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EFRAG Launces IG 2 Value Chain Implementation Guidance

EFRAG IG 2 Value Chain cover

The EFRAG IG 2 Value Chain Implementation Guidance is an essential resource for organizations aiming to comply with the European Sustainability Reporting Standards (ESRS).

This guidance helps companies understand and report on their upstream and downstream value chains, ensuring comprehensive and transparent sustainability reporting. It is particularly relevant for large listed and unlisted companies subject to the Corporate Sustainability Reporting Directive (CSRD).

Key Components of EFRAG IG 2 Value Chain

The EFRAG IG 2 Value Chain guidance is structured to provide detailed requirements and practical examples to help organizations navigate their value chain reporting under ESRS.

1. Understanding the Value Chain (VC)

The value chain encompasses all activities, resources, and relationships related to a company’s business model, from conception to delivery, consumption, and end-of-life.

It includes:

  • Upstream Actors: Suppliers and other entities providing products or services used in the company’s products or services.

  • Downstream Actors: Distributors, customers, and entities involved in the end use or disposal of the company’s products or services.

This holistic view of the value chain is crucial for identifying the full range of impacts, risks, and opportunities associated with a company's activities.

2. Importance of the Value Chain in Sustainability Reporting

The CSRD and ESRS require that sustainability statements include material information about the entire value chain. This is crucial because significant impacts, risks, and opportunities often occur outside a company's own operations, within its upstream and downstream value chains.

Example 1: Garment and Apparel Industry

A European garment company may pay fair wages within the EU but rely on suppliers in countries with poor labor conditions, highlighting the need to report on these upstream impacts.

Example 2: Electronics Industry

An electronics producer might have excellent waste management practices within its operations but may produce products that create significant electronic waste downstream, impacting environmental health.

3. General and Detailed Requirements

General Requirements:

  • Materiality Assessment: Identifying and assessing material impacts, risks, and opportunities (IROs) in the value chain. This includes understanding where in the value chain (geographies, sectors, operations, suppliers, customers) these IROs are likely to materialize.

  • Policies, Actions, and Targets (PATs): Disclosing PATs related to value chain actors. For example, policies to control pollution or prevent bribery in the value chain must be detailed.

Detailed Requirements:

  • Scope and Boundaries: Clear definitions of what constitutes the value chain and which parts need to be reported. This includes considering direct and indirect business relationships and their potential impacts.

  • Data Collection: Guidance on collecting and estimating data when primary information from value chain actors is unavailable. Companies must use all reasonable and supportable information available, including proxies and sector data.

4. Frequently Asked Questions (FAQs)

The guidance includes a comprehensive FAQ section addressing common concerns and providing practical advice on issues such as:

  • Where does the value chain begin and end? The value chain starts from the initial suppliers of raw materials and extends to the end-users and disposal of the products.

  • How to collect and estimate value chain data? Companies are advised to gather data from their direct business partners and use estimates, proxies, and publicly available information when direct data is not accessible.

  • What is the role of operational control in value chain reporting? Operational control refers to the ability of a company to direct the operational activities and relationships of another entity, site, or asset.

5. Transitional Provisions

The guidance outlines transitional provisions to help organizations gradually implement full value chain reporting. During the first three years, companies may limit the extent of value chain data they collect and report, focusing initially on available and publicly accessible information.

Figure 3: Decision Tree for Value Chain Data Collection

Practical Steps for Implementing EFRAG IG 2 Value Chain

Step 1: Understanding the Context

Organizations need to map out their entire value chain, identifying key actors, geographical locations, and processes. This foundational understanding is critical for effective materiality assessment and data collection.

For instance, a chair manufacturer needs to understand the origin of materials like wood, foam, and fabric and the sustainability issues associated with these materials.

Step 2: Identifying and Assessing IROs

Companies must identify actual and potential IROs within their value chains, focusing on areas where material impacts are most likely to occur. This involves engaging with stakeholders and using both primary and secondary data sources.

For example, understanding the environmental impacts of raw material extraction and the labor conditions in supplier factories are crucial steps.

Step 3: Reporting and Disclosures

Organizations must disclose their materiality assessment process, the IROs identified, and how these influence their policies, actions, and targets. Transparency about data collection methods, including the use of estimates and proxies, is essential.

This ensures that the sustainability reports are accurate and reflective of the company’s entire value chain.

The Significance of EFRAG IG 2 Value Chain for Sustainability Reporting

Implementing EFRAG IG 2 Value Chain is crucial for comprehensive and transparent sustainability reporting. By providing detailed guidance on how to assess and report value chain impacts, EFRAG ensures that companies can produce sustainability statements that reflect the full scope of their environmental and societal impacts. This approach promotes accountability and helps stakeholders understand the broader implications of business activities.

You can find EFRAG's IG 2 Value Chain Implementation Guidance here.


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