What is a value chain?
A value chain is a model that maps out a company’s activities from the procurement of raw materials to the final delivery of the product or service to the consumer. This means that the value chain follows the product from start to finish.
The value chain is a powerful tool for strategic planning and analysis within companies. It provides insights into how activities within an organization contribute to value creation and helps companies identify where they can add unique value to gain a competitive advantage.
Value chain for CSRD
The value chain in CSRD helps a company to map out the impacts, risks, and opportunities (IRO) of their companies in their chain. This IRO information is needed to perform the double materiality assessment.
For mapping out the value chain for CSRD, a company looks at the upstream and downstream value chain. This also determines the place(s) of one’s own company within this chain.
The value chain is a crucial component for CSRD because it provides insight into the chain over which not only double materiality must be carried out, but also provides insight into players in the chain from whom data must be collected later.
Additionally, it is also a component that is included in the ESRS 2 under SBM-1, which you will read more about in the next chapter.
How do I map out the value chain for CSRD?
The value chain is included in the ESRS 2. These are the cross-cutting standards that fall outside of the thematic and sector-specific standards. All companies within the scope of CSRD will have to report on this. In the ESRS 2, the following action point about the value chain is described:
Description of the main applications of the upstream and downstream value chain and the position of the company within this value chain.
ESRS 2 SMB-1
Reporting requirements of the value chain
The CSRD legislation explains how a company must report on the value chain to be able to report about this data point. This can be translated into the following concrete action points:
If your company is involved in multiple value chains, identify which are most important for your company. Then, focus your reporting only on these value chain(s).
All this data must be described narratively. This means that the data must be reported in a descriptive story form. This can be done with visual support. Think of a model containing the upstream and downstream links.
Estimations in the value chain
Sometimes, estimations have to be made in and around the value chain. Estimations can be made using indirect sources, such as sectoral data or other benchmarks.
In this case, it is important to mention which benchmarks have been used, on what basis this data has been prepared, and how accurate this data is. In many cases, you describe the measures that have been made to later obtain this data.
Upstream and downstream value chain
The upstream and downstream value chain is often mentioned in the context of the CSRD. In the following section, you will find information you need about these, for many still unknown, concepts.
What are the upstream and downstream value chain?
The upstream value chain is the part of the chain that sits before your company, think of producers and suppliers. The downstream part is after your company, here you can think of customers and society.
A concrete example could be a retailer selling consumer goods. In the upstream chain, the producers and suppliers of raw materials up to the products would be situated. Then, in the middle is the retailer, involved in distribution, stores, and employees. The chain ends in the downstream where the customers and society are situated.
Of course, a company can also be entirely at the beginning of the chain. However, it might be more difficult to be entirely at the end of the chain since the chain often ends with society.
Why is this approach important?
A clear insight into the entire chain, from raw material extraction to end-use, enables companies to implement more sustainable and responsible practices. This includes reducing the ecological footprint, ensuring ethical labor practices, and minimizing waste throughout the entire supply chain.
In the CSRD legislation drafted by the European Commission, this term is also continuously used in the context of the value chain. Therefore, using this approach when reporting information about the value chain is also a matter of course.
Practical tips for your CSRD chain analysis
Now that it is clear how and why the chain must be mapped, it’s time to start. For large corporations, this can be a difficult and lengthy task. They have a large supply chain with many complex links. Below are some practical tips that you can use for analyzing and mapping the chain.
Use internal documents
By using internal documents, you search through the purchase orders, supplier contracts, and production schedules of your company. These documents often provide a clear picture of your current links in the chain.
By collecting all relevant information from these documents, you get insight into the main suppliers, production processes, and distribution channels. This gives you a good view of which links exist and which are important.
Look at industry standards
Delve into the industry standards and practices within your sector. These standards can provide a benchmark for the functioning of your own value chain. By looking at what is common in the industry, you can determine where your chain differs and where it is similar.
It can also help to look at governance reports issued by companies that have already made significant strides in mapping the value chain for CSRD.
Involve various internal departments
A crucial practical tip for conducting a chain analysis is to actively involve and engage in conversations with different internal departments within your organization. Each department has its own interactions with and insights into different parts of the value chain.
To conduct a thorough chain analysis, organizing cross-functional workshops is an effective approach. By bringing together members from departments such as purchasing, production, sales, marketing, and logistics, you can provide a platform for exchanging knowledge and insights.
Use software for documentation
An important part of CSRD is the documentation of sustainability reporting and the eventual translation into the governance report. Due to the complex interrelation with other data points, documentation can be a challenging part. This makes software a crucial link to address it correctly.
Software can not only help with documenting the entire value chain but also with translating it into double materiality and eventually the governance report. Additionally, software makes it easy to supplement and adjust your value chain as needed.
The use of CSRD software for documentation and reporting within the framework of the CSRD is not only a practical choice for mapping the value chain but quickly becomes an indispensable tool for modern companies. Software solutions provide a structured platform with which organizations can effectively collect, analyze, and report their sustainability data.
