How to Involve the Value Chain in Double Materiality Assessment, blog image
Sustainability Reporting

How to Involve the Value Chain in Double Materiality Assessment?

May 24, 2024

The European Sustainability Reporting Standards (ESRS) and Corporate Sustainability Reporting Directive (CSRD) mandate reporting on material impacts that occur or may occur in an entity’s value chain. In this article, we explore the requirements related to value chain information and how companies should approach this in the context of the double materiality assessment.

CSRD and ESRS requirements for the value chain

As the overarching regulation for sustainability reporting in the EU, the CSRD requires reporting information relating to the value chain in addition to an entity’s operations. The ESRS’ approach to impacts reflects this as well, encompassing material information “connected with the undertaking’s operations and the upstream and downstream value chain, including through its products and services, as well s through its business relationships.”

It is a requirement to disclose whether each Impact, Risk, and Opportunity (IROs) identified in the the materiality assessment is connected to the business operations or its value chain. In both ESRS General Requirements and topical standards, information relating to material IROs must be included and this extends to IROs in the value chain. Certain standards such as the social standards ESRS S2 Workers in the value chain, ESRS S3 Affected Communities, and ESRS S4 Consumers and end-users directly cover value chain reporting and should be referenced for in-depth reporting guidance where relevant.

Value chain in the materiality assessment

Only material impacts most likely to occur in the value chain should be captured. Depending on the first part of the materiality assessment, the mapping of stakeholders including those in the value chain, a materiality assessment process should be designed that is “fit for purpose”. This means that there is no one-size-fits-all approach to materiality assessments, and it largely depends on the business-specific context. Secondly, the materiality assessment is informed by the due diligence process. However, general guidance consists of two steps for involving the value in the materiality assessment.

In its Materiality Assessment and Implementation Guidance published by EFRAG, the European Financial Reporting Advisory Group responsible for developing the ESRS, the first step in the materiality assessment is understanding the context of the business and its operations as well as its affected stakeholders. This involves the mapping of business relationships and the upstream and/or downstream value chain. Businesses can then further identify actual and potential IROs that may affect stakeholders, which is the subsequent step in the guidance.

1. Understanding the business context

This involves mapping business activities in its operatios as well as along the value hain, identifying key actors in the value chain, and developing a profileof each actor that captures their size, sector, location, and nature of activities. An understanding of the business strategy will provide further context as to its relationships with value chain actors. Often, existing risk management frameworks already capture actual and potential IROs in the value chain, thus providing a convenient starting point for companies launching the process of mapping IROs to parts of their value chain.

2. Identifying actual and potential IROs

Ambiguity and limitations are acceptable. However, as an ESRS requirement, it should be disclosed the extent to which the value chain is covered in reporting, for example disclosing any omissions while noting their importance and plans or actions for future disclosure.

Every effort should be made to gather information directly from key affected stakeholders in the value chain. This could take a variety of forms such as dialogue, meetings, surveys and questionnaires, interviews, focus groups, etc. Some forms of engagement likely already exist and may suffice for the data collection process. Secondary information may be relied upon in cases where primary information is not accessible, such as in the form of reports, studies, and consultation with appointed or qualified representatives. This is particularly relevant for silent stakeholders that are unable to represent themselves such as aspects of the environment.

In this stage, companies are required to disclose how they contributes to an IRO or are affected by it. This could be a direct contribution such as pollution in own operations or indirect involvement such as a human rights breach in an a supplier’s operations. It is important to make these distinctions as it will then determine the prioritization of impacts.

It should be noted that the above two steps for involving the value chain in materiality assessments do not cover the entire materiality assessment process. Please see our article on how to conduct a double materiality assessment in 6 steps for a detailed run-through.


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