EFRAG IG 2: Value Chain Implementation Guidance

Disclaimer
This implementation guidance is non-authoritative and accompanies the European
Sustainability Reporting Standards (ESRS), as stipulated in Articles 19a and 29a of Directive
2013/34/EU (the Accounting Directive) but does not form part of them. This means that if
anything in this guidance appears to contradict any requirement or explanation in ESRS,
ESRS take precedence. This implementation guidance is issued following EFRAG’s due
process for such non-authoritative documents and under the sole responsibility of EFRAG.
EFRAG assumes no responsibility or liability whatsoever for the content or any
consequences or damages directly, indirectly, or incidentally arising from following the
advice or guidance contained in this document. Users of this document are advised to
exercise their own judgment in applying ESRS. Information contained in this document
should not be substituted for the services of an appropriately qualified professional.
This implementation guidance has been developed for use by large listed and unlisted
companies that are subject to CSRD. It is therefore not intended for use by listed small and
medium-sized enterprises which adopt future LSME standards and other (not listed) SMEs
voluntarily reporting based on the future VSME standards.
This implementation guidance relates to the sector-agnostic ESRS as adopted by the
European Commission on 31 July 2023, and published in the Official Journal on 22
December 2023. Sector-specific standards may add sector specifications to be followed by
specific sectors.

About EFRAG
EFRAG’s mission is to serve the European public interest in both financial and sustainability
reporting by developing and promoting European views in the field of corporate reporting.
EFRAG builds on and contributes to progress in corporate reporting. In its sustainability
reporting activities, EFRAG provides technical advice to the European Commission in the
form of draft European Sustainability Reporting Standards (ESRS) elaborated under a robust
due process and supports the effective implementation of ESRS. EFRAG seeks input from all
stakeholders and obtains evidence about specific European circumstances throughout the
standard setting process. Its legitimacy is built on excellence, transparency, governance,
due process, public accountability and thought leadership. This enables EFRAG to speak
convincingly, clearly, and consistently, and be recognised as the European voice in
corporate reporting and a contributor to global progress in corporate reporting.

EFRAG is funded by the European Union through the Single Market Programme in which
the EEA-EFTA countries (Norway, Iceland and Liechtenstein), as well as Kosovo participate.
Any views and opinions expressed are however those of the author(s) only and do not
necessarily reflect those of the European Union, the European Commission or of countries
that participate in the Single Market Programme. Neither the European Union, the European
Commission nor countries participating in the Single market Programme can be held
responsible for them.

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Table of contents
Summary in seven key points ............................................................................... 5
1. Introduction ...................................................................................................... 6
Structure of the guidance........................................................................................................................................ 6
Cross references to IG 1 ......................................................................................................................................... 7
Acronyms and abbreviations used ........................................................................................................................ 7
2. Navigating value chain under CSRD and ESRS ................................................ 7
General requirements.............................................................................................................................................. 8
Detailed requirements ............................................................................................................................................. 8
Value chain coverage map .................................................................................................................................... 9
2.1 What is the VC? .................................................................................................. 10
Should IROs linked to all actors in the VC be considered? ............................................................................ 11
How does leverage or influence over the VC impact reporting? ................................................................. 11
2.2 Why does VC matter? ........................................................................................ 11
2.3 From own operations to value chain ................................................................ 12
The reporting group as a starting point ............................................................................................................ 12
Including value chain information ........................................................................................................................ 18
Specific group situations: associates and joint arrangements ....................................................................... 19
Entity-specific disclosures ...................................................................................................................................... 20
2.4 Which IROs in the VC are to be disclosed? ..................................................... 20
2.5 Coverage of the VC for Policies, Actions and/or Targets (PATs) .................. 20
2.6 Coverage of the VC for Metrics Disclosure Requirements ............................. 21
2.7 How do the transitional requirements work? .................................................. 22
Transitional provision with respect to entity-specific disclosures ................................................................... 23
2.8 What is the LSME cap and does it impact one’s disclosures? ...................... 24
3. Frequently asked questions (FAQ).................................................................. 24
FAQ 1: Where does the VC begin and end? .......................................................... 24
FAQ 2: Are financial assets (loans, equity and debt investments) considered
business relationships that trigger VC information? ........................................... 25
FAQ 3: How should the MA process be organised to properly capture material
IROs in the VC? ........................................................................................................ 26
1. Basic principles ................................................................................................................................................... 26
2. Materiality assessment steps ........................................................................................................................... 26
FAQ 4: How should information about the VC be disclosed in the context of the
materiality assessment? ......................................................................................... 28
BP-1 – General basis for preparation of the sustainability statement ....................................................... 28
SBM-1 – Market position, strategy, business model(s) and VC – ‘VC mapping’ ...................................... 28
IRO-1 – VC considerations in MA ....................................................................................................................... 29
IRO-1 – MA methods and assumptions .............................................................................................................. 30
SBM-3 – Disclosing the outcome of the MA ...................................................................................................... 30
FAQ 5: How are investees treated under ESRS E1? ............................................. 31
FAQ 6: Reporting perimeter for ESRS E1 in practice ........................................... 33
FAQ 7: Numerical example of GHG emissions under ESRS E1 reporting .......... 38
FAQ 8: How should the impacts resulting from business relationships be
assessed and quantified? ....................................................................................... 39

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FAQ 9: What is ‘reasonable effort’ to collect VC data? ........................................ 40

FAQ 10: How can estimates about the VC be developed? ................................... 41
FAQ 11: Is a case of bribery not involving an employee relevant for the
reporting entity? ...................................................................................................... 43
4. VC coverage map ............................................................................................ 43
VC coverage map of ESRS Set 1 ............................................................................ 44
Appendix A: Names of disclosure requirements ................................................ 46

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Summary in seven key points

This implementation guidance covers the upstream and downstream value chain (VC) of the
undertaking and not its own operations; it should be read with IG 1 Materiality Assessment.
1. The undertaking’s sustainability statement shall include information about all material
impacts, risks and opportunities (IROs) including those that arise or may arise in the
context of its business relationships in the upstream and downstream value chain.
Business relationships are not limited to direct contractual relationships.
2. The undertaking is not required to include value chain information in all disclosures,
but only when it is connected to material IROs beyond its own operations, due to its
business relationships, and when specifically required by the disclosure requirement.
3. Therefore, the materiality assessment shall cover the identification of material IROs in
the VC, with a focus on where (geographies, activities/sectors, operations, suppliers,
customers, other relationships, etc.) in the VC they are likely to materialise. Key
disclosures about the undertaking’s materiality assessment are SBM-1, SBM-3 and IRO-
1 (ESRS 2). They are not limited to but should cover the assessment of IROs in the VC.
4. Topical standards require disclosures about policies, targets and actions (PATs) for
material matters. In particular, they require either the disclosure of such PATs or a
statement about their absence. Limited to the extent that those policies, actions and
targets involve actors in the value chain, when describing the PATs for material matters,
the disclosure shall include information about how these address material upstream
and/or downstream VC IROs.
5. Topical standards require to include VC data only for a few metrics. However, when
the undertaking considers that a material IRO in the VC is not sufficiently covered by
the requirements in ESRS, it shall include additional entity-specific disclosures,
including metrics on when such information is necessary in order to enable users to
understand the undertaking’s material impacts, risks or opportunities.
6. When, after making reasonable efforts, it cannot collect primary VC information from
actors in its value chain for the materiality assessment or in order to prepare its
disclosures of material IROs, the undertaking shall estimate the missing information.
When estimating the missing information, it shall use all reasonable and supportable
information available without undue cost and effort, including proxies and sector data
and other information from indirect sources. The undertaking shall describe in the
basis for preparation for the metrics reported using value chain estimation and the
resulting level of accuracy. Depending on the circumstances, the materiality
assessment may be validly conducted without primary information being collected
from actors in the value chain.
7. The inclusion of VC information in the sustainability statement does not affect the
reporting boundaries, which correspond to the boundaries of the entities included in
the perimeter of its consolidated financial statements. The inclusion of VC information
correspond to the extent to which the sustainability statement covers the relationships
that all the undertakings in the consolidation perimeter have with their respective VC
counterparts, including beyond the first tier. Associates and other investees which are
not consolidated in the financial statements are treated as the other business
relationships, i.e., as actors in the value chain when this is the case. Refer also to
Chapter 2.3 below on operational control which is relevant to ESRS E1 Climate change,
ESRS E2 Pollution and ESRS E4 Biodiversity and Ecosystems.

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1. Introduction
8. The objective of this guidance is to support the implementation activities of preparers
and others using or analysing ESRS reports, specifically on value chain information, in
accordance with the requirements of Articles 19a or 29a of the Directive 2013/34/EU
(referred to as the ‘Accounting Directive’) as amended following the Directive (EU)
2022/2464, as regards Corporate Sustainability Reporting (referred to as ‘the CSRD’).
9. The content of this document has been developed on the basis of the Commission
Delegated Regulation (EU) 2023/2772 of 31 July 2023, supplementing Directive
2013/34/EU of the European Parliament and of the Council as regards sustainability
reporting standards.
10. In its implementation supporting function, EFRAG cannot develop concepts and
reporting requirements that go
beyond the content of the July A note on Corporate Sustainability Due
2023 Delegated Act or interpret Diligence Directive (CSDDD)
Union law. The purpose of the
implementation support As stated in ESRS 1 paragraph 58: ‘ESRS do not impose
material is to illustrate how the any conduct requirements in relation to due diligence;
provisions of the Delegated Act nor do they extend or modify the role of the
(in this document ‘Delegated administrative management or supervisory bodies of
the undertaking with regard to the conduct of due
Act’ or ‘Set 1 ESRS’) may be
diligence.’
implemented without
introducing new provisions. ESRS requires transparency around the reporting
New provisions can only result undertaking’s due diligence processes but do not
from future standard setting assume any compliance with the CSDDD or other
activities (e.g. future behavioural frameworks.
amendments to draft ESRS), if
and when applicable, in Consistent with the ESRS text in the Delegated Act, this
accordance with the EFRAG due guidance does not reflect the text of the CSDDD,
process. because the disclosure obligations of the CSRD are
independent of the CSDDD obligations.
11. As an example, when the
implementation supporting In practice, the CSDDD compliance may be conducive
documents point to a specific to better CSRD/ESRS reporting. However, even if value
approach or methodology that chain due diligence obligations do not exist for certain
is not detailed in the delegated companies under the CSDDD, this does not modify the
act, this has to be framed as one definition of the value chain for reporting purposes, i.e.
of the possible implementation the transparency obligations under ESRS.
approaches without excluding
other possibilities.

Structure of the guidance

12. The document is organised in three chapters as follows.
(a) The next chapter covers how to navigate VC requirements in ESRS, which is the
basis for the rest of the document.
(b) The chapter following it covers how an undertaking may implement VC under ESRS
by using frequently asked questions with the aim of providing practical guidance.

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(c) The last chapter includes the VC coverage map for Set 1 ESRS explaining the
coverage of the upstream and downstream VC as required by ESRS (excluding
considerations of entity-specific disclosures and SFDR indicators).

Cross references to IG 1
13. To avoid duplication and reduce the length of this document, there is significant
reference to the Materiality Assessment Implementation Guidance (IG 1) developed
by EFRAG. For example, the due diligence aspects related to the materiality
assessment (and VC aspects) are covered in that guidance rather than here.
14. Please note that references to the IG 1 are made in this blue colour, whereas references
in green designate this document.

