CSRD requires companies to provide comprehensive reporting on their value chain, including upstream and downstream activities and hence demanding a holistic impact assessment. The CSRD Sustainability Reporting framework mandates companies to provide comprehensive disclosures on their upstream and downstream value chains, focusing on the associated ESG risks. Impacts, risks, and opportunities associated with a company's operations often extend beyond its immediate activities. Upstream activities, such as sourcing raw materials and engaging suppliers, can pose significant environmental and social risks. Similarly, downstream activities, such as product distribution and end-of-life treatment, can have far-reaching consequences.
Understanding the CSRD value chain requirements is important for companies who want to enhance their sustainability reporting. By adopting this comprehensive approach, companies can enhance their sustainability strategies, foster accountability, and drive positive change within their operations and the broader ecosystem in which they operate.
Value Chain as defined in ESRS
A value chain encompasses the activities, resources, and relationships the undertaking uses and relies on to create its products or services from conception to delivery, consumption, and end-of-life. Relevant activities, resources, and relationships are related to the undertaking's business model and the external environment in which it operates. A value chain encompasses the activities, resources, and relationships the undertaking uses and relies on to create its products or services from conception to delivery, consumption, and end-of-life. The ESRS value chain reporting framework encompasses activities from production to end-of-life management. Refer to EFRAG IG 2: Value Chain Implementation Guidance
Requirements under ESRS:
Linking impacts, risks, and opportunities to the value chain
A company's sustainability statement must include all material impacts, risks, and opportunities (IROs) arising from its business operations and relationships, extending across its upstream and downstream value chains. The materiality assessment in CSRD helps companies understand and align their value chain IROs with their sustainability reporting obligations.
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These business relationships go beyond direct contractual ties, emphasizing the importance of identifying material IROs linked to the company's broader network, even if they aren't directly within its operations. Companies must align their materiality assessment to identify material IROs in their value chain.
The Double Materiality Assessment process should be organized to capture material IROs in the value chain adequately.
The materiality assessment is central to identifying significant IROs, particularly in the value chain. This process highlights where (in terms of geographies, sectors, or actors) material impacts are most likely to occur. Companies must focus on the parts of the value chain where these impacts are most significant, even if they need direct access to all actors. Critical disclosures required in this process include those under ESRS 2, such as SBM-1, SBM-3, and IRO1. This ensures that the assessment of IROs extends into the value chain.
Identifying actual and potential IROs
Companies face challenges when identifying actual and potential IROs in the value chain, particularly in tracing materials and products. ESRS 2 highlights the need for businesses to disclose how much of the upstream and downstream value chain is covered. Reliable data should be gathered from value chain actors. Companies can turn to secondary sources like publicly available reports and databases where data is unavailable.
Also Read: An Overview of ESRS 1 and ESRS 2 cross cutting standards
Assessing involvement in the value chain
Companies must assess the extent of their involvement in value chain impacts, risks, and opportunities, both in their operations and through their direct and indirect relationships. For instance, a company could be indirectly linked to labor rights violations or contribute to systemic issues like deforestation through its procurement practices. Understanding whether the company causes, contributes to, or is directly related to an impact is essential, as each scenario requires different responses and assessments.
This structured approach to materiality and value chain involvement ensures that companies can provide comprehensive sustainability disclosures, highlighting their role in managing risks and opportunities.
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Topical standards require disclosures about policies, targets, and actions (PATs)
When a company has policies, actions, and targets (PATs) related to its value chain, particularly for addressing material IROs, it must disclose them according to the European Sustainability Reporting Standards (ESRS). These disclosures are required when the PATs involve material IROs in the value chain, either upstream or downstream.
Topical ESRS standards mandate disclosure of PATs for material sustainability matters. If a company does not have such policies or targets in place, it must state this clearly. The information disclosed should include how the PATs address IROs in the value chain where applicable.
Although only a few metrics in topical standards require value chain data, companies must include additional, entity-specific disclosures when the ESRS requirements do not sufficiently cover a material IRO in the value chain. These entity-specific disclosures should include metrics and data to help users fully understand the company's material impacts, risks, or opportunities.
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Leverage and reporting
A company's ability to influence or exert leverage over actors in its value chain significantly affects how it manages and reports on issues related to essential IROs. When a company has a strong influence, such as being a large supplier or customer, it can better manage business relationships and gather value chain information to address IROs. However, when influence is limited due to factors like low buying power, indirect contracts, or limited operational control, the company may need help accessing relevant data.
Industry norms, competitor behavior, and suppliers' or customers' willingness to share information can also impact this. Regardless of leverage, the company must still assess the materiality of IROs. In cases where direct data is unavailable, companies may need to rely on estimates, proxies, or publicly available information to meet reporting requirements, ensuring that material IROs within the value chain are still reported even when data access is restricted.
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How do the transitional requirements work?
The transitional requirements outlined in the ESRS allow companies a phased approach to reporting on value chain information during the first three years of implementation. These provisions enable companies to limit the value chain information they report while still considering it in their materiality assessments, with less stringent data-gathering requirements for both qualitative and quantitative data. Importantly, these provisions are optional; companies can decide whether to utilize them regardless of the size of the value chain actors involved, including small and medium enterprises.
Suppose a company cannot obtain the necessary value chain information. In that case, it must explain its efforts to gather it, the reasons for any shortcomings, and its future plans for information acquisition. Additionally, companies may limit their disclosures to in-house and publicly available data regarding policies, actions, and targets for the value chain. They are only required to include upstream and downstream value chain information if mandated by other EU legislation. From the fourth year of reporting onward, full compliance with ESRS 1 becomes mandatory.
While entity-specific disclosures are required from the start, companies should prioritize reporting previous disclosures and adding new ones related to sector-specific sustainability matters. Certain provisions allow companies with fewer than 750 employees to omit specific data points related to greenhouse gas emissions and certain worker and community disclosures for the first year or two. Overall, these transitional requirements aim to ease initial compliance burdens while encouraging gradual enhancements in reporting capabilities.
Strategies for Effective Value Chain Reporting
- Value Chain Mapping: Create a visual representation of your value chain to identify critical actors, dependencies, and potential risks. Use this map to identify high-risk areas and potential IROs.
- Stakeholder Engagement: Regularly engage with stakeholders, including suppliers and customers, to understand their perspectives and gather valuable information.
- Risk Assessment: Conduct surveys, interviews, or focus groups with value chain workers to gather feedback and prioritize material impacts and risks within your value chain.
- Data Integration: Leverage technology to integrate data from various sources, ensuring accurate and timely reporting.
- Continuous Improvement: Utilize the three-year transitional period provided by ESRS to adapt to new reporting requirements. Regularly review and update your reporting processes to reflect changing regulations and stakeholder expectations.
- Transparency: Outline steps for improving data accuracy and expanding the scope of value chain reporting over time. Maintain open communication with stakeholders about your reporting processes and findings, fostering trust and accountability.
Implementing value chain mapping and corporate sustainability reporting planning is necessary for understanding supply chain sustainability effectively.
At ecoPRISM, we specialize in assisting companies navigate the complexities of value chain requirements. Contact us for tailored support in conducting double materiality assessments and ensuring comprehensive reporting across your upstream and downstream value chains.