Navigating Value Chain Reporting Under the ESRS

The Corporate Sustainability Reporting Directive (CSRD) and the European Sustainability Reporting Standards (ESRS) are transforming how companies approach sustainability reporting.

One requirement is to include material information not only about a company’s own operations but also about its value chain — spanning upstream suppliers, downstream customers, business relationships, and the lifecycle of its products and services.

For sustainability professionals, this presents a unique challenge: identifying when and how to integrate value chain data into their reports. Importantly, the inclusion of value chain information isn’t required in every disclosure. Instead, it must be tied to the company’s materiality analysis and focused on material impacts, risks, and opportunities (IROs) that go beyond its own operations.

In this blog, we’ll break down the complexities of value chain reporting under the ESRS, clarify when it’s required, and offer practical tips for implementation.

Drawing on EFRAG’s implementation guidance and frequently asked questions, this guide will help you navigate the value chain requirements effectively and align your reporting with ESRS expectations. Whether you're just starting or refining your sustainability statement, this article is designed to provide actionable insights.

Understanding the Value Chain in the ESRS Framework

The ESRS define the value chain (VC) as the full spectrum of activities, resources, and relationships that underpin an organization’s business model and its external operating environment. This includes everything from the creation of products or services to their delivery, use, and eventual end-of-life.

The ESRS breaks down value chain activities into three main categories:

1. Own operations – Activities within the reporting company, such as its use of human resources.
2. Supply, marketing, and distribution channels – This includes sourcing materials and services, selling products, and delivering services.
3. External operating environments – Factors like financing, geopolitical, geographical, and regulatory contexts.

Actors in the Value Chain

While the ESRS uses “value chain” in the singular, it acknowledges that many companies operate across multiple value chains. Importantly, value chain reporting covers both upstream actors (e.g., suppliers that provide materials and services) and downstream actors (e.g., distributors, customers, or waste management entities handling end-of-life products).

Business Relationships in the Value Chain

In this context, business relationships are broadly defined. They encompass relationships with business partners, entities within the value chain, and any other state or non-state entities directly connected to the company’s operations, products, or services. Notably, this is not limited to direct contractual relationships, but also includes:

• Indirect relationships beyond first-tier suppliers
• Shareholding positions in joint ventures or investments

Mapping out the activities in the value chain focused on material impacts, risks, and opportunities (IROs) is a crucial first step for identifying actors and business relationships in the value chain.

What Needs to be Covered in Value Chain Reporting?

The ESRS does not require exhaustive reporting on every actor in the value chain. Instead, companies should focus on material value chain information, specifically when IROs are linked to:

1. Hot spots – Relationships with actors likely associated with significant actual or potential impacts on people or the environment, which may create risks or opportunities.
2. Key dependencies – Actors critical to the company’s business model, where the dependency on products or services generates notable risks or opportunities.

Why is the Value Chain Important?

The CSRD and ESRS highlight the value chain because many key impacts, risks, and opportunities (IROs) occur outside a company’s own operations. Reporting only on internal activities offers an incomplete picture of how its products, services, and activities affect people and the environment.

A Broader Perspective on Risks and Impacts

Value chain reporting uncovers critical issues from a double materiality perspective:

• Impact materiality: For example, a retailer sourcing wood from outside the EU may face risks like unsafe working conditions and pollution at supplier sites, affecting both people and the environment.
• Financial materiality: Regulatory changes or stricter enforcement in supplier regions could lead to significant fines or disruptions, impacting the company financially.

Identifying Opportunities

Including the value chain also helps address major opportunities, such as reducing Scope 3 emissions, often the largest part of a company’s carbon footprint, as emphasized by the Carbon Disclosure Project (CDP).

By considering the entire value chain, companies ensure their sustainability reports are accurate, comprehensive, and aligned with regulatory and stakeholder expectations.

Enhancing Sustainability Reporting with Value Chain Information

The Reporting Group

The sustainability statement aligns with the financial reporting group (as per ESRS 1). Sustainability professionals should collaborate with the financial reporting team to ensure these nuances are addressed.