Acronyms and abbreviations used

15. The acronyms in this document are used as follows.
CSDDD – Corporate Sustainability Due Diligence Directive
CSRD – Corporate Sustainability Reporting Directive
Delegated Act – Commission Delegated Regulation supplementing Directive
2013/34/EU as regards sustainability reporting standards
DR – Disclosure Requirement
ESRS – European Sustainability Reporting
Annexes to the Delegated Act:
Standards
GHG – greenhouse gases or the GHG Annex II: Acronyms and glossary of
Protocol terms

GRI – Global Reporting Initiative

IG 1 – Materiality Assessment
Implementation Guidance issued by EFRAG
IG – Implementation guidance issued by EFRAG
IROs – impacts, risks and opportunities
ISSB – International Sustainability Standards Board
LSME – ESRS for Listed Small and Medium Enterprises (SMEs)
MA – materiality assessment; and
PAT – policies, actions and targets
VC – value chain

2. Navigating value chain under CSRD and ESRS

16. CSRD Art 19(a)(3) and 29(a)(3) require that reported information relates to an
undertaking’s own operations and its upstream and downstream VC, including its
products and services, its business relationships and its supply chain.
17. ESRS have been developed according to this legal requirement. The CSRD does not
provide any additional definitions or guidance on VC. However, with reference to

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impacts, the CSRD refers to international instruments of sustainability due diligence

which specify how the undertakings are expected to identify, address and report on
impacts across their VC.
18. The definitions of ‘value chain’, ‘actors in the value chain’ and ‘business relationships’
are defined in Annex 2 of the July 2023 Delegated Act.
19. Not all Disclosure Requirements (DRs) and datapoints in sector agnostic ESRS require
the inclusion of information about the undertaking’s upstream and downstream VC. In
many cases the undertaking is expected to focus on its own operations.

General requirements
20. The general requirements relating to all disclosures on VC can be found in ESRS 1
General requirements:
(a) the general requirements for reporting on VC are in chapter 5;
(b) Application Requirements AR 17 set out guidance on ‘Estimation using sector
averages and proxies’;
(c) ESRS 1 requires the inclusion of material VC information when this is necessary to
allow users to understand the undertaking’s material IROs and to produce
information that meets the qualitative characteristics of information stipulated in
Appendix C of ESRS 1 (ESRS 1 paragraph 65). This is a principles-based approach
that works on top of the specific datapoints in ESRS that require to include specific
VC information. This means that where necessary (i.e. reflecting the outcome of the
materiality assessment), the undertaking shall cover the VC; and
(d) lastly, but importantly, ESRS 1 contains specific transitional provisions with respect
to VC in Chapter 10.2.

Detailed requirements
21. Other detailed requirements about value chain can be found in ESRS as follows.
(a) ESRS requires disclosures concerning the process and outcomes of the materiality
assessment which are covered in ESRS 2 General disclosures (IRO-1 and SBM-3),
accompanied by SBM-1. For more on this, see below FAQ 4 How should
information about the VC be disclosed in the context of the MA as well as rows 1
through 3 of the VC coverage map of ESRS. For details about the materiality
assessment process, please refer to IG 1 and for the related VC aspects, please see
below FAQ 3 How should the MA process be organised to properly capture
material IROs in the VC. Please also refer to IG 1 FAQ 10 Should the assessment of
IROs rely on quantitative information?
(b) All topical standards require undertakings to
disclose their policies, actions and targets for Alignment with the ISSB and
material IROs. To the extent that such policies, GRI
actions and targets address material IROs in the The definitions of value chain
VC, this will be reflected in the disclosures. The under ISSB and GRI frameworks
minimum disclosure requirements with respect are aligned with ESRS.
to policies, actions and targets require
information on scope such as whether it relates
to the VC per ESRS 2 paragraphs 65(b), 68(b) and80(c). (See Chapter 2.5 Coverage

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of the VC for Policies, Actions or Targets). Within the disclosures about policies,
actions and targets, the Social topical standards ESRS S2 Workers in the value
chain, ESRS S3 Affected communities and ESRS S4 Consumers and end-users
provide a framework for reporting on material IROs related to these groups of
people in the VC and their management. As a reminder, the undertaking can
comply by disclosing that it has not adopted policies, actions and targets with
reference to the relevant material sustainability matter and provide reasons for this.
It may also report a timeframe in which it aims to adopt them (ESRS 2 paragraphs
62 and 72). Please refer to rows 4 and 5 of the VC coverage map of ESRS.
(c) There are only few sector-agnostic metrics in topical ESRS that require VC
information (see Chapter 2.6 Coverage of the VC for metrics). ESRS S2 to S4 for
instance do not include metrics per se. The other metrics do not refer to the value
chain. However, this includes some information about procured materials, please
refer to rows 6 and 7 of the VC coverage map of ESRS.
(d) Finally, when an undertaking What is the difference between value chain and
concludes that a material IRO is supply chain?
not sufficiently covered by a ESRS
to produce a sustainability In short, the VC includes the supply chain. The supply
statement that meets the chain is the actors in the VC upstream from the
qualitative characteristics of reporting entity. However, VC also includes
information, it shall provide downstream entities along with the supply chain.
additional disclosures on an The supply chain provides products, including raw
entity-specific basis to enable material, components or services, that are used in the
users to understand its IROs development of the undertaking’s products or
(ESRS 1 paragraph 63 and 65 as services. Depending on the position in the VC, an
well as paragraph 11 and AR 1 to undertaking’s supply chain can be part of the
5). These disclosures shall downstream VC of another undertaking.
include, where necessary,
appropriate metrics covering the In some industries, upstream or downstream refers to
relevant parts of the VC related to specific points in the chain rather to the reporting
the relevant material IRO as undertaking’s position in the chain.
selected by the undertaking (i.e. However, there are other entities and individuals that
there is no standardisation of are connected to the undertaking’s operations,
these metrics in the sector- products or services without being ‘suppliers’, e.g.,
agnostic standards). While local police protecting the undertaking’s assets, as
judgement is required in they may cause an impact by e.g., using excessive
determining whether and what force on people trespassing. In this case, there is no
disclosures are required, the business relationship, but there is a value chain
entity-specific disclosures impact. It may meet the materiality threshold if it is
dimension is not voluntary but a considered severe enough.
mandatory requirement.

Value chain coverage map

22. Chapter 4 of this document presents the VC coverage map illustrating the type of
coverage of VC information that is required by each specific Disclosure Requirement
in sector-agnostic ESRS. This also includes which metrics require inclusion of VC data
in the actual calculation.

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2.1 What is the VC?

23. While the focus of this Implementation Guidance is on upstream and downstream VC,
the definition of value chain in Annex 2 of the Delegated Act is broader than the
upstream and downstream VC, as it also includes own operations. VC is defined as ‘the
full range of activities, resources and relationships related to the undertaking’s
business model and the external environment in which it operates. A value chain
encompasses the activities, resources and relationships the undertaking uses and
relies on to create its products or services from conception to delivery, consumption
and end-of-life. Relevant activities, resources and relationships include: related to the
undertaking’s business model and the external environment in which it operates. A
value chain encompasses the activities, resources and relationships the undertaking
uses and relies on to create its products or services from conception to delivery,
consumption and end-of-life. Relevant activities, resources and relationships include:
(a) those in the undertaking’s own operations, such as human resources;
(b) those along its supply, marketing and distribution channels, such as materials and
service sourcing and product and service sale and delivery; and
(c) the financing, geographical, geopolitical and regulatory environments in which the
undertaking operates.’
24. ESRS use the term ‘value chain’ in the singular, although it is recognised that
undertakings may have multiple value chains.
25. According to this definition, the VC issues addressed in this implementation guidance
include both upstream and downstream actors and their activities. Actors or
undertakings upstream from the reporting undertaking (e.g., suppliers) provide
products or services that are used in the development of the undertaking’s own
products or services. Actors downstream from the reporting undertaking (e.g.,
distributors, customers, waste management) receive or use products or services of the
reporting undertaking or waste stream by the customers or end-users.
26. Annex 2 defines ‘business relationships’ as ‘The relationships the undertaking has with
business partners, entities in its value chain, and any other non-State or State entity
directly linked to its business operations, products or services. Business relationships
are not limited to direct contractual relationships. They include indirect business
relationships in the undertaking’s value chain beyond the first tier, and shareholding
positions in joint ventures or investments. ’as ‘[t]he relationships the undertaking has
with business partners, entities in its value chain, and any other non-State or State entity
directly linked to its business operations, products or services. Business relationships
are not limited to direct contractual relationships. They include indirect business
relationships in the undertaking’s value chain beyond the first tier, and shareholding
positions in joint ventures or investments.’
27. Setting out the VC activities may help identify the VC actors1.

1
EFRAG has consulted from 21 January to 21 May 2024 on an Exposure Draft of ESRS for listed SMEs
(LSME ED). Differently from the sector-agnostic standards that support the preparation of consolidated
sustainability statement for the group, consistent with the CSRD, LSME ED has been developed to
support the preparation of the individual (i.e., not consolidated) sustainability statement. In the LSME
ED material IROs of the subsidiaries are included in the sustainability statement as IROs arising from the
parent’s business relationship with them, i.e., as part of the value chain.

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Should IROs linked to all actors in the VC be considered?

28. ESRS do not require information on each and every actor in the VC, but rather the
inclusion of material VC information, i.e., when material IROs arise in the VC (ESRS 1
paragraph 64). When assessing material IROs, all relevant actors (both in direct and
indirect relationships) are to be considered. However, the assessment should focus on
relationships that are likely to be associated with material IROs, for example
relationships with:
(a) those actors who are associated with ‘hot spots’ and who likely expose to the
likelihood of actual and potential impacts (therefore generating impacts on people
and/or environment, which can in turn be sources of risks and opportunities); or
(b) those actors with respect to whom the business model of the undertaking shows
key dependencies in terms of products or services (therefore generating risks and
opportunities for the undertaking).

How does leverage or influence over the VC impact reporting?

29. In some cases, an undertaking may have leverage or be able to exert influence over
actors in its VC. Examples include cases where the undertaking is a large supplier or
customer and thereby exerts influence on its business relationships to manage its
impacts.
30. In other cases, its ability to obtain the necessary VC information as well as its capacity
to contribute to or influence the management of IROs arising in the VC, may be limited
given the nature or the absence of direct contractual arrangements, the level of control
that it exercises on the operations outside the consolidation scope and its buying
power. Other factors may include customs in the industry, the behaviour of the
reporting entity's competitors, and the willingness or ability of suppliers and customers
to provide such information.
31. However, leverage is not a factor when it comes to determining whether IROs that arise
in the VC are material or not. Leverage may affect the ability of the company to obtain
data and/or information from its counterparties in the VC. This may be relevant for the
reporting of material impacts as well as for reporting metrics, including entity-specific
information (See ESRS 1 AR 1 to AR 5) and may lead the undertaking to use estimates
and proxies.

2.2 Why does VC matter?

32. The CSRD and ESRS require that the sustainability statement include material
information about the upstream and downstream VC.
33. The reason for this is that the impacts, risks and/or opportunities deriving from impacts
or dependencies, of a reporting undertaking often occur in its upstream or
downstream VC rather than in its own operations. Therefore, focusing on own
operations would provide only a partial picture of the impacts on people and the
environment connected to the undertaking’s activities, products and services.
Furthermore, this would not allow for an appropriate identification of risks and
opportunities. Consider the following examples.

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(a) A EU garment and apparel company sells basic T-shirts produced in a country
outside the EU by an external supplier and reports under ESRS. The company may
pay its employees an adequate wage under collective bargaining agreements for
its operations in the EU. However, assuming that the external supplier is based in a
country outside the EU where the remuneration paid to the supplier’s employees
is below the adequate wage benchmark for the country and freedom of association
in that country may not be allowed, the reporting undertaking would not provide
a relevant depiction of its impacts if it was to consider only its own employees when
determining the scope of its actual and potential material negative impacts. In
other terms, material impacts on working conditions may be identified within the
workforce in its upstream VC (for this particular supplier).
(b) With a supplier of wood, a European retailer makes toys in a factory outside the
EU, where legal requirements are less stringent. The toy-making process has
several environmental and health and safety risks, due to dust and chemicals. There
is therefore a significant risk that the workers and the local communities are
exposed to severe occupational hazard exposures and health risks – important
when considering impact materiality. From a financial materiality perspective, if the
officials in that location start upholding laws rather than accepting bribes as is
currently the case, it could result in significant fines, possibly even closure for the
manufacturer. This could have a direct and significant financial impact on the
European retailer.
(c) An electronics producer may have processes in place to control and minimise the
packaging and other waste from its own operations, but its products may create
electronic waste which may in turn be hazardous to animals and wildlife when
discarded. This aspect is connected to the undertaking’s downstream value chain,
i.e. to impacts deriving from the end use of its products.
(d) As highlighted by Carbon Disclosure Project (CDP), Scope 3 GHG emissions are
expected to be material for many or most undertakings.

