The European Sustainability Reporting Standards (ESRS) ESRS 2 General Disclosures require companies to report on their value chains.
What is required?
The undertaking shall disclose the elements of its strategy that relate to or impact sustainability matters, its business model and its value chain.
ESRS, Strategy Disclosure Requirement SBM-1 – Strategy, business model and value chain
Why?
The objective of this Disclosure Requirement is to describe the key elements of the undertaking’s general strategy that relate to or affect sustainability matters, and the key elements of the undertaking’s business model and value chain, in order to provide an understanding of its exposure to impacts, risks and opportunities and where they originate.
In two earlier posts, I explained that in the context of ESRS determining impacts (going out) of a company and financial risks and opportunities (going in) to a company were at the heart of sustainability reporting. Understanding your value chain is key to identifying impacts, risks and opportunities.
First, let’s look at how ESRS define value chain.
The full range of activities, resources and relationships 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. Relevant activities, resources and relationships include:
i. those in the undertaking’s own operations, such as human resources;
ii. those along its supply, marketing and distribution channels, such as materials and service sourcing and product and service sale and delivery; and
iii. the financing, geographical, geopolitical and regulatory environments in which the undertaking operates.
Value chain includes actors upstream and downstream from the undertaking. Actors upstream from the undertaking (e.g., suppliers provide products or services that are used in the development of the undertaking’s products or services). Entities downstream from the undertaking (e.g., distributors, customers) receive products or services from the undertaking
ESRS
Although a graphic depiction of your value chain is not required by the ESRS, it helps to visualize impacts, risks, and opportunities. “A picture is worth a thousand words” seems an appropriate quote.
What might such a value chain map look like?
Companies’ value chain details will vary depending on their sectors and industries. Inputs, business activities, and outputs will be different for manufacturing firms compared to service firms.
How can a company disclose their value chain activities?
The undertaking shall disclose a description of its business model and value chain, including:
(a) its inputs and its approach to gathering, developing and securing those inputs;
(b) its outputs and outcomes in terms of current and expected benefits for customers, investors and other stakeholders; and
(c) the main features of its upstream and downstream value chain and the undertaking’s position in its value chain, including a description of the main business actors (such as key suppliers, customers, distribution channels and end-users) and their relationship to the undertaking. When the undertaking has multiple value chains, the disclosure shall cover the key value chains. ESRS use the term “value chain” in the singular, although it is recognised that undertakings may have multiple value chains.
ESRS
Value chain disclosure is also required in the General Disclosures of the Global Reporting Initiative (GRI) Standards. In addition, questions involving risks and opportunities in the value chain are included in the CDP Climate Questionnaire.
Here are some examples of Value Chain Mapping that might be useful if you need to disclose your company’s value chain.
Look at these two companies:
James Hardie Sustainability Report FY 2023 See page 14.
CalSTERS Sustainability Report 2022-23 See page 9.
One can also consider how these two industries are depicted:
Innovation Center for U.S. Dairy, 2022 Materiality Guide for U.S. Dairy See page 12.
Williams for natural gas industry value chain
In my next post, I will talk more about the requirements of ESRS.