers, 2022;
Meech & Bayliss, 2021; Falkenberg et al., 2023).
Different theoretical perspectives can be used in order to further investigate the challenges
that large manufacturing firms face in the early implementation stage of ESRS E5 as well as
the strategies that they implement as a response to these challenges. Institutional theory and
organizational learning theory are the two theories used in this study. The institutional
perspective includes the process of isomorphism which means that organizations morph
together to create homogeneity and harmonized practices (DiMaggio & Powell, 1983).
Organizational learning perspective, on the other hand, helps understand the process and
actions undertaken by organizations in response to the challenges that the ESRS E5 standard
brings. The latter is especially relevant for understanding how organizations acquire,
interpret, and apply knowledge in order to improve their performance and adapt to a changing
environment (Argyris & Schön, 1995).
1.2 Problem discussion
The aim of CSRD is to harmonize sustainability reporting practices across Europe. The EU
Commission suggests that by harmonizing the information to be provided the medium and
long term reporting costs will be reduced (European Commission, n.d). However, the
implementation of non-financial reporting regulations poses challenges for companies (La
Torre, Sabelfeld, Blomqvist, Tarquinio & Dumay, 2018). ESRS E5 particularly poses
challenges to those with large and complex supply chains, like many manufacturing firms
(Jaeger & Upadhyay, 2020). Compliance with the new ESRS E5 directive will require firms
to publish more information regarding their circularity work. This could incline the need for
previous experience, supply chain issues and other implementation challenges (Borglund et
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al., 2010; Vermunt, Negro, Verweij, Kuppens & Hekkert, 2019). Villiers (2022) argues that
the CSRD could create over-regulation which could lead to uncertainty, information overload
and increased costs. The complexity of the new regulation will incline challenges for firms.
Companies will therefore have to prepare for the implementation of these directives in
advance.
The ESRS E5 standard represents a significant change to corporate reporting by requiring
companies to report on the relatively new perspective of circular economy. Unlike previous
standards, it covers a broader range of companies and introduces the principle of double
materiality, as well as requiring third-party quality assurance of reported sustainability
information. (Swedish Financial Supervisory Authority, 2023; European Commission, n.d;
European Parliament, 2022)
The manufacturing industry is highly affected by this new CSRD directive and especially the
ESRS E5 standard due to their complex supply chains and reliance on resources sourced
globally (Jaeger & Upadhyay, 2020).
There is also a growing need for research to support small and medium-sized firms in their
preparation for CSRD compliance (Falkenberg et al., 2023). Although small and medium
sized companies will only be forced to implement CSRD in the future it's still important to
get an understanding of the challenges faced by large firms at the early stage of ESRS E5
implementation in order to be prepared for when they themselves will implement the
directive (Falkenberg et al., 2023).
Because of its recent introduction, there is a lack of extensive practical knowledge and
research regarding the challenges in the implementation of ESRS E5. This also brings a
significant practical knowledge gap surrounding how companies should address the
challenges. Furthermore, there is also a scarcity of studies focusing on the implementation of
CSRD, particularly concerning resource use and circular economy reporting in large
manufacturing firms, providing a significant research gap surrounding this subject.
This study therefore seeks to provide insights regarding both the practical knowledge gap and
the research gap that can assist companies, including large, medium-sized and small
enterprises, in preparing for the complexities of CSRD and ESRS E5 implementation.
Additionally, the study aims to contribute to the broader understanding of the challenges of
sustainability reporting regulation implementation.
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1.3 Purpose
This study aims to investigate the early stage implementation of the ESRS E5 standard under
the new EU CSRD directive in large Swedish manufacturing companies. The research seeks
to provide insights into the evolving landscape of corporate sustainability reporting,
particularly concerning resource use and circular economy practices. The research attempts to
address the following proposed research questions:
1. What are the main challenges faced by Swedish large manufacturing firms in the
early implementation stages of ESRS E5?
2. What organizational strategies are implemented as a response to the main challenges
faced by Swedish large manufacturing firms in the early implementation stages of
ESRS E5?
1.4 Delimitations
This study follows a research approach that comes with some delimitations. Firstly, this study
only focuses on large manufacturing firms in Sweden which was a choice made by the
researchers because of the time constraints of the study. If more time would have been given,
more interviews could have been made with a broader range of companies from different
industries. However, as the time was scarce the researchers of this study deemed it necessary
to only focus on a specified industry within a specific country. Another delimitation of this
study is that it only focuses on the reporting of circular economy and not the circular business
model. As the ESRS E5 standard mainly regards the reporting side of resource use and
circular economy and the fact that many large firms already have business models that are
somewhat circular it was deemed more interesting to only focus on the reporting of circular
economy and resource use.
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2. Theoretical framework
In this section of the report previous research within the field is presented. Firstly, previous
research regarding earlier standards and directives within sustainability reporting are
presented in chronological order from when they were first released. Secondly, a discussion
surrounding CSRD and specifically ESRS 1 and 2 as well as ESRS E5 is presented. Thirdly,
the implementation of earlier directives and standards and challenges connected to that is
presented. Fourthly, circular economy reporting is discussed. The last three chapters in this
section present the two theories that this study uses as well as the analytical model that this
study follows.
2.1 Development of sustainability reporting over time
2.1.1 GRI
In the beginning of the 1970s CSR reports were of little value to stakeholders. Instead,
companies used their CSR reports for marketing purposes and the information provided in the
reports were not comparable, reliable nor useful in any way for stakeholders (Tschopp &
Huefner, 2015). The GRI was founded in 1997 with the goal to create a global framework for
the voluntary reporting of organizations environmental, social and governance impacts
(Brown, de Jong & Lessidrenska, 2009). It's argued that the GRI is the world's first
standardized approach to sustainability reporting (Milne & Gray, 2013). This is an important
starting point which for many nowadays may seem obvious but it wasn´t until 2003 that
France included CSR reporting requirements for their publicly traded firms, becoming the
first country to do so (Tschopp & Huefner, 2015). In the annual meetings in 2006 and 2008
the message was clear that sustainability reporting had become a normality for socially
responsible businesses and the GRI initiative defines how such sustainability reports should
be judged and structured (Brown et al., 2009).
Over the course of the GRI´s history it has been an important sustainability reporting
standard-setter. The GRI has contributed significantly to the continuous development of
sustainability reporting practices around the world. Furthermore the initiative has created a
common language between firms when it comes to reporting on sustainability information
which has greatly increased the comparability of the content within different companies
sustainability reports (De Villiers, La Torre & Molinari, 2022). This initiative therefore
encouraged companies to not only focus on corporate profits but also start to recognize the
impact that the company has on social, environmental and economic parts of the business
(Raith, 2023). However the GRI is only a standard-setter which creates standards that
companies voluntarily either choose to follow or not choose to follow (De Villiers et al.,
2022). This voluntary reporting worsens the comparability of the information in the
sustainability reports which may be a reason as to why the NFRD directive, and later on, the
CSRD directive was created.
Some of the GRI standards connect to circular economy strategies. These are GRI 301, 302,
303, 305 and 306 (Massari & Giannoccaro, 2023). Massari & Giannoccaro (2023) find that
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these GRI standards can be utilized by firms as a tool to communicate their circular economy
strategies. Communicating their environmental performance can be important for firms in
order to gain a competitive advantage against their competitors or showing their interest in
the circular economy towards their stakeholders. This increased transparency of firms'
circular economy strategies can lead to increased consumer awareness regarding circular
economy practices which may have positive effects on both society and the environment
(Massari & Giannoccaro, 2023). Thus, previous research suggests that GRI can serve as an
instrument providing a common language for circular economy reporting, increasing
corporate transparency and accountability, as well as the quality of reporting (Massari &
Giannoccaro, 2023). However, there are also challenges related to the lack of guidance during
the implementation of GRI standards. To manage these challenges, companies use third-party
assurance services (Dagiliene, Frendzel, Sutiene & Wnuk-Pel, 2020).
Another challenge is that GRI guidance on how to report circular economy is fragmented. For
example, GRI 306 provides some guidance regarding companies reporting on waste
management, but there is no clear guidance regarding other important aspects related to
circular economy. Therefore it is highly relevant to explore whether or not the CSRD and
more specifically the ESRS E5 regulation will succeed in providing companies with a
regulation that encompass all different aspects of circular economy and what challenges that
companies face along the early stage implementation (Pozzoli, Nastari, Pisano & Venuti,
2023).
2.1.2 Mandatory sustainability reporting for swedish state-owned companies
In 2007, the Swedish government released new guidelines mandating state-owned companies
to produce sustainability reports aligning with the GRI standards. These guidelines aimed to
enhance transparency regarding social and environmental responsibilities while fostering
increased commitment to sustainability activities. Borglund et al. (2010) analyzed the impact
of these mandates, observing heightened dedication, awareness, and structured approaches to
sustainability issues among state-owned companies.
Initially, the focus of reporting centered on refining procedures, yet Borglund et al. (2010)
suggest that further adjustments in sustainability practices were necessary. The guidelines
formed part of a comprehensive ownership policy focused on promoting sustainability and
transparency, drawing from positive experiences with prior financial report requirements.
However, Borglund et al. (2010) noted discrepancies in how companies responded, with prior
experience playing a significant role in the ease of adaptation. Companies with previous
sustainability reporting experience underwent fewer changes compared to those without,
leading inexperienced firms to engage numerous consultants initially. Over time, as
companies learned to produce sustainability reports proficiently, consultant reliance
diminished, indicating a positive learning curve facilitated by the guidelines.
Finally, the researchers emphasized the role and importance of companies' experience of
implementing these guidelines for the future development of their sustainability reporting
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practice, including development of relevant measures of KPIs related to different aspects of
sustainability.
2.1.3 Integrated Reporting Framework
The global financial crisis in 2008 has further revealed the importance of transparency of
corporate non-financial information and social, environmental and governance
responsibilities. In 2010 there were concerns that the traditional way of corporate reporting
wasn't sufficient in supplying stakeholders with the information they wanted regarding
non-financial information. Reporting of the non-financial information was often kept separate
from the financial reports and the non-financial reports were often long and difficult to
understand. In 2010 International Integrated Reporting Council (IIRC) proposed that a
solution to this problem would be for companies to produce integrated reports which include
financial and non-financial information (Cheng, Green, Conradie, Konishi & Romi, 2014).
This led to the global initiative of the IIRC to launch the Integrated Reporting Framework in
2013 with a goal of accelerating the adoption of integrated reporting and with value creation
as its focus (IIRC, 2013). Barnabè & Nazir (2021) highlights the importance of incorporating
circular economy-related activities and information into integrated reports and the authors
also emphasize that terminology and reporting practices needs to be more standardized when
it comes to the circular economy field. Furthermore integrated reporting principles can
support the analysis, representation and disclosure of circular economy data which can be
useful for companies seeking to align their reporting with sustainable practices (Barnabè &
Nazir, 2021).
Opferkuch, Walker, Roos Lindgreen, Caeiro, Salomone & Ramos (2023) presents some
challenges and benefits that companies face as a consequence of integrating their circular
economy activities into their external communication and sustainability reporting. The three
main challenges included a lack of circular economy reporting benchmark, high complexity
within the circular economy data and a lack of consumer acceptance and awareness regarding
circular products. Furthermore, the main benefits are that circular economy is a powerful
storytelling tool, it is a tool that companies can use to promote sustainable education, it drives
transparency and it also improves companies reputation and can make the company eligible
for future incentives regarding for example financial incentives awarded to companies that
are in the forefront of the circular economy implementation (Opferkuch et.al, 2023).
2.1.4 NFRD
In 2014 the EU released a new directive for sustainability reporting called the Non-Financial
Reporting Directive (NFRD). This directive mandates public interest firms with more than
500 employees to report non-financial information that include social and environmental
matters in their annual reports (Johansen, 2016). These are for example listed companies,
banks, insurance companies and public-interest companies. Companies within the scope of
this directive had to report in accordance with the directive by 2018. The biggest difference
between the GRI and the NFRD is that the NFRD is a regulation and the companies within
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the directive are required to adhere to the regulation as opposed to the GRI which as
mentioned above is a standard that companies choose to either follow or not follow (De
Villiers et al., 2022).
The NFRD directive can be seen as a big step towards the goal of getting companies to report
more on their non-financial data. The shift from voluntary to mandatory sustainability
reporting can be seen as a step to improve companies information systems but also improve
the performance of the companies. This regulation also makes it possible to compare different
companies' performance when it comes to sustainability (Doni, Silvio, Corvino & Mazzoni,
2020). However, the NFRD directive has faced criticism for being an ineffective and soft
regulation because of the directive's inability to create a unified sustainability reporting
framework (Ahern, 2016).
Another one of the downsides connected to the NFRD is that it focuses too much on strict
financial aspects. This means that the directive only focuses on the inflows and outflows of
monetary elements. Elements that cannot be measured in monetary terms are therefore not
mentioned by companies complying with the NFRD directive. This means that the
information presented by the companies is more tailored towards the investors community
rather than the public. Critical scholars consider the one-sided focus problematic, because it
ignores an important audience of a broader group of stakeholders to which information on
corporate environmental and social impacts is highly relevant. The double materiality
principle in CSRD is therefore a concept that could help mitigate this problem in the future
(Cosma, Leopizzi, Nobile, & Schwizer, 2022).
Paridhi & Arora (2023) argues that one major challenge with the implementation and
adoption of sustainability reporting is that there is a measurement problem within
sustainability due to its complexity and that sustainability reporting will remain a gimmick
until this measurement problem has been resolved. Ramanathan & Isaksson (2023) adds to
this by arguing that an understanding of sustainability will have to be continuously evolving
and the way in which companies have reported growth, development and progress will have
to change in the future.
One of the major opportunities that has been seen from companies' implementation of NFRD
is the improved ESG performance, social performance and environmental performance
(Aluchna, Roszkowska-Menkes & Kamiński, 2023). Although these improvements and
changes in corporate reporting practices take time, the improvements in environmental
performance could first be seen during the third year of the mandatory sustainability
legislation. This indicates that mandatory sustainability legislation can be seen as a long term
opportunity but it can also be a challenge for firms as it takes time for them to implement
transparency principles into organizational structures (Aluchna et al., 2023).
