How the CSRD and ESRS are Changing ESG and Value Chain Reporting
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Directive (EU) 2022/2464 on Corporate Sustainability Reporting (CSRD), adopted in 2022, will change how companies disclose Environmental, Social, and Governance (ESG) information to stakeholders. Moreover, the CSRD introduces new requirements for reporting ESG impacts, risks, and opportunities across the value chain. Central to the CSRD are the European Sustainability Reporting Standards (ESRS), which guide companies in drafting sustainability reports. This blog explores how the CSRD and ESRS have changed non-financial reporting, particularly their implications for value chain reporting. With stakeholders increasingly focused on ESG matters, the CSRD and ESRS guarantee comprehensive reporting on the ESG practices of companies and suppliers.
Non-financial reporting and value chain impact
In the past, annual reports mainly focused on financial aspects. Today, stakeholders are concerned not only about the environmental and social impacts of the company's activities but also how environmental and social factors impact the company and its activities. They are interested in how the company deals with and is impacted by carbon emissions, renewable energy use, gender equality, employee rights, human rights, or governance practices.[1] These topics, also known as sustainability matters or ESG matters, influence the willingness of stakeholders to invest in a company and, therefore, the long-term continuity of the former.[2]
Nowadays, stakeholders' concerns also extend to value chain practices.[3] Companies operate in competitive markets, pushing suppliers for lower prices or faster production times. In turn, to keep up with these demands, suppliers may adopt strategies that harm employee rights or carbon emissions levels.[4] Of course, these practices clash with stakeholders' ESG interests.
ESG legal framework
The ESG legal framework encompasses various Regulations and Directives targeting different aspects of ESG reporting and investment. For example, Regulation (EU) 2020/852 (Taxonomy Regulation) regulates sustainable investments, while Regulation (EU) 2019/2088 (Sustainable Finance Disclosure Regulation (SFDR)) dictates non-financial disclosure rules for financial entities. In 2022, the CSRD revised and expanded the ESG framework to ensure more relevant, comparable, and reliable sustainability information.[5] The CSRD amended Directive 2013/34/EU (Accounting Directive), revising Articles 19a and 29a. These Articles require companies listed on regulated markets and parent companies of large groups to draft a sustainability report. Furthermore, the CSRD also introduced Article 29b of the Accounting Directive, establishing the ESRS to guide companies in reporting sustainability information.[6]
CSRD Reporting Requirements
According to the CSRD and ESRS, companies must focus their sustainability reporting on the impact, risks, and opportunities arising from their activities, their business relationships, or from any other relevant factors. After assessing the nature of their activities, companies must perform a double materiality assessment.[7] The double materiality assessment means that companies should provide information on the impact generated on people and the environment (impact materiality), and how sustainability matters affect the development, performance, and position of the company itself (financial materiality).[8] Impact materiality focuses on outward impacts on external stakeholders. In contrast, financial materiality addresses inward impacts on financial stakeholders like creditors and investors.
The CSRD is being implemented in phases. Starting from the 2024 financial year, it applies to companies previously covered by Directive 2014/95/EU (Non-Financial Reporting Directive). In 2025, it will extend to large EU companies, followed by listed SMEs in 2026 and non-EU companies with significant EU operations in 2028. Sustainability reports drafted under the CSRD will become available to stakeholders in 2025.[9]
Value Chain Disclosures
The CSRD and the ESRS require companies to extend sustainability reporting to include impacts, risks, and opportunities in their value chains. According to Article 19a(2)(f)(ii), Article 29a(2)(f)(ii), and paragraph 63 ESRS 1, the sustainability reporting shall include material impacts, risks and opportunities connected with the company's upstream and downstream value chain. Companies must determine the relevance of the ESG value chain information to be included in the annual report through the materiality assessment, the due diligence principle, and any specific requirements related to the value chain in other ESRS.
However, the CSRD and ESRS do not require all ESG information on every actor in the value chain. The inclusion of ESG matters can be limited to information relevant to the specific part of the value chain. For instance, part of the value chain might be concerned only with the disclosure of environmental issues, while another part might focus on social issues.
Furthermore, the CSRD and the ESRS acknowledge that companies might face difficulties while gathering information from their suppliers. Limitations might be connected with the level of control the company exercises over its suppliers or with the contractual agreements in place. Paragraph 53 of the CSRD states that disclosures concerning value chains should be proportionate and relevant to the scale and complexity of the company's activities. The capacities and characteristics of the entities within the value chain should be considered when reporting, particularly in the case of smaller entities not subject to the same sustainability reporting requirements. In light of these principles, ESRS 1 permits companies to estimate value chain data using sector averages and proxies where direct information is unavailable. However, it is important to state that companies can adopt this facilitation without prejudice to any other due diligence obligations in the value chain, as regulated in the newly adopted Directive (EU) 2024/1760 (Corporate Sustainability Due Diligence Directive (CSDDD)).
Conclusion
In March 2025, stakeholders will gather far more information regarding the value chain. First, the CSRD will change how companies disclose information regarding ESG matters. Secondly, stakeholders will gather more and more information on how ESG risks are addressed in the value chain. Overall, the EU is looking increasingly to ensure that companies are held accountable for what they are doing in their value chain. The CSRD and the introduction of the value chain reporting requirement ensure public accountability for companies and informed investment for stakeholders. From a non-financial-reporting point of view, companies will no longer be able to excuse themselves for not knowing what their suppliers are doing. Companies must now report to stakeholders how the ESG issues are addressed holistically in the value chain.
[1] https://www.pwc.com/sk/en/environmental-social-and-corporate-governance-esg/esg-reporting.html
[2] https://www.wolterskluwer.com/en/expert-insights/the-abcs-of-esg-reporting
[3] https://www.sedex.com/blog/esg-impact-on-supply-chains-what-to-expect-in-2024/
[4] https://hbr.org/2020/03/a-more-sustainable-supply-chain
[5] https://finance.ec.europa.eu/capital-markets-union-and-financial-markets/company-reporting-and-auditing/company-reporting/corporate-sustainability-reporting_en
[6] https://finance.ec.europa.eu/news/commission-adopts-european-sustainability-reporting-standards-2023-07-31_en
[7] https://ec.europa.eu/newsroom/fisma/items/754701/en
[8] Recital 29 of the CSRD; https://ec.europa.eu/newsroom/fisma/items/754701/en
[9] https://finance.ec.europa.eu/capital-markets-union-and-financial-markets/company-reporting-and-auditing/company-reporting/corporate-sustainability-reporting_en
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