Considering the value chain for ESRS compliance

Considering the value chain for ESRS compliance

For years, reporting organisations have been getting away with slack reporting on impacts related to the value chain. Often, upstream or downstream operations are the source or recipient of the greatest impacts. One of the ways in which the European Sustainability Reporting Standards (ESRS) is changing reporting is a heavier emphasis on value chain impacts, recognising that much more guidance is needed in this area. The ESRS Social Standards are comprised of four sets of standards, three of which are directly related to social impacts in the value chain. This article explores value chain disclosure requirements, as well as where to start assessing these impacts to meet compliance.

Stakeholder groups in the valuechain

The ESRS Social Standards are four sets of standards grouped by stakeholders, listed below along with the scope in brief.

1.    S1: Own Workforce

Covers working conditions, equal treatment and opportunities, and workplace rights

2.    S2: Workers in the Value Chain

Covers working conditions, equal treatment and opportunities, and workplace rights

3.    S3: Affected Communities

Covers the economic, social, and cultural rights of communities, their civil and political rights, and native rights

4.    S4: Consumers and End Users

Covers information available to consumers regarding a product/service, their personal safety and social inclusion

S2-4 are stakeholder groups along the value chain, as they lie beyond operational boundaries where a company has direct control. These are the standards for reference when reporting on value chain impacts.

Value chain disclosure requirements

EFRAG has outlined sub-topics foreach set of standards that may be material to a company’s operations and activities. Although they differ, they share these five disclosure requirements below.

• Policies for each material stakeholder group
• Engagement processes for each group to understand existing and potential impacts that they face
• Processes to remediate negative impacts on the stakeholder group caused by the reporting organisation’s operations and grievance channels available for stakeholders to raise concerns
• Measures taken to address material impacts and the reporting organisation’s approaches to mitigate risks and pursue opportunities, as well as the effectiveness of those measures/approaches
• Targets for managing negative impacts, creating positive impacts, and managing the risks and opportunities

Other value chain related disclosures

Besides the S2-4 standards, value chain related information also needs to be disclosed in other places of the ESRS. This applies very concretely to ESRS E1 Climate Change, where Scope 3 emissions shall be reported. At the same time, it applies to every standard where the reporting company identifies material impacts, risks and opportunities related to its value chain.

Materiality assessment for value chain impacts

Not all stakeholder groups may be relevant to a company’s value chain. This begs the question: which standard is relevant for a company’s reporting? Before embarking on the reporting process, it is critical to conduct a double materiality assessment. This is an ESRS requirement which narrows the information reported to only those Impacts,Risks, and Opportunities (IROs) that are financially or impact material to the reporting organisation.

When dealing with the value chain, it is useful to have a comprehensive map of value chain activities to enable the identification of potential impacts at every stage. This will help you in the materiality assessment process, where you can start off with a longlist of potential impacts (informed by the ten topical ESRS standards and their sub-topics), then determine which of these are not material or require adaptation to company/local context.

The materiality assessment process itself is guided by three criteria: scale, scope, and irreversibility, and further informed by the likelihood of occurrence for negative impacts. There is some room for determining the scale and scope used, but it must be defined precisely and utilise threshold values outlined in the ESRS Double Materiality Guidelines.The IROs that are identified as material should then be reported according to sub-topics. 

It should be noted that the process for materiality assessment should also be carried out in accordance with ESRS guidelines and is worth investing resources into. It is after all the basis for the entire reporting plan that is to follow. We recommend establishing a process for the materiality assessment and value chain mapping before delving into the topical disclosures.

How Daato helps

Daato helps in various ways with the reporting of value chain-related aspects, namely:

• A dedicated module to assess supply chain impacts and risks
• Documentation of all value chain impacts, risks and opportunities in your Double Materiality Assessment
• Multiple possibilities and ways to engage with value chain stakeholders
• Reporting of value chain related information across the ESRS

Learn more about our capabilities in our ESRS Super Guide or Book a Demo.