The evolution of CSR reporting over the past several years has been intense and it's still in an
early stage. Nowadays it has developed to the point where it has become an integral part in
how companies choose to report. Although compared to financial reporting which has
developed over the past 100 years, CSR reporting is still a rather new way of reporting.
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Tschopp & Huefner (2015) highlights the fact that at the time of writing their article in 2015
CSR reporting still has a long way to go before it can provide decision useful information.
This is because there is not one agreed upon standard that the companies need to follow
which worsens the comparability of the companies CSR reports. However, critiques of the
harmonization of CSR reporting argue that there is not one standard that would be applicable
to the needs of all stakeholders (Tschopp & Huefner, 2015).
2.2 CSRD
The new CSRD directive serves as an amended and tightened version of the existing
European rules for sustainability reports that were introduced in 2014 by the NFRD. The
CSRD directive entered into force on January 5 2023 and will first be applied in the financial
year of 2024, for the reports published in 2025 (European Commission, n.d). Companies
already covered by the NFRD are required to comply with the new standards starting from
January 1, 2024, with reporting obligations commencing in 2025. Large companies not
covered by the NFRD will need to adhere to the CSRD from January 1, 2025, with reporting
obligations beginning in 2026. For listed small and medium-sized enterprises, small and
non-complex credit institutions, and captive companies, the CSRD requirements will come
into effect from January 1, 2026, with reporting obligations starting in 2027 (Swedish
Financial Supervisory Authority, 2023).
The aim of the new sustainability directive is that stakeholders will have access to necessary
information to evaluate companies from a sustainability standpoint. By harmonizing the
information required to be provided the new rules should also lead to medium and long term
reporting cost reductions (European Commission, n.d). The hope is also that the directive will
create a greater awareness of risks and opportunities within the companies (Swedish
Financial Supervisory Authority, 2023).
The new standards arising from the CSRD directive are referred to as the European
Sustainability Reporting Standards (ESRS) and are established by the European Financial
Reporting Advisory Group (EFRAG) who is a private association whose mission is to serve
the European public in both financial and sustainability reporting (EFRAG, n.d). On the 22nd
of December 2023 the ESRS standards were published to the public. The standards consist of
ESRS 1 and ESRS 2 referring to general requirements and general disclosures, as well as ten
separate standards on different environmental, social and governance (ESG) topics (European
Union, 2023).
2.2.1 ESRS 1 & ESRS 2
ESRS 1 General requirements and ESRS 2 General disclosures are overarching standards that
collectively form a framework and a guide for the ten separate ESG standards. ESRS 1
serves as a comprehensive framework that lays down the foundational requirements for the
sustainability reporting. This standard aims to guide firms in disclosing essential information
15
regarding their material impacts, risks, and opportunities concerning ESG matters. ESRS 1
not only outlines the fundamental concepts and drafting conventions but also provides
detailed guidelines on how to prepare and present sustainability related information
effectively. (European Union, 2023)
ESRS 2 delves deeper into the specifics of sustainability reporting by focusing on general
disclosures that firms are obligated to include in their sustainability reports. This standard sets
out the precise information that must be disclosed concerning material impacts, risks, and
opportunities across various aspects such as governance, strategy, impact risk and opportunity
management, metrics, and targets related to sustainability. ESRS 2 emphasizes the
importance of integrating sustainability considerations into the core of business strategies and
models. (European Union, 2023)
The basis for sustainability disclosures in the CSRD is rooted in the concept of double
materiality. Double materiality comprises two dimensions: impact materiality and financial
materiality. Impact materiality focuses on the assessment of impacts, risks, and opportunities
within the firm's value chain, regardless of their financial implications. On the other hand,
financial materiality relates to sustainability matters that could reasonably affect the
organization's financial position, performance, cash flows, access to finance, or cost of capital
over the short, medium, or long term. The CSRD underscores the interconnectedness of these
two dimensions and highlights the importance of considering both impact and financial
materiality when determining the significance of sustainability issues for reporting purposes.
(European Union, 2023).
2.2.2 ESRS E5
The aim of the ESRS E5 standard is to establish disclosure requirements that enable users of
the sustainability statement to gain a comprehensive understanding of how a firm influences
resource use and promotes circular economy principles. It requires disclosure on material
positive and negative impacts, actions taken to mitigate risks, plans for circular economy
integration, and the financial effects of resource related impacts. The standard emphasizes
resource inflows, circularity, resource outflows, and waste management disclosures. In
summary, it provides a concise framework for reporting on sustainable practices, circular
economy commitment, and effective risk management in resource use. (European Union,
2023)
The ESRS E5 standard provides disclosure requirements under ESRS 2 General disclosures.
The disclosure requirements are divided into two sections. The first section includes
requirements related to impact, risk and opportunity management. Apart from the disclosure
requirements related to ESRS 2 this section includes disclosure requirement E5-1 on policies
related to resource use and circular economy, and disclosure requirement E5-2 on Actions
and resources related to resource use and circular economy. These two requirements obligates
firms to disclose their policies related to resource use and circular economy as well as the
actions taken and resources allocated towards circular economy and its implementation.
(European Union, 2023)
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The second section of disclosure requirements includes required disclosures of metrics and
targets related to resource use and circular economy. This section includes disclosure
requirements E5-3, E5-4, E5-5 and E5-6. These requirements touch upon targets, resource
inflows, resource outflows and anticipated financial effects. Targets should be disclosed
related to resource use and circular economy, targets of various aspects such as circular
product design and waste management should be specified. Disclosure of information on
resource inflow and outflow is mandatory; including aspects such as materials, water and
waste. Lastly E5-6 addresses the anticipated financial effects of material risks and
opportunities related to resource use and circular economy. (European Union, 2023)
2.3 Implementation of sustainability reporting standards
When it comes to the implementation of sustainability reporting standards each company
interprets these standards in a local setting during the process of implementation. Different
factors and organizational dynamics affect how a company interprets sustainability reporting
standards and how they diffuse sustainability practices (Rossi & Luque-Vílchez, 2021). As
discussed above the CSRD directive serves as an amended and tightened version of the
previous NFRD directive (Swedish Financial Supervisory Authority, 2023). For a lot of large
companies sustainability reporting has become common practice although the transition may
still be significant as the CSRD directive encompasses more than the NFRD directive.
Additionally, challenges may arise in reporting on circular economy and resource use, as
previously discussed in the problem discussion.
The main objective of sustainability reporting is to measure and communicate the
performance of the firm's ESG factors. It also serves as a tool for firms to navigate change
effectively and establish realistic and attainable objectives. Unlike financial reporting,
sustainability reporting is a relatively recent practice, with limited mandatory requirements
for firms (Meech & Bayliss, 2021). This is why many companies are anticipating a
substantial shift with the implementation of the new CSRD directive. Various benefits are
associated with adopting sustainability reporting. These advantages encompass enhanced
financial performance and value for the company. Although, as highlighted by Meech &
Bayliss (2021), measuring the precise financial improvements resulting from sustainability
reporting can be difficult. In spite of this difficulty there is evidence that high quality
sustainability reporting can lead to a lot of different benefits including for example cost
reductions stemming from improved resource use, improved stakeholder relationships and
better access to capital (Meech & Bayliss, 2021).
There are also challenges associated with implementation of sustainability reporting. The
three main challenges are compliance costs, greenwashing and the proliferation of standards
and frameworks. High compliance costs are associated with the high costs especially for
small companies that want to use sustainability reporting. This creates a barrier to entry and
with the CSRD directive forcing these companies to report on their sustainability information
it may increase costs a lot. In the future there may be a lot of pressure put on these firms. This
17
has the potential to minimize the benefits associated with sustainability reporting. This is also
in line with what Hamed, Al-Shattarat, Al-Shattarat & Hussainey (2022) find in their article
where they find that CSR reporting quality is higher in bigger firms and that a possible reason
for this may be that the bigger firms are under more scrutiny from their stakeholders than the
smaller ones. This forces the bigger firms to create higher quality reports in order to appear
legitimate towards their stakeholders. Radu, Dragomir & Hao (2023) find that another reason
as to why large companies' non-financial reports are of higher quality is because they have
more resources that are necessary to create high quality non-financial reports. Also, they are
actively involved in the development of tools that can be used to transparently report
non-financial data to its stakeholders. However Radu et al. (2023) find that there is a potential
connection between profitability and non-financial reporting quality where firms that focus
on profitability may have worse quality within their non-financial reports. On the other hand
some profitable firms focus on appearing more transparent through the use of non-financial
reports with the objective of appearing legitimate towards stakeholders (Radu et al., 2023).
Baumüller & Sopp (2022) discusses the fact that companies that will have to comply with
this new regulation will have to operate in an increasingly challenging environment. This is
something that will put a lot of extra pressure on firms. Furthermore, companies will first of
all have to deal with the political pressure connected to the transition towards a more
sustainable economy in Europe and second of all the companies have to deliver on the
stakeholders increased demand when it comes to sustainability information (Baumüller &
Sopp, 2022).
Talpur, Nadeem, & Roberts (2023) highlight the influence of geographic location on the
quality of CSR practices. Their findings indicate that firms based in developed countries tend
to exhibit superior CSR practices, primarily due to the robust institutional frameworks and
effective law enforcement mechanisms present in these countries. However, it is noteworthy
that many of these firms also operate in developing countries, where institutional settings and
law enforcement mechanisms may be less developed (Talpur et al, 2023).
The study by Talpur et al. (2023) observes an increasing number of CSR scandals over the
course of the study. Companies often adopt CSR practices in response to pressure from
stakeholders, governmental bodies, and regulatory frameworks as well as the global society.
Unfortunately, the combination of internal incompetence and external pressure contributes to
a decline in the quality of CSR reporting within these companies. Moreover, discrepancies
between external standards and regulations create a challenging environment for companies.
The lack of alignment between these external benchmarks further compounds the complexity
of CSR reporting, potentially leaving companies in a confusing situation (Talpur et al.,
2023).
Maas & Sampers (2020) find that it´s not certain that mandatory non-financial reporting is
successful. It depends strongly on context, the implementation and the organization. Some
examples on both positive effects and negative effects for organizations or stakeholders when
it comes to non-financial reporting are provided in the article. Positive effects that connect to
sustainability reporting for example include a clear image of the organization's sustainability
18
goals and improved firm reputation. Some of the negative effects include increased costs as
well as an indication on CSR performance that may be seen as both positive and negative.
According to Maas & Sampers (2020) there are still a lot of organizations that do not report
on non-financial information and organizations could benefit from more guidance when it
comes to these things.
Villiers (2022) discusses the initiative to include new reporting requirements and expand the
scope of the NFRD directive in the form of the new CSRD directive. Villiers (2022) argues
that the new reporting requirements are complex and that they will lead to over-regulation,
lack of clarity, information overload and increased costs for firms. This can create big
problems for firms and Villiers (2022) indicates that due diligence legislation may be more
advantageous for firms. This still adds a new layer of regulation which might add complexity
but it also pushes firms to understand and reflect on their risks and impacts. Due diligence is
also something that is not new to firms as a lot of firms use it to help with issues such as
corruption (Villiers, 2022).
Hamed et.al (2022) investigates the effects of mandatory CSR regulation on companies
within the UK. They find that when the reporting is mandatory there is a higher quality
within the CSR reports. Suggesting that the new CSRD directive which forces listed
companies to provide sustainability reports in the future will make for higher quality
sustainability reports in the future (Hamed et.al, 2022).
2.4 Circular economy reporting
Following the introduction of the CSRD it will be mandatory for all companies within its
scope to report on circular economy as long as it's seen as material to the company. The
decision whether or not something is material to the company is made by the company itself
which means that this to some extent is a management decision. However, the CSRD
encounters this problem by making assurance mandatory to some extent (van Garsse &
Stiers, 2023).
Dagiliene et al. (2020) examines the circular economy reporting of large manufacturing firms
in Europe and find that there are, as of the completion of the study in 2020, few firms that
report on circular economy information. The main focus is on the reduction of water, air and
material emissions where there is little focus on reuse, recycle and recovery information
regarding circular economy in the sustainability reports of manufacturing firms. In this study
the companies focus on normative factors and best practices when doing their circular
economy reporting rather than the pressures from regulation. Impacts from mimetic factors
such as looking at how other competitors or peers work with their circular economy reporting
is also more common (Dagiliene et al., 2020). By developing circular economy reporting the
manufacturing companies can gain more legitimacy from their shareholders, employees and
society as a whole (Dagiliene et al., 2020). Wang, Che, Fan & Gu (2014) finds that
institutional pressures are one of the driving factors when it comes to the quality of circular
19
economy accounting information. Furthermore, mandatory disclosures of circular economy
information has also increased the disclosure quality of this information, indicating that
regulatory pressures in the form of mandatory reporting increases the quality of circular
economy disclosures by firms (Wang et al., 2014).
With the introduction of the CSRD the focus on circular economy reporting will increase in
the future and depending on how much experience the firms have regarding circular economy
reporting they may have varying degrees of additional reporting to do (Falkenberg et al.,
2023). Companies that have previously reported in accordance with GRI may have an easier
transition as they have already reported on sustainability beforehand (Falkenberg et al.,
2023). There is an advantage for companies that have started to implement the reporting
requirements at an early stage which most of the large companies already have. Experts
believe that new reporting requirements regarding circular economy reporting are good as
they raise awareness regarding the subject. However, for a concrete implementation in
practice there is a need for more regulatory obligations regarding for example a guideline
surrounding the design of the circular economy reporting. The indicators and definitions
within the regulations are seen as too imprecise. Although advantages include the increase in
transparency as firms need to report more information regarding their circular economy work
(Falkenberg et al., 2023). This new regulation mandates that companies examine their value
chains and disclose circular economy information deemed materially relevant. With the
implementation of ESRS E5, large companies may also require more detailed circular
economy data from their suppliers (van Garsse & Stiers, 2023). These suppliers, often smaller
and not immediately subject to ESRS E5, may nonetheless be forced to generate substantial
circular economy information due to pressure from larger companies, even before the
regulation formally impacts them (van Garsse & Stiers, 2023).
