Understanding the value-chain

Supply chain is a major factor for any organization, the impact on the supply chain due to policies and rules, can impact an organization too. The CSRD framework emphasizes the crucial role of value chains in assessing carbon emissions, overall environmental impact and to understand the risks and opportunities and its impact. Upstream actors from the company include suppliers and provide products or services that are used in the development of the company's products or services. The CSRD Supply Chain Impact is profound, influencing every aspect of an organization's operations from upstream suppliers to downstream distributors. Downstream actors from the company include distributors and customers who receive products or services from the company.

The CSRD requires value chain reporting, which covers the activities, resources, and relationships the reporting company uses and relies on to create its products or services from conception to delivery, including consumption and end-of- life. Activities, resources, and relationships along the value chain include the following:

  • Entities in the company's own operations, such as human resources;
  • Entities responsible for its supply, marketing and distribution, such as materials and service sourcing and product and service sale and delivery; and
  • The financing, geographical, geopolitical and regulatory environments in which the company operates.

In many large organizations, certain suppliers are known as “impact hotspots” thus making the supply chains a major environmental and social factor. These suppliers play a critical role in both measuring a company's carbon footprint and implementing sustainable improvements.

Also Read: The EU Corporate Sustainability Due Diligence Directive: A New Era for Corporate Responsibility

Under the CSRD's new rules, the organizations must ask their main suppliers to measure the environmental impact of their products which is known as “product footprint”. These product footprints will then be used in the organization's overall environmental assessments.

Value chain is at the core

Unlike first generation environmental legislation that only focused on a company's own footprint, CSRD dives deep into supply chain, so that organizations can take responsibility for their entities in its value chain. The main elements of the EU due diligence directive concern human rights and environmental provisions.

The EU supply chain due diligence proposal under CSRD reporting requirements aims to increase accountability for corporates. This legislation will have a huge impact on the management of global supply chains, putting pressure on supply chain, procurement, sourcing, and sustainability teams to integrate robust supply chain due diligence policies and create a means for measuring or monitoring overall supply chain compliance.

Information to be reported by an organization across its value-chains:

The following types of information was laid out by ESRS reporting requirements of the CSRD directives for an organization to report to help stakeholders understand the impact of the value chain entities on the organization's operations. Value Chain Reporting under CSRD involves detailing the activities, risks, and opportunities within an organization's value chain.

  • Material impact, risk and opportunities (IROs) across its value chain.
  • Describe the nature and the entities of its value chain.
  • Describe its material IROs and report where in the value chain they arise
  • Describe how policies, actions or targets (PAT) cover value chain.
  • Mention the PAT for IROs that are linked to people in the value chain. The organization should disclose whether and how PAT covers value chain.
  • Describe its own operations, if no entities of value chain are required.
  • Disclose procured materials.
  • Specific quantitative datapoints that require value chain coverage.
  • SFDR indicators ESRS 2 Appendix B, if material to value chain coverage.
  • Other EU law in ESRS 2 Appendix B, if material to value chain coverage.

The organizations also have to disclose policies, actions or targets laid by it and by its entities covered in value chain that impacts ESG parameters. Understanding the CSRD Supplier Environmental Impact is essential for setting realistic and achievable sustainability targets across the value chain. The following actions have to reported according to the ESRS reporting requirements:

  • Policies to prevent and control pollution by its value chain actors
  • Policies against bribery and corruption for value chain actors and training for them
  • Actions and resources related to pollution and targets to reduce pollution generated by a supplier.
  • Clauses regarding the respect of fundamental human rights in contracts with value chain actors.
  • Audits conducted on high-risk suppliers
  • Selection criteria for new suppliers such as the existence of effective grievance mechanisms or freedom of association
  • Targets for suppliers on sustainable material use, for example X% recycled content or X% less waste.

Supplier compliance and steps to improve sustainability:

Being compliant means suppliers, partners, and service providers meet the same standards as your organization for optimal quality, safety, and industry fairness. Supplier compliance is the process of ensuring that a third-party vendor meets the regulatory and industry requirements of the business it supplies. Ensuring Supplier Compliance under CSRD is crucial to avoiding supply chain disruptions and maintaining the organization's integrity. Effective tracking and monitoring are key components of Sustainable Supply Chain Management, ensuring that all actions align with CSRD requirements. It also must comply with the business's internal policies.

Also Read: Impact of the Corporate Sustainability Reporting Directive (CSRD) on UK Companies

Supplier compliance is important so that an organization can avoid supply chain issues or reputational damages. Supply Chain Risk Management under CSRD involves identifying potential environmental and social impacts early in the supply chain. Such compliance issues may lead an organization to lose out financially due to third-party actions.

The following steps can be taken by an organization to identify and eliminate issues in the value chain:

  • Identification and assessment: An overview of the supply network should be in place to assess how severe any negative impact can be for an organization. If an efficient ESG data management system is in place, it can help to identify the risks and opportunities and to utilize or eliminate the impact.
  • Prevention or mitigation: After identification and assessment, companies need to create an action plan for the prevention and mitigation of any negative impacts identified. A robust CSRD Due Diligence Supply Chain process ensures that identified risks are effectively mitigated, protecting the organization's reputation and sustainability goals. Dedicated resources and planning should be in place for this stage.
  • Tracking and Monitoring: By using the reported data, the effectiveness of the actions taken can be tracked. If the actions are not effective, an organization should reassess the action plan and take new steps to effectively prevent and mitigate the negative impacts.
  • Communication: Internal and external communication of due diligence ensures the best practices in an organization and demonstrates transparency to suppliers, investors, and consumers.
  • Remediation: Due diligence is not enough if proper remediation actions are not considered. If proper actions are taken, then negative impacts can be eliminated, and better practices can be opted across the organization and its stakeholders. Remediation efforts are crucial to ensuring long-term Supply Chain Sustainability, especially under the rigorous standards set by CSRD.

Also Read: Understanding ESRS Standards: A Comprehensive Guide to CSRD Reporting

Tips for CSRD reporting on value chain:

  • Understanding the industry standards: Dive into the industry standards and practices within the sector. These standards can be used as a benchmark for the functioning of an organization's value chain. It can also help to go through governance reports issued by companies that have already made significant progress in mapping the value chain for CSRD.
  • Using internal documents: By using internal documents, an organization can search through the purchase orders, supplier contracts, and production schedules. These documents often provide a clear picture of an organization's current links in the chain. By collecting all relevant information from these documents, companies can get insight into the main suppliers, production processes, and distribution channels. This gives a good overview of which links exist and which are important.
  • Collaboration amongst departments: To accurately conduct a chain analysis is to actively involve and engage in conversations with different internal departments within an organization. Each department might have its own interactions with and insights into various entities of the value chain. If members from departments such as purchasing, production, sales, marketing, and logistics, are brought together, then a platform will develop for exchanging knowledge and insights.
  • Use of reporting software: An important part of CSRD is the disclosure of the sustainability performance. Due to the complex interrelation within the data points, reporting can be challenging. This makes software a crucial part to report information accurately and comprehensively. ESG Compliance Reporting is made more efficient with the use of specialized software, which helps organizations meet the stringent requirements of CSRD.

    The use of software for ESG data gathering, analysis and reporting within the framework of the CSRD is not just a practical choice for mapping the value chain but quickly becomes an indispensable tool for modern companies. Software platforms like ecoPRISM help organizations to effectively collect, analyze, and report their sustainability data seamlessly.

Streamline your CSRD compliance with ecoPRISM's powerful ESG management platform. Contact us to speak to our experts or book a demo of our software platform to get an insight into how we can simplify your CSRD journey.

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