2.3 From own operations to value chain

The reporting group as a starting point
34. ESRS 1 paragraph 62 states: ‘The sustainability statement shall be for the same
reporting undertaking as the financial statements.’ In the Accounting Directive, a
group is defined as ‘a parent undertaking and all its subsidiary undertakings’. As this is
derived from financial reporting, sustainability professionals should obtain assistance
from the financial reporting function to understand the implications that this has for
the ESRS sustainability statement.
35. Sometimes subsidiaries are not included in the financial reporting consolidation on
the basis of materiality, for practical reasons. Such subsidiaries may still have material
sustainability matters that need to be reported in the consolidated sustainability
statement. Therefore, the materiality of their IROs need to be evaluated as well. Please
refer to IG 1 Chapter 5.2 FAQs on financial materiality for insights into these for the
purpose of the sustainability statement.
Internal or intragroup transactions
36. For sustainability reporting purposes, groups must include information about material
IROs of the subsidiaries. The elimination of internal transactions in the preparation of

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consolidated financial statements has no implications for the identification of IROs. The
underlying impacts that occur in the group’s operations are in scope of the reporting,
when material, as well as the ones identified in the VC. For example, the impacts from
the emissions from transport, even if not for external sales, do not disappear merely
because they relate to an internal/intragroup transaction. Therefore, groups should
consider IROs related to internal transactions where appropriate.
Joint arrangements
37. For undertakings that apply IFRS, effective since 2013, IFRS 11 Joint Arrangements
changed the financial reporting treatment under IAS 31 Interests in Joint Ventures as
follows:

38. This means that rather than proportional consolidation, for joint operations, a joint
operator with joint control will recognise in relation to its interest in a joint operation:
(a) its assets, including its share of any assets held jointly;
(b) its liabilities, including its share of any liabilities incurred jointly;
(c) its revenue from the sale of its share of the output arising from the joint
operation;
(d) its share of the revenue from the sale of the output by the joint operation; and
(e) its expenses, including its share of any expenses incurred jointly.
39. This means that its assets and liabilities forming part of the financial perimeter are own
operations rather than value chain.

Operational control
40. For certain environmental matters, ESRS refer to the concept of ‘operational control’
to identify situations where information about IROs of a site, an asset or an entity under
operational control but outside the financial control perimeter have to be reported.

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Operational control – definition

41. In alignment with the GHG Protocol, ESRS include the concept of operational control,
which is defined in Annex 2 of the Delegated Act as the situation where ‘the
undertaking has the ability to direct the operational activities and relationships of the
entity, site, operation or asset’. The GHG Protocol adds that this is where the
undertaking has the full authority to introduce and implement the operating policies,
which often implies also executing such operations.
42. AR 40 of ESRS E1 also explains, in the context of GHG emissions, that this happens
‘when the undertaking holds the license - or permit - to operate the assets from these
associates, joint ventures, unconsolidated subsidiaries (investment entities) and
contractual arrangements.’
43. Operational control may also apply where the undertaking is legally recognised under
certain regulations (for example the EU Emissions Trading system) as an ‘operator’2 of
a facility. This implies specific legal rights and obligations.
44. The GHG Protocol (page 18) also emphasises that operational control does not mean
that an undertaking necessarily has authority to make all the decisions concerning an
operation. For example, large capital investments may require approval of all partners
that have joint financial control. Not having the authority to make all decisions
concerning an operation does not affect the determination of operational control.
45. There is no definition of ‘operations’ in the CSRD or the ESRS. On Page 23 of the GHG
Protocol reads, as follows: ‘The term “operations” is used here as a generic term to
denote any kind of business activity, irrespective of its organizational, governance, or
legal structures.’
46. Assessing whether operational control exists depends on the undertaking’s specific
facts and circumstances, including the sector(s) where it operates, and on the types of
contractual relationships prevailing in that sector(s).
Operational control – ESRS E1, GHG emissions
47. Under ESRS E1, Scope 1 and 2 GHG emissions shall include, in addition to the
emissions of the parent and its subsidiaries, also the GHG emissions of sites, assets and
entities under operational control, as a separate line item.
48. Supplementing the definition in Annex 2 of the Delegated Act, ESRS E1 paragraph 46
focusses on the treatment of entities related to the reporting group (such as associates,
joint ventures and joint arrangements not structured through an entity) under
operational control. The treatment means that the reporting is accountable for 100%
of the relevant emissions rather than the relevant equity holding.

2 As explained in the GHG Protocol on page 21: ‘Since compliance responsibility generally falls to the operator
(not equity holders or the group company that has financial control), governments will usually require reporting on
the basis of operational control, either through a facility level-based system or involving the consolidation of data
within certain geographical boundaries (e.g. the EU ETS will allocate emission permits to the operators of certain
installations).’

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49. ESRS E1 AR 40 clarifies the definition in Annex 2 whereby the undertaking shall include
100% of the GHG emissions of the entities it operationally controls in its disclosures. It
provides an example whereby, when an undertaking has a contractually defined part-
time operational control, it shall consolidate
100% the GHG emissions emitted during the
Targets and operational control
time of its operational control.
ESRS E1-4 requires transparency about
50. This means that the reported GHG emissions
the reporting undertaking’s targets for its
will reflect the terms and conditions of the
emissions. If the undertaking does not
relevant agreements. For example, when the
set targets for assets, sites or entities
reporting undertaking is the operator of the
under its operational control (as it does
activities during a certain phase of the
not have control over the investment
production process and its partner is the
budget to reduce emissions), the
operator in another phase, the reporting
disclosure will reflect the target(s) as
undertaking would report in its scope 1 and 2
defined, i.e. only for the consolidated
the GHG emissions that pertain to the phase group. However, the disclosure should
that it operationally controls. be clear about the scope of the target(s).
51. ESRS E1 (paragraph 50 (b)) requires disclosing
the Scope 1 and 2 emissions of undertakings
under operational control separately from the ones related to the consolidated group
(presented following ESRS E1 paragraph 50 (a)). The latter correspond to the outcome
of the financial control approach in the GHG Protocol. Please note that a literal reading
of paragraph 50(b) may make it seem as if this is only applicable to investees
(associates, joint arrangements and unconsolidated subsidiaries, etc.) under
operational control but this is not the intention. GHG emissions of entities, assets and
sites under operational control but without financial control (or without investment
relationship) will also be included in the disclosure under paragraph 50(b).
Furthermore, for IFRS preparers, any assets, including the undertaking’s share of any
assets held jointly in joint operations (defined in IFRS11) or its liabilities, including its
share of any liabilities incurred jointly in joint operations (defined in IFRS 11) will be
part of the balance sheet for financial reporting purposes, i.e., included in disclosures
under paragraph 50(a). In addition, where the reporting undertaking has operational
control over its joint operators’ (defined in IFRS 11) assets, the GHG emissions arising
from this will be included in scope 1 and 2 under ESRS E1 paragraph 50(b).
Operational control – Other environmental standards
52. ESRS E2-4 Pollution of air, water and soil also specifically includes those emissions from
facilities under the operational control of the undertaking. Similarly, ESRS E4
Biodiversity and ecosystems in paragraph 16(a) also includes sites under the
operational control of the undertaking.

Operational control – ESRS 2, Basis for preparation

53. ESRS 2 BP 1 (paragraph 5) requires that the undertaking discloses to what extent the
sustainability statement covers the undertaking’s upstream and downstream value
chain. When appropriate, the undertaking should describe whether operational
control was considered or not.

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Compatibility of ESRS E1 and the GHG Protocol

54. As described in paragraph 34 above, ESRS use a financial control approach while the
GHG Protocol allows for three possible reporting approaches. The disclosure of scope
1 and 2 under ESRS E1 paragraph 50(a) is aligned with the financial control approach
under the GHG Protocol. However, in order to provide further information, ESRS
requires separate disclosures about the emissions from items under operational
control (ESRS E1 paragraph 50(b)).
55. The intention of this step was to reduce the options under the GHG Protocol and to
thus improve comparability, while maintaining compatibility with the GHG Protocol, at
level of ESRS E1 paragraph 50 (a). The requirement to disclose emissions separately
from items that are not financially controlled but that are under the operational control
of the reporting undertaking provides a full picture of the impacts of the undertaking.
This additional disclosure requirement also recognises that the environmental
regulations often apply to the operator rather than the owner of assets.
56. ESRS E1 does not aim at requiring the full implementation of the operational control
approach under the GHG Protocol, as it maintains financial control as the primary
selected approach.
57. An undertaking is able to reconcile ESRS reporting with that under a GHG Protocol
operational control approach, by deducting the GHG emissions from those assets,
sites etc., that are under financial but not operational control from its total Scope 1 and
2 emissions under ESRS E1.

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Environmental reporting value chain decision tree

59. The following decision tree summarises some of the important aspects related to the
measurement of emissions of GHG in ESRS E1 and of pollutants in ESRS E2. The same
approach is also applicable in the preparation of the disclosure of the list of material
sites in ESRS E4 paragraph16:

Reporting undertaking
Parent plus subsidiaries (including all assets
recognised in the consolidated financial statements) and
the entity’s share of assets and liabilities in joint
operations.
ESRS 1 par. 62

+
Any other sites, assets, or undertakings (including associates or joint
ventures) under operational control?

Yes, I have operational control.

No, I do not have operational control.

Are these actors

Distinguish between emissions from own
in the value
operations (parent plus subsidiaries) disclosed
chain such as
per ESRS E1 par. 50(a) and include 100% of
suppliers or
GHG emissions it operationally controls per
customers?
ESRS E1 AR 40 as a separate row per ESRS E1
par. 50(b).
Operational control mentioned in ESRS E2 and
E4.

For ESRS E1 and E2 metrics, include Yes.

them as VC metrics for the share of
impacts attributable to the reporting
undertaking’s products and services as
for other actors in the VC (ESRS 1
paragraphs 63 and 67 and ESRS E1 No, they are not actors in
paragraph 46) the value chain such as
suppliers or customers.
and
For ESRS E1 metrics: include as GHG Scope 3
For ESRS E1 metrics: include GHG emissions category 15 ‘Investments’ if
Scope 3 emissions category 15 significant (ESRS E1 paragraph 44(c), AR
‘Investments’ if significant (ESRS E1 39(a), AR 46 and AR 48).
par. 44(c), AR 39(a), AR 46 and AR 48).

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Operational control does not apply to Social standards

60. Definitions used in ESRS S1 Own workforce and S2 Workers in the value chain focus on
the contractual arrangements between the workers and the undertaking. Similarly, the
basis for ESRS S3 Affected communities and S4 Consumers and end-users is the
relationship of these stakeholders with the reporting entity.
61. Operational control is not relevant to these standards.

Including value chain information

62. The information about material IROs of the parent and subsidiaries is ‘extended’ in
order to cover VC information. This is defined in ESRS 1 paragraph 63 as information
on the material IROs connected to the undertaking through its direct and indirect
business relationships in the upstream and/or downstream value chain. This may
include associates and joint arrangements where they are also actors in the value chain
of the reporting undertaking, such as when they are customers or suppliers as
described below.
63. Value chain information is part of the sustainability statement in the following three
aspects:
(a) the materiality assessment – please refer to Chapter 3 FAQ 3 How should the MA
process be organised to properly capture material IROs in the VC?
(b) the description of whether (and if so, the extent to which) the reporting
undertaking’s policies, actions and targets cover its VC - please refer to Chapter
2.5 Coverage of the VC for PAT.
(c) metrics related to the VC - please refer to Chapter 2.6 Coverage of the VC for
Metrics.