2.5 Institutional Theory
The theoretical lens of institutional theory is used in this study to better understand the
dynamic nature of the early implementation process of ESRS E5. The institutional theory
developed by DiMaggio & Powell (1983) helps examine the organizational conformity that is
shaped by social values and beliefs. The theory examines the process towards homogeneity
also referred to as isomorphism, and the theory presents three main types of isomorphism:
coercive, mimetic and normative, that drives organizational conformity (DiMaggio & Powell,
1983).
Coercive isomorphism results from formal or informal external pressure, often from an actor
that the organization is dependent on (DiMaggio & Powell, 1983). This could be for example
regulatory systems guiding organizations to act in a specific way or other more informal
actors such as pressure from shareholders or employees to act in a specific manner. Mimetic
isomorphism explores the tendency of organizations to imitate other actors, this often in
response to uncertainty (DiMaggio & Powell, 1983). Because of uncertainty within
organizations, businesses often model their behavior after esteemed peers as a way to obtain
20
legitimacy and success (Suchman, 1995). Normative isomorphism relates to the
organization's tendency to adopt its structures or practices as a result of societal norms or
ethical considerations (DiMaggio & Powell, 1983). If personnel within firms are of a similar
mindset and have been professionalized using the same type of education, businesses will
tend to start acting similarly (DiMaggio & Powell, 1983).
2.5.1 Institutional theory and sustainability reporting
In the area of sustainability reporting, institutional theory offers a lens through which to
examine the influences and pressures that shape the reporting practices of organizations.
Previous studies have examined the influence and interplay of normative, mimetic and
coercive isomorphism in the context of sustainability reporting.
Research suggests that normative and mimetic mechanisms play significant roles in shaping
sustainability reporting practices. For instance, Posadas, Ruiz-Blanco, Fernandez-Feijoo &
Tarquinio (2023) study indicates that normative and mimetic pressures positively influence
the quality of sustainability reporting. Their findings underscore the importance of the
normative climate in which the firm operates (Posadas et al., 2023). Examining the
implementation of the NFRD in Spain and Italy they found that the coercive mechanisms of
the standards did not contribute to enhancement of reporting practices (Posadas et al., 2023).
This would indicate that new reporting requirements might not be sufficient enough to
improve sustainability reporting within firms operating in environments with a strong
tradition of sustainability reporting (Posadas et al., 2023).
Evidence regarding coercive isomorphism does however remain mixed. Hossain, Rana,
Nahar, Rahman & Lema (2023) highlights how coercive pressures, such as those exerted
through regulatory frameworks like the Water Act 2007, can compel organizations to enhance
their disclosures on social and environmental issues. In this case, the regulatory environment
acts as a coercive force, compelling organizations to align their reporting practices with
community expectations, thereby showcasing a form of legitimacy behavior (Hossain et al.,
2023). However, other studies suggest that the existence of regulatory frameworks may not
always lead to significant improvements in reporting practices, this is the case in Indonesia
where the regulation provides great flexibility (Fitriasari & Kawahara, 2018). What can be
seen from these studies is that the coercive mechanisms of regulations can have an impact on
the reporting practices of firms when the regulation is non-flexible and require firms to
change their practices.
Álvarez-Etxeberria, Marco-Fondevila & Zamora-Ramírez (2023) sheds light on the
isomorphic process among firms in the context of non-financial disclosure regulation,
specifically focusing on the transposition of the 2014/95/EU Directive (NFRD) into Spanish
law. The study reveals that the period, following the directive's issuance in 2014 and its
transposition in 2018, prompted increased proactivity in information disclosure, driven more
by market and stakeholders' pressures than the law's enforcement (Álvarez-Etxeberria et al.,
2023). The research finds that the law's enforcement did not lead to increased information
disclosure, with mimetic and normative processes playing a more significant role, particularly
21
in environmentally sensitive sectors and non-leading companies (Álvarez-Etxeberria et al.,
2023). This shows that the leading companies seem to have a more positive impact on
information disclosure than the actual legal requirements.
Additionally, Shabana, Buchholtz & Carroll’s (2017) three-stage model outlines the evolution
of CSR reporting practices. In the first stage, defensive reporting occurs as companies sense
pressure to close the expectation gap under coercive isomorphism (Shabana et al., 2017). The
second stage, proactive reporting, emerges as knowledge of CSR reporting spreads, and the
practice becomes normatively sanctioned (Shabana et al., 2017). In the third stage, imitative
diffusion, a critical mass of CSR reporters is created, and the benefits of CSR reporting begin
to outweigh costs due to mimetic isomorphism (Shabana et al., 2017). This model provides
insights into the transformative journey organizations undergo in response to isomorphic
pressures in the realm of sustainability reporting, and it provides a reality in which the
institutional pressures differ over time.
These findings collectively emphasize the intricate relationship between institutional theory
and sustainability reporting. As the new CSRD directive is implemented, the interplay of
normative, mimetic, and coercive mechanisms must be carefully considered. Insights from
previous research suggest that a nuanced understanding of these institutional pressures is
crucial for understanding the implementation of the new directive, as well as the challenges
that come with it. Organizations and regulatory bodies can draw valuable lessons from these
studies to foster meaningful improvements in sustainability reporting practices.
2.6 Organizational Learning
This study employs the theory of organizational learning to delve into the processes and
actions undertaken within organizations in response to the challenges posed by the
implementation of ESRS E5. The theory of organizational learning is a framework that
mainly focuses on how organizations acquire, interpret and apply knowledge in order to
improve their performance and adapt to changing environments (Argyris & Schön, 1995).
The two loops of learning (single- and double-loop) are central in the theory of organizational
learning. Argyris & Schön (1995) describe single-loop learning as “instrumental learning that
changes strategies of action or assumption underlying strategies in ways that leave the values
of a theory of action unchanged”. Single loop learning involves organizations detecting and
correcting deviations by making incremental adjustments to improve operations while norms
and assumptions remain the same (Argyris, 1999). Double-loop learning is instead described
by Argyris & Schön (1995) to incline learning that involves changes in values, beliefs and
assumptions within the organization. Double-loop learning leads to examination of the
fundamental principles resulting in a transformation of organizational goals, strategies and
procedures. Both loops of learning work alongside each other within organizations in order
to both ensure more profound changes as well as ensuring improvement and adaptation
within existing structures.
22
The process of organizational learning can according to Dale (1994) be divided into three
stages; knowledge acquisition, dissemination and implementation. Knowledge acquisition
involves the gathering of data and insight. The knowledge can be obtained through direct
experience, outside sources or past organizational experiences (Levitt & March, 1988). The
dissemination stage involves the actions taken within the organization in order to distribute
the knowledge. Effective dissemination of knowledge is crucial in the organizational learning
process (Levitt & March, 1998). The final phase of the learning process involves the
implementation. This entails putting the acquired knowledge into action (Levitt & March,
1998), translating insights and ideas into strategies, practices and aligning goals.
2.7 Analytical Model
Building on the two theories presented above, an analytical model has been designed to
provide a deeper understanding of the challenges faced by firms during the early
implementation stages of ESRS E5, and the subsequent strategies by these firms.
Given the introduction of CSRD and ESRS E5, companies face changing business and
reporting conditions. Firms will have to undergo some process of change and learning. The
organizational learning perspective is relevant for understanding the way companies manage
different challenges related to the accounting for circular economy. The learning process
divided into the acquisition stage, dissemination stage and the implementation stage can be
affected by the institutional environment. The way in which organizations act is often an
effect of the institutional environment, and the process of change and learning within the
organization should be no different. Previous research presented under sections 2.5 and 2.5.1
has found that firms often act in a coercive, normative and/ or mimetic manner in response to
change and adaptation.
The early implementation stage of ESRS E5 stretches across the three stages of the
organizational learning process. The strategy the firms use during the learning process and
the early implementation will be a result of their institutional behavior and the isomorphic
mechanisms present. Challenges will both appear because of the early implementations stage,
but it will also affect the way in which companies decide to act during the stage.
The analytical model outlined in this thesis aims to explain the strategies employed within
organizations in response to the challenges posed by ESRS E5. The implementations of
different strategies within manufacturing firms in Sweden in response to the different
challenges will be broken down with the help of the model. The magnitude of change and
organizational learning should therefore also be easier to determine. Moreover, the model
serves as a tool to identify what isomorphic mechanisms that are present in the early
implementation stage of ESRS E5 and connected to each strategic choice made.
23
Figure 1: Analytical model
24
3. Research Methodology
The aim of this chapter is to describe and motivate clearly, reflectively, and transparently
what we have done, how we have done it, and why. Firstly, the research approach is
described and motivated. Secondly, the design that the study follows is presented and
motivated, the reason behind the choice of industry and firms, the process of creating the
interview guide and the document review is described. Thirdly, the process of analyzing the
material including the coding of the interview transcripts is discussed. Then, the research
quality is critically discussed in terms of trustworthiness as well as strengths and weaknesses
of the chosen method. Lastly, the ethical considerations that the study takes into
consideration and follows are presented.
3.1 Research approach
The research methodology chapter is designed in a way that it clarifies what data we intended
to collect, how, why, and where (Tucker, 2021). In this study a qualitative approach is
adopted by using semi-structured interviews and document review in order to explore the
challenges and strategies of ESRS E5 early stage implementation for large Swedish
manufacturing firms. Manufacturing firms were chosen in order to investigate an industry
believed to be heavily affected by the development of resource use and circular economy
(Jaeger & Upadhyay, 2020). The motivation behind the use of a qualitative approach in this
research lies in its ability to help the researchers understand and analyze the participants view
and reflections around how they see situations in the social world. This type of research is
centered around gathering and understanding written or oral information as well as
non-numerical data (Bryman, Bell & Nilsson, 2017). The use of semi-structured interviews
within this qualitative approach gives the researchers the ability to gain in-depth insights
from people that work with the early stage implementation of ESRS E5 on a daily basis. The
interviews were conducted with key stakeholders such as sustainability managers,
compliance officers or other key personnel who have experience with circular economy
reporting within their firm. Falkenberg et al. (2023) indicates that there is a need for expert
interviews within this field of research in order to gain a deeper knowledge about the
challenges that firms face. Furthermore, the answers gathered from these expert interviews
can then be used by companies yet to implement the ESRS E5 standard and prepare them for
what they will have to do to tackle the challenges that the directive might bring.
Complementing the interviews, a document review is also performed, relevant documents
such as annual reports are reviewed in order to gain an even deeper understanding of the
subject at hand. This also provides additional context of the situation and helps when both
formulating interview questions but also in understanding the answers better.
25
3.2 Research design
Semi-structured interviews have been conducted with experts actively engaged in
sustainability reporting and specializing in resource use and circular economy practices.
These interviews offer valuable insights into the nuanced perspectives and experiences of
professionals navigating the complexities of the ESRS E5 regulation. The use of
semi-structured interviews also gives the interviewers a flexibility when conducting the
interviews and the respondents a possibility to talk freely about the subject at hand (Bryman
et al., 2017).
In conjunction with semi-structured interviews, a document review is employed to delve
deeper into the strategies and practices adopted by companies in implementing the ESRS E5
regulation. By scrutinizing documents such as annual reports, this study aims to gain a
comprehensive understanding of how organizations articulate and execute their sustainability
initiatives in alignment with regulatory requirements.
The combination of semi-structured interviews and document review serves to provide a
multifaceted view of the challenges encountered by companies in the early stages of ESRS
E5 implementation. Semi-structured interviews offer rich qualitative data, clarifying the
internal dynamics and decision-making processes within organizations (Bryman et al., 2017).
Document review, on the other hand, offers a systematic examination of the tangible outputs
and expressions of sustainability efforts as documented by the companies themselves
(Bryman et al., 2017).
By integrating these methodological approaches, this study aims to offer valuable insights
into the practical implications and strategic considerations associated with the adoption of the
new ESRS E5 regulation in the realm of sustainability reporting, resource use, and circular
economy practices.
3.2.1 Manufacturing industry and companies
This study focuses on investigating large Swedish manufacturing firms. Jaeger & Upadhyay
(2020) mean that the manufacturing industry is a cornerstone within the economy however,
as this industry is bound by tradition it may be hard for it to quickly transition towards
circularity. Large manufacturing firms work a lot with different suppliers from different parts
of the world. This means that most of them have a global impact. To ensure a production
process where the products are produced in an environmentally friendly way and that the
products are not thrown away when they have been used it is important for these firms to
achieve circularity (Jaeger & Upadhyay, 2020). However, the supply chains of these large
firms are often complex and involve stakeholders from different countries which makes the
transition harder (Preston, 2012). Therefore, the potential gain both environmentally and
financially for these firms are big and that is one of the reasons as to why this study focuses
on the manufacturing industry. Jaeger & Upadhyay (2020) indicate that the large
manufacturing firms have the knowledge to make a strategy towards moving to circularity
however it may take time. Furthermore the environmental thinking in Sweden is well
26
established which provides a good foundation and potential for the manufacturing firms to be
able to implement circular economy reporting in an efficient way (Business Sweden, n.d;
Robeco, 2023).
The companies were chosen by looking up the biggest manufacturing firms in Sweden. These
large manufacturing firms all have rich histories within different parts of the manufacturing
industry and a lot of them have worked with circularity for a long time. The concept of
circular economy is therefore nothing new for these companies, it´s something that they have
worked with for a long time as they know that they have a large impact on the environment.
Also, as they are aware of their stature and impact in the world it's important for them to be in
the forefront of sustainability initiatives. Relevant interview subjects that work within
sustainability reporting in some way within the different firms were found and contacted
using LinkedIn.
3.2.2 Semi structured interviews
Semi-structured interviews are used to identify challenges and strategies in the ESRS E5
early stage implementation. Furthermore, semi-structured interviews allow to gain deeper
insights into the evolving landscape of corporate sustainability, particularly resource use and
circular economy practices as follow up queries can be helpful to address aspects mentioned
in the open-ended questions. This can be helpful in combination with the document review to
explore aspects which remain after analyzing certain documents.