Some subsidiaries excluded from financial consolidation for materiality or practical reasons may still have significant sustainability impacts that must be included in the report.

Internal Transactions

Internal or intragroup activities must also be assessed for material IROs. For instance, emissions from internal transport should be reported if they have significant environmental impacts, even if the transaction occurs within the group.

Joint Arrangements

For joint operations under IFRS, assets, liabilities, and operations are treated as part of the reporting entity’s own operations rather than the value chain. This means sustainability reporting should reflect these impacts as part of the group’s operational footprint.

By extending the focus beyond the financial reporting boundary, companies can ensure that all material sustainability issues, whether internal or external, are captured comprehensively.

Financial Assets

Business relationships and value chains, as defined in the July 2023 Delegated Act, cover all types of activities and relationships. If a company provides a financial loan to another business, and this leads to environmental harm like water or land contamination, the company is connected to the impact through the loan agreement. The only specific disclosure required for investments is related to significant GHG emissions under Category 15 of ESRS E1.

Example: Environmental Value Chain Reporting

The decision tree below highlights key considerations for measuring GHG emissions under ESRS E1 and pollutants under ESRS E2:

What is “Reasonable Effort” to Collect Value Chain Data?

When collecting value chain information for the sustainability statement, a company should make “reasonable efforts” to gather data from its upstream and downstream value chain, considering factors like cost and feasibility (ESRS 1, paragraph 69).

If primary data is unavailable, the company can use estimates, sector data, or other proxies, such as country or industry statistics, without excessive cost or effort (ESRS 1, AR 17).

Reasonable effort doesn’t mean avoiding disclosure. The company should determine the best approach for gathering meaningful value chain data based on its specific circumstances and resources. If direct data is too difficult to obtain, secondary sources (like sector averages) can be used. It's also important to document efforts and methodologies for transparency and audit purposes.

How to Estimate Information about the Value Chain?

Companies are permitted to use estimates for missing value chain information. They should use available resources such as proxies, sector data, or indirect sources. When doing so, companies must:

• Document the methodology used to estimate value chain information, including its limitations and level of accuracy.
• Ensure the assessment focuses on material IROs without undue cost or effort.

A materiality assessment can still be valid even without direct data from value chain actors, as long as reasonable steps are taken to gather data. Examples of data sources include government reports, non-profit organizations, and academic institutions. If primary data isn't available, companies can use these secondary sources for social, environmental, or human rights matters.

Companies should prioritize areas where they have significant risks, like safety or child labor concerns, based on general data (e.g., minimum wage information in high-risk countries). For broader environmental impacts (like pollution from steel production), companies can track performance through metrics like circular economy goals instead of estimating indirect impacts.

When using estimates, companies should ensure transparency about the data sources and the accuracy of their estimates. Over time, as the company collects more accurate data, it can refine its reporting.

This flexibility allows companies to navigate the challenges of data collection across complex value chains while still fulfilling ESRS requirements.

Get Ready for Collecting Value Chain Data

To effectively collect value chain data, companies should consider implementing ESG software solutions like Sunhat that streamline and automate the data collection process. These tools can simplify the management of complex data from both upstream and downstream value chain actors.

Key benefits of using such ESG software include:

• Easy collaboration: Software enables seamless collaboration with internal teams and external partners, allowing for efficient data sharing and updates across the value chain.
• Data delivery by external users: These platforms allow external stakeholders, such as suppliers and distributors, to securely input and share data directly into the system, improving the flow and accuracy of information.
• Improved accuracy & compliance: Using software enhances the accuracy of data and ensures compliance with ESRS requirements, making it easier to meet reporting standards.
• Audit trail: Software solutions provide a transparent audit trail, supporting effective governance and reporting processes.

By investing in the right software, companies can improve their data collection practices, enabling more precise and comprehensive value chain reporting, while also facilitating continuous improvements over time.