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Specific group situations: associates and

joint arrangements Purchase transactions with an
64. Accounting frameworks generally have associate
specific treatments for certain investees, such An undertaking, P, produces chairs
as associates and joint ventures, to signify a with wood sourced from another
difference in relationship compared to when undertaking that is classified as an
one has control from a financial reporting associate (A) for its financial reporting.
perspective resulting in a parent/subsidiary P holds an equity share in A of 30%. P
relationship. However, the starting point for buys 10 tons of wood from A to
ESRS reporting is not equity accounting or produce its chairs. P will treat A in the
proportional consolidation, as one may find same way as any other supplier when
under financial reporting. considering the impacts connected
65. ESRS 1 paragraph 67 states that when with the wood purchased from A.
associates or joint ventures are part of the Therefore, in this case, the impacts
undertaking’s VC, for example as suppliers or related to the 10 tons of wood
customers, the undertaking shall include purchased (i.e. impacts that are directly
information required by ESRS 1 paragraph 63 linked to the undertaking’s products
consistent with the approach adopted for the and services through its business
other business relationships in the VC3. relationships) rather than limiting its
Furthermore, when determining impact impacts to its equity share in A as a
metrics, the data in relation to the associates basis for estimating.
or joint ventures are not limited to the share
of equity held but shall be considered on the basis of the impacts that are directly
linked to the undertaking’s products and/or services through its business relationships
(ESRS 1 paragraph 67).
66. Where associates and joint ventures do not form part of the value chain as suppliers or
customers (also referred to as actors in the value chain), they are treated as
investments. Investments form part of the undertaking’s business relationships (as
defined). As such, they may give rise to impacts that are connected to the undertaking
and that are to be considered in the materiality assessment and reported when
material. However, topical ESRS do not have specific reporting requirements that
indicate how to measure these impacts, apart from GHG Scope 3 Category 15
disclosures where significant, in accordance with ESRS E1 paragraph 44(c), AR 39(a) as
explained in AR 46 and AR 48.
Other investments, no further transactions.
67. Business relationships with the investees may give rise to impacts that are connected
to the undertaking and that are to be considered in the materiality assessment and
reported when material. There are no specific requirements in topical standards on
how to measure impacts that are connected to the undertaking through its investments
without joint control and/or significant influence, meaning generally below 20%, apart
from GHG Scope 3 Category 15 disclosures as explained in paragraph 66.

3
This is not the case when operational control applies.

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Entity-specific disclosures
68. As explained in paragraph 69 below, in the cases above, apart from the materiality
assessment process, the undertaking may also have to provide entity-specific
information, i.e. more than the specified requirements in ESRS relating to the VC.

2.4 Which IROs in the VC are to be disclosed?

69. The two overarching requirements in ESRS 1 that are applicable here are:
(a) paragraph 63 requiring information on material IROs connected to the
undertaking’s upstream and downstream VC; and
(b) paragraph 11 requiring entity-specific information when a reporting undertaking
concludes that a material IRO is not covered sufficiently by an ESRS, to enable users
to understand such IRO. Such entity-specific information is expected to cover both
IROs in own operations and IROs in the upstream and downstream VC, when they
are material.
70. An impact may be material to the reporting undertaking if it arises in any part of the
VC, including at any tier of its upstream VC or supply chain. In this regard, in the IRO
assessment in the VC, the undertaking has to consider IROs that it may be connected
to through its own operations, products or services via business relationships (see also
IG 1 FAQ 2 What is meant by the undertaking being “connected” with an impact?).
71. The identification of IROs in the upstream and downstream VC is embedded in the
materiality assessment (ESRS 1, Chapter 3 – Double materiality) as the basis for
sustainability disclosure. For further information about materiality, please consult IG 1.

2.5 Coverage of the VC for Policies, Actions and/or Targets

(PATs)
72. To the extent that the undertaking has PAT in place that address VC actors, for material
IROs (including those in the VC), it should disclose this (ESRS 2 paragraphs 64(b), 67(b)
and 70(b)). Examples could include:
(a) policies to prevent and control pollution by its VC actors;
(b) policies against bribery and corruption for VC actors and training for them;
(c) actions and resources related to pollution as well as targets to reduce pollution
generated by a supplier (ESRS E2 Pollution AR 13 and 19);
(d) clauses regarding the respect of fundamental human rights in contracts with VC
actors;
(e) audits conducted on high-risk suppliers;
(f) selection criteria for new suppliers such as the existence of effective grievance
mechanisms or freedom of association; and
(g) targets for suppliers on sustainable material use for example X% recycled content
or X% less waste.
73. VC information coverage is also important for ESRS E1-1 paragraph 16(b), which
requires disclosing the decarbonisation levers identified by the undertaking in setting
its targets and defining its actions, including levers in the VC. This type of information

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is expected to be primarily needed in order to set and manage the targets and
implement the actions. Reporting is expected to use data existing for such purposes.
74. As a reminder, the undertaking can comply by disclosing that it has not adopted
policies and/or actions with reference to the relevant sustainability matter and provide
reasons for this. It may also report a timeframe in which it aims to adopt them (ESRS 2
paragraph 62). The same applies to targets (ESRS 2 paragraph 72).
75. In addition, the undertaking should always consider the need to provide entity-specific
information. Please refer to paragraph 69 (b) above.
76. In ESRS 4 Biodiversity and ecosystems, there are specific requirements dealing with
value chain information: ESRS 4-1 Transition plan and consideration of biodiversity and
ecosystems in strategy and business model, the topical specification ESRS 2 IRO-1
Description of processes to identify and assess material biodiversity and ecosystem-
related impacts, risks, dependencies and opportunities as well as ESRS E4-4 Targets
related to biodiversity and ecosystems (paragraph 32(c)). These do not necessarily
result in the need to collect VC data from actors in the VC solely for the purpose of
reporting. The undertaking is expected to leverage on information that is collected for
business purposes, e.g., E4-1 paragraph 13, E4 ESRS 2 IRO 1 paragraph 17(a), and E4-
4 paragraph 32(c).

2.6 Coverage of the VC for Metrics Disclosure Requirements

77. All ESRS DRs related to metrics cover only own operations except for:
(a) Disclosure Requirement ESRS E1-6 Gross Scopes 1, 2, 3 and total GHG emissions;
(b) Disclosure Requirement ESRS E1-7 GHG removals and GHG mitigation projects
financed through carbon credits; and
(c) entity-specific disclosures where the undertaking determines whether and, if so,
what VC information is required (see paragraph 79 below).
78. As described in the VC coverage map in Chapter 4 below, there may be qualitative
disclosures required under ESRS. A few examples are listed below:
(a) Disclosure Requirement ESRS E5-4 Resource inflows requires a description of
resource inflows where material which may include a description of the IROs in the
value chain (ESRS E5 paragraph 30). However, when disclosing the quantification
of materials used in the production of the undertaking’s products and services, this
relates only to own operations (ESRS E5 paragraph 31). The undertaking
determines whether additional information on the VC is needed on an entity-
specific basis.
(b) ESRS E5-4 paragraph 30 requires a qualitative description of the undertaking’s
resource inflows along the upstream value chain. ESRS E2-5 and ESRS E5-5 refer to
materials procured and used within the undertaking. While they do not explicitly
refer to value chain information, the impacts that arise from the upstream value
chain are indirectly covered by the description of the procured material.

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(c) With reference to the social standards, ESRS S2

Affected communities suffer the
Workers in the value chain and S4 Consumers
consequences of the undertaking or
and end users cover the VC by definition. ESRS
its VC’s operations. However, they
S3 Affected communities addresses impacts on are not necessarily an actor in the
communities affected directly by the VC. For example, an affected
undertaking as well as by actors in the VC. community is an actor in the VC
These standards do not specify any metrics, but where it provides the land on which
the ESRS require the undertaking to consider the mining takes place.
entity-specific metrics, as explained below.
79. Beyond the specific provisions on metrics in the sector-agnostic ESRS, the undertaking
shall provide additional VC metrics information or integrate VC data into its metrics,
when according to the outcome of its materiality assessment, this is necessary from an
entity-specific perspective (ESRS 1 paragraph 11 and AR 1 to 5 read in conjunction
with ESRS 1 paragraph 65). In particular, ESRS require the undertaking to consider
appropriate entity-specific metrics needed for understanding of the impacts or
tracking the effectiveness of companies’ actions. Possible examples are the following:
(a) impact data of suppliers should be included in the reported metrics, when the
undertaking depends in its upstream VC or supply chain on activities that have a
high impact on the environment;
(b) the percentage of workers in value chains in high-risk areas covered by social
security schemes; and
(c) the percentage reduction in health and safety incidents compared to incidents in
the prior period or as compared to a base period where the quality of the
information can be assured.
80. It is important to note that this is relevant only for those activities of VC actors that are
associated with material IROs and not for all VC actors. Also, these disclosures are not
standardised, and the selection of the appropriate metric is in the purview of the
reporting undertaking while considering the needs of users and the qualitative
characteristics of information.
81. Sector-specific ESRS will cover the inclusion of VC data in the undertaking’s impact
metrics when relevant. In the transition period until the ESRS sector standards are
available, the undertaking as part of its entity-specific disclosures shall consider this
aspect and draw inspiration from the available best reporting practices (see ESRS 1
paragraph 131(b)).

2.7 How do the transitional requirements work?

82. The general transitional provisions in ESRS 1 from paragraph 130 onwards allow for a
temporary limit for the information on the VC to be reported during the first three years
of reporting under ESRS. Specifically, preparers are required to consider VC in their
materiality assessment, but the data gathering aspects, both for qualitative and
quantitative information, are limited in their first three years of reporting.
83. The transitional provisions are intended to provide reporting undertakings with more
time to prepare for the new reporting regime in case that not all the necessary
information regarding VC is available. The transitional requirements are optional, i.e.,
the undertaking can decide whether it wants to use them or not and they apply
regardless of whether the VC actor is an SME.

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84. The steps an undertaking can consider during this time may include:
(a) updating contracts with actors in the VC to reflect the status of new implemented
policies or target tracking, such as foreseeing the provision of periodic information;
(b) Stakeholder engagement and other enhancements to the materiality assessment;
(c) preparing technological infrastructure as well as other types of infrastructure
required for reporting; and
(d) improving knowledge about the structure of the VC, specific actors involved and
associated impacts and dependencies.
85. The transitional requirements (ESRS 1 paragraph 132) foresee that if not all the
necessary VC information is available during the first three years of the reporting
undertaking’s sustainability reporting under ESRS, the undertaking shall explain:
(a) the efforts it made to obtain the necessary information;
(b) the reason(s) why it could not obtain the necessary information; and
(c) its plans to obtain the necessary information in the future.
86. In addition, during the transitional period, reporting undertakings may limit
information to in-house data (such as data available to the undertaking and publicly
available information) to disclose information on policies, actions and targets for the
VC (ESRS 1 paragraph 133 (a)).
87. In addition, with reference to metrics, the undertaking is not required to include
upstream and downstream VC information, except for datapoints derived from other
EU legislation, as listed in ESRS 2 Appendix B (see ESRS 1 paragraph 133 b)) during
the transitional period.
88. Starting from its fourth year of reporting under ESRS, the undertaking shall comply with
ESRS 1 paragraph 63 (ESRS 1 paragraph 135) as explained in this document.
89. In addition to the transitional provisions described above, Appendix C of ESRS 1
specifies that for ESRS E1-6 Gross Scopes 1, 2, 3 and Total GHG emissions,
undertakings or groups with less than an average of 750 employees at balance sheet
dates, may omit datapoints on Scope 3 emissions and the total GHG emissions for the
first year of preparation of their sustainability statement. Similarly, the disclosure
requirements for ESRS S2 Workers in the value chain, ESRS S3 Affected communities
and ESRS S4 Consumers and end-users may be omitted for the first two years by
undertakings that have 750 or less employees during the financial year.

Transitional provision with respect to entity-specific disclosures

90. The provision of entity-specific disclosure under ESRS 1 paragraph 11 is not optional
in the first three annual sustainability statements. It is mandatory. In the first three
annual sustainability statements, when the reporting undertaking is defining its entity-
specific disclosures, it may as a priority:
(a) include disclosures it previously reported (where these meet the qualitative
characteristics of information per Chapter 2 of ESRS 1); and
(b) add disclosures to cover those material sustainability matters in its sector(s) using
the available best practice and/or available frameworks (such as IFRS or GRI sector-
specific requirements).

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91. The transitional provision related to value chain (paragraphs 132 to 135 of ESRS 1)
covers also the VC information to be covered by entity-specific disclosures. There is no
three-year transition with respect to entity-specific disclosures that do not include the
VC. Given that entity-specific disclosures may trigger the inclusion of VC information,
the transitional provision applying to entity-specific disclosures (ESRS 1 paragraph
131) is also relevant here.

