For most companies, the greatest opportunities for sustainability lie in the value chain. 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. But how do you do that? In this article, which is a short summary of the guide Empact wrote for Sdu, 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?
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.