Three Challenging Value Chain Requirements of the CSRD – And What They Mean For Your Sustainable Procurement Program

October 23, 2023 EcoVadis EN

From disclosing environmental and human rights impacts across your value chain to reporting on Scope 3 emissions, the EU's Corporate Sustainability Reporting Directive (CSRD) will ask more of your sustainable procurement and reporting program than any regulation before it. This article explores how you can prepare for these requirements – and how EcoVadis can help. 

The CSRD, which entered into force earlier this year, is set to fundamentally change the global reporting landscape. Building upon the foundation laid by the NFRD and expanding its scope, it ramps up environmental, social and governance (ESG) reporting requirements for more than 50,000 companies in the EU and beyond. Underpinned by the European Sustainability Reporting Standards (ESRS), the CSRD aims to greatly enhance the breadth, quality and comparability of sustainability data available to investors and other stakeholders. Companies will now have to look far beyond their operations and report on the environmental and social impacts of their value chain. This includes adopting a “double materiality” lens for risk and impact mapping, setting credible ESG targets and tracking progress toward them, and reporting on Scope 3 emissions. Here we explore what these requirements will mean for your sustainable procurement and reporting efforts – and how EcoVadis can help you prepare for compliance and turn regulatory obligation into opportunity. 

Companies In the EU, US, UK, Japan and Beyond Need to Get Ready 

The CSRD’s reporting requirements will be phased in over the next five years. Starting in 2025, the roughly 12,000 large and publicly listed companies already subject to the NFRD will be required to report on their 2024 data. Coverage will expand in 2026 to all large companies operating in the EU meeting at least two of the following criteria: 250+ employees, €40 million in turnover and €20 million in total assets. Listed small and medium-sized enterprises that meet certain criteria will be brought into the fold the following year.

In addition to the non-EU companies that fall within the above thresholds, international parent companies with a net turnover of at least €150 million and one subsidiary or branch in the EU must start reporting in 2028. An estimated 10,000 non-EU companies are likely to be directly impacted by the directive, with nearly a third coming from the US, 13% from Canada, 11% from the UK and 8% from Japan. Many more companies throughout global supply chains will be indirectly affected as their downstream partners request the data they need for compliance. No matter where you are based, now is the time to ready your sustainable procurement and reporting program. 

Responding to the CSRD’s Value Chain Requirements

Although these reporting horizons are fast approaching – particularly for the EU’s largest companies – the bulk of companies remain underprepared. Our recent joint study with Supply Management Insider found that just 22% of the more than 100 companies surveyed feel fully prepared to comply with upcoming regulations like the CSRD. Many companies report that they lack the resources, tools and in-house capacity needed to build a procurement program capable of effectively mapping supply chain risks, assessing impacts and collecting supplier sustainability data. Here are three of the CSRD’s challenging value chain requirements and how our solutions can help your company get ready to meet them.


1) Apply a “double materiality” lens and map risks, impacts and opportunities throughout your value chain.

A key differentiator of the CSRD is the “double materiality” lens it requires companies to apply to their reporting. This means that, in addition to disclosing the impact of climate and other sustainability-related risks on their business (financial materiality), companies must report on how their operations and value chain impact people and the planet (impact materiality). The latter should be the starting point, as many risks and opportunities that influence financial performance stem from these impacts. The ESRS set out a broad range of metrics – on everything from biodiversity to value chain workers – that companies may have to report on. You will need to conduct broad risk mapping, including across your supply base, to determine which are material.

Our IQ Plus tool is ideally suited to this task. It leverages AI scanning of supplier documents and predictive risk profiles developed using our ratings data to give companies unparalleled visibility into the sustainability risks and potential impacts across their value chain. A comprehensive dashboard enables companies to view their risk/opportunity landscape at both an aggregated and individual supplier level. The tool also provides guidance on priority risks – a crucial feature given that ESRS emphasizes reporting on “negative impacts based on their relative severity and likelihood.”


2) Set targets on environmental and social impacts across your value chain and report on progress.

Disclosure alone is no longer enough under the CSRD. Companies will need to have “measurable, outcome-oriented and time-bound targets” in place to track their progress on addressing material risks and impacts throughout their value chain. In this way, the directive connects the dots between sustainability due diligence and reporting. 

Setting credible targets requires companies to not only map risks across their value chain but also evaluate and baseline impacts at the supplier level. Once a company has identified risks with IQ Plus, it can then use EcoVadis Ratings to baseline supplier performance on 21 sustainability criteria (and many more sub-criteria) closely aligned with the ESRS requirements. Companies can also use EcoVadis’ collaborative platform to collect supplier data on key metrics. This gives companies the insights they need to set compliance-ready targets and build the long-term foundation for their sustainable procurement program. The emphasis on collecting and verifying evidence at every step of the rating process will also make it easier for companies to meet the CSRD’s third-party assurance obligations.


3) Report on your Scope 3 emissions and mitigation measures.

The CSRD requires companies to report on GHG emissions and reduction targets across all three scopes. With 80% of the typical company’s carbon footprint stemming from its value chain, Scope 3 will likely be material for most reporters. Companies will also need to break these emissions down by category and provide information on measures being taken to set their value chain on a 1.5ºC-aligned decarbonization pathway. 

Most companies are still in the early stages of gaining the Scope 3 visibility the CSRD demands. Our Carbon Action Module helps companies collaborate with their suppliers to build transparency and overcome key barriers to supply chain decarbonization. The Heatmap tool leverages multiple data sources to provide advanced mapping of carbon risks and hotspots across the value chain. Carbon performance ratings give buyers a comprehensive understanding of their suppliers’ carbon efforts and a collaborative platform enables the exchange of primary emissions data. The Module facilitates ongoing collaboration so that buyers can drive supplier improvement and, in turn, enhance the quality and granularity of their Scope 3 reporting. 


Smart Compliance Starts With a Holistic Approach

To meet CSRD’s unprecedented value chain requirements, companies must refocus their procurement efforts around sustainability. Those that build a holistic sustainable procurement program – one that proactively identifies and addresses environmental and human rights impacts rather than simply reacting to them – will be much better prepared to report. The benefits of taking such an approach also go beyond compliance. Our study with Bain & Company found that the companies in our network leading the way on sustainable procurement are more likely to have satisfied employees and a profitability edge over their peers. Whether your company is within the CSRD’s scope or other emerging regulations, the benefits associated with building transparency on sustainability across your value chain will only continue to grow.
 

About the Author

EcoVadis EN

EcoVadis is a purpose-driven company whose mission is to provide the world's most trusted business sustainability ratings. Businesses of all sizes rely on EcoVadis’ expert intelligence and evidence-based ratings to manage risk and compliance, drive decarbonization, and improve the sustainability performance of their business and value chain. Its AI-powered risk mapping, actionable scorecards, benchmarks, carbon action tools, and insights guide a resilience and improvement journey for environmental, social and ethical practices across 200 industry categories and 175 countries.

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