2.8 What is the LSME cap and does it impact one’s disclosures?
92. Article 29b (4) of the CSRD limits the VC information that the ESRS shall require
undertakings in the scope of the CSRD to obtain from small- and medium-sized
enterprises (SMEs) for their reporting under ESRS. ESRS may not require disclosures
which will result in reporting undertakings having to request information from the
SMEs in their VC (either listed or not listed) if such information goes beyond the
disclosures required in the listed SME (LSME) ESRS.
93. This limitation is often referred to as the ‘LSME cap’ and it aims at limiting the burden
for SMEs and to embed proportionality in the ESRS.
94. The LSME ESRS are still under development and are expected to be finalized by
EFRAG in December 2024.

3. Frequently asked questions (FAQ)

95. This chapter provides further practical guidance on the VC principles described in the
previous chapter.

FAQ 1: Where does the VC begin and end?

96. ESRS requires the undertaking to identify and assess material IROs across its entire VC
from a double materiality perspective. In this regard:
(a) relevant impacts are defined as those that are connected to the undertaking, which
includes when they are either caused by or contributed to or that are directly linked
to the undertaking’s operations, products or services through a business
relationship. The relevant impacts are not ringfenced by proximity or contractual
relationship, but by the fact that they occur in connection to the processes at any
stage of the VC that contribute to the undertaking’s operations, products or
services, or that result from the use or end-use of those products or services.
Conversely, the impacts of actors in the value chain not connected to the
undertaking’s operations, products and services are outside of the scope of impact
materiality (see also IG 1 FAQ 2 What is meant by the undertaking being
‘connected’ to an impact?); and
(b) relevant risks and opportunities are those attributable to business relationships, in
particularly with actors in the VC that are beyond the scope of consolidation used
for the preparation of financial statements for financial materiality (ESRS 1
paragraph 49).
97. To assess potential and actual impacts, it is important that the undertaking identify in
particular:
(a) the location and characteristics of suppliers including beyond the first tier of their
upstream VC or supply chain;

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(b) the users of their services and goods;

(c) how the goods are treated in terms of waste at the end of their life; and
(d) who may be affected by their services and goods.
98. See FAQ 7 How to assess and quantify the impacts of the VC resulting from business
relationships? below for recommendations on how to organise the processes to
identify and assess material impacts across the VC.
99. To assess risks and opportunities, the undertaking considers its own dependencies on
natural, human and social resources. The undertaking identifies potential changes in
the availability, price and quality of such resources, which are sources of risks and
opportunities, including those stemming from its upstream and downstream VC. The
following three examples illustrate this concept.
(a) A company has a tier-1 supplier, that provides it with the main components of its
final products, in a region with water scarcity. To provide the components, the
supplier needs minerals from a mining company which is heavily dependent on a
supply of water. As such, this supplier would be at risk if one of the mines was no
longer able to access sufficient water from its existing sources. Consequently, the
supplier may face physical risks in the future due to the water scarcity in the region,
which could lead to operational disruptions and increased costs. This situation
could lead to discontinuities in the supply of steel with disruptions in production;
(b) If the buying price does not cover the cost of a product bought, it may increase the
pressure on the working conditions for the suppliers. If the purchasing department
of the reporting entity does not understand lead times or ignores lead times when
ordering this, could have a negative effect on the workforce of their contractual
partners in terms of overtime, accidents or use of forced labour;
(c) A company active in the food sector needs to be constantly supplied with natural
key inputs (such as flours). One of its main suppliers is active in a region at high risk
of biodiversity loss and following the request by local authorities to restore
damaged habitats it has a more variable production of key natural inputs and
higher production costs. This situation could lead to disruptions in the supply of
key natural inputs, creating consequences for the production of the company
active in the food sector. Active spot markets with delivery close to the company
may alleviate the risk of disruption but may have implications for pricing.

FAQ 2: Are financial assets (loans, equity and debt investments)

considered business relationships that trigger VC information?
100. Yes- business relationships and VC, as defined in Annex 2 of the July 2023 Delegated
Act does not exclude any types of activities or business relationships.
101. ESRS 1 AR 12(b) explains that where the reporting undertaking provides financial loans
to another enterprise that ultimately results in the contamination of water and land
surrounding the operations of such enterprise, this negative impact is connected to
the reporting undertaking by way of the relationship created by the loan agreement.
102. Per paragraph 66, for investments there is currently only a specific disclosure provision
under Category 15 of GHG emissions where significant under ESRS E1.

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103. EFRAG plans to work on the development of further draft standards or guidelines for
financial institutions, and on that occasion, specific solutions will be consulted on for
comments.

FAQ 3: How should the MA process be organised to properly

capture material IROs in the VC?
1. Basic principles
104. The materiality process is the process by which the undertaking determines material
information on sustainability impacts, risks and opportunities and this includes
information related to the VC, but not information on each and every actor in the VC.
Therefore, for the identification of impacts, risks and opportunities within the
materiality assessment, the undertaking should focus on the parts of its value chains
where material impacts are most likely to occur. In general, the starting point is the
assessment of impacts, although there may also be material risks and opportunities
that are not related to the undertaking’s impacts. As outlined in IG 1 Chapter 3 How is
the materiality assessment performed?, the undertaking should design a process that
is fit for this purpose, as required by ESRS 1 Chapter 3 and disclose it, per the
requirements set out in ESRS 2 IRO-1. An undertaking, shall design a process that is
fit for this purpose based on its specific facts and circumstances, factoring in
consideration of the depth of the assessment. This principle also applies to the value
chain.
105. The ESRS clarify that the materiality assessment process is informed by the due
diligence process (where relevant).

2. Materiality assessment steps

106. Guidance on the organisation of the materiality assessment process can be found in
IG 1 Chapter 3 How is the materiality assessment performed? As explained there
(emphasis added): ‘ESRS do not mandate how the materiality assessment shall be
conducted by an undertaking, or how the process should be designed. No one
process would suit all types of economic activities, location(s), business relationships
or value chains (upstream and/or downstream) of all the undertakings applying ESRS.
An undertaking, based on its specific facts and circumstances, shall design a process
that is fit for purpose considering the requirements of ESRS 1 Chapter 3, and what
needs to be disclosed regarding the materiality assessment and its outcome (see ESRS
2 IRO-1, IRO-2 and SBM-3). Therefore, the ESRS provide several aspects that an
undertaking takes account of when designing the materiality assessment process.’
107. With this caveat, IG 1 provides guidance for the general organisation of the MA
process. The guidance included below reflects how VC aspects can be considered in
the possible process.
Step A. Understanding the context
108. As explained in IG 1, the first step in the MA process is understanding the context in
which the undertaking operates. Therefore, the undertaking needs to understand its
VC in terms of the business actors involved, their size, the sectors or nature of their
activities, geographical locations, and processes. This is a starting point for the
identification of where IROs are likely to arise.

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109. The context also includes understanding the undertaking’s strategy and business
model and how they are connected to possible material IROs.
110. The strategy of the undertaking will influence its business model, which will focus on
its own operations but also include aspects around its upstream and downstream value
chain. All of this will be considered in its materiality assessment.
111. The undertaking can consider tracing or mapping its VC activities and actors to identify
whether and which parts of its value chains are in areas of heightened risks. In some
cases, if the undertaking does not have reliable information on the geographical
location of its VC (for example beyond the first tier), it may map the IROs associated
with global value chains for materials, products and services it uses or produces, to the
extent that they are relevant to its VC. For example, a chair manufacturer may use
products such as steel, wood, foam and fabric in its business. These raise questions
around the origin of their components (e.g. oil used to produce foam and cotton for
the fabric) and the transportation used to deliver them to the undertaking. Are there
any environmental (deforestation, biodiversity, water usage) or social issues (working
conditions, impact on communities) in the countries of origin of the components?
What are the sustainability matters pertaining to the consumers? Here the sales
channels may be relevant as well as the ability to re-use, re-cycle or up-cycle the
furniture at the end of its life.
112. As explained in the general instructions in IG 1, engagement with affected
stakeholders can support the assessment and validation of the impacts. The
undertaking should also identify (likely) affected stakeholders and consider engaging
with them. See also IG 1 FAQ 17 What is the role of silent stakeholders and how should
they be considered?
Step B. and Step C: Identification of actual and potential IROs as well as assessment
and determination of the material IROs
113. Identification and assessment of impacts can be challenging for those parts of the VC
where the undertaking is not able to trace materials and products. ESRS 2 paragraph
5 c) requires a description of the extent to which the disclosures cover the
undertaking’s upstream and downstream VC.
114. The undertaking should aim to gather reliable data from actors in its VC, when
inclusion of VC information is needed according to ESRS 1.65. If this is not possible
after having made reasonable efforts, it may rely as appropriate on sources of
secondary data. Secondary data include information such as publicly available reports
and studies, sector proxies, data from local, regional and national authorities,
newspaper articles, databases, etc. used to estimate the IROs where this provides
relevant and faithfully representative information.
Assessment of the involvement of the undertaking with the VC
115. The undertaking is required to provide a description of the material impacts, risks and
opportunities connected to it, as well as those that are directly linked to its operations
and services in its upstream or downstream value chain (ESRS 2 SBM-3 paragraph 48
(a)).
116. As explained in IG 1, FAQ 2 What is meant by the undertaking being ‘connected’ with
an impact? the undertaking may for instance be involved in a breach of labour
standards through its procurement and payment policies and practices, or even by
sourcing from suppliers with cases of labour rights abuse.

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117. The contribution to the impacts in the VC may concern direct business relationships.
However, the undertaking may find itself contributing to impacts that occur in more
distant parts of the VC. This may, for instance, be the case when the undertaking or its
direct suppliers are using commodities or components whose production is
associated with severe systemic impacts, such as palm oil or coltan. Similarly, the
undertaking may be contributing to impacts that result from the use of its products,
such as oil and gas derived from fossil fuels, plastics contributing to microplastics
pollution, cigarettes, or pesticides.
118. An undertaking can cause, contribute or be directly linked to an impact in the value
chain. Distinguishing the type of involvement is important given that it could lead to a
different assessment or categorisation of the negative impact.
Environmental topical standards on the materiality assessment
119. Environmental standards use the concept of life cycle or life cycle assessment, which
also covers value chain, in the context of the materiality assessment. In particular:
(a) ESRS E2 AR 18: ‘In order to assess materiality, the undertaking may consider
Commission Recommendation (EU) 2021/2279 on the use of the Environmental
Footprint methods to measure and communicate the life cycle environmental
performance of products and organisations’;
(b) ESRS E3 AR 14: ‘The undertaking may rely on primary, secondary or modelled data
collection or other relevant approaches to assess material impacts, dependencies,
risks and opportunities, including Commission Recommendation 2021/2279 on
the use of the Environmental Footprint methods to measure and communicate the
life cycle environmental performance of products and organisations (Annex I –
Product Environmental Footprint; Annex III – Organisation Environmental
Footprint)’;
(c) ESRS E5: the concept of 'life cycle’ is so important that it is part of the objective in
paragraph 3 and AR 6, which explain its use in assessing IROs in own operations
and the VC.

FAQ 4: How should information about the VC be disclosed in

the context of the materiality assessment?
120. The disclosure of information about the VC is required in two steps: as a component
of (i) the materiality assessment process and of (ii) the outcome of the materiality
assessment.

BP-1 – General basis for preparation of the sustainability statement

121. ESRS 2 paragraph 5(c) requires disclosing to which extent the sustainability statement
covers the undertaking’s upstream and downstream VC. Therefore, in addition to
metrics, this applies to all the steps listed below to the extent that material IROs arise
in the upstream and downstream VC.

SBM-1 – Market position, strategy, business model(s) and VC – ‘VC

mapping’
122. To provide an understanding of where in the undertaking’s VC material IROs may arise,
ESRS 2 paragraph 42(c) in SBM-1 requires the following in the description of its VC:

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(a) the main features of its upstream and downstream VC;

(b) the undertaking’s position in its VC; and
(c) the description of the main business actors and their relationship to the
undertaking, including:
(i) key suppliers,
(ii) key distribution channels, and
(iii) key customers and/or end users.
123. Identifying the key actors requires judgement to reflect the specific circumstances of
the undertaking’s VC and should involve consideration of both impact and financial
materiality criteria.
124. The mapping of the VC for material impacts is expected to use the sustainability due
diligence process when it is in place. However, the due diligence process may go
beyond such mapping per se as explained below, looking at the impacts throughout
the VC and identifying potential ‘hot spots’ by cross-referencing countries where
materials are produced to social and environmental risk databases (i.e., Type of impact
by Country by Actor in the VC). These hotspots may then be further investigated.

