2 Navigate the value chain under CSRD and ESRS – Complete comprehensive read

CSRD art 19(a)(3) and 29(a)(3)/ESRS 1.5 Value chain require that reported information relates to a company’s own operations and its upstream and downstream Value Chain (VC), including its products and services, its business relationships and its supply chain.

What is the difference between value chain and supply chain?
In short, the VC includes the supply chain. The supply chain is the actors in the VC upstream from the reporting entity. However, VC also includes downstream entities along with the supply chain.

The supply chain provides products or services that are used in the development of the undertaking’s products or services. Depending on the position in the VC, an undertaking’s supply chain can be part of the downstream VC of another undertaking.

In some industries, upstream or downstream refers to specific points in the chain rather than with reference to the reporting undertaking’s position in the chain.

Navigating the value chain under CSRD and ESRS
How to identify the reporting boundaries?

Reporting boundaries for sustainability reporting

The reporting boundaries would be based on the financial statements (For example, when reporting for a group where the parent company prepares consolidated financial statements, the consolidated financial and sustainability statements will be prepared for the parent and its subsidiaries.) –but expanded to cover material impacts, risks and opportunities related to the upstream and downstream value chain.

Associates or joint ventures –accounted for under the equity method or proportionally consolidated –may form part of the upstream or downstream value chain, if they are to be considered as business partners of the reporting company.

When determining impact metrics, the data of associates or joint ventures are not limited to the equity share held but should be taken into account on the basis of the impacts that are directly linked to the company’s products and services through its business relationship.

Most of the metrics in the sector-agnostic standards are limited to the own operations (no value chain). If information on the value chain cannot be obtained, in the first three years of applicable the draft ESRSs would allow transitional measures.

Disclosures – General requirements

The general requirements relating to all disclosures on VC can be found in ESRS 1 General requirements:

  1. The requirements for reporting on the VC are in chapter 5;

  2. Application Requirements AR 17 set out guidance on ‘Estimation using sector averages and proxies’; and

  1. Lastly, but importantly, ESRS 1 contains specific transitional provisions with respect to VC in chapter 10.2.

ESRS 1 requires the inclusion of material VC information when this is necessary to allow users to understand the undertaking’s material impacts, risks and opportunities (IROs) and to produce information that meets the qualitative characteristics of information set for in Appendix C of ESRS 1 (ESRS 1 paragraph 65).

This is a principles-based approach that works on top of the specific datapoints in ESRS that require to include specific VC information. This means that where necessary (i.e. reflecting the outcome of the materiality assessment), the undertaking shall include additional entity-specific metrics to cover VC (see ESRS 1 paragraph 11).

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Gain insight into the value chain

One of the reasons the CSRD is listed as a very sweeping new regulation is that the CSRD and the ESRS do not just focus on your own organization. Information is also required about the material sustainability impacts, risks and opportunities in the value chain.

Reporting on the value chain requires a good understanding of how it is structured and functions. Knowledge is needed about the products and services that are purchased, the resources that are used in the creation of these products and services, as well as what happens to the product or service after it is sold.

Materiality analysis and sustainability due diligence provide important input in mapping the value chain. Good to know is that not every party in the chain needs to be reported on, but only to the extent material to the sustainability reporting. The ESRS requires companies to report on policies, actions and objectives and results in the form of “metrics.”

Most “metrics” under the ESRS will be reportable without directly requiring information from the supply chain. The information can be reported based on the resources available to you as a company itself. Most of the information needed from the chain will oversee the “policies, actions and objectives” sections.

Depending on the information you need from the materiality analysis and the type of relationship the company has with partner in the value chain, it may be possible to engage directly with these partners and coordinate the information needed. If this is not possible, an estimate can be made based on sector information, for example.

Tips and tricks:

  • If information from the value chain is not available in the first three years after the CSRD takes effect, the company can also comply with the CSRD by explaining why the information is not yet there and what the company is doing to still obtain this information.

  • Need information from value chain partners? Start informing them early! Want to know more about metrics and the value chain? Contact Crowe Peak.

Understand the ESG data flow for each business process.

Once an ESG team is assembled, you are already on the right track. However, now the team must get to work and start collecting the data needed for ESG reporting. A good first step for this is to understand the data flow for each ESG business process. ESG touches every area of an organization.

From greenhouse gas emissions and human resources to information security and privacy. That means a lot of data needs to be collected. It is also important to understand the data flows for each ESG business process: where does the data come from (internally or externally)? Where do they go? Who is tasked with collecting, validating and reporting? A flowchart can help visualize the data flows.