The main motivation behind using semi-structured interviews has been emphasized by Kallio,
Pietilä, Johnson & Kangasniemi (2016). They emphasize the depth that semi-structured
interviews can offer in exploring topics. Semi structured interviews open-ended nature will
enable us to collect rich and context specific data. This will provide us with a foundation to
make a more insightful analysis of the challenges and opportunities faced by large
manufacturing firms in Sweden. Semi-structured interviews also allow for a focused
interview while at the same time giving way for other possible ideas that the interviewers
may come to think about during the interview which may further enhance the understanding
of the subject (Adeoye‐Olatunde & Olenik, 2021; Bryman et al., 2017). Most importantly,
the use of semi-structured interviews allows the respondents to express their answers in their
own words and in their own way.
Adams (2015) also highlights an important advantage of using semi-structured interviews. He
mentions the flexibility of this interview type and how it allows the interviewer to adapt
during the interview. This will allow us in our study to explore unexpected avenues that may
arise during the interview process. This flexibility will be valuable in performing an in-depth
qualitative analysis.
One of the main parts within semi-structured interviews that can be seen as both an advantage
and a disadvantage is the fact that different interviewers can gain different answers from the
same respondent. The reason for this is because in a semi-structured interview you are
supposed to ask follow up questions which you don't do in a structured interview. This means
27
that you can get different answers depending on which follow up questions you ask and the
way in which questions are asked (Qu & Dumay, 2011).
However, semi-structured interviews can be time consuming, labor intensive and they require
interviewer sophistication, as the preparation of the questions require knowledge concerning
the state-of-the art and the analysis of a huge volume of transcripts and notes requires time
(Adams, 2015). Also, during the interview, semi-structured interviews pose challenges, as
this type of inquiry is synchronous, the interviewer needs to focus much more on the
questions to ask and the responses to provide. In detail, the interviewer must formulate the
questions as a result of the interactive nature of communication (Opdenakker, 2006).
Addressing the limitation of labor intensity and time consumption discussed above we have
chosen to perform interviews at a purposive selected group of large manufacturing firms in
Sweden. This more focused approach helps us gain valuable conclusions in a selected field
within the time constraints of the study. It is also important to ensure that the limited number
of interviews is conducted with participants with relevant experience. This optimizes both our
and the interviewed firms' use of resources. As discussed above this is something that we
made sure to do before we made contact with the interview subjects.
To improve the overall reliability of the study and to address the possible limitations
connected to the difficulties of gathering the same results across repeated trials, precautions
were taken to avoid leading questions. The interviewer prioritized neutral and open-ended
questions to prevent steering responses. To further solidify reliability, participants were
encouraged to summarize key points at the end of the interview. These measures align with
Creswell's (2009) recommendations and aim to minimize potential sources of bias,
contributing to the overall dependability of the research findings.
Regarding issues of validity and reliability of the proposed research instruments several
factors in conducting the interviews must be considered. The term "validity" which describes
how closely a study reflects the particular ideas it seeks to explore, can be increased by
considering an interviewer's propensity to judge the candidate solely on their own merits or
by avoiding that the interviewer seeks answers to support their preconceived notions (Cohen,
Manion & Morison, 2007). These factors must be considered to reduce the bias. Regarding
the reliability of the proposed method, which describes to what extent a research instrument
produces the same results on repeated trials, the focus should be on the avoidance of leading
questions and giving the respondent the possibility to sum up the main points (Creswell,
2009).
3.2.3 Interview process
A well-structured interview guide is important in optimizing time management. This study
follows the steps outlined by Kallio et al. (2016). Kallio et al. (2016) has put together a
well-cited 5-step process. 1. Identifying the prerequisites for using semi-structured
interviews: Critically scrutinize if the purpose of the study and questions can possibly be
answered through this method of semi-structured interviews, which preliminarily seems
28
feasible through interviewing the right participants. 2. Retrieving and utilizing previous
knowledge: Use previous knowledge as a foundation to develop the interview guide. Within
this step, perform a literature review and, if possible, discuss with experts within the area of
the ESRS E5 directive to add onto the literature review. 3. Formulating the preliminary
interview guide: Develop the preliminary interview guide which includes consideration on
how to gain the optimal balance between the main theme of ESRS E5 standards and the
follow-up questions on for example the impact on sustainability reporting. 4. Pilot testing the
interview guide: Perform a pilot test of the interview which includes testing the application of
the guide, estimating the effectiveness of the questions and also perfecting the follow-up
questions to enhance the coverage of the interview guide. This is an important step since all
information and knowledge want to be captured within the interview. 5. Presenting the
complete interview guide: The last step is to present the entire semi-structured interview
guide in the study paper. The aim of this is to produce a polished, clear and logical guide for
the data collection that builds upon the previous steps from the evolution process. With the
help of these five steps, researchers can develop a reliable qualitative semi-structured
interview guide that adds to the credibility of the study results (Kallio et al., 2016).
Descriptive answers could be supported by starting the questions in the interview with words
such as who, what, where, when and how, according to Chenail (2011). Turner (2010) adds on
to this and says that the word why could be used as well.
The interview guide utilized in this study was developed following the structured approach
outlined by Kallio et.al. (2016), which involves the five key steps presented above. 1.
Identifying the prerequisites for using semi-structured interviews: Initially, we determined
that conducting semi-structured interviews would be the most effective method for achieving
the objectives of our research. Given the recent nature of the ESRS E5 regulation and the
absence of previous research as well as a lack of comprehensive annual reports reflecting its
implementation, relying solely on document review could limit the depth of our findings.
Therefore, we opted for semi-structured interviews to gain insights directly from experts
actively engaged in sustainability reporting. We ensured the relevance of our respondents by
targeting individuals involved in various aspects of sustainability reporting.
2. Retrieving and utilizing previous knowledge: Building upon the theoretical framework
outlined in our study regarding historical sustainability standards as well as circularity, we
created a preliminary outline for the interview guide.
3. Formulating the preliminary interview guide: Through collaborative brainstorming
sessions, we generated a list of potential questions designed to explore pertinent themes and
concepts.
4. Pilot testing the interview guide: Subsequently, we refined the interview guide through
iterative discussions and feedback. Although we didn't manage to perform a pilot testing of
the interview guide prior to implementation, the interview guide underwent thorough review
and validation by our supervisor to ensure its appropriateness and effectiveness in capturing
the intended data. Additionally, we shared the interview guide with the respondents in
advance, allowing them the opportunity to review and provide feedback, ensuring clarity and
29
alignment with their expertise and experiences. It also gave them the opportunity to give as
reflective and complete answers as possible (Martelli & Greener, 2018). This collaborative
approach facilitated a comprehensive and structured exploration of the complexities
surrounding the implementation of the ESRS E5 regulation within the context of
sustainability reporting.
5. Presenting the complete interview guide: The final polished version of the interview guide
is presented in the appendix of this study.
Due to the geographical locations of some of the firms as well as the tight schedules of the
interview subjects all of the interviews were held through online calls. Doing the interviews
face-to-face would have been optimal but due to the long distances that we would have had to
travel it would not have been possible to do all interviews face-to-face. Therefore, we opted
for the next best thing which is to do the interviews through online calls.
3.2.4 Document review
Doing a document review is a useful tool for researchers to get background information
surrounding the companies investigated in the study. These organizational documents include
for example annual reports, press releases and more (Bryman et al, 2017). Investigating these
kinds of documents is a great way of seeing how the companies communicate their thoughts
and ambitions for the implementation of ESRS E5 in the future to their stakeholders.
In the context of this study, the document review primarily focuses on understanding the
circular economy initiatives of the firms and their strategies for integrating the new ESRS E5
standard into their sustainability frameworks. Additionally, we sought to identify any
encountered challenges within these documents. This entailed scrutinizing the annual reports
of large manufacturing firms, with a particular emphasis on identifying keywords such as
“CSRD” or “ESRS E5” mentioned therein.
Given that the implementation of CSRD is due in 2024, it is unsurprising that the 2023
annual reports do not extensively cover preparations for this directive. Consequently, our
scrutiny primarily aimed to ascertain any indications within these reports regarding firms ́
readiness for ESRS E5 implementation. As a result, while the document review did not yield
an abundance of challenges, it nonetheless provided invaluable insights into how large
manufacturing firms are positioning themselves for the impending CSRD implementation and
how they are communicating this information to their stakeholders. Moreover, the document
review complements the data obtained from interviews with the companies, serving as a
corroborate resource.
30
Table 1: Respondents and companies included in the study
3.3 Analytical process
In order to make sense of the interview data stemming from the interviews this study uses
thematic analysis. Thematic analysis can be described as a method for identifying, analyzing
and interpreting themes within qualitative data. Furthermore, thematic analysis is a useful
method for generating codes and themes within the data. The aim of thematic analysis is to
summarize the data content and identify and interpret key features of the data that are
connected to the research question of the study (Clarke & Braun, 2017).
After every interview we produce transcripts in order to gain a greater overview of what was
said in the interview and to easier produce citations. The transcripts are coded using a
thematic analysis as discussed above where we look through the transcripts and identify key
themes within the transcripts that connect to the research questions of the study. The main
themes that we look for are if the respondent mentions anything that can be seen as a
challenge connected to the early stage implementation of ESRS E5. Furthermore, we also
look for any strategies or practices that the company implements as a response to these
challenges. After that we summarize the data that is relevant to the study in the results section
of this report. This empirical data in combination with the theoretical framework and the
analytical model is then the foundation for the results and analysis presented further down in
this report.
Because the implementation of ESRS E5 by companies is still in an early stage there is not a
lot of previous research regarding this subject. This scarcity in previous literature means that
there is not a lot of previous literature to build this study upon (Falkenberg et al., 2023).
Therefore an abductive approach has been used in this study where the literature and the
empirical findings continuously interact with each other (Sabelfeld, Dumay & La Torre,
2023). The abductive approach means that the researchers try to identify the conditions that
would make the phenomenon less puzzling and to make surprising facts into something
natural or obvious (Bryman et al., 2017).
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3.4 Reflection on research quality and method
When it comes to qualitative research a common measurement of research quality is
trustworthiness. Trustworthiness refers to the degree of confidence in data, interpretation, and
methods used in the study in order to ensure quality. Within trustworthiness there are four
different main categories, these include credibility, dependability, confirmability and
transferability. Later on, a fifth category was added called authenticity. It is also important to
know that not all of these categories are included in all studies (Connelly, 2016).
The most important part of trustworthiness is credibility which refers to the confidence in the
truth of the study and the findings of the study. This is the same as internal validity in
quantitative research (Connelly, 2016). In order to strengthen the credibility of this study we
have chosen to use respondent validation (Bryman et al, 2017). After each interview the
material was transcribed and translated into English if necessary and then sent back to the
interview subject in order for the interview subject to look through the interview one more
time and see what he or she had said. This gave the respondents the opportunity to change
little parts that may have come out wrong or further develop answers on parts where the
respondent felt like he or she hadn't given a good enough answer. This minimizes the risk of
us as researchers misunderstanding anything that the respondents say. Furthermore, it ensures
to us that we have understood the material in a correct way and that it reflects what the
respondents wanted to bring forward. This use of respondent validation strengthens the
credibility of this study and its findings (Connelly, 2016; Bryman et al, 2017)
Dependability is the stability of the data within the study over time as well as over the
conditions of the study. One of the main procedures in order to ensure dependability is for the
researchers to keep track of a process log where the researchers keep notes on all activities
that happen during the study and decisions surrounding different aspects of the study such as
for example who to interview (Connelly, 2016). Bryman et al. (2017) notes that this is a time
consuming and demanding task and therefore we have only done this to some extent during
this study. This mainly involves notes regarding which personnel within the different
companies to interview in order to ensure that we focus on personnel that are involved with
the sustainability reporting in the companies and that they work with the implementation of
the new CSRD directive. It is also to make sure that the respondents have somewhat similar
roles within the different companies.
Confirmability refers to the neutrality of the study and that the findings from the study are
consistent, meaning that the study could be repeated and still get similar results (Connelly,
2016). The confirmability of this study was ensured by using respondent validation as
discussed above where the transcripts were sent back to the respondents in order to make sure
that the transcripts reflected the true experience of the interview and that nothing came out
wrong (Bryman et al., 2017).
Transferability refers to the extent to which the findings of the study are applicable to persons
in other settings. This is different from the other categories within trustworthiness as it is the
readers that determine how applicable the findings of the study are to their own situation.
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Therefore it's important for qualitative researchers to focus on the informants and their story
without saying that it is everyone's story (Connelly, 2016). In this study we have made efforts
in order to make the results more transferable by focusing on a specific industry being the
manufacturing industry. We have also focused on just Swedish firms and only firms that are
considered large according to the new CSRD directive. This means that the results in this
study can be transferable to companies working in a similar industry or are of similar size.
These companies can then use these results in order to help them implement the new CSRD
regulation in the future and help them report in accordance with ESRS E5 when it comes to
their resource use and circular economy.
The qualitative research approach with focus on semi-structured interviews and document
review comes with both strengths and weaknesses. One of the potential weaknesses of this
study is the fact that we have only had one interview per company. It may be hard to get a
good view of each company by only having one interview although as we were mostly
interested in the challenges that the companies faced, having more interviews with the same
companies would likely have gotten us roughly the same answers. Therefore it was deemed
that one interview per company was enough.
As described by Bryman et al. (2017) one of the main weaknesses with qualitative studies is
that the results coming from these studies cannot be generalized beyond the situation in
which they were produced. This means that the results coming from this study are hard to
generalize to companies that work outside the manufacturing industry or companies that are
not large. It has also been argued that there is a lack of transparency within qualitative
research. This can for example be that there is uncertainty regarding how respondents have
been chosen (Bryman et al., 2017). This transparency issue has been mitigated in this study
by us as researchers clearly revealing how we found the respondents and our thought process
behind the selection.
As discussed earlier in the method section one of the strengths of qualitative research is its
ability to gain a broader context of the organizations investigated. By interviewing
individuals in the companies, we were able to get more extensive information regarding the
challenges that they faced in the early stage implementation of ESRS E5 as well as how they
have worked to respond to these challenges.
