ESRS Implementation Guidance IG1 - Materiality Assessment IG2 - Value Chain IG3 - List of ESRS Datapoints IG2 - Value Chain

The document is organised in three chapters as follows.

To avoid duplication and reduce the length of this document, there is significant reference to the Materiality Assessment Implementation Guidance (IG 1) developed by EFRAG. For example, the due diligence aspects related to the materiality assessment (and VC aspects) are covered in that guidance rather than here.

Please note that references to the IG 1 are made in this blue colour, whereas references in green designate this document.

The acronyms in this document are used as follows.

The general requirements relating to all disclosures on VC can be found in ESRS 1 General requirements:

Other detailed requirements about value chain can be found in ESRS as follows.

Chapter 4 of this document presents the VC coverage map illustrating the type of coverage of VC information that is required by each specific Disclosure Requirement in sector-agnostic ESRS. This also includes which metrics require inclusion of VC data in the actual calculation.

While the focus of this Implementation Guidance is on upstream and downstream VC, the definition of value chain in Annex 2 of the Delegated Act is broader than the upstream and downstream VC, as it also includes own operations. VC is defined as ‘the full range of activities, resources and relationships related to the undertaking’s business model and the external environment in which it operates. A value chain encompasses the activities, resources and relationships the undertaking uses and relies on to create its products or services from conception to delivery, consumption and end-of-life. Relevant activities, resources and relationships include: related to the undertaking’s business model and the external environment in which it operates. A value chain encompasses the activities, resources and relationships the undertaking uses and relies on to create its products or services from conception to delivery, consumption and end-of-life. Relevant activities, resources and relationships include:

ESRS use the term ‘value chain’ in the singular, although it is recognised that undertakings may have multiple value chains.

According to this definition, the VC issues addressed in this implementation guidance include both upstream and downstream actors and their activities. Actors or undertakings upstream from the reporting undertaking (e.g., suppliers) provide products or services that are used in the development of the undertaking’s own products or services. Actors downstream from the reporting undertaking (e.g., distributors, customers, waste management) receive or use products or services of the reporting undertaking or waste stream by the customers or end-users.

Annex 2 defines ‘business relationships’ as ‘The relationships the undertaking has with business partners, entities in its value chain, and any other non-State or State entity directly linked to its business operations, products or services. Business relationships are not limited to direct contractual relationships. They include indirect business relationships in the undertaking’s value chain beyond the first tier, and shareholding positions in joint ventures or investments. ’as ‘[t]he relationships the undertaking has with business partners, entities in its value chain, and any other non-State or State entity directly linked to its business operations, products or services. Business relationships are not limited to direct contractual relationships. They include indirect business relationships in the undertaking’s value chain beyond the first tier, and shareholding positions in joint ventures or investments.’

Setting out the VC activities may help identify the VC actors(*).

The CSRD and ESRS require that the sustainability statement include material information about the upstream and downstream VC.

The reason for this is that the impacts, risks and/or opportunities deriving from impacts or dependencies, of a reporting undertaking often occur in its upstream or downstream VC rather than in its own operations. Therefore, focusing on own operations would provide only a partial picture of the impacts on people and the environment connected to the undertaking’s activities, products and services. Furthermore, this would not allow for an appropriate identification of risks and opportunities. Consider the following examples.

The two overarching requirements in ESRS 1 that are applicable here are:

An impact may be material to the reporting undertaking if it arises in any part of the VC, including at any tier of its upstream VC or supply chain. In this regard, in the IRO assessment in the VC, the undertaking has to consider IROs that it may be connected to through its own operations, products or services via business relationships (see also IG 1 FAQ 2 What is meant by the undertaking being “connected” with an impact?).

The identification of IROs in the upstream and downstream VC is embedded in the materiality assessment (ESRS 1, Chapter 3 – Double materiality) as the basis for sustainability disclosure. For further information about materiality, please consult IG 1.

To the extent that the undertaking has PAT in place that address VC actors, for material IROs (including those in the VC), it should disclose this (ESRS 2 paragraphs 64(b), 67(b) and 70(b)). Examples could include:

VC information coverage is also important for ESRS E1-1 paragraph 16(b), which requires disclosing the decarbonisation levers identified by the undertaking in setting its targets and defining its actions, including levers in the VC. This type of information is expected to be primarily needed in order to set and manage the targets and implement the actions. Reporting is expected to use data existing for such purposes.