IRO-1 – VC considerations in MA
125. Subsequently, the undertaking shall describe its materiality assessment process,
including in relation to the VC, and the extent to which it may be informed by the due
diligence process.
126. ESRS 2 IRO-1 paragraph 53 (b)(ii) requires an overview of the process to identify, assess
and prioritise the impacts that the undertaking is involved in through its own
operations or because of its business relationships. Similarly, paragraph 53 requires
disclosing an overview of the process used to identify, assess, prioritise and monitor
risks and opportunities that have or may have financial effects, which may arise due to
the undertaking’s business relationships in the VC. In fact, the business relationships in
the upstream and downstream VC shall also be considered in the context of assessing
the materiality of risks and opportunities and not just for impacts (ESRS 1 paragraph
66).
127. A disclosure that meets these requirements could be structured as follows:
(a) the types of VC relationships that were considered in the materiality assessment;
(b) the methods that the undertaking used; and
(c) the sustainability topics that were evaluated.
128. For impacts, based on the initial mapping the undertaking may focus on areas where
actual or potential impacts could arise, which in turn reflect areas where negative
impacts are or could be severe. The undertaking will reasonably focus:
(a) on different types of business relationships and VC segments for different
sustainability matters; and
(b) on areas of heightened risk of adverse impacts, affected stakeholder engagement
and prioritisation based on criteria of severity and likelihood.

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129. For risks and opportunities, this should include how the process considered any other
factors in the VC that are sources of IROs, including dependencies on natural and
social resources.

IRO-1 – MA methods and assumptions

130. ESRS 2 IRO-1 requires information on methods and assumptions applied in the
materiality assessment (ESRS 2 paragraph 53(a)), including thresholds, to assess
materiality (paragraph 53(b)(iv)). This should account for any specifics related to the
VC. As per ESRS 2 BP-1, the undertaking should describe the extent of any limitations
on the materiality assessment process with respect to the VC.

SBM-3 – Disclosing the outcome of the MA

131. As a result of the materiality assessment, the undertaking shall disclose the material
IROs originating in its VC. ESRS 2 SBM-3 paragraph 48(a) requires disclosing ‘where in
its business model, its own operations and its upstream and downstream value chain
these material impacts, risks and opportunities are concentrated’.
132. The preparation of this disclosure may use evidence of impacts from the due diligence
process, such as the concentration of types of impacts by country or operational step.
133. ESRS 2 SBM-3 also requires describing the material impacts identified following the
materiality assessment process disclosed under IRO-1, specifying ‘whether the
undertaking is involved with the material impacts through its activities or because of
its business relationships, describing the nature of the activities or business
relationships concerned’ (ESRS 2 paragraph 48 (c)(iv)).
134. ESRS 2 paragraph 48(b) requires as well disclosure of ‘the current and anticipated
effects of [the undertaking’s] material impacts, risks and opportunities on its business
model, value chain, strategy and decision-making, and how it has responded or plans
to respond to these effects, including any changes it has made or plans to make to its
strategy or business model as part of its actions to address particular material impacts
or risks, or to pursue particular material opportunities’.
135. This implies that when strategically important hotspots for VC IROs have been
identified, ESRS 2 SBM-3 requires information about discussions of the impacts at the
relevant managerial level or governance bodies in charge (paragraph 48(b)).
136. The disclosures should be consistent with the corresponding information on whether
and how the VC was considered in the materiality assessment.
137. The information required by ESRS 2 SBM-3 paragraph 48(a)(b) (such as the effects on
and changes in the VC, the undertaking’s business strategy and how it responds or
plans to respond to those effects) should enable an understanding of the
undertaking’s basic ability to influence those IROs and any potential effects on the
undertaking.
138. When providing information required by ESRS SBM-3 on material IROs or PAT,
qualitative information may be sufficient (for instance, for human rights policies with
respect to the VC). However, quantitative information may be required to help users
understand impacts, their severity and their likelihood and/or to track the effectiveness
of actions to manage them.

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FAQ 5: How are investees treated under ESRS E1?

139. IG 2 refers to the terms associates, joint arrangements, joint operations, control, joint
control, investment entity, significant influence and joint ventures, having as a
reference the definitions per IFRS Accounting standards. Similar concepts exist in local
GAAP in EU countries, but the specifics may differ.
140. The table below illustrates the treatment of impacts arising from investments of the
undertaking depending on their accounting treatment in the financial statements.

Common Accounting treatment4 Measuring impacts by

characteristic(s) metrics in E1 standard

Subsidiaries Control (as defined in Include 100% of assets, Fully included (scope of
IFRS 10) – also referred liabilities, equity, consolidation is the
to in this document as income, expenses and same as financial
‘financial control’ cash flows5 reporting)

Associates Significant influence (as The investment is • operational control:

defined in IAS 28) recognised as a single GHG emissions to the
line item on balance extent of operational
sheet (cost adjusted for control (ESRS 1
post-acquisition changes paragraph 67).
in the investor’s share of • associates that are
net assets). The actors in the value
investor’s profit or loss chain
and other (purchases/sales with
comprehensive income the investing
include its share of the undertaking): impacts
investee’s profit or loss connected to the
and other undertaking’s
comprehensive income products and services
through transactions;
and / or
• associates with other
business relationships
(i.e., investees) as for
investments below.
Joint ventures Joint control (as defined
in IFRS 11) with rights to Same scenario as for
the net assets of the Same as for associates associates6
arrangement

Joint operations Joint control (as defined Recognise its assets, The assets/liabilities of
in IFRS 11) with rights to liabilities, revenue, the joint arrangement
the assets and expenses, including any recognised on balance

4 Please note that this is a very simplified description of the financial reporting requirements (and may differ
between IFRS and local GAAP standards used in European countries) and thus does not capture the nuances
involved in classifying investments. For the actual definitions and accountant principles, please refer to the legal
texts.
5
Except for an investment entity (as defined in IFRS 10) which shall measure an investment in a subsidiary at fair
value through profit or loss.
6 Operational control can also apply to assets under joint control. The related GHG emissions then reflects the terms
and conditions of the arrangement.

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Common Accounting treatment4 Measuring impacts by

characteristic(s) metrics in E1 standard

obligations for the share from items held sheet by the reporting
liabilities relating to the jointly undertaking form part of
arrangement own operations. In
addition, where the
reporting undertaking
has operational control
over its joint operators’
assets, these will be
included under E1
paragraph 50(b)
Investments All other investments (in Recognised at fair value; No specific indications in
the scope of IFRS 9) dividends in profit or ESRS E1 metrics on how
loss; changes in fair to measure impacts
value are recognised in connected with the
profit or loss or in other undertaking through its
comprehensive income investments (except for
category 15 of GHG
Protocol)

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FAQ 6: Reporting perimeter for ESRS E1 in practice

141. The following example of the corporate reporting of a fictional group, Seren, has been inspired in the GHG Protocol reporting
standard, pages 22 and 23.
142. Seren Group has a number of subsidiaries, joint arrangements and associates who are active in the production and marketing of
chemicals. Its group structure and investments are as follows:
(a) A wholly owned subsidiary, Seren UK. As Seren is the parent of Seren UK for financial reporting purposes, it also controls its
operational policies.
(b) A subsidiary called Seren US, which has 17% held by outside shareholders. Seren holds 83% of the shares.
(c) Seren US has a 75% stake in Pulsar, its subsidiary for financial reporting purposes. Ultimately, its operational policies are
determined by Seren (Seren has operational control).
(d) Galactica, a 50-50 joint arrangement between Seren US and Estrella classified as a joint venture under IFRS 11 Joint Arrangements.
Seren’s share of Galactica’s emissions are regarded as significant for the purposes of the GHG protocol. (Seren does not have
operational control).
(e) Seren holds a 43% stake in Sol, which it calls a joint venture with Alexa. However, Sol is classified as a subsidiary of Seren for
financial reporting purposes.
(f) Seren has joint control of Comet (33.3% stake) with two other parties. It is classified as a joint operation under IFRS 11. One of the
other joint operators has operational control. Seren’s share of emissions are regarded as significant. (Seren does not have
operational control).
(g) Seren has a 60% stake in Oril but share joint control with its partner. Oril is classified as a joint operation under IFRS 11, and Seren
is an operator of Oril. (Seren has operational control).
(h) Seren also has joint control of Cosmos with three other parties. Cosmos is classified as a joint venture under IFRS 11, with Seren
sharing the net assets of Cosmos. The emissions are regarded as significant. (Seren does not have operational control).
(i) Seren has joint control of Atom with another party. Atom is classified as a joint venture under IFRS 11, with Seren sharing the net
assets of Atom. In this case, Seren has operational control over Atom. (Seren has operational control).
(j) Nebu, an associate for financial reporting (IAS 28 Investments in Associates and Joint Ventures) where Seren has operational
control. Seren holds 29% stake. (Seren has operational control).

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(k) Seren holds 36% of Nova’s shares and has classified it as an associate for financial reporting purposes. Nova has control over its
own operations. (Seren does not have operational control).
(l) Seren holds 1% of Lumen’s shares. Seren’s share of emissions are regarded as insignificant (Seren does not have operational
control).
(m) Seren is the operator of Company X’s subsidiary, Asteri, in which Seren also holds 2.4%. (Seren has operational control.)
(n) Finally, Seren operates the Stea site owned by Company X. (Seren has operational control.)

143. The figure below depicts Seren Group, whereas the table following it sets out the reporting under ESRS and the GHG Protocol as well
as how these entities impact Seren’s profit before taxation.

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144. The GHG emissions reporting under the GHG Protocol and ESRS would be as follows.
GHG Protocol emission reporting6
Control of Operating profit under Equity
Interest Financial Operational
Entity operational Other details IFRS (financial share ESRS Comment
held control control
policies statements) approach
Wholly owned
a Seren UK 100% Seren 100% included 100% 100% 100% 100%
subsidiary Scope 1 or 2
b Seren US 83% Seren Subsidiary 100% included 83% 100% 100% 100% (E1 par.
Subsidiary of Seren 50(a))
c Pulsar 75% Seren 100% included 62.25% 1 100% 100% 100%
US
JV of Seren US with 50% included as income Scope 3
d Galactica 50% Estrella 41.5% 2 0 0 50% 3, 9
Estrella from JV Investment
e Sol 43% Seren Subsidiary 100% included 43% 100% 100% 100% Scope 1 or 2
Joint operation under Share of revenue/expenses (E1 par. 50
f Comet 33.3% Rain 33.3% 0 0 33.3%4
joint control from its assets/liabilities (a))
Joint operation under Share of revenue/expenses Scope 1 or
g Oril 60% Seren 60% 0 100% 100%
joint control from its assets/liabilities 25
Joint venture under Scope 3
h Cosmos 25% Other 25% as income from JV 25% 0 0 25% 9
joint control Investment
Joint venture under Scope 1 or 2
i Atom 50% Seren 50% as income from JV 50% 0 100% 100%
joint control (E1 par 50 b)
Associate, Seren’s 29% as income from Scope 1 or 2
i Nebu 29% Seren 29% 0 100% 100%
OC associate (E1 par 50 b)
Associate under IAS 36% as income from Scope 3
k Nova 36% Nova 36% 0 0 36% 9
28 associate Investment
Dividends and fair value
l Lumen 1% Quasar Subsidiary of X 0 0 0 0%7
changes
Revenues from activities as
Subsidiary of X, Seren
m Asteri 2.4% Seren operator and dividends 08 0 100% 100%
is operator (i.e. OC) Scope 1 or 2
etc.
(E1 par 50 b)
Site where Seren has Revenues from activities as
n Stea site - Seren 0 0 100% 100%
operational control operator

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 EFRAG IG 2: Value Chain Implementation Guidance

Legend:
1: 83% x 75.
2: 83% x 50.
3: Without transactions between Galactica and Seren, reported as Scope 3 category 15: 100% (reflecting control over Seren US) x 50.
4: Seren will reflect the emissions from its own assets and operations used in the joint operation.
5: Seren will reflect 60% of Oril’s emissions as own operations under paragraph 50(a) and 40% under paragraph 50(b) (operational control).
6: Grey cells come from GHG Protocol or are derived from it. For other colours, please refer to paragraph 146 below.
7: Regarded as not significant.
8: Accounted for as Scope 3 (Investment) proportionate to the stake in the company (2.4%).
9: Share of equity of Scope 1 and 2 of the GHG emissions of the investee.