3.5 Ethical considerations
All of the interview subjects used in this study are kept anonymous throughout the whole
study, meaning that no identifying information is presented in any publications or
presentations resulting from this study. This is done to ensure that the integrity of the study is
kept intact and that the interview subjects don't under any circumstances get harmed by this
research. All the answers given by the interview subjects are used only for this study and for
nothing else. Furthermore, answers are analyzed within the context of this study and therefore
the answers from the interview subjects will not be taken out of context. The study also
ensures that there will be no confidential information presented which could possibly harm
33
the interview subjects or the companies involved in the study. This was agreed upon in
collaboration with the interview subjects before the interviews took place. It was also agreed
beforehand that participation in the study is voluntary and every interview subject has the
right to withdraw at any time without any sort of penalty. Furthermore, the interview subjects
need to feel pleased with the interviews and they therefore had the opportunity to add things
that they missed during the interview afterwards or delete things that they didn't want to be
included in the interview. This is to make sure that the interview subjects feel comfortable
with the interviews and the answers that they have provided. In order to further ensure both
the respondents and companies safety as well as the researchers safety a confidentiality
agreement has been created and sent out to the respondents that requested one. This is done to
further ensure that problems connected to the issues discussed above will not be a problem
within this study and that the companies and respondents in this study feel safe. The
confidentiality agreement was sent out to respondents that requested it and once they
approved the agreement it was signed by the respondent and both of the researchers.
In the interest of maintaining confidentiality the firms in the study are also kept anonymous.
As a majority of the firms expressed their desire to remain anonymous the choice to keep all
firms anonymous was made. Identifiable information provided during the interviews has been
altered in order to keep the anonymity intact and make sure that the information cannot be
traced back to individual firms. This approach is not only the most ethical option, but it also
encourages honesty and openness in the information shared during the interviews. This will
contribute to enhancing the reliability and validity of the collected data.
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4. Results
In this section the information from the interviews are presented and given meaning to.
Firstly, the challenges that the respondents indicate that the companies face with the early
stage implementation of ESRS E5 is presented. Lastly, the organizational strategies that the
companies use in order to face the challenges are presented.
4.1 Challenges
4.1.1 Uncertainties related to CSRD and ESRS E5
The uncertainties attached to the new CSRD regulation and ESRS E5 standard was one of the
most discussed challenges. The uncertainties began to emerge already before the final draft
from EFRAG was released. R1 explained how different drafts were released one after another
which changed the way in which the firm could prepare for the final draft. The uncertainty
surrounding what the final product was going to look like made it hard for companies in the
early implementation of the regulation (R1). Although there was uncertainty attached to the
first couple of drafts, the overall uncertainty regarding the new regulation was mostly
discussed by the respondents (R1, R2, R3, R4, R5).
Because sustainability reporting is a rather new concept in comparison to financial reporting
there are still a lot of uncertainties. The set up of financial reporting has been developed and
improved for many years and now the goal is that sustainability reporting is going to look the
same as financial reporting in a lot less time (R1). One of the respondents said that:
‘’We're aiming for the same quality of the data and the processes and data
assurance. But we only have a couple of years, so the timeline is much shorter
and that's working with the uncertainty of what it is that we need to report. It is
very present and challenging’’. (R1)
The uncertainty of exactly what each company is supposed to disclose about circular
economy and how to disclose is evident. R3 further underscores this uncertainty and explains
that:
‘’The ESRS E5 consists of a broad scope of reporting as you should describe
the resource inflow in own operation and upstream value chain. The company
must make a clear distinction of the material resource flows in the value chain
in order to prepare disclosures which are relevant for the company to report
upon. This relates back to the general principles in ESRS 1’’. (R3)
R3 further explains that this uncertainty is something that is especially prevalent during the
early stage of implementation and that in a couple of years it will most likely be more
streamlined. It will take time for firms to familiarize themselves with the new directive and in
the beginning it does cost a lot of money and resources to do so, especially for smaller
companies. “Resource allocation for preparing for the extensive reporting in CSRD may be
challenging for smaller companies with limited reporting functions” (R3).
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Furthermore, the early implementation stages of the CSRD during 2024 is found to be
dominated by companies re-positioning and creating an organization that is acceptable in the
future, which is perceived by the respondents to be a big challenge (R2). Within this
perspective, the companies face the need to set up systems for gathering data and making sure
the data quality is right and they will also need methodologies for reaching the data. Since a
lot of the requirements in CSRD and ESRS E5 are new there are uncertainties on how this
should be done. The respondents see the early implementation process as an important step of
the long process of corporate adaptation to the new requirements, which requires the
managers to be patient and willing to realize that “this is not going to be perfect straight
away”. (R2)
4.1.2 Gap between CSRD/ESRS E5 and current sustainability reporting practice
The most talked about challenge regarding the new regulation and standard amongst the
respondents is the fact that CSRD is a lot more extensive and specific in comparison to earlier
sustainability standards (R1, R2, R3, R4, R5). This is of course also one of the reasons for
why there is uncertainty amongst the firms. With CSRD being a much more specific
regulation than the ones before, R1 argues that the technical and abstract language in the
directive makes it difficult for different parts of the organization to link their day-to-day work
with the standards. Therefore, R1 indicates that it has been a challenge for the company to get
everyone onboard with the new CSRD regulation. Although R1 also indicates that there is a
strong belief within the company that this is going to be good in the future.
The double materiality assessment now needed from firms in accordance with CSRD has
been one of the main reasons for the elevated extensiveness of sustainability reporting. R1
said the following when being asked how CSRD has impacted the firm:
‘’I think it has impacted the company in different ways. The first and the most
obvious being that we have double materiality now, which is the result of that it
is basically more topics that we need to work on and from different sorts of
perspectives. So we need to expand the sustainability work that we've done so
far to two different topics and this mandatory part that if the topic is relevant,
you need to report. So that has been quite, quite a big change’’. (R1)
R3 further underscores the elevated extensiveness of the CSRD directive. The double
materiality assessment has generated a lot more data points that companies need to assess and
adhere to, this has put a lot of pressure on the reporting function of the firm. It is further
explained by R3 that a lot more is mandatory with the CSRD in comparison to earlier
frameworks like GRI. A lot more is mandatory for the firms, but a lot more is also more
detailed in the CSRD. There is a lot more for companies to do following the CSRD
implementation. This is especially true for resource use and circular economy reporting in
accordance with ESRS E5 compared to previous standards and directives regarding circular
economy reporting. R3 explains how disclosures such as waste management is required to be
on a more granular level, e.g. disclosure related to reuse and recycling split on hazardous and
non-hazardous waste.
36
R2 indicates that the new CSRD directive asks for more detail regarding the circular
economy information that the company presents and puts even more focus on the things that
the company already has in their strategy. R2 believes that this helps the company be more
specific and ask for more information regarding circularity both from inside the company and
from suppliers.
The comprehensiveness of the new requirements is a challenge for all companies now
commanded to adhere to the CSRD. R4 supports this statement:
‘’The main difference is that CSRD is a law. And it's a completely different
level of engagement that is required from the entire company which is very
challenging. There are many people who have big troubles with I mean, I'm not
speaking about Firm 4 specifically. I know that it's a big challenge for many,
many professionals to understand that now it's for real now it's a requirement,
now we must collect the data and report and verify it which will be very tough.
So the first big difference is that’’. (R4)
It is further explained that the same statement goes for the resource use and circular economy
aspect of the CSRD (R4). Much more regarding reporting on these topics are now mandatory
and much more extensive. This is and will remain to be a huge challenge for firms. The
extensiveness of the new requirements are also underscored by R5 who puts extra emphasis
on the extensiveness of the double materiality assessment:
‘’But the double materiality analysis is more comprehensive than it has been
before, and there's a new way of thinking, both in terms of positive and
negative impacts and also financial risks and opportunities, especially if
there's immaturity among everyone, almost because people are not used to
thinking about financial risks and opportunities’’. (R5)
It is evident that the extensive scope and, at the same time, the high level of details in the
CSRD and ESRS E5 requirements, highlighted by for example the double materiality
assessment are posing a significant challenge for firms in the early implementation stage of
ESRS E5. Companies are required to change and expand their sustainability reporting
practices. The elevated extensiveness of resource use and circular economy reporting also
poses value chain challenges for firms.
4.1.3 Value chain - limited data
One of the main differences between the CSRD and earlier regulation is that the CSRD is
much more specific and detailed compared to previous standards, both when it comes to
sustainability but also when it comes to circular economy and resource use more specifically
(R1, R2, R3, R4, R5). This can for example be that the companies need to report a lot more
details surrounding hazardous waste and non hazardous waste but they also need to report on
how the waste goes to reuse, recycle etc. (R3). The companies need to look at the whole
value chain when they report which is a big difference compared to how it looked before the
CSRD regulation. Unlike the GRI, where certain aspects could be omitted, the CSRD
37
mandates comprehensive reporting. This places a heightened emphasis on assessing and
addressing value chain impacts. However, it is worth noting that quantitative data regarding
the value chain's impact isn't mandatory under ESRS E5. Instead, such reporting tends to be
more descriptive in nature (R3). Therefore companies can not focus solely on their own
operations or their own circular economy. Instead, companies need to focus on suppliers in
connection to their circular economy in order to make sure that the whole value chain is
circular and uses the resources in a sustainable way (R4). Firm 5 highlights this challenge in
their 2023 annual report where they from a double materiality assessment found the
challenges in both the upstream and the downstream value chain (D5).
When it comes to circularity R1 indicates that this is something that the company has been
involved in for a long time. The biggest difference now is that the company needs to report
on their circular economy initiatives. These things are big challenges mainly because of the
limited data availability for all the companies within the industry. R1 gave an example of
what problems that can arise because of limited data availability:
‘’You need to kind of find where the data is coming from, but I think one of the
big challenges is this percentage of recycled content in the materials for
example, because that is something that, well, we would need to ask our
suppliers. What is the recycled content in this metal plate that you provided
that the challenge there is that they don't know either. So it's like everyone
needs to learn about this and sort of upgrade their knowledge about the
materials and the data. So even if we ask today, it's not that all suppliers can
answer this, and yet we're supposed to disclose this’’. (R1)
Similarly, R2 also indicates that specifically when it comes to ESRS E5 there are a lot of
questions regarding the share of renewable materials, biological materials and share of
recycled materials that needs to be reported on. There are many steps that the company needs
to do to get all this in place.
With time R1 indicates that the companies will be able to gain more data about products and
learn more about how they are supposed to utilize this data to be able to produce good
sustainability reports. R3, on the other hand, indicates that they have a lot of the data required
but it's more about compiling the data in the right way that they haven't done before. It's also
about finding the data within the company, they collect the data but since they are not used to
it having to be so detailed they don´t have all the data ready straight away. So it's more about
finding out where they have the data. Although R3 also indicates that this is connected to the
ambition level of the company and how detailed they want the information to be:
‘’Depending on the granularity and scope of data that is disclosed there will be
challenges in obtaining complete data and understanding of the upstream
impact. The value chain for certain materials can be very long and there may
be several sub-suppliers from Tier X to own operation. To obtain the full
understanding of the impact in resource used from these value chains will
require further transparency and collaboration with suppliers. This due
38
diligence process is an important step for us to further understand the impact
and how we can address that’’. (R3)
Following the CSRD directive there has been a lot of focus on the resource inflows into the
company (R2, R3). These big companies work with a lot of suppliers from all around the
world and it therefore becomes a big challenge for the company to collect data from all of
their suppliers. Therefore, data availability is one of the major challenges for companies
working with the new ESRS E5 directive since the companies may not even be able to collect
this data from their suppliers since the suppliers don´t have the information (R2). This
demand on more detailed information when it comes to resource inflow is also indicated by
R3:
‘’The LCA is an important report for us to further understand the resources
used and the impact of our products. Even though these are not exact measures
it provides indications of the impact and can support in prioritization in our
work how to address the impact through out the value chain. As supplier data
gets more available, we will also be able to perform even better assessments on
the impact’’. (R3)
One of the more concrete examples of a challenge connected to the supply chain and the
requirement on more detailed information in ESRS E5 was presented by R4:
‘’We have reporting of spend, so how much they spend on the materials they
buy, but not always how much of the material they buy. And one of the
requirements on the E5 is to report the weight of all materials that you buy
and then specify how much of that weight is bio based recycled, sustainable as
they put it. And for us it's bio based recycled under the target of circularity. So
this will be a challenge for us and is already challenged and we need that to
establish the reporting of weight’’. (R4)
In order to align themselves with the new ESRS E5 regulation the companies are required to
report more detailed information but since this is new the companies have not gotten all this
information yet. Depending on the relationship that the company has with its suppliers and
the size of the suppliers this information may be hard to gather. The data quality that the
company is able to get from their supplier also depends on the supplier's maturity when it
comes to reporting on sustainability information. If the company has a smaller supplier from
a country that doesn't prioritize sustainability as much it can be hard for the company to gain
high quality data from that supplier (R2).
4.1.4 External pressure
From the interviews held it was obvious that there was an external pressure on the firms. The
external pressure isn't something new that has appeared because of CSRD or ESRS E5
however it is a challenge that is relevant in this case. The respondents all mentioned that they
have some type of external pressure when it comes to their sustainability work as a whole.
39
Most of them didn't mention sustainability reporting specifically in these instances however
they did mention their companies sustainability work as a whole.
R1 does for example mention that stakeholders such as investors do pay a lot of attention to
the sustainability performance of their firm and do put certain demands on the firm's
sustainability work. In order for investors and other stakeholders to properly evaluate a firm's
sustainability strategy and efforts a sustainability report of high quality has to be made. This
puts pressure on firms to put forward a well thought out report.
R4 also mentioned several important stakeholders that do put pressure on the firm to perform
well regarding sustainability. It is mentioned that the stakeholder relationship is quite intense
in a good way, however by being transparent they do show stakeholders that they are serious
(R4). R4 says the following regarding stakeholder pressure on the firm's sustainability work:
“So I mean, we have many challenges that we're looking into, but being
transparent and ambitious, I think that we prove to our stakeholders that we
are assets within our industry’’. (R4)
In this case it is obvious that higher quality sustainability reporting would be something that
is appreciated by the companies stakeholders.
