EU Corporate Sustainability Reporting Directive Value Chain Guidance Finalized – Key Points From the Guidance

Last Friday, EFRAG finalized its first three ESRS Implementation Guidance documents. The guidance addresses the materiality assessment (IG 1), value chain (IG 2) and ESRS datapoints (IG 3). 

For the uninitiated, EFRAG (the European Financial Reporting Advisory Group) is the technical adviser to the European Commission that developed the draft European Sustainability Reporting Standards issued under the CSRD. 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. 

In this post, we discuss IG 2, EFRAG’s value chain implementation guidance. The guidance outlines the reporting requirements for the value chain from materiality assessment to policies and actions to metrics and targets. It illustrates the reporting boundary for sustainability reporting, including operational control for purposes of ESRS environmental standards. The guidance also includes FAQs and a value chain map summarizing value chain implications per disclosure requirement across all ESRS. EFRAG previously had published IG 2 in draft form for public feedback (see our earlier post).

IG 2 covers undertakings’ upstream and downstream value chains. It does not cover their own operations. The guidance is intended to be read with IG 1, the materiality assessment implementation guidance finalized at the same time as the value chain guidance. IG 1 is discussed in yesterday’s post.

The EFRAG guidance is non-authoritative. It is intended to support the implementation activities of preparers and others using or analyzing ESRS reports. The guidance does not amend or modify the ESRS.

Seven key points from the guidance

IG 2 characterizes the following as its key points:

1. An undertaking’s sustainability statement must include information about all material impacts, risks and opportunities (IROs), including those that arise or may arise in the context of its 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 information only is required when connected to material IROs beyond the undertaking’s own operations due to its business relationships and when specifically required by a disclosure requirement.
3. Accordingly, a materiality assessment must cover the identification of material IROs in the value chain, with a focus on where in the value chain they are likely to materialize. This may include, for example, geographies, activities/sectors, operations, suppliers, customers and other relationships. Key materiality assessment disclosures are SBM-1, SBM-3 and IRO-1 in ESRS 2 (ESRS 2 addresses cross-cutting general disclosures). These disclosures are not limited to but should cover the assessment of IROs in the value chain.
4. Topical standards require disclosures concerning policies, targets and actions (PATs) for material matters. In particular, they require either the disclosure of the PATs or a statement regarding their exclusion. If the PATs involve actors in the value chain, when describing the PATs for material matters, the disclosure must include information regarding how they address material upstream and/or downstream value chain IROs.
5. The topical ESRS require inclusion of value chain data only for selected 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 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 from actors in its value chain for the materiality assessment or to prepare its material IRO disclosures, it must estimate the missing information. When doing so, the undertaking must use all reasonable and supportable information available without undue cost and effort, including proxies and sector data and other information from indirect sources. The undertaking must describe in the basis for preparation the metrics reported using value chain estimation and the resulting level of accuracy. Depending on the circumstances, the materiality assessment may be validly conducted without primary information being collected from actors in the value chain.
7. The inclusion of value chain information in the sustainability statement does not affect reporting boundaries. The reporting boundary corresponds to the entities included in the perimeter of the undertaking’s consolidated financial statements. Value chain information corresponds to the relationships the undertakings in the consolidation perimeter have with their respective value chain counterparts, including beyond the first tier. Associates and other investees not consolidated in the financial statements are treated as other business relationships, i.e., as actors in the value chain, when that is the case.

How is the final guidance different?

Since it’s more in the weeds than most readers will want to go, we haven’t summarized the changes from the draft guidance in this post. The changes, which are relatively discrete, are discussed in detail in EFRAGs’ Feedback Statement.

Additional Ropes & Gray posts on the CSRD and ESRS 

For numerous additional posts discussing the Corporate Sustainability Reporting Directive and the European Sustainability Reporting Standards – including the topics discussed in this post – see Ropes and Gray’s Insights page. 

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