145. On the previous page under ‘Comment’, where the cells are white, this reflects Scope 1 and Scope 2 emissions as per paragraph
50(a) of ESRS E1. Where the cells are yellow, these are Scope 1 and Scope 2 emissions as per paragraph 50(b) of ESRS E1, i.e., those
items not under financial control but under operational control. Lastly, the green cells reflect Scope 3 emissions.
146. On the previous page under ‘Comment’, where the cells are white, this reflects Scope 1 and Scope 2 emissions as per paragraph
50(a) of ESRS E1. Where the cells are yellow, these are Scope 1 and Scope 2 emissions as per paragraph 50(b) of ESRS E1, i.e., those
items not under financial control but under operational control. Lastly, the green cells reflect Scope 3 emissions.
147. With the yellow cells, the emissions will be reported by the owner under paragraph 50(a) of ESRS E1 as well as by the operator or
person with operational control under paragraph 50(b) of ESRS E1. Preparers may provide additional context about these emissions,
especially in the context of policies, actions and targets.

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FAQ 7: Numerical example of GHG emissions under ESRS E1

reporting
148. Company A is a global fashion company.
149. Company B is a producer of fabrics and has a GHG emissions total of 100,000 metric
tons (scope 1,2 and 3). How should GHG emissions be accounted for in Company A’s
consolidated sustainability statement in each of the following circumstances?
(a) A has operational control over B, and for financial reporting purposes Company B
is a subsidiary of Company A. Scope 1 and Scope 2 emissions of B amount to
90,000 metric tons7;
(b) A does has no investment in B and does not exercise operational control over B.
Company B is a supplier of fabrics, and 80% of the fabrics produced by Company
B are supplied to Company A. Therefore, A and B have sales/transactions with each
other. It is assumed that category 1 (emissions from purchased goods and services)
is significant for company A;
(c) Company A holds a 30% ownership share in Company B, and for financial
reporting purposes, is an associate of Company A. Company A does not have
operational control or transactions with B (i.e., only the investment in equity). The
Scope 1 and Scope 2 emissions amount to 90,000 metric tons, and it is assumed
scope 3 emissions category 15 (emissions from investments) is significant for
company A.
150. Company A would report the following in its consolidated sustainability statement with
respect to Company B in each of the above scenarios. Note that the scenarios are
independent from each other.

GHG emissions
Scenario Scope/Category ESRS reference
under ESRS E1

90, 000 metric tons Scope 1 or Scope 2 ESRS E1 par. 50(a)

a) Operational
control Scope 3 per category
10, 000 metric tons reflecting Company B ESRS E1
operations
Scope 3 Category 1:
b) Transactions ESRS 1 par. 67, E1 par.
80,000 metric tons emissions from purchased
(VC) 51
goods
c) Only Scope 3 Category 15:
27,000 metric tons ESRS E1 par. 51
investments emissions from investments

151. Please note that under any of the other environmental standards (e.g. E2 Pollution),
ESRS do not describe how to report under the third scenario.

7
The outcome would be the same even if Company A did not have operational control over Company B, as in
ESRS E1 the emissions of the subsidiaries are included irrespective of having operational control over them.

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FAQ 8: How should the impacts resulting from business

relationships be assessed and quantified?
152. As set out in IG 1 FAQ 10 Should the assessment of IROs rely on quantitative
information? where qualitative analysis is sufficient for the undertaking to reasonably
conclude that a matter is ‘not material’, adding quantitative information to the analysis
would not bring much value to the materiality assessment, where the undertaking has
this data due to its sustainability and management practices as well as its engagement
with suppliers.
153. The materiality assessment regarding the upstream value chain may be validly
conducted by large undertakings without direct information from specific suppliers.
Undertakings reporting under the sector-agnostic standards may typically conduct the
assessment using average regional or sector data to characterise the areas of potential
impacts and risks associated with their value chain.
154. As mentioned above, the materiality assessment process evolves over time, and the
undertaking may be redefining the balance between qualitative and quantitative
information. Please refer to IG 1 Chapter 3.6 Deep dive into impact materiality – Setting
thresholds.
155. For the materiality assessment and for the inclusion of VC data required by metrics
(such as for Scope 3 GHG emissions and other entity-specific disclosures when
appropriate), the undertaking may either obtain information directly from actors in its
VC, use estimates or proxies, or combine both approaches.
156. Obtaining information directly is the most appropriate approach in certain cases, for
instance, for major tier 1 suppliers (the direct and substantial contractual relationship
is a good basis for organising appropriate flows of data) or for customers of products
and services, in particular when they are end users (the undertaking knows the
parameters of its products and services). When this is the case, the undertaking may
need to ask its suppliers and other relationships for information enabling the
quantification of the impacts. The undertaking may use questionnaires, surveys and
audits to obtain the information. Its buying power and overall contractual influence
may help in this regard.
157. It should be noted that the more severe the impact, the stronger the incentive to omit
such sensitive information, and this could impact the reliability of the information
provided by such supplier. This may be particularly relevant for incidents of child or
forced labour in the VC.
158. Apart from this issue, the reliability of information directly obtained from the VC may
improve over time since VC actors may not be able to quantify their impacts yet but
may be in the position to do so in the future, given the evolution of sustainability
reporting. Therefore, supporting such actors to set up effective systems may be
important. It may also be advisable to engage with them and, where relevant, to also
encourage them to do the same with their value chains.
159. Generally, the effort placed on actors in the VC should be proportionate and, as
mentioned above, undertakings do not have to report on each and all value chain
actors.
160. As set out in ESRS 1 paragraph 69 and further explained under FAQ 9 How can
estimates about the VC be developed? the undertaking shall estimate the impact when
it cannot collect the necessary data with the required reliability after reasonable effort

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when necessary. Estimates and proxies may be used in combination with information
obtained directly as well as when quantification is required. Using estimates, like in
financial reporting, is acceptable if organised under a process designed to comply
with the qualitative characteristics of information expected from sustainability
information. Estimates and proxies may currently be the only available solution to
quantify impacts in certain cases due to the unreasonable efforts required to collect
data. Examples include tier 2 or tier N suppliers; tier 1 suppliers when they are
excessively high in number; and customers when they are not end users (e.g., when
the undertaking delivers products or services that are further transformed before
contributing to the delivery of products and services to the end users).
161. An example where obtaining primary data may not be possible and estimates may be
used is a beverage company that advises its drinks to be served cold, i.e., by using
refrigeration capacity, and it has determined energy use as a material matter. This
undertaking would find it impossible to precisely measure its impact with each and
every customer. However, from its materiality assessment, it assesses that electricity
use is a significant part of its impact in the downstream VC. In this case, estimating its
impact would involve considering variables such as volumes sold, the average time in
which the inventory will be cooled before consumption and an estimate of the average
electricity used to cool its products on a unit basis. This may need to also consider the
location and related prices. Depending on its assessment of the materiality of
electricity use, the undertaking may want to provide a sensitivity analysis of its
electricity use depending on reasonably possible changes in the important variables
in its calculations. Proxies are often available at sector or product level. In all cases, the
undertaking shall clearly explain the basis for its estimates and the proxies used as well
as any factor affecting their consistency over time.
162. ESRS 2 paragraph 10 requires the undertaking to disclose the metrics that include VC
data estimated using indirect sources, including the basis for preparation, the resulting
level of accuracy and the planned actions to improve accuracy in the future.

FAQ 9: What is ‘reasonable effort’ to collect VC data?

163. When inclusion of VC information is necessary under ESRS 1 paragraph 63 or on an
entity-specific basis, a reporting entity collects information about its upstream and
downstream VC only to the extent that this is compatible with a reasonable effort
(ESRS 1 paragraph 69) for use in its sustainability statement. In all other circumstances,
it shall estimate the missing information based on ‘all reasonable and supportable
information that is available to the undertaking at the reporting date without undue
cost or effort’ (ESRS 1 paragraph AR 17). This includes estimates, sector-average data
and other proxies. For example, an undertaking could use country and/or sector-
statistic-based risk assessment data. If more details are known, such as the specific
location of farming and manufacturing processes, more specific data may be made
available. Also refer to paragraph 160 on the need to comply with the quality of
characteristics requirement.
164. The undertaking should determine the best available way to prepare meaningful VC
information and dedicate proportionate resources once the degree of difficulty has
been properly assessed.
165. As explained above, the undertaking should report on material IROs in its own
operations and in its upstream and downstream VC. In this context, putting the
appropriate processes in place is a matter of management decision, internal
organisation and allocation of resources. ‘Reasonable effort’ and ‘undue cost or effort’

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relate to the processes put in place by the undertaking to collect VC information and
the amount of resources dedicated to these processes. ‘Reasonable effort’ cannot be
an excuse for not disclosing. ‘Reasonable effort’ and ‘undue cost and effort’ depend
on facts and circumstances specific to the undertaking. On the basis of FAQ 7 above,
using free and publicly available information may in some cases be considered a
reasonable effort. In determining whether an action is beyond ‘reasonable effort’
and/or beyond ‘undue cost and effort’, the undertaking shall balance the reporting
burden of obtaining direct data and the potential lower quality of the information
resulting from not undertaking that action. The estimation procedures adopted by the
undertaking when direct data are not used are subject to ESRS 2 paragraph 10.
166. For VC data, a good starting point is a deep understanding of what, where and how
inputs for its products and/or services are sourced upstream and/or what, where and
how its products and services are brought to market downstream.
167. ESRS 1 paragraph 68 indicates that the undertaking’s ability to obtain VC information
may vary depending on factors such as its contractual arrangements, the level of
control it may exercise beyond the consolidation perimeter and its buying power.
Therefore, there are cases where obtaining the information may be more challenging.
In such cases, the undertaking may use other sources of information. For example, an
undertaking may have a major exposure to forced labour because it is getting
significant volumes of agricultural commodities and products from jurisdictions where
forced labour in agriculture has been documented by the ILO (the International Labour
Organisation) and the FAO (the Food and Agriculture Organization of the UN). For the
materiality assessment, it is not necessary for the undertaking to change practices and
estimate the number of cases of child or forced labour in its value chain. What is
important is that it has enough information to conclude that the impacts are severe
(based on scale, severity and irremediability).
168. Similarly, undertakings calculating their full environmental footprint may use estimates
not only because it would be unreasonable to get primary data but also because such
data would not be reliable.
169. In the context of materiality assessment, the focus on the VC and VC information
should be where the undertaking is expected to have a severe negative impact (on
people and the environment). This means that general impact assessments could be
useful for the initial work on collecting VC information. Examples include general
information about the undertaking’s region or sectors of sourcing. For example, where
an undertaking is sourcing its products mostly indirectly from Country A and Country
B, it may look at available general information about the minimum wage in those
countries when considering its social impacts. In Country A, the minimum wage is
generally 100% to 120% of the living wage, but in Country B the minimum wage is less
than 80% of the living wage. Therefore, the exposure to significant impacts is more
likely in Country B, all else being equal.
170. For its own governance as well as for purposes of an audit trail for its assurance
provider, it would be good for the undertaking to document its efforts, the outcomes
of these and how the information has been incorporated in its reporting process. (Refer
also to IG 1 FAQ 12 Should the materiality assessment be documented/evidenced?)

FAQ 10: How can estimates about the VC be developed?

171. As discussed in paragraph 28 above, primary VC information is not required for all
disclosures in the sustainability statement. Where the undertaking determines that VC

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information is required and primary data (i.e., directly collected from the actor in the
VC) is not available after making reasonable efforts, estimated data can be used.
172. In estimating the missing information, ESRS require using internal and external
information. Such estimates can be used either for assessing material IROs or for
disclosing metrics in the VC, as outlined in ESRS 1 Chapter 5.2. When assessing
material IROs in the VC, a combination of primary data (i.e., directly collected from the
actor in the VC) and estimated data (using secondary data as input) can be employed.
173. Secondary data include data from indirect sources, sector-average data, sample
analyses, market and peer groups data, other proxies and spend-based data.