Apart from more talked about stakeholders such as investors and banks R5 also mentioned
stakeholders such as customers, employees and future employees. In this case it once again is
talked about in a more broad sustainability perspective and not specifically reporting however
stakeholders such as the three mentioned also do appear interested in the sustainability
reports provided by firms. In order to both attract customers and employees firms may need
to develop a satisfactory sustainability report. R5 mentioned the following when being asked
if external stakeholders put demand on the firm's sustainability work:
‘’Yes, absolutely, external stakeholders demand it in various ways. I also
believe that to attract them, there are demands from both customers and then
there are investors as well as employees and future employees who demand.
So, the demands are definitely there’’. (R5)
Another challenge that R1 talked about is the fact that the company is currently focusing on
CSRD but there are stakeholders in parts of the world that are not necessarily interested in
CSRD. CSRD is not fully in line with other reporting standards around the world. R1 says the
following:
‘’So for example, waste reporting there are one kind of metrics in the CSRD
but when it comes to the US there are different kinds of metrics. So how do we
approach that? We are required to report according to CSRD, but we have
customers in the US and we have production there and there are stakeholders
that are interested in those metrics as well, so it's a little bit of a challenge how
to manage the reporting jungle’’. (R1)
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There is a difficulty for these large global firms in trying to get along with all the reporting
requirements. Stakeholders put demands on the firms which in some cases can be quite
inconvenient.
As a whole it is obvious that stakeholders have certain demands on firms and that it is
important for firms to perform a well written sustainability reporting in order to satisfy its
different stakeholders. This isn't a new challenge however a challenge that is now heightened
by the fact that a new regulation has come into play.
4.2 Organizational learning strategy
4.2.1 Building knowledge
In the early implementation process of such a big and new directive like the CSRD it's
important for companies to have the right expertise both internally and externally. R5
indicates that they solve this problem by educating employees within the firm as well as
hiring consultants that are more experienced and specialized towards different parts within
CSRD, like ESRS E5. Similarly, R4 indicates that their company does a good job of
benchmarking in order to see if the company is able to solve the challenges themselves or if
they need external support from for example consultants in order to adhere to the directive. In
the early implementation stages of the CSRD directive R3 also indicated that they used
external specialists. This was done in order to make sure that they interpreted the CSRD
directive correctly and that they identified the right gaps within their existing annual report
that they had to fill in order to comply with the new standard. Furthermore, R3 also points out
that external consultants have a lot of industry knowledge regarding the implementation of
CSRD and more specifically circular economy and resource use. These consultancy bureaus
are working globally and have a lot of experience regarding what other companies in the
same industry are doing. This can be valuable information for companies in the early
implementation process since they have little experience themselves regarding what and how
to report.
R4 indicates that one of the challenges becomes to spread the knowledge and understanding
of CSRD throughout the organization. Since these are large firms it can be hard to spread the
knowledge around and train people within the organization. Spreading the information and
knowledge within the organization is important in order to successfully adapt to a new
environment.
R1 also highlights the importance of using the knowledge within the firm in a good way. The
firm has set up different work groups that are experts in different subject matters:
‘’We have set up a structure that we have several different work streams. That
means that we have basically made several groups of work groups with subject
matter experts that are then specifically looking at the CSRD requirements that
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are relevant for them. […] Since we're very decentralized, we need to involve
all business areas as well, and then we have these groups then working on
specifically looking at the CSRD text and mapping the gaps and then
implementing the processes because they are the closest to understanding and
what needs to be implemented where’’. (R1)
In a similar way R3 talks about how they have made use of the knowledge already within the
firm by combining different people with different necessary skills in teams in order to more
effectively implement the new standards.
R1 further highlights the importance of talking about the subject within the firm in different
forums and other occasions in order to spread the knowledge and information within the firm.
R1 says the following regarding knowledge building within the firm:
‘’It is a challenge because I don't know if you've read the CSRD or like the
ESRS texts, but it is not really user friendly and it's quite challenging to
understand the structure and so on. It's been challenging to kind of make sure
that everyone is on board, but what we do is then work with those work
streams, and we have team leaders that then can work sort of more closely with
some other team leaders and show them and sort of translate for them or like
explain the logic behind it a little bit and translate it into business language, so
they understand what this is about. But yeah, it's about educating and talking
about CSRD in various different forums and networks and sort of structures’’.
(R1)
In firm 5’s 2023 annual report a similar strategy is presented, where they highlight the
importance of continuous communication regarding the new directive amongst relevant
committees and boards within the firm (D5).
Apart from making use of the knowledge within the firm as well as looking for help from
consultants the firms seek information and knowledge from their peers. There is almost no
previous knowledge surrounding the implementation of this directive and therefore
companies do not expect to implement this in a perfect way right away. However looking at
and collaborating with peer companies could be a good source of inspiration and information
as emphasized by R2:
‘’We also have knowledge sharing and have had knowledge sharing sessions
with peer companies and how they're doing and going about this and of course
there are seminars and these things to attend and listen to’’. (R2)
R2 further indicate that the company tries to prepare and align themselves with the new
directive by looking at peer companies:
‘’I would say that we work a lot with peer companies. Some of our other large
Swedish enterprises are similar industrial companies as us. We share a lot. We
have a lot of experience sharing with them and that's both from specific topics,
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but then maybe also within different kinds of sustainability networks, where we
participate and it's both on how you do specifically. How do you collect your
data? Which functions do you involve? Sometimes it's just very good to share
that with others, just to understand and how we do it in a clever way’’. (R2)
R3 also indicates that their firm participates in knowledge sharing regarding their
implementation process. Roughly once a month they participate in workshops in order to
discuss the implementation which produces valuable information for the firm. Firms do also
seek external guidance from external reports, legislations and frameworks during the early
implementation process (D5).
4.2.2 Early start
Common for all companies interviewed is that they have previously worked a lot with
sustainability reporting as well as circular economy and resource use. The respondents
indicate that this has created a great foundation for their companies in this transition although
with ESRS E5 requesting more detailed information it's still a challenge for the companies to
be able to adapt to the new directive (R1, R2, R3, R4, R5).
Apart from already having a good sustainability foundation within the firms all companies
started working with the new regulation quite early. Popular amongst the interviewed
companies is to perform a so-called double materiality analysis in which the firms can
identify what to work on with the implementation (R1, R2, R3, R4, R5). The double
materiality assessment is also highlighted in the firm's 2023 annual reports as a base for their
upcoming sustainability report in 2024 (D1, D2, D3, D4, D5). R2 indicated that they started
doing an analysis in November:
‘’I think we really started it off in December or in November this autumn where
we first did the gap analysis on what is required and based on a double
materiality exercise we looked at the standards and sort of found out where the
greatest gaps were and now we've started filling the gaps and we've sort of
devoted 2024 for filling the gaps’’. (R2)
It is obvious that a lot of planning and preparatory work has to be done in order to
successfully implement the ESRS E5. R2 further explains how the firm has to develop
methodologies on how to effectively retrieve and handle data in order to comply with the new
standard. This new methodology cannot be rushed in order to build a procedure that is
applicable within the firm and its context (R2).
R3 described how they already two years ago started to look at how the new directive could
impact them as a company and in 2023 they also did a gap analysis and a double materiality
analysis based on the 2022 annual report in order to compare it with the disclosure
requirements of CSRD. Once again the importance of an early start is highlighted.
The importance of proper planning and development of processes is also highlighted by R5.
R5 underlines the fact that CSRD “requires comprehensive background processes that need to
43
be in place” (R5). The company started to familiarize themselves with the directive already in
2021 and had its first workshop regarding the directive in 2022 (R5).
4.2.3 Supply chain collaboration
During the interviews, it became evident that supply chain collaboration is paramount when
striving for high-quality resource use and circular economy reporting.
R2 indicates that the company works tightly with their key suppliers to increase data quality
and accuracy but they also work a lot with suppliers where the company knows that their
footprint is high. The reason as to why the company starts with these suppliers is that they
know that these are the places where the impact will be the biggest. Similar to this, R4
indicates that they work a lot with their suppliers through the company's own sustainability
self-assessment questionnaire which is based on the company's code of conduct. This is a
questionnaire provided to the company's suppliers and the company then requires 90% of
suppliers covering 90% of the company's spend to reply to the questionnaire. If the suppliers
don´t answer the questionnaires or if they provide concerning information the company may
need to follow up on their cooperation with the supplier. Because of the amount of suppliers
that the company has this becomes a big challenge. The company therefore aims to have
some sort of a risk map of their suppliers where they will be able to do physical audits as well
as virtual audits to make sure that the suppliers meet the company's requirements regarding
ESRS E5 (R4).
Similarly, R3 indicates that the company's procurement department works with suppliers to
increase the data information that the company gets from its suppliers. The company is
collaborating with suppliers delivering steel and aluminum to the company in order for the
company to be able to collect the correct data. They also work a lot within resource use with
“closed loop” with their suppliers. For example regarding aluminum the company sends back
all of the scrap metal or waste from some of their production to their supplier. The supplier
then melts it and creates a new component, thereby both minimizing waste in the production,
but also minimizing the use of virgin raw materials (R3). By having a close relationship with
supplies in this way the data and information regarding the inflow of material will be of
higher quality which will increase the standard of the companies reporting of resource use
and circular economy according to ESRS E5. R1 further explains how the collaboration with
its suppliers is a key factor in data accuracy:
‘’So overall, being in a closer dialogue with the suppliers is what's going to
increase the accuracy of the data and being very clear about the definitions of
what it is that we need and what kind of data we need to gather’’. (R1)
The insights gained from the interviews underscores the importance of supply chain
collaboration. Transparent communication with the suppliers of the firm seem to be the most
important aspect of the collaboration strategy employed by the firms. Moving forward,
continued engagement with the suppliers are according to the firms important in order to
adhere to the new ESRS E5 standard.
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5. Analysis and discussion
In this chapter the findings from the results section are analyzed in combination with the
literature presented in the theoretical framework as well as using the analytical model.
Firstly, challenges are presented and analyzed. Secondly, the organizational learning process
for the firms is discussed and analyzed.
5.1 Challenges
5.1.1 Uncertainties related to CSRD and ESRS E5
The various uncertainties associated with the implementation of CSRD and ESRS E5
represent a significant challenge. While such overarching uncertainties are typical when new
reporting requirements are introduced, they remain particularly challenging for firms during
the initial stages of implementing a new reporting standard, prior to acquiring the necessary
knowledge and experience.
A significant challenge posed by the new directive and standard is the expectation among
stakeholders analyzing sustainability reports that these reports, including those concerning
circular economy, will achieve the same level of quality as financial reports, despite the
relatively shorter period of development for sustainability reporting. Tschopp & Huefner
(2015) argue that financial reporting has been developing for over 100 years and now
sustainability reporting, that has mainly been voluntary practice for most of the companies
until recent years, is expected to comply with the tall requirements within a short time frame.
The lack of experience and the lack of a harmonized guidance for companies make the
implementation of circular economy reporting complex and challenging in practice (Tschopp
& Huefner, 2015; Falkenberg et al., 2023).
Some possible barriers connected to the implementation of ESRS E5 found in this study
involve the high costs associated with the increased efforts on sustainability reporting and
implementation of reporting on circular economy. Particularly the technical and complex
language in the standard makes the practical implementation challenging, because the
“language” of accounting for circular economy has not been experienced by companies in the
same way before. This is similar to what Dagliene et.al (2020) found regarding a lack of
guidance during the implementation of GRI, indicating that these are challenges that have
been present when implementing previous standards. To manage this challenge companies
use third-party assurance services to review their sustainability reports, increasing costs even
more. Furthermore, there is a challenge related to a demanding amount of data across the
value chain, finding and implementing all this data is time- and resource consuming, leading
to higher costs overall. These problems regarding the value chain are discussed further in the
5.1.3 section of this study.
On the other hand, the companies see some potentials related to the new regulations, for
example increased quality of sustainability reports, which is usually appreciated by the
capital market actors, and add extra value to the company because of the increased
45
transparency of the corporate reporting (Sveriges Finansanalytikers Förening, 2022).
Furthermore the fact that firms will have to follow one agreed upon standard also has the
potential to make the learning process shorter as companies have the ability to look at peers
and competitors and take inspiration from them. Therefore, the early stage implementation
may be hard for firms as there are a lot of new things which creates uncertainties but the
learning curve has the potential to be steep in the beginning as companies have the
opportunity to learn from each other.
Over time, when both the regulators´ and the companies´ experience accumulates, the
guidance behind the standards will also be developed regarding the implementation of ESRS
E5 in reporting practice. The respondents of these studies are rather optimistic about this, and
the current focus seems to be on the learning process. The large change that the ESRS E5
brings to the sustainability reporting area will bring uncertainties and this will influence the
way in which firms act in order to best implement the new standard. As discussed by
Suchman (1995), firms often seek inspiration from their peers in times of uncertainty. This
phenomenon has also been observed during the study. Gaining knowledge from outside
sources is also highlighted by Levitt & March (1998) as a good way to speed up the process
of organizational learning. The knowledge acquisition strategies employed by firms is further
analyzed and discussed in section 5.2.1.
In their discussion of integrated reporting Opferkuch et.al. (2023) discuss a problematic lack
of circular economy reporting benchmark related to the circular economy perspective in
companies. From the discussion with the respondents, we see the same concern. Even though
there is a reporting benchmark for circular economy reporting in the form of ESRS E5, the
disclosures and reporting requirements are perceived to be difficult to interpret and
understand. They are seen to be vague which, again, leads to uncertainties at the
implementation phase. This is also in line with Falkenberg et al. (2023), highlighting that
indicators and definitions are too imprecise, and emphasizing the need for more guidance
about the design of circular economy related measures and disclosures. With the introduction
of ESRS E5 there is a hope that companies will have a clear benchmark and a regulation that
will guide how they design their circular economy reports.
The firms included in this study previously reported in accordance to the GRI and they have
all been reporting on their sustainability work to some extent. They believe that this prior
experience regarding sustainability reporting has helped with the implementation of ESRS
E5. This is in line with what Falkenberg et al. (2023) discuss surrounding the fact that
companies that have reported in accordance to GRI and that have started implementing the
new ESRS E5 regulation at an early stage have an advantage. Therefore, earlier experience
plays a big part in the early-stage implementation of ESRS E5 as illustrated by this study.
