The Corporate Sustainability Reporting Directive (CSRD) introduces a landmark shift in sustainability reporting.
According to Greenomy, it significantly broadens the scope of reporting beyond a company’s direct operations to encapsulate the entire value chain. This includes upstream and downstream activities, products, services, and business relationships.
With the European Sustainability Reporting Standards (ESRS) Delegated Act at its core, CSRD challenges enterprises to meticulously map out and transparently report on their value chain’s sustainability impacts, risks, and opportunities. This article aims to shed light on how businesses can adeptly navigate these reporting requirements, ensuring both compliance and a deeper commitment to sustainable practices.
Misinterpretations between the value chain and the supply chain are common, yet the distinctions are crucial. The ESRS defines the value chain as a comprehensive range of activities, resources, and relationships integral to a business’s model and its external environment.
This definition includes both upstream suppliers and downstream distributors or customers, emphasizing the need for businesses to assess their impacts, risks, and opportunities (IROs) throughout these extensive networks. Crucially, this involves identifying significant business relationships, even beyond direct contractual ones, to encompass indirect connections and shareholdings in joint ventures or investments.
Identifying where to concentrate efforts within the value chain to spot material IROs can be complex. The European Financial Reporting Advisory Group (EFRAG) advises focusing on “hot spots” associated with high risks of impacts and areas where the company’s business model is heavily dependent on certain products or services. This dual approach helps businesses prioritize their assessments and reporting on material IROs effectively.
CSRD demands the identification of material impacts not only directly caused by a company’s operations but also those contributed to or directly linked through business relationships in the value chain.
This requirement underscores the importance of recognizing the myriad ways a business can be connected to, and thus responsible for, impacts within its value chain. This understanding is pivotal for conducting thorough Double Materiality Assessments (DMAs) and determining the scope of reporting required.
Once IROs have been identified through DMAs, businesses must disclose their policies, actions, and targets (PATs) addressing these areas. While most reporting will focus on the company’s own operations, there are instances, such as Scope 3 GHG emissions, where value chain data must be included.
The ESRS sets a framework for when and how to report on value chain IROs, urging companies to provide detailed disclosures, even when they extend beyond direct operations.
The challenge of collecting comprehensive value chain data is acknowledged in the CSRD, with provisions allowing for reasonable efforts in gathering this information. Companies may initially rely on estimates, proxies, or sector data until more precise data can be sourced. The notion of ‘reasonable effort’ is pivotal here, balancing the need for quality information against the practical difficulties of data collection.
To facilitate the transition to full value chain reporting, the ESRS provides a three-year grace period for companies to adapt. This period allows businesses to enhance their data collection capabilities, engage with stakeholders, and deepen their understanding of the value chain. Despite initial allowances for limited data, companies are encouraged to transparently report their progress, outlining the efforts made and plans for comprehensive reporting in the future.
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