The new wave of ESG regulations is shaking up how organisations manage their value chains 🌊
Value chains are decisive in improving sustainability performance
Whether through voluntary or mandatory reporting, organisations are encouraged to manage and improve the sustainability performance of both their direct and indirect activities.
Rather than simply focusing on what they have control over, such as the emissions of company-owned vehicles, organisations are increasingly measuring the impact of their value chains.
Value chains relate not only to the activities needed to create a good or a service but also to the impact this value-creation process has on the people directly and indirectly involved.
When measuring emissions, focusing on value chains allows for a holistic and full-lifecycle perspective of the creation of goods or services. It goes beyond accounting for scope 1 and 2 emissions and also considers the organisation's upstream and downstream scope 3 emissions.
In this instance, organisations working to reduce the environmental impact of their value chains would aim to reduce the emissions from the production of a good, the materials needed for it, and how it is disposed of at the end of its use.
This value chain approach is relevant for emissions measurement, and it also applies to wider social and environmental sustainability management.
For organisations to truly improve their sustainability performance, focus on value chains is needed, and that is why we are seeing a regulatory push for sustainability in value chains.
ESG regulations are driving buyer and supplier collaboration for sustainability
The rise in ESG regulations is requiring organisations to engage their suppliers on a collaborative journey to improve their sustainability performance. These regulations are changing sustainability management and setting new standards for value chains.
Among the alphabet soup of ESG regulations, the three causing the most headaches for Equipoise’s customers in 2024 are CBAM, CSRD and CSDDD.
The Carbon Border Adjustment Mechanism (CBAM)
What is the CBAM?
The CBAM is a mechanism launched by the European Union to tax the import of emissions-intensive goods produced outside of the EU. The regulation’s objective is to accelerate the EU’s journey to carbon neutrality by 2050 and ensure that member states reduce their emissions by 55% by 2030.
Through the CBAM, the EU will ensure that the carbon price of imports matches the carbon price of goods produced within the EU and that its emission reduction initiatives are not undermined. It will also encourage lower-carbon production in non-EU countries.
How will the CBAM impact value chains?
To comply with the CBAM, organisations importing cement, iron, steel, aluminium, fertiliser, electricity or hydrogen into the EU will need to collect emissions data from their suppliers and disclose it in a quarterly CBAM report.
This will necessitate importers and exporters collaborating to share product-level carbon footprint assessments and ensure that decarbonisation is being driven throughout the value chain to reduce the amount of carbon taxes they will be asked to pay.
When will organisations need to comply with CBAM?
The first phase of the CBAM’s implementation lasts between October 1st 2023, and December 31st 2025. During this time, companies need to start disclosing every quarter the greenhouse gas emissions embedded in their imports, with product-level emissions data required since July 31st 2024.
We will enter CBAM’s definitive phase on January 1st 2026, when the regulation will come into full effect. By then, companies be required to purchase CBAM certificates for the emissions they import into the EU.
The Corporate Sustainability Reporting Directive (CSRD)
What is the CSRD?
The CSRD is a European Union regulation that will make the reporting and disclosure of social and environmental sustainability data mandatory. This new reporting framework will impact more than 49,000 organisations worldwide.
Building on the foundations of the Non-Financial Reporting Directive (NFRD), the CSRD will enhance sustainability reporting by standardising it and requiring organisations to disclose a wider range of environmental, social and governance data.
How will the CSRD impact value chains?
The CSRD’s reporting standards, known as ESRS, cover non-financial data such as metrics on workers in the value chain and biodiversity, as well as how an organisation’s activities impact climate change and the risks climate change presents for the organisation.
Such comprehensive requirements ask for organisations to look beyond their operations and consider the role their value chain plays in their overall sustainability performance. This is where collaboration with value chain partners will be needed to collect accurate data on ESG factors.
When will organisations need to comply with CSRD?
The CSRD will impact organisations in waves. Those already subject to NFRD will need to report in 2025, while large organisations with more than 250 employees and a net turnover over €50 million or assets greater than €25 million will need to start reporting in 2026.
In 2027, small and medium-sized organisations listed on EU-regulated markets will be required to disclose their data. The last category of organisations concerned in 2028 are non-European companies with an EU branch or subsidiary with over €150 million in net turnover.
The Corporate Sustainability Due Diligence Directive (CSDDD)
What is the CSDDD?
The CSDDD is a new European Union directive that aims to advance sustainability and responsible behaviour in companies' operations and value chains by legally requiring due diligence to play a role in their sustainability strategy.
Companies falling under the scope of CSDDD will be required to identify and address any human rights transgressions and negative environmental impacts within their operations, subsidiaries and value chain partners both within and outside of Europe.
How will the CSDDD impact value chains?
Companies will be required to establish a due diligence process to comply with this directive and avoid penalties, such as fines from European Union member states. Given its reach, this directive will demand companies to monitor their value chains.
This due diligence and risk management will require companies covered by the CSDDD to work closely with organisations in their value chains to conduct diligence regarding human rights and environmental risks and collaborate with them to tackle any issues arising.
When will organisations need to comply with CSDDD?
CSDDD entered into force on July 25th 2024, and European Union member states are expected to incorporate this directive into national law by July 26th 2026. A year after that, the CSDDD’s rules will progressively become a legal requirement for companies.
The first companies impacted from July 26th 2027, will be those based in the EU with more than 5000 employees and a turnover greater than €1.5 billion. The directive will then be progressively rolled out to other organisations before coming into full force from July 26th 2029.
The future of sustainable value chain management
While they address different factors in an organisation's sustainability performance, these three regulations highlight how mandatory sustainability reporting increasingly requires the management of ESG factors across the value chain.
When we consider emissions measurement, this comes as no surprise, as scope 3 emissions account for 75% of an organisation’s carbon footprint. Decarbonisation strategies will have to consider emissions in the value chain and how to collaborate with suppliers to jointly drive reductions.
The same principles apply to other factors of an organisation’s sustainability performance. The rigour applied to ensuring the safety and health of a company’s workers should be extended to those in the value chain contributing to the creation of their products or services.
Compliance with a growing amount of sustainability regulations requires a value chain approach to sustainability management, and organisations stand to benefit from being proactive by starting to engage their value chain partners.
Whether by being a low-emission and competitive supplier for EU importers subject to the CBAM or by standing out as a partner that can support customers on their own sustainability journey, the business benefits of cost savings and revenue generation are clear for sustainability leaders.
At Equipoise, we see value chains as the crucial piece to improving sustainability performance. We support our clients with the collection, measurement, and disclosure of their ESG data to ensure compliance with regulations and guide their sustainability strategy.
Get in touch with Equipoise to explore how you can manage the sustainability performance of your value chain and comply with ESG regulations.
You can also register for our webinar "ESG Supply Chain Regulations Impacting You: CSDDD, CSRD, CBAM" on the 14th of August to stay ahead of the regulatory curve and find out about how procurement and sustainability teams can support their organisations with compliance.