As a reminder, the undertaking can comply by disclosing that it has not adopted policies and/or actions with reference to the relevant sustainability matter and provide reasons for this. It may also report a timeframe in which it aims to adopt them (ESRS 2 paragraph 62). The same applies to targets (ESRS 2 paragraph 72).

In addition, the undertaking should always consider the need to provide entity-specific information. Please refer to paragraph 69 (b) above.

In ESRS 4 Biodiversity and ecosystems, there are specific requirements dealing with value chain information: ESRS 4-1 Transition plan and consideration of biodiversity and ecosystems in strategy and business model, the topical specification ESRS 2 IRO-1 Description of processes to identify and assess material biodiversity and ecosystem-related impacts, risks, dependencies and opportunities as well as ESRS E4-4 Targets related to biodiversity and ecosystems (paragraph 32(c)). These do not necessarily result in the need to collect VC data from actors in the VC solely for the purpose of reporting. The undertaking is expected to leverage on information that is collected for business purposes, e.g., E4-1 paragraph 13, E4 ESRS 2 IRO 1 paragraph 17(a), and E4-4 paragraph 32(c).

All ESRS DRs related to metrics cover only own operations except for:

As described in the VC coverage map in Chapter 4 below, there may be qualitative disclosures required under ESRS. A few examples are listed below:

Beyond the specific provisions on metrics in the sector-agnostic ESRS, the undertaking shall provide additional VC metrics information or integrate VC data into its metrics, when according to the outcome of its materiality assessment, this is necessary from an entity-specific perspective (ESRS 1 paragraph 11 and AR 1 to 5 read in conjunction with ESRS 1 paragraph 65). In particular, ESRS require the undertaking to consider appropriate entity-specific metrics needed for understanding of the impacts or tracking the effectiveness of companies’ actions. Possible examples are the following:

It is important to note that this is relevant only for those activities of VC actors that are associated with material IROs and not for all VC actors. Also, these disclosures are not standardised, and the selection of the appropriate metric is in the purview of the reporting undertaking while considering the needs of users and the qualitative characteristics of information.

Sector-specific ESRS will cover the inclusion of VC data in the undertaking’s impact metrics when relevant. In the transition period until the ESRS sector standards are available, the undertaking as part of its entity-specific disclosures shall consider this aspect and draw inspiration from the available best reporting practices (see ESRS 1 paragraph 131(b)).

The general transitional provisions in ESRS 1 from paragraph 130 onwards allow for a temporary limit for the information on the VC to be reported during the first three years of reporting under ESRS. Specifically, preparers are required to consider VC in their materiality assessment, but the data gathering aspects, both for qualitative and quantitative information, are limited in their first three years of reporting.

The transitional provisions are intended to provide reporting undertakings with more time to prepare for the new reporting regime in case that not all the necessary information regarding VC is available. The transitional requirements are optional, i.e., the undertaking can decide whether it wants to use them or not and they apply regardless of whether the VC actor is an SME.

The steps an undertaking can consider during this time may include:

The transitional requirements (ESRS 1 paragraph 132) foresee that if not all the necessary VC information is available during the first three years of the reporting undertaking’s sustainability reporting under ESRS, the undertaking shall explain:

In addition, during the transitional period, reporting undertakings may limit information to in-house data (such as data available to the undertaking and publicly available information) to disclose information on policies, actions and targets for the VC (ESRS 1 paragraph 133 (a)).

In addition, with reference to metrics, the undertaking is not required to include upstream and downstream VC information, except for datapoints derived from other EU legislation, as listed in ESRS 2 Appendix B (see ESRS 1 paragraph 133 b)) during the transitional period.

Starting from its fourth year of reporting under ESRS, the undertaking shall comply with ESRS 1 paragraph 63 (ESRS 1 paragraph 135) as explained in this document.

In addition to the transitional provisions described above, Appendix C of ESRS 1 specifies that for ESRS E1-6 Gross Scopes 1, 2, 3 and Total GHG emissions, undertakings or groups with less than an average of 750 employees at balance sheet dates, may omit datapoints on Scope 3 emissions and the total GHG emissions for the first year of preparation of their sustainability statement. Similarly, the disclosure requirements for ESRS S2 Workers in the value chain, ESRS S3 Affected communities and ESRS S4 Consumers and end-users may be omitted for the first two years by undertakings that have 750 or less employees during the financial year.

