Do you know what is hiding in your value chain? Now you should

Even though Danish companies have been used to include certain CSR matters in their reporting for several years, the European Sustainability Reporting Standards (ESRS) introduce a whole new era of sustainability reporting. In this article we zoom in on the increased focus on value chain information that are to be included in the sustainability reporting.

The newly published Corporate Sustainability Reporting Directive (CSRD) introduces the need for deeper insight into the companies’ value chains. As part of the transparency objective in the ESRS, companies are required to include value chain information in a much wider extension than seen before. The extension does not require information on every entity in the value chain, only material impacts and risks shall be reported. An impact or risk within the value chain is material when it falls within the scope defined in the company’s double materiality assessment. 

In ESRS 1 General requirements and ESRS 2 General disclosures the interaction between the company and its value chain is introduced. Spotlight is put on the need to know the key features of the value chain, as these can potentially also become a material impact or risk to the company.

It is apparent that most companies need to take actions to be able to assess which parts of their value chain will be material for the new reporting requirements, as this focus has not been part of sustainability reporting before. Companies that have worked with a materiality assessment in their sustainability reporting before, seem to have a more focused reporting, which is also the purpose of the double materiality assessment, to put the right focus and ensure relevant sustainability reporting. 

To identify material impacts and risks, companies need to know the critical dependencies and impacts in the value chain. These are certainly corner stones in how the double materiality assessment should be prepared. In KPMG we believe that the best starting point to identify material value chain information, is to map significant third parties. This regardless of whether it is merely a compliance exercise or is to be used to unlock commercial value.

A double materiality assessment is an exercise with multiple layers. The overall outcome is to identify impacts, risks and opportunities that are both impact and financially material. To reach this outcome both actual and potential, as well as impacts and risks on the short-, medium-, and long-term must be addressed.  

In our view, the exercise of mapping significant third parties, is a very meaningful way to start the double materiality process, regardless of the level of ambition for the ESG reporting.