For most companies, the greatest opportunities for sustainability lie in the value chain. A sustainable value chain is essential for achieving ESG goals and meeting CSRD reporting requirements. So do you really want to make an impact? Then you cannot avoid taking a close look at your value chain and working with suppliers and other actors to make it more sustainable.
For CSRD-compliant organizations, mapping ESG risks in the value chain is even mandatory. This applies not only to direct suppliers, but to the entire chain: from raw material to end user. But how do you tackle this? How do you integrate sustainability into your procurement process and how do you report on it according to CSRD requirements?
In this article, which is a short summary of the handbook written by Empact for Sdu, we explain our five-step plan and you will discover how to systematically improve the ESG performance of your value chain. From identifying sustainability risks to implementing ESG procurement criteria, we take you through the complete process.
What exactly is a value chain?
Value chain or “value chain” is a concept originally coined by Michael Porter to mean the position of an organization in relation to a larger value system. A value chain includes (upstream) suppliers and (downstream) customers and end users. Thus, a value chain is like a chain of companies supplying each other and allows one to represent the position of a company in relation to all its (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 impacts, for example. 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 to a more sustainable value chain
At Empact, we use the description prepared by EFRAG for reporting on value chains, in line with what the CSRD currently expects from companies. To actually move from reporting (steps 1 to 4) to improvement, an additional step needs to be taken: making impact (step 5).
Step 1. Analyze and assess materiality
In order to determine which themes and topics to focus on within the chain, a materiality analysis must first be made. That is, investigate which themes are relevant, both in terms of impact on ESG themes and on the financial aspects of business operations. For this, logically, the value chain must first be mapped out in outline form. 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 out value chain
Once material themes are validated, the value chain can be zoomed in further. In this phase, all suppliers, customers and other relationships (actors) are identified. In the context of the CSRD, this need only be done with actors around material themes, but to make the most of opportunities, a full overview can also be chosen.
Especially for large companies 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 start mapping some of the relevant actors in the value chain.
Step 3. Data analysis
Data is then collected for each actor on the material themes determined in step 1. Think of a company’s CO2 emissions, working conditions and (drinking) water consumption. A challenge here is that data from outside the own organizational 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 statutory reporting standards. When a company, despite reasonable efforts, cannot collect information on the upstream and downstream value chain, it estimates the information to be reported using all reasonable and well-founded information available. These include data from indirect sources, industry average data, sample analyses and market data.
Step 4. Report on the value chain
After collecting data regarding all material actors around material themes, this data should be reported. This is done according to the requirements and guidelines set forth in the CSRD. Some of the requirements set by the CSRD for a value chain report:
- The description of the materiality test should clearly explain how themes related to the entire value chain have been identified, assessed and prioritized.
- The value chain (upstream and downstream) should be described, as well as the organization’s position in it and the most important actors.
- A review of purchased materials and products was made.
- The qualitative data points regarding the value chain are explained.
- The quantitative data points regarding the value chain are explained.
Step 5. Making an impact
After making a report that meets all the legal requirements, you could put it in a drawer and get on with your day. But, of course, that’s not what it’s 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 basis in your hands to make that work now.
To start with this, it is usually valuable to make a plan to collect more (reliable) data around ESG topics. Often this is a 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: https://www.imvoconvenanten.nl/nl.
Next, there are four solution directions for improving ESG performance in the upstream value chain (or supply chain):
- Directly through its own organization
- By making it part of the agreement with suppliers
- Collectively through sectoral collaborations, for example
- Through a global approach, such as Round Table Sustainable Palm Oil.
Also making an impact with your value chain?
Want to know more about developing value chain mapping? Then check out https://www.sdu.nl/shop/jes-knowledge.html for a more in-depth look at this topic. Or would you like more information on how we at Empact can help you take advantage of opportunities in the value chain? Then also take a look here for more information or contact us today.
Frequently Asked Questions
What is the difference between a value chain and supply chain?
A value chain includes the complete flow of activities that add value to a product or service, from raw material to end user. This includes both upstream (suppliers) and downstream (customers) activities. A supply chain focuses primarily on the physical flow of goods and raw materials from suppliers to the company. For sustainability and CSRD reporting, the broader value chain approach is essential, as the use phase and end-of-life impact must also be included.
How do I map ESG risks in my value chain?
Start with a materiality analysis to determine which sustainability themes are most relevant to your sector. Then identify for each chain link where the greatest ESG impact is: think CO2 emissions, water use, working conditions and biodiversity loss. Use sector-specific databases, request data from suppliers via questionnaires, and work with estimates based on sector averages where necessary. For CSRD reporting, be able to substantiate how you arrived at these insights.
What should I report on my value chain according to the CSRD?
The CSRD requires you to report on material sustainability issues throughout your value chain. This means: a description of your value chain including key actors, quantitative data on material impacts (such as scope 3 emissions), your due diligence process, and measures taken to reduce negative impacts. You should include both upstream (suppliers) and downstream (product use and processing) impacts.
What ESG requirements can I place on suppliers?
Start with basic ESG requirements such as compliance with international labor standards, anti-corruption policies, and environmental laws. For strategic suppliers, you can go further: ask for carbon reduction targets, certifications (such as ISO 14001), transparency about their own supply chain, and participation in sustainability initiatives. Make ESG performance part of your supplier selection and evaluation. Important: also offer support to suppliers to improve.
How do I integrate sustainability into my procurement process?
Sustainable procurement starts with drawing up ESG criteria for different product categories. Integrate these in your tender documents and weigh sustainability in your award criteria (for example, 20-30% of the total score). Train your buyers in ESG topics, work with suppliers on improvement plans, and monitor progress with KPIs. Also consider innovative forms of collaboration such as long-term partnerships for sustainable innovation.
How can I reduce scope 3 emissions in my value chain?
Scope 3 emission reduction requires collaboration in the chain. Start by identifying your largest sources of emissions (often purchasing, transportation and product use). Set reduction targets with suppliers, encourage the use of renewable energy, optimize transportation and logistics, and design products for longer life and recycling. Also consider adjusting your supplier portfolio toward climate leaders.