The EU’s Corporate Sustainability Reporting Directive will have broad impact. Approximately 50,000 undertakings are expected to have a reporting obligation. The recently finalized European Sustainability Reporting Standards specify the information required to be reported under CSRD.

As we recently posted, this summer’s ESG must-read is ESRS 1, which contains the general requirements applicable to CSRD reporting. The objective of ESRS 1 is to provide an understanding of the architecture of the ESRS, the drafting conventions and fundamental concepts used and the general requirements for preparing and presenting sustainability information in accordance with CSRD.

Understanding ESRS 1 is therefore critical to preparing for CSRD reporting. It will drive not only disclosure, but also the underlying processes and controls. As a threshold matter, understanding ESRS 1 also is important for developing the project plan for CSRD readiness.

Posts in this “Summer of CSRD” series discuss selected aspects of ESRS 1, in a bite-sized read, in more or less the order presented in ESRS 1.

In the last post, we discussed due diligence.

In this post, we discuss the value chain, which is addressed in ESRS 1, chapter 5.

The reporting undertaking and the value chain

ESRS 1 indicates that the information about the reporting undertaking provided in the sustainability statement is required to include information on the material impacts, risks and opportunities (IROs) connected with the undertaking through its direct and indirect business relationships in the upstream and/or downstream value chain. This is referred to in the ESRS as “value chain information.”

  • The undertaking is required to include material IROs connected with both its upstream and downstream value chain (1) following the outcome of its due diligence process (see our earlier post) and materiality assessment (see our earlier post) and (2) in accordance with any specific requirements related to the value chain in other ESRS.
  • Information is not required on every actor in the value chain. Only material upstream and downstream value chain information is required to be included. Different sustainability matters can be material in relation to different parts of the undertaking’s upstream and downstream value chain. Value chain information only in required in relation to the parts of the value chain for which the matter is material.
  • The undertaking is required to include material value chain information when necessary to (1) allow users of sustainability statements to understand the undertaking’s material IROs and/or (2) produce a set of information that meets the required qualitative characteristics (see our earlier post).
  • When determining at which level within its own operations and upstream and downstream value chain a material sustainability matter arises, the undertaking is required to follow double materiality (see our earlier post) in assessing IROs.
  • For policies, actions and targets, the undertaking’s reporting is required to include upstream and/or downstream value chain information to the extent those policies, actions and targets involve actors in the value chain.
  • When associates or joint ventures, accounted for under the equity method or proportionally consolidated in the financial statements, are part of the undertaking’s value chain (such as suppliers), the undertaking is required to include information related to those associates or joint ventures as applicable. When determining impact metrics, the data of the associate or joint venture is not limited to the share of equity held, but must instead be taken into account on the basis of the impacts that are connected with the undertaking’s products and services through its business relationships.

Using estimates

As noted in ESRS 1, the undertaking’s ability to obtain necessary upstream and downstream value chain information may vary depending on factors such as contractual arrangements, the level of control the undertaking exercises on the operations outside the consolidation scope and its buying power. When the undertaking does not have the ability to control the activities of its upstream and/or downstream value chain and its business relationships, obtaining value chain information may be more challenging. Obtaining value chain information for small and medium-sized enterprises and other upstream and/or downstream value chain entities that do not have a CSRD reporting obligation also may be challenging.

  • If the undertaking cannot collect required information about its upstream and downstream value chain after making reasonable efforts to do so, it is required to estimate the information to be reported about its upstream and downstream value chain by using all reasonable and supportable information, such as sector-average data and other proxies. Estimates made using sector-average data or other proxies may not result in information that does not meet the required qualitative characteristics (see our earlier post).
  • With respect to metrics, ESRS 1 notes that, in many cases (in particular for environmental matters for which proxies are available), the undertaking may be able to comply with the reporting requirements without collecting data from the actors in its upstream and downstream value chain, for example when calculating the undertaking’s scope 3 greenhouse gas emissions.