Article 29b (4) of the CSRD limits the VC information that the ESRS shall require undertakings in the scope of the CSRD to obtain from small- and medium-sized enterprises (SMEs) for their reporting under ESRS. ESRS may not require disclosures which will result in reporting undertakings having to request information from the SMEs in their VC (either listed or not listed) if such information goes beyond the disclosures required in the listed SME (LSME) ESRS.

This limitation is often referred to as the ‘LSME cap’ and it aims at limiting the burden for SMEs and to embed proportionality in the ESRS.

The LSME ESRS are still under development and are expected to be finalized by EFRAG in December 2024.

ESRS requires the undertaking to identify and assess material IROs across its entire VC from a double materiality perspective. In this regard:

To assess potential and actual impacts, it is important that the undertaking identify in particular:

See FAQ 7 How to assess and quantify the impacts of the VC resulting from business relationships? below for recommendations on how to organise the processes to identify and assess material impacts across the VC.

To assess risks and opportunities, the undertaking considers its own dependencies on natural, human and social resources. The undertaking identifies potential changes in the availability, price and quality of such resources, which are sources of risks and opportunities, including those stemming from its upstream and downstream VC. The following three examples illustrate this concept.

Yes- business relationships and VC, as defined in Annex 2 of the July 2023 Delegated Act does not exclude any types of activities or business relationships.

ESRS 1 AR 12(b) explains that where the reporting undertaking provides financial loans to another enterprise that ultimately results in the contamination of water and land surrounding the operations of such enterprise, this negative impact is connected to the reporting undertaking by way of the relationship created by the loan agreement.

Per paragraph 66, for investments there is currently only a specific disclosure provision under Category 15 of GHG emissions where significant under ESRS E1.

EFRAG plans to work on the development of further draft standards or guidelines for financial institutions, and on that occasion, specific solutions will be consulted on for comments.

The disclosure of information about the VC is required in two steps: as a component of (i) the materiality assessment process and of (ii) the outcome of the materiality assessment.

IG 2 refers to the terms associates, joint arrangements, joint operations, control, joint control, investment entity, significant influence and joint ventures, having as a reference the definitions per IFRS Accounting standards. Similar concepts exist in local GAAP in EU countries, but the specifics may differ.

The table below illustrates the treatment of impacts arising from investments of the undertaking depending on their accounting treatment in the financial statements.

The following example of the corporate reporting of a fictional group, Seren, has been inspired in the GHG Protocol reporting standard, pages 22 and 23.

Seren Group has a number of subsidiaries, joint arrangements and associates who are active in the production and marketing of chemicals. Its group structure and investments are as follows:

The figure below depicts Seren Group, whereas the table following it sets out the reporting under ESRS and the GHG Protocol as well as how these entities impact Seren’s profit before taxation.

The GHG emissions reporting under the GHG Protocol and ESRS would be as follows.

On the previous page under ‘Comment’, where the cells are white, this reflects Scope 1 and Scope 2 emissions as per paragraph 50(a) of ESRS E1. Where the cells are yellow, these are Scope 1 and Scope 2 emissions as per paragraph 50(b) of ESRS E1, i.e., those items not under financial control but under operational control. Lastly, the green cells reflect Scope 3 emissions.

On the previous page under ‘Comment’, where the cells are white, this reflects Scope 1 and Scope 2 emissions as per paragraph 50(a) of ESRS E1. Where the cells are yellow, these are Scope 1 and Scope 2 emissions as per paragraph 50(b) of ESRS E1, i.e., those items not under financial control but under operational control. Lastly, the green cells reflect Scope 3 emissions.

With the yellow cells, the emissions will be reported by the owner under paragraph 50(a) of ESRS E1 as well as by the operator or person with operational control under paragraph 50(b) of ESRS E1. Preparers may provide additional context about these emissions, especially in the context of policies, actions and targets.

Company A is a global fashion company.

Company B is a producer of fabrics and has a GHG emissions total of 100,000 metric tons (scope 1,2 and 3). How should GHG emissions be accounted for in Company A’s consolidated sustainability statement in each of the following circumstances?