This is also similar to what Borglund et al. (2010) find regarding mandatory sustainability
reporting, emphasizing the importance of previous experiences in corporate sustainability
reporting. Our evidence adds to this discussion by showing that companies with less
experience compensate for the lack of internal expertise by outsourcing the consultants ́
services at the CSRD and ESRS E5 early-stage implementation phase. This is especially the
46
case when the large firms have enough financial resources available for allocation towards
the implementation of the new standard.
5.1.2 Gap between CSRD/ESRS E5 and current sustainability reporting practice
One of the main parts regarding CSRD compared to earlier standards like GRI or NFRD is
that CSRD is more specific and extensive and the ESRS E5 standard requires companies to
produce more information regarding their circular economy work. One of the main new and
challenging parts discussed by the respondents was the principle of double materiality. The
principle means that companies need to focus on both impact materiality focusing on risks
and opportunities related to social and environmental impacts and financial materiality
focusing on how sustainability matters impact corporate value in terms of risks and
opportunities (European Union, 2023). Within the CSRD, the EU Commission emphasizes
the importance of having an interconnectedness between these two types of materiality.
However in practice, as the respondents perceive it, double materiality is a challenging
concept to implement for the companies, to get a grasp of and understand in practical terms .
The materiality issue was also discussed by van Garsse & Stiers (2023) who argues that
whether or not something is seen as material to a company is decided by the company itself.
This means that management needs to make decisions on what to include and what not to
include and in the early stage implementation of ESRS E5 it's evident that this is challenging.
This of course depends on the novelty and uncertainties of the ESRS E5 standard but also on
the broadness of the standard and the need for more information regarding the company's
circular economy work. With double materiality being a new concept within CSRD there is
little to no prior experience on how to implement it, meaning that the companies will have to
either learn from each other or gain the necessary knowledge as time goes on.
The need for more extensive information in combination with the fact that it's now mandatory
for the firms to produce circular economy reports in accordance with ESRS E5 puts a lot of
pressure on the firms. This regulatory pressure could be connected to coercive pressure as
discussed by DiMaggio & Powell (1983). The coercive pressures from ESRS E5 forces the
companies to improve their collection and reporting of circular economy information. Even
though the companies may have this information it may be that they haven't been forced to
report on it before but now they have to produce information in accordance with ESRS E5
regarding their circular economy work. Wang et al. (2014) find that mandatory circular
economy reporting leads to higher disclosure quality and Hamed et.al (2022) and Baumüller
& Sopp (2022) indicate that the reporting quality increases because the companies will have
to operate in an increasingly competitive environment. However, this study can neither
confirm nor deny whether or not the introduction of ESRS E5 leads to higher reporting
quality. The quality could increase as more information is reported on however there is a risk
that the need for more extensive information regarding sustainability leads to some negative
effects. As ESRS E5 is new and there is not a lot of knowledge surrounding the
implementation of the standard there is a risk of information overload for the firms during the
early stage implementation in line with what Villiers (2022) discusses. This information
47
overload may lead to a lack of clarity (Villiers, 2022). Numerous companies in this study
indicated that ESRS E5 introduces a multitude of new concepts and components they must
learn and comply with. This may lead to information overload, leading to a potential decrease
in reporting quality. Although, the companies interviewed in this study were generally
well-prepared for the new directive and possessed prior experience and knowledge in
sustainability reporting, which facilitated the transition. Nevertheless, despite their previous
experience, these companies found it challenging to navigate the comprehensive new
requirements of ESRS E5 during the early stage implementation.
5.1.3 Value chain - limited data
Another one of the main challenges is the value chain and the lack of data available within it.
With the introduction of ESRS E5, there is an increased need for companies to gather circular
economy information from their suppliers. However, for various reasons, companies can find
it challenging to meet the extent and quality of data demanded by ESRS E5. These challenges
are multifaceted and include issues such as data availability, quality, and reliability from
suppliers who may have varying levels of understanding and commitment to circular
economy principles. As a consequence of ESRS E5 it's not enough for the companies to focus
solely on their own circular economy work, instead they need to make sure that the whole
value chain is sustainable and focuses on their circular economy work.
Earlier research surrounding the challenge of reporting on circular economy connected to the
value chain is scarce. Many studies highlight challenges related to a lack of clarity and
guidance, as well as higher costs associated with the increased reporting requirements as
discussed above (Opferkuch et al., 2023; Falkenberg et al., 2023; Tschopp & Huefner, 2015;
Maas & Sampers, 2020; Villiers, 2022). These studies predominantly focus on the obstacles
companies face in interpreting and implementing new reporting standards, which often
require significant changes to internal processes and substantial investments in new data
management systems.
This study, therefore, sheds light on a new type of challenge that earlier research has not
focused on, being the specific demands ESRS E5 places on companies to collect
comprehensive and accurate information from their suppliers regarding circular economy.
This challenge is not only about gathering data but also ensuring its integrity and consistency
across the entire value chain. Suppliers, especially those in regions with less stringent
environmental regulations, might not have the necessary systems in place to provide the
required data, leading to gaps and inconsistencies. As indicated by respondents and as
discussed by Talpur et al. (2023), geographic location significantly influences the quality of
sustainability information. Suppliers based in less developed countries often exhibit a lower
emphasis on sustainability, thereby impeding the company's ability to obtain the necessary
information. Specific challenges related to the value chain include the necessity for
companies to obtain information on the percentage of recycled content in their materials, a
detail that suppliers may lack, thereby preventing the company from reporting this
information. Consequently, companies tend to prioritize suppliers that have the most
48
substantial impact on their operations, typically focusing on major suppliers or those
providing key materials. This study highlights the challenge for companies to collect accurate
data from all suppliers, which is essential for the production of high-quality sustainability
reports.
The increasing demand for circular economy information concerning firms' value chains puts
pressure on suppliers to provide high-quality data, despite not being directly affected by the
regulation. Van Garsse & Stiers (2023) discuss this dynamic, noting that large companies
may force their smaller suppliers to generate circular economy information sooner than they
would have if they were not supplying to a large company subject to the CSRD. Absent this
relationship, these smaller suppliers might have deferred compliance until later. This study
shows that this might very well be the case for the companies investigated as they request the
appropriate information from their suppliers, encouraging them to improve their data
collection.
The need for additional data acquisition leads to increased costs for companies, as they must
either generate new data or retrieve existing data internally if available. This aligns with the
challenges regarding increased compliance costs highlighted by Maas & Sampers (2020) and
Villiers (2022) concerning the new CSRD directive. Several companies in this study suggest
that compliance will result in increased costs due to the necessity of collecting additional data
from their suppliers. Conversely, one respondent indicated that their company already
possesses the required data but will need to locate and organize it. Nonetheless, these
processes are expected to elevate costs for firms during the initial implementation phase.
Opferkuch et al. (2023) identify the high complexity of circular economy data as a significant
challenge. Given the complexity and the extensive amount of data companies must collect,
there are substantial difficulties in both data collection and retrieval, as well as significant
associated costs. This challenge emerged as a primary concern in all interviews, highlighting
increased coercive pressure on firms to report comprehensively on their value chains and the
volume of data required. Conversely, Falkenberg et al. (2023) do not emphasize this issue to
the same extent in their study of the agri-food sector. Therefore, it can be argued that this
study offers a more nuanced depiction of the specific challenges faced by the manufacturing
industry, which differ from those encountered in other sectors such as agri-food.
5.1.4 External stakeholder pressure
As discussed earlier there are regulatory pressures put on firms in the form of the new CSRD
directive as well as the ESRS E5 standard, however there may also be different kinds of
stakeholder demands that can influence companies' work surrounding sustainability and
circular economy. Baumüller & Sopp (2022) discusses the fact that companies will have to
deal with both political demands as well as stakeholder demands when it comes to
sustainability information. If the firms are not skilled enough when it comes to sustainability
reporting there is a possibility that these pressures lower the overall quality of the
sustainability reports (Talpur et al., 2023). Although the companies investigated in this study
indicate that stakeholders put certain demands on the sustainability information that they
49
produce, this is nothing new. Their stakeholders have always put demands on them and they
instead indicate that the pressure encourages the companies to collect and present
sustainability information of higher quality. The external pressures coming from stakeholders
are nonetheless challenging but it's nothing new, what's new is the regulatory pressure
coming from the CSRD regulation and more specifically the ESRS E5 standard as discussed
above.
5.2 Organizational learning process
The new ESRS E5 standard has forced an organizational change amongst manufacturing
firms in Sweden in which they need to adapt to the new more extensive way to report on
resource use and circular economy. There is a clear coercive pressure from the new standard
that has initiated an organizational learning process. As talked about by DiMaggio & Powell
(1983) pressures from regulatory systems can get organizations to act in a certain way.
From the interviews it is clear that the new CSRD regulation will enhance the information
disclosed by firms regarding their resource use and circular economy. This could go against
the findings by Posadas et al. (2023) which found regulatory requirements doesn't necessarily
improve sustainability reporting within firms with a strong tradition of sustainability
reporting. As we do not yet know if the reporting actually will improve we cannot yet
disprove this statement, however a more transparent and extensive sustainability report
should also mean a better report.
The fact that the new standard has inclined change and improvement goes along with the
findings of Hossain et al. (2023) which found that coercive force can instigate sustainability
reporting improvement. This could be because of the more inflexible nature of the new
standard. Fitriasari & Kawahara (2018) did find that regulatory pressure did not improve
reporting; however in that case the regulation provided great flexibility. What can be learned
from this is that the ESRS E5 standard is strict enough to initiate change, but it is still too
early to know if it will bring purely positive change to resource use and circular economy
reporting.
5.2.1 Acquisition
The first stage of organizational learning as discussed by Dale (1994) as well as Levitt &
March (1988) is the acquisition stage. The new ESRS E5 standard and the challenges
connected to it has forced organizations to acquire new knowledge and information. Since the
study is made during the early stages of ESRS E5 implementation this is the most prominent
stage discussed during the interviews held. As discussed by Levitt & March (1988)
knowledge can be obtained in many different ways and this is also evident in this case.
During the acquisition stage one can also see clear patterns of isomorphic mechanisms
present which is shown by the similarities in the way the companies gather information, but
may also later be shown in how they present their resource use and circular economy.
50
One of the ways in which companies can acquire new information as discussed by Levitt &
March (1998) is through outside sources. This way of acquiring information is highly present
amongst the firms during the early stage implementation of the CSRD and especially the
ESRS E5 standard. During the interviews it was obvious that hiring external consultants was
one of the most used strategies to acquire knowledge surrounding the new standard. As
presented by the respondents this can be a good way to gain new knowledge and information
that is not present within the firm. This is especially helpful since there seems to be a
challenge for firms with the CSRD being a more extensive regulation and since all firms in
some way are uncertain regarding the new requirements. The use of external consultants is a
prime example of normative isomorphism present in the early stage implementation of ESRS
E5. If all firms hire external consultants which all most likely have the same type of
experience, education and mindset it will lead to a more unified way of working with the
standard amongst the firms. The external consultants will bring the same type of knowledge,
ideas and views to all firms.
Apart from hiring external consultants the firms also acquire knowledge from outside sources
by both looking at and collaborating with peers. Once again this is an example of an
isomorphic mechanism present in the early stage implementation of ESRS E5, in this case
mimetic isomorphism. Mimetic isomorphism as described by Suchman (1995) often appears
when organizations are uncertain. From the interviews it is clear that the organizations are
quite uncertain on how to handle the new standard and collaborating and observing peer
companies can be a good way to acquire new knowledge and information. By companies
modeling their behavior after peers the firms will become more conformed and will move
more towards organizational homogeneity, also known as isomorphism. Similar to this, firms
also make use of existing reports, legislations and documents publicly available to them.
What can be seen regarding the strategies of acquiring knowledge is that both mimetic and
normative isomorphism is present in the early stage implementation of ESRS E5. This would
indicate that the organizations have and will be influenced by these institutional pressures and
most likely conform in some capacity. We can however not know if this will in the future
improve the actual sustainability reports. Posadas et al. (2023) found that mimetic and
normative pressures does improve the quality of sustainability reports which could indicate
that these pressures also in this instance will be positive on a whole. The fact that normative
and mimetic isomorphism is present this early in the implementation process does also
somewhat disprove the three-stage model outlined by Bucholtz & Carroll (2017) which
claims that the different isomorphic pressures come in three different stages. It is clear that
the coercive pressure arrives first as claimed by Buchholtz & Caroll (2017), however in the
case of this study mimetic and normative isomorphism is also present during the early stage
which is not mentioned in the three-stage model.
Apart from outside sources of information that the companies use to acquire knowledge it
was also mentioned during the interviews that there is a lot of knowledge within the firms.
Past organizational experience is as mentioned by Levitt & March (1988) one of the main
ways to gain organizational knowledge. All of the respondents mention that the sustainability
knowledge is rather high within the firms already. This knowledge is of course useful when
51
facing the challenges provided by the new ESRS E5 standard. It is not for certain, however
normative isomorphism could also in this case be present. All firms interviewed are Swedish
large manufacturing firms that most likely have the same type of people employed. This
could lead to a case where the firms adopt similar strategies.
The third way in which knowledge can be obtained as presented by Levitt & March (1998) is
through experience. This has also been showcased by the firms. Most respondents mentioned
that they have made gap analyses or double materiality assessments in order to gain further
knowledge on what to work on. By doing these types of exercises the firm will build
knowledge within the company that will make the adaptation to the new standard easier.
The significance of both external and internal knowledge sources when navigating the
challenges occurring during the early implementation stage of the ESRS E5 standard is
evident in the analysis. External sources, such as hiring consultants and collaborating with
peers, exhibit normative and mimetic isomorphism, shaping a unified approach among
organizations. Internally, firms leverage past experience and conduct gap analyses,
emphasizing the importance of organizational knowledge. In accordance with the
organizational learning theory organizations do however also need to successfully
disseminate the knowledge acquired within the firm.
