EU Corporate Sustainability Reporting Directive draft value chain guidance published – key points from the guidance

On December 22, EFRAG published draft value chain guidance. Draft EFRAG IG 2 explains how to navigate the value chain requirements in the European Sustainability Reporting Standards adopted under the CSRD, contains FAQs for implementing value chain reporting under the ESRS and includes an upstream and downstream value chain map that explains the coverage of the upstream and downstream value chain.

The objective of the implementation guidance is to support the implementation activities of preparers and others using or analyzing ESRS reports. The guidance is non-authoritative. It accompanies but does not form part of the ESRS. 

For the uninitiated, EFRAG (the European Financial Reporting Advisory Group) is the technical adviser to the European Commission which developed the draft ESRS. Its mission is to serve the European public interest in both financial and sustainability reporting by developing and promoting European views in the field of corporate reporting.

Seven key points from the draft guidance

Draft IG 2 characterizes the following as its key points:

1. An undertaking’s sustainability statement is required to include information about all material impacts, risks and opportunities (IROs). This includes IROs that arise or may arise in the context of the undertaking’s business relationships in the upstream and downstream value chain. Business relationships are not limited to direct contractual relationships.
2. An undertaking is not required to include value chain information in all disclosures. Value chain disclosures only are required when connected with material IROs beyond the undertaking’s own operations due to its business relationships.
3. The materiality assessment is required to cover the identification of material IROs in the undertaking’s value chain, with a focus on where in the value chain the IROs are likely to materialize (e.g., geographies, activities/sectors, operations, suppliers, customers, other relationships, etc.). Key disclosures about the undertaking’s materiality assessment should cover the assessment of IROs in the value chain.
4. Topical ESRS require disclosures about policies, targets and actions (PATs) for material matters. They require either disclosure of the PATs or a statement regarding their absence. When describing PATs for material matters, the disclosure must include information about how the PATs address material upstream and/or downstream value chain IROs.
5. Topical ESRS require the inclusion of value chain data only for a few metrics. However, when an undertaking determines that a material IRO in the value chain is not sufficiently covered by ESRS requirements, it must include additional entity-specific disclosures, including metrics, when the information is necessary to enable users to understand the undertaking’s material IROs.
6. If after making reasonable efforts an undertaking cannot collect primary value chain information for its materiality assessment or to prepare disclosures concerning material IROs, it must estimate the missing information using all reasonable and supportable information available without undue cost and effort. This includes using proxies and sector data and other information from indirect sources. The undertaking must describe in its basis for preparation the metrics using value chain estimation and the resulting level of accuracy.
7. The inclusion of value chain information in the sustainability statement does not affect the undertaking’s reporting boundary. The reporting boundary corresponds to the entities included in the undertaking’s consolidated financial statements. Value chain information includes the relationships that all of the consolidated undertakings have with their respective value chain counterparts, which extends beyond the first tier. Associates and other investees that are not consolidated in the financial statements are treated as part of the value chain as applicable. Operational control in the context of greenhouse gas emissions reporting (ESRS E1) also is specifically noted in the key points.

Note that earlier drafts of the value chain guidance previously were published by EFRAG.  

Next steps

Draft IG 2 is currently open for public comment. Stakeholders can provide feedback until February 2, 2024. EFRAG previously indicated it intends to finalize its value chain guidance during the first quarter of 2024 (see our earlier post).   

Materiality assessment guidance

On December 22, EFRAG also published draft materiality assessment implementation guidance, Draft EFRAG IG 1. Draft IG 1 is discussed in our earlier post here. Draft IG 2 indicates that it should be read together with the materiality assessment implementation guidance. To avoid duplication and reduce the length of Draft IG 2, overlapping concepts are discussed in Draft IG 1.

Additional Ropes & Gray posts on the ESRS 

For additional posts discussing the CSRD and ESRS – including the topics discussed in this post – see our Summer of CSRD series, which can be linked to here. 

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