Company A would report the following in its consolidated sustainability statement with respect to Company B in each of the above scenarios. Note that the scenarios are independent from each other.

Please note that under any of the other environmental standards (e.g. E2 Pollution), ESRS do not describe how to report under the third scenario.

As set out in IG 1 FAQ 10 Should the assessment of IROs rely on quantitative information? where qualitative analysis is sufficient for the undertaking to reasonably conclude that a matter is ‘not material’, adding quantitative information to the analysis would not bring much value to the materiality assessment, where the undertaking has this data due to its sustainability and management practices as well as its engagement with suppliers.

The materiality assessment regarding the upstream value chain may be validly conducted by large undertakings without direct information from specific suppliers. Undertakings reporting under the sector-agnostic standards may typically conduct the assessment using average regional or sector data to characterise the areas of potential impacts and risks associated with their value chain.

As mentioned above, the materiality assessment process evolves over time, and the undertaking may be redefining the balance between qualitative and quantitative information. Please refer to IG 1 Chapter 3.6 Deep dive into impact materiality – Setting thresholds.

For the materiality assessment and for the inclusion of VC data required by metrics (such as for Scope 3 GHG emissions and other entity-specific disclosures when appropriate), the undertaking may either obtain information directly from actors in its VC, use estimates or proxies, or combine both approaches.

Obtaining information directly is the most appropriate approach in certain cases, for instance, for major tier 1 suppliers (the direct and substantial contractual relationship is a good basis for organising appropriate flows of data) or for customers of products and services, in particular when they are end users (the undertaking knows the parameters of its products and services). When this is the case, the undertaking may need to ask its suppliers and other relationships for information enabling the quantification of the impacts. The undertaking may use questionnaires, surveys and audits to obtain the information. Its buying power and overall contractual influence may help in this regard.

It should be noted that the more severe the impact, the stronger the incentive to omit such sensitive information, and this could impact the reliability of the information provided by such supplier. This may be particularly relevant for incidents of child or forced labour in the VC.

Apart from this issue, the reliability of information directly obtained from the VC may improve over time since VC actors may not be able to quantify their impacts yet but may be in the position to do so in the future, given the evolution of sustainability reporting. Therefore, supporting such actors to set up effective systems may be important. It may also be advisable to engage with them and, where relevant, to also encourage them to do the same with their value chains.

Generally, the effort placed on actors in the VC should be proportionate and, as mentioned above, undertakings do not have to report on each and all value chain actors.

As set out in ESRS 1 paragraph 69 and further explained under FAQ 9 How can estimates about the VC be developed? the undertaking shall estimate the impact when it cannot collect the necessary data with the required reliability after reasonable effort when necessary. Estimates and proxies may be used in combination with information obtained directly as well as when quantification is required. Using estimates, like in financial reporting, is acceptable if organised under a process designed to comply with the qualitative characteristics of information expected from sustainability information. Estimates and proxies may currently be the only available solution to quantify impacts in certain cases due to the unreasonable efforts required to collect data. Examples include tier 2 or tier N suppliers; tier 1 suppliers when they are excessively high in number; and customers when they are not end users (e.g., when the undertaking delivers products or services that are further transformed before contributing to the delivery of products and services to the end users).

An example where obtaining primary data may not be possible and estimates may be used is a beverage company that advises its drinks to be served cold, i.e., by using refrigeration capacity, and it has determined energy use as a material matter. This undertaking would find it impossible to precisely measure its impact with each and every customer. However, from its materiality assessment, it assesses that electricity use is a significant part of its impact in the downstream VC. In this case, estimating its impact would involve considering variables such as volumes sold, the average time in which the inventory will be cooled before consumption and an estimate of the average electricity used to cool its products on a unit basis. This may need to also consider the location and related prices. Depending on its assessment of the materiality of electricity use, the undertaking may want to provide a sensitivity analysis of its electricity use depending on reasonably possible changes in the important variables in its calculations. Proxies are often available at sector or product level. In all cases, the undertaking shall clearly explain the basis for its estimates and the proxies used as well as any factor affecting their consistency over time.