5.2.2 Dissemination
The dissemination stage in the organizational learning process is important in order to
successfully adapt to a new environment as a firm. While the dissemination of knowledge
within the firm wasn't as much talked about during the interviews it was clear that it is
something that the firms think about and value when it comes to the early implementation
stage of ESRS E5. Most respondents did mention the importance of spreading the knowledge
and how they work with knowledge and information dissemination. As mentioned in the
result section firms for example set up different work streams or work groups as a measure to
spread the information. The importance of talking about the standard in different forums and
occasions is also mentioned as it is clear that the companies find the value of everybody in
the organization being onboard when implementing CSRD.
5.2.3 Implementation
Because this research is done during the early stages of ESRS E5 implementation the actual
implementation hasn't materialized just yet. When the research was being done and the
interviews were held the firms mostly operated in the acquisition stage of the organizational
learning process. However, from the interviews it is clear that an early start is important in
order to face the challenges with the ESRS E5 implementation which have inclined firms to
start constructing some background processes and procedures. Most firms did highlight the
importance of processes needed to be in place early for a successful implementation. What
these procedures look like are unclear however from the interviews it is mentioned that they
should be company specific and fit in the firm's specific circumstances.
52
One part of the implementation process that has been more developed is the supply chain
collaboration. Once again the importance of an early start is clear amongst the firms and with
the obvious supply chain challenges brought by the implementation of ESRS E5, firms have
already started to take action regarding their supplier collaboration. The early implementation
of engagement with suppliers is most likely an effect of firms already being rather
knowledgeable about their suppliers. All firms already have some type of supplier
collaboration set up and they know that getting the supplier on board with the changes
brought by the ESRS E5 standard will take time. Because of this the firms have to start
implementing these types of strategies already. In the case of supply chain collaboration it
does seem from the interviews that it is more about updating the collaboration and not totally
transforming a methodology.
5.3 Updated analytical model
The organizational learning process spurred by the implementation of CSRD and ESRS E5 in
particular is multifaceted and marked by diverse strategies and challenges. It is evident that
the implementation process of ESRS E5 isn't as simple as a three step model. Rather it is
more dynamic where firms will continue to seek and acquire new knowledge even though it
has started the dissemination or implementation processes. The lines in between the three
stages aren't as clear and the early implementation stage of ESRS E5 does not move in a
straight line across the three stages in the organizational learning process.
The coercive pressures of the new regulatory requirements does initiate the organizational
learning process. The coercive pressure forming the way in which the firm's strategy
develops appears before the three stages. It is evident in the acquisition stage that firms use
both internal and external sources of information which in due time will affect the
organizational response to the challenges presented by the ESRS E5 implementation. It is
also evident that both normative, mimetic and coercive mechanisms are present during the
early implementation stage of ESRS E5 which are and will increase the conformity of the
strategies employed by firms. As of now normative and mimetic mechanisms have mainly
been found in the acquisition stage. These isomorphic behaviors in the early stage
implementation of ESRS E5 will impact the organizational learning process. While it is yet
still too early to gather comprehensive information regarding the dissemination and
implementation stage it is obvious to the interviewed firms how important these stages are in
the process of change within the firms.
What has been observed during the study is a tension and connection when looking at the
early stage implementation of ESRS E5 from the perspective of the two theories. The tension
and connection is visualized by the knots in figure 2 below. Organizational learning theory
focuses on adaptability and forward-thinking (Argyris & Schön, 1995). The theory suggests
that an organization increases their performance by effectively acquiring, disseminating and
implementing new information. On the other hand, institutional theory focuses more on the
role of conformity and legitimacy (DiMaggio & Powell, 1983). The tension arises when one
53
considers the balance between forward-thinking and conformity within an organization. The
organizational learning process can be seen as a tool for innovation while the institutional
mechanisms hinders organizational uniqueness. What we have observed is that organizations
have to navigate the tension between innovation and conformity. This balance is crucial for
organizations to successfully adapt to the new environment caused by the implementation of
CSRD and ESRS E5. What we have observed is that most firms do adopt similar strategies, at
least when one looks at the knowledge acquisition strategies. We can also see that isomorphic
mechanisms are present in some strategies. However while the strategies employed are
mostly similar they are still adapted for each firm's individual need. It does seem like the
firms employ similar strategies however through learning processes they adapt and tailor each
strategy for their own business.
Figure 2: Updated analytical model
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6. Conclusion
This section presents the conclusion based on the findings from the analysis section. Firstly,
key findings from the analysis that aim to answer the research question and fill gaps in
existing literature are presented. Secondly, the implications of these findings are be discussed.
Finally, limitations connected to this study are brought forward and suggestions for future
research are discussed.
6.1 Key findings
The aim of the study was to offer an understanding of the challenges faced by Swedish large
manufacturing firms during the early stage implementation of ESRS E5, as well as gaining a
better understanding of the strategies employed by firms during this time. Through an
extensive examination of interview data, complemented by data from corporate reports, and
existing literature several key findings have emerged. The key findings are used in order to
answer the two research questions.
Connected to the first research question a couple of primary challenges could be found
amongst the studied firms. These include, uncertainties surrounding the new regulation, the
more extensive nature of the CSRD and ESRS E5, value chain challenges, and external
pressures.
One of the primary challenges identified is the uncertainty surrounding the new ESRS E5
standard. This uncertainty is shaped by the lack of experience and standardized guidelines.
The introduction of ESRS E5 offers hope for improved guidance, although the early
implementation stage is accompanied by uncertainty. Despite these challenges, there is a
belief amongst the respondents that experience gained over time will streamline the reporting
process and enhance clarity surrounding the reporting requirements and improve the
sustainability information.
Moreover, the transition to CSRD and ESRS E5 in particular brings more extensive reporting
obligations, most notably by the concept of double materiality. The increased reporting
demands necessitates a change in organizational practices and resource allocation to meet the
expanded scope. The regulatory pressure of the ESRS E5 forces firms to improve data
collection.
The interviews also highlighted the challenges surrounding sustainability data availability
within the value chain. The new ESRS E5 standard pushes firms to provide more information
regarding their materials and value chain. Depending on the supplier's sustainability maturity
it may be hard to gather the necessary information. This is a big challenge for large firms
because of their extensive supplier networks that necessitates substantial data collection
efforts.
Although as discussed in the analysis there are also potential risks associated with the
implementation of CSRD and ESRS E5 in particular. The complex nature of the CSRD
55
directive and the increased demand for sustainability information may lead to over-regulation
and information overload for the firms, increasing costs a lot.
Connected to the second research question it is obvious that external coercive pressures, both
stakeholder-driven, but most notably regulatory, exerts significant influence on firms strategic
alignment with the new ESRS E5 standard. The organizational learning process induced by
the implementation of ESRS E5 is for now mostly characterized by a multifaceted knowledge
acquisition strategy. Diverse strategies of gaining knowledge such as external consultation,
peer collaboration, and internal knowledge accumulation is used. In the knowledge
acquisition stage it is obvious that both normative and mimetic isomorphic pressures are
active which could lead to conformity in the reporting output. While not highlighted as much
it is also crucial to underscore the importance of effective dissemination and implementation
of acquired knowledge in order to successfully adapt to the new regulation.
In conclusion, the early stage implementation of CSRD and ESRS E5 in particular is highly
affecting firms with challenges such as organizational uncertainties, increased extensiveness
of sustainability reporting and supply chain complexities. The coercive pressures of the new
regulation has forced an organizational learning process to begin within the firms, in which
similar strategies are employed amongst the firms in order to successfully navigate the
transition.
6.2 Implications
6.2.1 Implications for research
By studying a relatively unexplored subject matter, this research has made a contribution to
addressing a knowledge gap within previous literature. Because of the recentness of the
CSRD there is a scarcity of studies focusing on the CSRD and especially the ESRS E5
standard. This study has made contributions to this gap by providing relevant conclusions
surrounding the implementation of the new regulation and standard within large
manufacturing firms in Sweden. Apart from this the study can also be seen as a contribution
to the broader understanding of the challenges connected to sustainability reporting
regulation implementation. This study has made contributions by providing more in depth
analysis into manufacturing firms in Sweden, providing a further nuance to the already
existing literature within the broader topic.
This study has also built upon the recommendations from Falkenberg et al. (2023) who
recommended that further research on the implications of this subject had to be made. They
highlighted the need for an interview study where experts within the field are being
interviewed. This highlighted research gap has been contributed to through this study.
In the analysis made in this study new contributions to the already well developed theories,
institutional theory and organizational learning theory originally developed by DiMaggio &
56
Powell (1983) and Argyris & Schön (1995) respectively, have been made. By studying the
implementation of ESRS E5 through the lens of the two perspectives a tension was
discovered. The tension between the two theoretical perspectives builds upon the fact that
institutional theory is more focused on conformity while organizational learning theory
focuses on innovation and forward thinking. The discovery of this tension presents a new
way of thinking regarding the already existing theories and provides the opportunity to study
other events through the same theoretical lens.
6.2.2 Implications for practice
With the results of this study showing that there is an uncertainty amongst firms regarding the
implementation of CSRD and ESRS E5, and especially the double materiality aspect of the
new regulation, a suggestion is to increase the guidance available to firms during the initial
implementation phase. More guidance should be developed by the appropriate policymakers,
especially in the context of resource use and circular economy reporting. A decreased
uncertainty amongst firms implementing the regulation in the future would greatly reduce the
burdens associated with the implementation of ESRS E5.
This study does also contribute to lessen this uncertainty and aims to help firms implementing
the regulation and standard in the future. As mentioned by Falkenberg et al. (2023), an
understanding of the challenges faced by large firms at the early stage implementation of
ESRS E5 will greatly help other firms in their future implementation. This is especially
directed towards small, and medium sized firms' future implementations, but the information
provided in this study will also contribute to a better understanding amongst larger firms
already within the implementation process.
With the challenges faced by firms and the clear learning process that firms have to go
through it should be noted that sustainability reports proved by firms adhering to the CSRD
may not be perfect from the beginning. Stakeholders should be aware of this and this study
contributes to this awareness by providing stakeholders a better understanding of the
challenges and processes firms have to go through during the early implementation of the
regulation and standard.
Finally, the research conducted in this study holds the potential to serve as a valuable societal
contribution by calling attention to transparency in corporate sustainability reports. By
disseminating our findings to a broader audience, including policymakers, practitioners and
the general public, this research can initiate discussions surrounding the important subject of
sustainability and especially circular economy reporting within society.
57
6.3 Limitations and future research
As this is a study that has focused on the early stage implementation of the ESRS E5 standard
there are still a lot of unknowns about the implementation and how the standard is to be
implemented by companies in the future as well as what challenges they may face along the
implementation process.
One possible limitation to this study is that it only focuses on one particular industry, being
the manufacturing industry. There may be differences between industries in what challenges
ESRS E5 brings. Companies with smaller value chains and not as many materials and
suppliers needed to assemble their product may not have the same challenges as the large
manufacturing companies investigated in this study. Furthermore, this study only focuses on
Swedish companies which means that companies from other geographical locations within
Europe may encounter different challenges from implementing ESRS E5. Although, as the
companies in this study are large, global companies that are present all over the world, they
have to adhere to a lot of different stakeholders' demands which may decrease the effect that
geographic location has on the implementation of ESRS E5. Another possible limitation is
that this study only focuses on large companies. SMEs that will have to implement CSRD in
the future are therefore not included in this study.
Furthermore, this study only addresses the challenges faced by the large manufacturing
companies during the early stage implementation of ESRS E5. The study therefore doesn't
investigate the possible opportunities that the standard may bring to the companies. The
reason for this is because during the early stage implementation of ESRS E5 the companies
don't yet know what the possible opportunities stemming from the standard can be. It could
therefore be beneficial for future research to look at challenges but more importantly
opportunities in a year's time to see if the companies have gotten a grasp of the standard and
if they have encountered or found any opportunities connected to the implementation of
ESRS E5.
Another suggestion for future research is to study SMEs implementation of the ESRS E5
standard and look for any similarities regarding the challenges and strategies that were found
in this study when investigating large companies. This can give indications on the importance
of firm size and possibly also previous experience when it comes to the challenges stemming
from the implementation of ESRS E5.
Lastly, another possible avenue for future research can be to focus on different industries
other than the manufacturing industry investigated in this study. This could give indications
on what challenges companies from different industries face when implementing ESRS E5
and if there are any similarities or differences depending on what industries the companies
operate in.
58
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Appendix
A1. Interview guide
Introduction
- To ensure confidentiality and anonymity, I'd like to reassure you that all information shared
during this interview will be treated with the utmost discretion. Are you comfortable
proceeding with the understanding that your responses will be kept confidential?
- Shortly describe your role at xxx and what the role inclines
- How long have you been with the company, and what initially drew you to work in the field
of sustainability reporting?
Sustainability Reporting
- How have you worked with sustainability reporting previously at xxx?
- How do you think this may have affected the company's ability to implement the
new CSRD directive?
- When did xxx become aware of the new CSRD regulation and when did you start working
towards implementing it?
- How do you work with the new directive today?
- How has your way of working changed so far?
- What do you think are the largest differences between already existing frameworks such as
NFRD and the new CSRD? Overall and when it comes to reporting on resource use and
circular economy specifically.
- How are xxx ensuring that everyone has the necessary skills and knowledge to effectively
implement CSRD?
- Have you observed any responses from external stakeholders regarding your sustainability
initiatives?
- Do external stakeholders put demands on xxx´s sustainability work and what are some
examples of what these demands can be?
- Have there been any unexpected benefits or learning experiences throughout the
implementation journey so far?
- How do you navigate the tension between short-term financial considerations and long-term
sustainability objectives when making strategic decisions?
66
ESRS E5
- How has xxx worked with resource use and circular economy reporting previously?
- Have you encountered any challenges in aligning your existing reporting practices with the
requirements of ESRS E5?
- What specific measures or initiatives has xxx undertaken to address the requirements of
ESRS E5?
- How do you ensure data accuracy and reliability when reporting on resource use and
circular economy?
- How has the process of implementing ESRS E5 impacted your overall sustainability
strategy?
- Has the new directive on resource use and circular economy increased the awareness of
risks and opportunities within the firm? If yes, how?
- In what ways do you collaborate with suppliers or partners to enhance sustainability
practices, particularly in terms of resource use and circular economy principles?
- Have you encountered any regulatory or compliance challenges while implementing ESRS
E5 so far, and if so, how have you addressed them?
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