26 October 2022 (Updated 31 August 2023)

What’s the issue?

Sustainability-related risks and opportunities arise not just in the reporting entity1 itself, but right across a company’s value chain. Therefore, reporting on a company’s impacts and dependencies that give rise to those risks and opportunities is important.

Many companies are likely to face challenges in obtaining information about activities outside their control, including:

  • understanding the quality and availability of data;
  • obtaining information in a timely manner;
  • using measurement techniques that are aligned with other parties; and
  • identifying appropriate estimates and approximations when data is unavailable.

It will take time to implement systems, processes and controls that will allow timely reporting.

Reporting on a wide range of activities, resources and relationships across the value chain helps investors understand a company’s impacts and dependencies that could reasonably be expected to affect its prospects.

What are the requirements?

Under the standards2, a company provides material information about all sustainability-related risks and opportunities in the reporting entity itself and throughout its value chain – e.g. Scope 3 greenhouse gas (GHG) emissions.

For example, this could include activities, resources and relationships:

  • in the entity itself – e.g. production activities or relationships with the workforce;
  • upstream – e.g. with raw material manufacturers or service providers;
  • downstream – e.g. with distributors or customers; and/or
  • with the external environment – e.g. financial, geographical, geopolitical or regulatory.

The standards provide guidance to support data quality and availability challenges for value chain reporting – e.g.on Scope 3 GHG emissions.

There are also transition reliefs3 available that limit the amount of data required from the value chain in the first year of reporting.

What’s the impact?

It will take time to develop effective sustainability-related financial disclosures because their scope is broader than many companies are used to. Reporting involves data from outside the organisation and extensive use of estimates.

Despite the available transition reliefs, companies could find gathering quality data particularly challenging and the standards could have significant implications for their processes, systems and controls beyond financial reporting – especially if they are conglomerates or have complex supply chains.

Actions for management

  • Read our guide for more on the requirements.
  • Understand your value chain to identify where sustainability-related risks and opportunities arise. Use this to determine the types of data that you may need to collect.
  • Engage with parties in your value chain early to begin the process of gathering the relevant information.
  • Identify areas where estimates will be needed until reliable data is available from your value chain.
  • Consider what broader changes in processes, controls and systems will need to be made to define, capture and report the appropriate data.

1 A reporting entity prepares general-purpose financial statements and is the same for financial statements and sustainability reporting. If the reporting entity is a group, then both its consolidated financial statements and its sustainability reporting would be for the parent and its subsidiaries.

2 IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures (together ‘the standards’).

3 Companies can choose to omit Scope 3 emissions disclosures in the first year of reporting. In addition, the climate-first exemption allows companies to report only on climate-related risks and opportunities in the first year. Data from the value chain relating to other sustainability-related risks and opportunities is not required until the second year of reporting.

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