How to Assess Supply Chain ESG Impact - the Esgrid Method

28. veebr 2024

Stakeholders, customers and (most recently) the European Union care greatly about your business’ value chain ESG. 

The Environmental, Social and Governance impacts of value chains directly reflect a corporation’s overall structure, planning and sustainability. Today’s growing EU regulations surrounding ESG put pressure on many new categories of business to investigate, report and act on that information for a better, sustainable future.

However, collecting, analysing and understanding ESG data compliantly from both your businesses’ interior and exterior can be a major challenge –– the ever-morphing task is expensive, difficult and time-consuming.

Esgrid’s supply chain ESG solution evolves alongside these regulatory changes, remaining ever-compliant with the EU, and providing businesses with a priceless competitive edge through invaluable insight and sustainability.

In this article we’d love to discuss the recent changes in EU regulations, the value of ESG comprehension to any business (mandated or not), and how Esgrid is paving the way for companies to grasp their value-chain data like never before. 

How the European Union’s ESG legislation is evolving in 2024

New rules in the EU market “... aim to strengthen the reliability and comparability of ESG ratings” through transparent and integrity-based ESG ratings providers. It is the key mission of the European Securities and Markets Authority (ESMA) to usher in an era of stronger, more comparable ratings that prevent conflicts of interest between businesses, investors and other parties.

3 key pieces of regulation in play affect all businesses required to report their value-chain ESG in Europe: the Corporate Sustainability Reporting Directive (CSRD, European Sustainability Reporting Standards (ESRS), and the Corporate Sustainability Due Diligence Directive (CSDDD). 

CSRD includes more EU businesses, more reportable data

The Corporate Sustainability Reporting Directive was enacted in 2022, adopted to replace the existing Non-Financial Reporting Directive of late –– 12 years later.

The directive broadens the scope of companies required to disclose sustainability information, encompassing all large EU-based companies and those listed on EU-regulated markets (excluding micro-enterprises). This information and precise method of reporting continues to grow as national member-state adaptation remains underway.

Companies resting within this scope must report on ESG aspects not only within their own operations but also throughout their value chains.

Making the transition:
The directive offers a three-year grace period in which companies may omit some value-chain ESG data, but need to provide reasons for omission and show efforts to obtain it, as well as future plans for obtaining. 

ESRS provides ESG reporting guidance for EU companies

The European Sustainability Reporting Standards were implemented to complement the CSRD legislation, offering a set of reporting standards and guidance for businesses.

The goal of the ESRS is to ensure consistent, relevant, and accessible reporting on environmental, social, and governance (ESG) aspects.

3 categories for standards under the ESRS:

  • Cross-Cutting Standards: Outline fundamental concepts and requirements for ESG reporting. 

  • Topical Standards: Cover various ESG matters such as climate change, pollution, and workforce-related issues.

  • Sector-Specific Standards: Tailored to industries like oil and gas, agriculture, and textiles, addressing sector-specific reporting requirements. These are currently postponed.

The European Union plans to continue adopting new standards specific to individual types of entities, including those in value chains. As of January 2024, all companies under the CSRD scope must comply with general requirements, conduct a materiality assessment, and report on material topics.

Special Considerations for SME: A flexible reporting regime has been offered for listed SMEs allowing them to hold-off on reporting until 2026 (plus an additional 2-year optional opting out). The European Financial Reporting Advisory Group (EFRAG) is developing proportional standards for listed SMEs and voluntary standards for non-listed SMEs to facilitate their transition to sustainable reporting.

CSDDD protects environmental & human rights via ESG regulation

The Corporate Sustainability Due Diligence Directive is currently being negotiated by three European institutions, and a two-year implementation timeline for EU member states will follow once formally adopted.

While the CSRD and ESRS focus on disclosure, the CSDDD aims to enforce mandatory due diligence measures. It seeks to monitor and address negative impacts within supply chains to safeguard human rights and the environment.

Companies that within the scope of the CSRD must prevent, mitigate, or end any identified adverse impacts, monitor the effectiveness of due diligence policies, and publicly communicate their actions. The directive introduces duties for directors and civil liabilities for non-compliance as well –– the CSDDD affects EU and non-EU companies that fall under CSRD legislation.

Esgrid's approach to Value Chain & Supply Chain ESG performance assessment 

Esgrid operates at the forefront of ESG (Environmental, Social, and Governance) performance evaluation within value chains, offering companies an easy-to-use platform to assess and enhance their sustainability practices. 

At its core, our methodology hinges on a meticulous analysis of existing European Union (EU) sustainability legislation and a keen eye on future initiatives –– ready to adapt and align with evolving standards so users always have accurate and up-to-date assessments.

Our approach at Esgrid is grounded in several key principles:

  1. We adhere closely to European Sustainability Reporting Standards (ESRS), ensuring that our clients can easily align their reporting with these frameworks.

  2. We support materiality assessments, allowing companies to focus on disclosing ESG data that is most relevant to their operations and stakeholders. This tailored approach enhances the efficiency and effectiveness of reporting efforts.

  3. Our methodology caters to companies of varying needs and reporting ambitions. Whether they require a basic overview of supply chain ESG performance or seek more detailed insights for comprehensive reporting.

Esgrid offers flexible assessment options to accommodate any business under the EU’s regulations and their own unique needs.

Esgrid’s method

Responses from value chain entities are assessed based on established ESG practices, intentions to adopt such practices or any absence thereof. These assessments are aggregated to generate an Assessment Summary, providing a clear overview of sustainability practices across different ESG topics. This summary is presented graphically and highlights areas of strength and areas for improvement. 

Esgrid evaluates ESG performance within value chains using a gap-analysis method:

Entities receive 

  • 1 point for each positive answer confirming established ESG practices,

  • 0.5 points for expressing a commitment to adopt such practices, and 

  • 0 points for negative, unclear, or missing responses.

Where the respondents are requested to upload documents to verify their responses, Esgrid carries out a sanity check that the title and substance of the document are generally in line with the document requested.

An Assessment Summary visualises each entity's ESG maturity on a scale from 

  • Low (0-25%, red)

  • Medium (25-75%, yellow)

  • High (75-100%, green)

alongside recommendations for enhancing sustainability practices.

For companies assessing their value chain, Esgrid aggregates ESG maturity levels and displays them on the Assessment Insights page, highlighting entities with well-established ESG processes and providing access to individual responses and summaries.

It’s our goal to empower companies to take targeted action

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Disclaimer: The output produced by Esgrid is not intended for public disclosure or for distribution by subscription or other means within the purposes of Proposal for a Regulation of the European Parliament and of the Council on the transparency and integrity of environmental, social and governance (ESG) rating activities.

Esgrid does not, and is not authorised or licenced to, issue or provide any ESG ratings, scores, and/or opinions that can be publicly used or distributed. Esgrid provides its outputs pursuant to an individual order and provided exclusively to the person who placed the order.