ESRS 2 paragraph 10 requires the undertaking to disclose the metrics that include VC data estimated using indirect sources, including the basis for preparation, the resulting level of accuracy and the planned actions to improve accuracy in the future.

When inclusion of VC information is necessary under ESRS 1 paragraph 63 or on an entity-specific basis, a reporting entity collects information about its upstream and downstream VC only to the extent that this is compatible with a reasonable effort (ESRS 1 paragraph 69) for use in its sustainability statement. In all other circumstances, it shall estimate the missing information based on ‘all reasonable and supportable information that is available to the undertaking at the reporting date without undue cost or effort’ (ESRS 1 paragraph AR 17). This includes estimates, sector-average data and other proxies. For example, an undertaking could use country and/or sector-statistic-based risk assessment data. If more details are known, such as the specific location of farming and manufacturing processes, more specific data may be made available. Also refer to paragraph 160 on the need to comply with the quality of characteristics requirement.

The undertaking should determine the best available way to prepare meaningful VC information and dedicate proportionate resources once the degree of difficulty has been properly assessed.

As explained above, the undertaking should report on material IROs in its own operations and in its upstream and downstream VC. In this context, putting the appropriate processes in place is a matter of management decision, internal organisation and allocation of resources. ‘Reasonable effort’ and ‘undue cost or effort’ relate to the processes put in place by the undertaking to collect VC information and the amount of resources dedicated to these processes. ‘Reasonable effort’ cannot be an excuse for not disclosing. ‘Reasonable effort’ and ‘undue cost and effort’ depend on facts and circumstances specific to the undertaking. On the basis of FAQ 7 above, using free and publicly available information may in some cases be considered a reasonable effort. In determining whether an action is beyond ‘reasonable effort’ and/or beyond ‘undue cost and effort’, the undertaking shall balance the reporting burden of obtaining direct data and the potential lower quality of the information resulting from not undertaking that action. The estimation procedures adopted by the undertaking when direct data are not used are subject to ESRS 2 paragraph 10.

For VC data, a good starting point is a deep understanding of what, where and how inputs for its products and/or services are sourced upstream and/or what, where and how its products and services are brought to market downstream.

ESRS 1 paragraph 68 indicates that the undertaking’s ability to obtain VC information may vary depending on factors such as its contractual arrangements, the level of control it may exercise beyond the consolidation perimeter and its buying power. Therefore, there are cases where obtaining the information may be more challenging. In such cases, the undertaking may use other sources of information. For example, an undertaking may have a major exposure to forced labour because it is getting significant volumes of agricultural commodities and products from jurisdictions where forced labour in agriculture has been documented by the ILO (the International Labour Organisation) and the FAO (the Food and Agriculture Organization of the UN). For the materiality assessment, it is not necessary for the undertaking to change practices and estimate the number of cases of child or forced labour in its value chain. What is important is that it has enough information to conclude that the impacts are severe (based on scale, severity and irremediability).

Similarly, undertakings calculating their full environmental footprint may use estimates not only because it would be unreasonable to get primary data but also because such data would not be reliable.

In the context of materiality assessment, the focus on the VC and VC information should be where the undertaking is expected to have a severe negative impact (on people and the environment). This means that general impact assessments could be useful for the initial work on collecting VC information. Examples include general information about the undertaking’s region or sectors of sourcing. For example, where an undertaking is sourcing its products mostly indirectly from Country A and Country B, it may look at available general information about the minimum wage in those countries when considering its social impacts. In Country A, the minimum wage is generally 100% to 120% of the living wage, but in Country B the minimum wage is less than 80% of the living wage. Therefore, the exposure to significant impacts is more likely in Country B, all else being equal.

For its own governance as well as for purposes of an audit trail for its assurance provider, it would be good for the undertaking to document its efforts, the outcomes of these and how the information has been incorporated in its reporting process. (Refer also to IG 1 FAQ 12 Should the materiality assessment be documented/evidenced?)

As discussed in paragraph 28 above, primary VC information is not required for all disclosures in the sustainability statement. Where the undertaking determines that VC information is required and primary data (i.e., directly collected from the actor in the VC) is not available after making reasonable efforts, estimated data can be used.

In estimating the missing information, ESRS require using internal and external information. Such estimates can be used either for assessing material IROs or for disclosing metrics in the VC, as outlined in ESRS 1 Chapter 5.2. When assessing material IROs in the VC, a combination of primary data (i.e., directly collected from the actor in the VC) and estimated data (using secondary data as input) can be employed.

