Sustainability Report on the Value Chain

The Corporate Sustainability Reporting Directive (CSRD), issued by the European Parliament in December 2022, has introduced many innovations to the sustainability reporting obligation imposed on companies, revolutionizing both its content and deployment. These changes, described by the European directive but in most EU countries not yet translated into more detailed national legislation, have raised some concerns. To beware of the next interpretations and applications of the CSRD are not only the subjects explicitly contemplated by the directive, but also those which, although formally exempted from the obligation, as a consequence of the modifications of the object of reporting, from now on will be required to collect their sustainability information on the account of their bigger business partners.

This is the consequence of the provision of the directive which instructs to include in the Sustainability Report a description of the main negative impacts, existing or potential, linked to the company’s value chain, therefore an exposition of the actions undertaken by the company to identify and monitor such impacts. The ESRS (European Sustainability Reporting Standards) then specify that information on the material impacts, risks and opportunities connected to the company through its direct and indirect commercial relationships in the upstream and downstream value chain, as resulting from the due diligence activities and materiality analysis, must also be reported.

These references to the company’s value chain substantially broaden the transparency obligation imposed on European undertakings, some say making this task excessively burdensome, if not downright impractical. The provisions analyzed imply that even companies that due to their size and nature had been exempted from the obligation to compile a Sustainability Report, will now be required to gather information regarding the ESG sectors. Indeed, such data will be requested by those companies subjected to the obligations of the CSRD from their smaller commercial partners, which will likely encounter greater difficulties in the completion of this task due to their limited resources.

It is clear why an obligation of such nature could be worrisome at first glance, but by studying the directive in more depth we can recognise a series of measures that the European Union bodies have implemented to take these difficulties into account and mitigate the obligation when necessary. First of all, the extension of the object of reporting does not necessarily have to concern every single entity in the value chain, but only the most relevant ones. Then the legislation allows that in circumstances where the company is unable to collect the required data, it can report estimates using all reasonable information to its availability (e.g. average sector data).

Finally, during the first three years of implementation of the directive, if all the necessary information relating to a company’s value chain is not available, the company will not be sanctioned but will only have to explain the efforts made to obtain it, the reasons why it was not possible and its plans to succeed in the future. Therefore undertakings are not left to their own devices, recipients of impossibly onerous obligations, but are gently led by the European Union step by step towards the development of social entrepreneurship.

 

Bibliography

CRSD
https://eur-lex.europa.eu/legal-content/IT/TXT/?uri=CELEX%3A32022L2464

Report on the Value Chain:
https://www.assolombarda.it/video/incontri-informativi/credito-finanza-e-incentivi/la-rendicontazione-della-sostenibilita-obbligo-o-volontarieta/lo-standard-europeo-di-rendicontazione-dell
a-sostenibilita-il-focus-sulla-value-chain