Organizations will also need to determine whether they own and store the data themselves or whether the data comes from a third party. It is important to document the specific location of data (such as applications or spreadsheets) to evaluate its completeness and accuracy.

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Value Chain Reporting Requirements

A further notable aspect of CSRD reporting is the requirement for companies not only to report with respect to their own operations, but also their broader value chain. Reporting companies will therefore be required to report information on the material impacts, risks, and opportunities connected to the in-scope entity through its direct and indirect business relationships in the upstream and/or downstream value chain. According to ESRS 1 (see above, companies would not be required to report in relation to every single entity in the value chain, but only those that are considered “material” (on the basis of double materiality).

A key aspect of this extension of reporting requirements to include the broader value chain is the fact that it will likely lead to potentially significant ESG data requests of companies that are themselves not within the scope of the CSRD. A large number of such companies will be within the broader value chains of in-scope entities, and therefore such in-scope entities will require this ESG data in order to meet their own reporting requirements under the CSRD.

This will likely extend to entities in the value chain of in-scope entities that have no business operations within the EU at all. The EU has recognised that procuring such information may prove challenging in the short term, and has included a three-year grace period within the CSRD for reporting on these issues. For the first three years of application, companies may explain their efforts in relation to obtaining value chain information and the reasons they have not been able to procure such information.

Value Chain Reporting Requirements
An example of ESRS E5 Circular Economy VC interactions in high-impact sectors

Plastic value chain

The circular economy for plastics is an approach that aims to minimize waste and maximize the value of plastic materials by promoting their reuse, recycling, and regeneration. This involves several key actors in the plastic VC:

a) Raw material suppliers: these companies extract and produce raw materials used in the production of plastics, such as crude oil, natural gas, and petrochemicals. They supply these materials to plastic manufacturers.

b) Plastic manufacturers: these companies use raw materials to produce different types of plastic products, including packaging materials, consumer goods, automotive parts, etc. Plastic manufacturers may range from large multinational corporations to smaller specialized companies.

c) Brand owners: these are companies that market and sell products packaged in plastic. They collaborate with plastic manufacturers to develop and produce packaging that represents their brand image. Brand owners have a significant influence on packaging design and material choices, such as for food, beverage, cosmetics, and other industries.

d) Retailers: these include supermarkets, department stores, and online platforms that sell plastic-packaged products to consumers. They play a crucial role in the distribution and marketing of plastic products.

e) Consumers: they are the end-users of plastic products. They purchase and use plastic-packaged goods in their daily lives. They have a direct impact on the demand for plastic and can influence sustainable consumption practices.

f) Waste management companies: these companies are responsible for collecting, sorting, recycling, and disposing of plastic waste. They operate recycling facilities, waste-to-energy plants, and landfill sites. Waste management companies work closely with municipalities and local authorities to manage plastic waste effectively.

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These actors play different roles in the lifecycle of plastics, including the implementation of Extended Producer Responsibility (EPR) schemes and plastic deposit schemes for consumers.

a) Extended Producer Responsibility (EPR) is a policy approach that holds manufacturers responsible for the end-of-life management of their products. EPR organizations are typically industry associations or independent entities that administer and enforce EPR programs. They collaborate with producers, retailers, and waste management companies to ensure the proper collection, recycling, and safe disposal of plastic products.

b) Plastic deposit schemes, also known as bottle deposit schemes or container deposit schemes, encourage consumers to return used plastic containers for recycling by offering a refundable deposit. Under these schemes, consumers pay an additional amount when purchasing a plastic container, which is refunded when they return the empty container to a designated collection point. The returned containers are then collected, sorted, and sent for recycling. These schemes help increase recycling rates and reduce plastic litter in the environment.

Governments at various levels (local, regional, and national) play a crucial role in formulating and implementing policies related to plastic waste management. They establish regulations, set recycling targets, and enforce compliance with EPR schemes. Government agencies also work with stakeholders to develop plastic deposit schemes and other initiatives to promote recycling and reduce plastic pollution.

Overall, the plastic VC involves a wide range of actors, including raw material suppliers, manufacturers, brand owners, retailers, consumers, waste management companies, EPR organizations, and government bodies. Collaboration and engagement among these stakeholders are vital to promoting sustainable plastic use, recycling, and waste management practices.

Real life example

Real life example

https://www.philips.com/a-w/about/environmental-social-governance/environmental/supplier-sustainability/responsible-sourcing-of-minerals.html

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