Secondary data include data from indirect sources, sector-average data, sample analyses, market and peer groups data, other proxies and spend-based data.

The adjacent text box lists some sources of such data. Some of these require a fee and are provided as examples, but ESRS do not require the use of fee-based external sources. These are examples of external sources that help address environmental, social and human rights as well as corruption matters.

It is difficult to collect VC information necessary to produce the relevant disclosure about impacts caused by indirect business relationships where the undertaking does not have a direct contractual relationship and enjoys less leverage. If the undertaking cannot collect the necessary data after making reasonable efforts to do so, the undertaking may then need to rely on data from indirect sources, like sector-average data, sample analyses, market and peer groups data, other proxies, etc. For example, for VC workers extracting commodities used as components of the undertaking’s products, the undertaking may be able to arrange site audits. However, if those actions to obtain primary data and information are not possible after reasonable effort, the undertaking may rely on sector or country data estimating those impacts (e.g., negative impacts on safety, health; risk of child labour; etc.) in the location of the mining activities.

Disclosing quantitative measures of indirect impacts does not produce relevant information about the undertaking’s impacts in all circumstances. Consider a manufacturer of bike parts who uses steel in its products and therefore has an issue with pollution generated by its steel production. It is theoretically possible to estimate the volume of pollution/quantify the environmental footprint, as some have done. However, this may not be necessary and would not be conducive to relevant information, as it would fail to disclose on the undertaking’s contribution to mitigating the pollution that derives from its products. The undertaking could instead measure its performance in terms of ESRS E5 metrics on circular economy.

When a reporting entity does not have data received directly from VC actors after making reasonable efforts, it shall estimate the information to be reported using sector data or similar data as a starting point (ESRS 1 paragraph 69). Examples include Scope 3 emissions or living wage data on facilities in very high-risk countries, including beyond the first tier of business relationships.

As set out in AR 73 of ESRS S1 Own workforce, the WageIndicator is indicated as a potential source (along with others) for calculating adequate wage benchmarks outside the EEA as the last option in the hierarchy. The WageIndicator provides information about minimum and living wages for more than 200 countries, which could be an example of applicable benchmarks as referred to under ESRS S1-10 Adequate wages. Undertakings can use this information to explain prioritisation of actions and targets in specific countries or regions for both own workforce and workers in the VC. The information from such sources could become part of the undertaking’s explanation under ESRS 2 SBM-3 on how it identified and assessed material IROs. The exact living wages may differ in certain facilities and are dependent on the composition of the worker’s family; however, these sources can be useful in the context of the materiality assessment. Once wage has been identified as a material risk, more accurate data may be needed to set targets and to report on progress.

Where deemed relevant, undertakings need to consider that setting up a reliable data collection system which includes VC partners takes time. They may consider processes and controls to collect the data and report the information. The quantity and quality of VC information is likely to improve over time, but until then sector data or similar sources can be a good starting point. As mentioned in paragraph 28 above, information about each and every actor in the VC is not required.

The use of appropriate estimates or proxies is critical for the quality of reported information. The origin of the data may influence the quality of the information provided in the sustainability statement. Therefore, transparent disclosure and explanation of the use of estimates are essential.

ESRS 2 BP-2 paragraph 10 requires preparers to:

Consider a case where Q, an employee at a customer (XYZ) of the reporting undertaking (ABC), was found to have been bribed by S, an employee at one of XYZ’s suppliers. In this case, ABC would not have to disclose this under the metrics of ESRS G1-4 as an employee of the reporting undertaking is not involved in the case, as explained in ESRS G1 paragraph 26. However, ABC would consider this information when it considers the risks around corruption and bribery in the sector/geographical area going forward.

The above table should be read with the following additional notes for those DRs marked with the following symbol: ^◘

Per paragraph 72, for material IROs where the undertaking has policies, actions and targets in place covering the VC, it should disclose this (ESRS 2 paragraphs 64(b), 67(b) and 70(b)). If not, either because the undertaking does not have such PAT or because these do not cover the VC, the undertaking will comply by indicating this.

The names of the disclosure requirements are provided in Appendix A.