For most companies, the greatest opportunities for sustainability lie in the value chain. If you really want to make an impact, then you cannot avoid taking a good look at your value chain and work with suppliers and other actors to make it more sustainable. But how do you do that? In this article, we explain our five-step plan and show you how to systematically improve the ESG performance of your value chain.
What exactly is a value chain?
The value chain is a concept originally coined by Michael Porter, to denote the position of an organisation in relation to a larger value system. A value chain includes (upstream) suppliers and (downstream) customers and end-users. In other words, a value chain is a chain of companies supplying each other. It allows to represent the position of a company in relation to all (indirect) suppliers and (indirect) customers.
Before Porter, the concept served to determine a company’s competitive position, but in the context of CSRD and ESG, we use it to map and improve scope-3 impact, for instance. After all, when your suppliers become more sustainable, your product becomes more sustainable. Similarly, when customers emit less CO2 when using your products, for example, your ESG performance will improve.
Step by step towards a more sustainable value chain
At Empact we use the guidance document prepared by EFRAG for reporting on value chains, which is in line with what the CSRD currently expects from companies. Starting from reporting (steps 1 to 4) to actually making an improvement, an additional step needs to be taken: making impact (step 5).
Step 1. Analyse and assess materiality
To determine which themes and topics to focus on within the chain, you should start with making a materiality analysis. This means that you should investigate which themes are relevant, both in terms of impact on ESG topics and on the financial aspects of business operations. In order to do this you will need an outline of the value chain first. Then, according to the principle of due diligence and in close consultation with relevant stakeholders, material themes are determined and validated.
Step 2. Accurately map the value chain
Once material themes have been validated, the value chain can be zoomed in further. In this phase, all suppliers, customers and other business partners (actors) are identified. In the context of the CSRD, this only needs to be done for the actors around material themes, but to make the most of opportunities, a full overview can also be chosen.
For large companies in particular, it can be quite a challenge to map all actors, especially when also looking at TIER 2 (for example: suppliers of suppliers) and TIER 3 (suppliers of suppliers of suppliers of suppliers). A stakeholder identification and mapping tool can then assist to make a start of mapping some relevant actors in the value chain.
Step 3. Data analysis
Data is then collected for each actor on the material topics defined in step 1. Data such as a company’s CO2 emissions, working conditions and (drinking) water use. A challenge here is that data from outside the own organisational boundaries usually has a limited degree of reliability. Financial data on purchasing costs, revenues and cash flow are often readily available, but this is much less true for CO2 emissions and social aspects.
Therefore, this is also taken into account within the reporting standards. If, despite reasonable efforts, a company cannot collect information on the upstream and downstream value chain, it shall estimate the information to be reported using all reasonable and well-founded information available. This could include data from indirect sources, industry average data, sample analyses and market data.
Step 4. Reporting on the value chain
After collecting data regarding all material actors on material topics, this data has to be reported. This is done according to the requirements and guidelines set out in the CSRD. Some of the requirements set by the CSRD for a value chain report are:
- The description of the materiality analysis should clearly explain how topics related to the entire value chain have been identified, assessed and prioritised.
- The value chain (upstream and downstream) must be described, as well as the organisation’s position within it and the most important actors.
- An overview of purchased materials and products.
- An explanation of the qualitative data points concerning the value chain.
- An explanation of the quantitative data points concerning the value chain.
Step 5. Making impact
After making a report that meets all legal requirements, you could put it in a drawer and get on with your day. But that, of course, is not what it is all about. We didn’t start Empact to write reports, but to make an impact. In other words, to improve ESG performance. And with a value chain report, you have a wonderful tool to start making impact.
To start with this, it is usually valuable to make a plan to collect more (reliable) data around ESG topics. Often, you will encounter sectoral issue, and collaborating with other actors in the chain can prove valuable. There are numerous initiatives where competitors, suppliers and customers within a sector are working together. For example, around (precious) metals, clothing and energy. For inspiration, see: Agreements promoting international Responsible Business Conduct.
Next, there are four solution directions for improving ESG performance in the upstream value chain (or supply chain):
- Directly, through your own organisation
- By making it part of the agreement with suppliers
- Collectively, through e.g. sectoral collaborations
- Through a global approach, such as Round Table Sustainable Palm Oil.
Can’t wait to make an impact with your value chain?
Do you also want to go beyond reporting, but are unsure where to start and how to get sustainable ambitions from the paper to the workplace? If so, we hope this article has helped you. Want to know more or are you curious what Empact can do for you? Then just get in touch and let’s make impact together.
Would you like more information on how we at Empact can help you seize value chain opportunities? Contact us today.