Examples of external data sources 174. The adjacent text box lists some sources
of such data. Some of these require a fee and
• Academic institutions such as the are provided as examples, but ESRS do not
Environmental Performance require the use of fee-based external sources.
Index These are examples of external sources that
• Government bodies such as the help address environmental, social and human
European Social Progress Index rights as well as corruption matters.
of the European Commission and
the US Department of State’s 175. It is difficult to collect VC information
Social Progress Index necessary to produce the relevant disclosure
• ILO social protection by country about impacts caused by indirect business
• Non-profit organisations such as relationships where the undertaking does not
the World Justice Project and have a direct contractual relationship and
other NGOs enjoys less leverage. If the undertaking cannot
collect the necessary data after making
reasonable efforts to do so, the undertaking may then need to rely on data from
indirect sources, like sector-average data, sample analyses, market and peer groups
data, other proxies, etc. For example, for VC workers extracting commodities used as
components of the undertaking’s products, the undertaking may be able to arrange
site audits. However, if those actions to obtain primary data and information are not
possible after reasonable effort, the undertaking may rely on sector or country data
estimating those impacts (e.g., negative impacts on safety, health; risk of child labour;
etc.) in the location of the mining activities.
176. Disclosing quantitative measures of indirect impacts does not produce relevant
information about the undertaking’s impacts in all circumstances. Consider a
manufacturer of bike parts who uses steel in its products and therefore has an issue
with pollution generated by its steel production. It is theoretically possible to estimate
the volume of pollution/quantify the environmental footprint, as some have done.
However, this may not be necessary and would not be conducive to relevant
information, as it would fail to disclose on the undertaking’s contribution to mitigating
the pollution that derives from its products. The undertaking could instead measure its
performance in terms of ESRS E5 metrics on circular economy.
177. When a reporting entity does not have data received directly from VC actors after
making reasonable efforts, it shall estimate the information to be reported using sector
data or similar data as a starting point (ESRS 1 paragraph 69). Examples include Scope
3 emissions or living wage data on facilities in very high-risk countries, including
beyond the first tier of business relationships.
178. As set out in AR 73 of ESRS S1 Own workforce, the WageIndicator is indicated as a
potential source (along with others) for calculating adequate wage benchmarks
outside the EEA as the last option in the hierarchy. The WageIndicator provides

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information about minimum and living wages for more than 200 countries, which could
be an example of applicable benchmarks as referred to under ESRS S1-10 Adequate
wages. Undertakings can use this information to explain prioritisation of actions and
targets in specific countries or regions for both own workforce and workers in the VC.
The information from such sources could become part of the undertaking’s
explanation under ESRS 2 SBM-3 on how it identified and assessed material IROs. The
exact living wages may differ in certain facilities and are dependent on the composition
of the worker’s family; however, these sources can be useful in the context of the
materiality assessment. Once wage has been identified as a material risk, more
accurate data may be needed to set targets and to report on progress.
179. Where deemed relevant, undertakings need to consider that setting up a reliable data
collection system which includes VC partners takes time. They may consider processes
and controls to collect the data and report the information. The quantity and quality of
VC information is likely to improve over time, but until then sector data or similar
sources can be a good starting point. As mentioned in paragraph 28 above,
information about each and every actor in the VC is not required.
180. The use of appropriate estimates or proxies is critical for the quality of reported
information. The origin of the data may influence the quality of the information
provided in the sustainability statement. Therefore, transparent disclosure and
explanation of the use of estimates are essential.
181. ESRS 2 BP-2 paragraph 10 requires preparers to:
(a) identify the metrics for which estimates are used;
(b) describe the basis for preparation;
(c) describe the resulting level of accuracy; and,
(d) where applicable, describe planned actions to improve accuracy in the future.

FAQ 11: Is a case of bribery not involving an employee relevant

for the reporting entity?
182. Consider a case where Q, an employee at a customer (XYZ) of the reporting
undertaking (ABC), was found to have been bribed by S, an employee at one of XYZ’s
suppliers. In this case, ABC would not have to disclose this under the metrics of ESRS
G1-4 as an employee of the reporting undertaking is not involved in the case, as
explained in ESRS G1 paragraph 26. However, ABC would consider this information
when it considers the risks around corruption and bribery in the sector/geographical
area going forward.

4. VC coverage map
183. The table below maps the disclosure requirements in the sector-agnostic ESRS and
that cover the VC.
184. The VC coverage map of Set 1 shown below does not include disclosures that fall
under entity-specific disclosures mandated under ESRS 1 paragraph 11. It is the
responsibility of the undertaking to determine whether entity-specific VC information
is required to offer users an understanding of the undertaking’s material IRO’s and/or

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to meet the qualitative characteristics of information per Appendix B of ESRS 1

(paragraph 65 of ESRS 1)

VC coverage map of ESRS Set 1

Level of VC coverage Disclosure Requirements with this level of VC coverage
1. The undertaking shall assess its material IROs across its VC. IRO-1
2.The undertaking shall describe its VC. SBM-1◘
3.The undertaking shall describe its material IROs and report where in the VC they arise SBM-3◘
4.The undertaking shall reflect BP-1/2◘, E1-2 to E1-4 E4-1 to E4-4, S2-1 to S2-5 G1-1,
whether and how policies, actions or SBM-2, E2-1 to E2-3, E5-1 to E5-3, S3-1 to S3-5 G1-2,
targets (PAT) cover VC.
GOV-4/5 E3-1 to E3-3, S1-1 to S1-5 S4-1 to S4-5 G1-3
5. The standard covers PAT for IROs that are linked to people in the VC. The S2 S4
undertaking shall disclose whether and how PAT cover VC. S3 8

6.The disclosure only reflects own GOV-1/3, E1-8 -E1-9, E3-4/5 E5-6 G1-4
operations, as no coverage of VC is IRO-2, E2-4◘, E4-5/6 S1-1 to S1- to
required. 179 G1-6
E1-5 E2-6, E5-4 par. 31
7.Disclosure of procured materials. E2-5◘ E5-5◘
8.There are specific quantitative datapoints in this DR that require VC coverage 10 E1-6 E1-7
9.There are specific qualitative datapoints in this E1-1 E4 IRO 1 par 17(a) E5-4
DR that require VC coverage11. E4-1 par. 13 E4-4 par. 32(c) par. 30

10.SFDR indicators12 listed in ESRS 2 VC to be covered to the extent contemplated in the relevant
Appendix B. technical standards
11.Other EU law (excluding SFDR) in ESRS 2 Appendix B. VC covered when required by relevant
regulation.

185. The above table should be read with the following additional notes for those DRs
marked with the following symbol: ◘
DR Contents
BP-1 To what extent the sustainability statement covers the undertaking’s upstream and
downstream VC.
BP-2 When metrics include VC data estimated using indirect sources, such as sector-
average data or other proxies, the undertaking shall:
i. identify the metrics;
ii. describe the basis for preparation, per E4-1 paragraph 13;
iii. describe the resulting level of accuracy; and,

8
The standard ESRS S3 Affected communities covers a group of people who may also be part of the undertaking’s
upstream and downstream VC when they also have business relationships with the undertaking.
9
Some consider DR S1-7 as requiring information about the VC; however, these employees are part of own
workforce and therefore own operations.
10
Coverage of VC information does not necessarily mean collection of data from actors in the value chain. See
paragraphs 156 to 160 above.
11
Coverage of VC information does not necessarily mean collection of data from actors in the value chain. See
paragraphs 156152 to 160 above.
12
The SFDR regulation has been open for consultation, and changes may follow.

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DR Contents
iv. where applicable, describe the planned actions to improve the accuracy in the
future.
SBM-1 Requires that value chain be covered but is not expected to trigger data requests for
actors in the value chain – i.e., can be covered by internal or public information.
SBM-3 For each material IRO identified in the materiality assessment, the undertaking shall
report whether the undertaking is involved with the negative or positive impacts
through its activities or because of its business relationships.
E2-4 AR 20 refers to procurement of microplastics.
E2-5 Relates to the products/materials and/or substances procured which ends up in
products/manufacturing.
E5-5 Includes supplied material but does not expand to suppliers and waste treatment; it
may sometimes require information from supplier who treats waste

186. Per paragraph 72, for material IROs where the undertaking has policies, actions and
targets in place covering the VC, it should disclose this (ESRS 2 paragraphs 64(b), 67(b)
and 70(b)). If not, either because the undertaking does not have such PAT or because
these do not cover the VC, the undertaking will comply by indicating this.
187. The names of the disclosure requirements are provided in Appendix A.

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Appendix A: Names of disclosure requirements

188. The list of names of the disclosure requirements below is to help in the use of the VC
coverage map.

ESRS 2 – General disclosures

DR 2-BP-1 – General basis for preparation of the sustainability statement
DR 2-BP-2 – Disclosures in relation to specific circumstances
DR 2-GOV-1 – The role of the administrative, management and supervisory bodies
DR 2-GOV-2 – Information provided to and sustainability matters addressed by the undertaking’s administrative,
management and supervisory bodies
DR 2-GOV-3 – Integration of sustainability-related performance in incentive schemes
DR 2-GOV-4 – Statement on due diligence
DR 2-GOV-5 – Risk management and internal controls over sustainability reporting
DR 2-SBM-1 – Strategy, business model and value chain
DR 2-SBM-2 – Interests and views of stakeholders
DR 2-SBM-3 – Material IROs and their interaction with strategy and business model
DR 2-IRO-1 – Description of the processes to identify and assess material IROs
DR 2-IRO-2 – Disclosure Requirements in ESRS covered by the undertaking’s sustainability statement
Policies MDR-P – Policies adopted to manage material sustainability matters
Actions MDR-A – Actions and resources in relation to material sustainability matters
Metrics MDR-M – Metrics in relation to sustainability matters
Targets MDR-T – Tracking effectiveness of policies and actions through targets

ESRS E1- Climate change

DR E1-1 – Transition plan for climate change mitigation
DR E1-2 – Policies related to change mitigation and adaptation
DR E1-3 – Actions and resources in relation to climate change policies
DR E1-4 – Targets related to climate change mitigation and adaptation
DR E1-5 – Energy consumption and mix
DR E1-6 – Gross Scopes 1, 2, 3 and Total GHG emissions
DR E1-7 – GHG removals and GHG mitigation projects financed through carbon credits
DR E1-8 – Internal carbon pricing
DR E1-9 – Anticipated financial effects from material physical and transition risks and potential climate-related opportunities

ESRS E2 - Pollution
DR E2-1 – Policies related to pollution
DR E2-2 – Actions and resources related to pollution
DR E2-3 – Targets related to pollution
DR E2-4 – Pollution of air, water and soil
DR E2-5 – Substances of concern and substances of very high concern
DR E2-6 – Anticipated financial effects from pollution-related IROs

ESRS E3 - Water and marine resources

DR E3-1 – Policies related to water and marine resources
DR E3-2 – Actions and resources related to water and marine resources
DR E3-3 – Targets related to water and marine resources
DR E3-4 – Water consumption
DR E3-5 – Anticipated financial effects from water and marine resources-related IROs

ESRS E4 - Biodiversity and ecosystems

DR E4-1 –Transition plan and consideration of biodiversity and ecosystems in strategy and business model
DR E4-2 – Policies related to biodiversity and ecosystems
DR E4-3 – Actions and resources related to biodiversity and ecosystems
DR E4-4 – Targets related to biodiversity and ecosystems
DR E4-5 – Impact metrics related to biodiversity and ecosystems change
DR E4-6 – Anticipated financial effects from biodiversity and ecosystem-related IROs

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ESRS E5 - Resource use and circular economy

DR E5-1 – Policies related to resource use and circular economy
DR E5-2 – Actions and resources related to resource use and circular economy
DR E5-3 – Targets related to resource use and circular economy
DR E5-4 – Resource inflows
DR E5-5 – Resource outflows
DR E5-6 – Anticipated financial effects from material resource use and circular economy-related IROs

ESRS S1 - Own workforce

DR S1-1 – Policies related to own workforce
DR S1-2 – Processes for engaging with own workforce and workers’ representatives about impacts
DR S1-3 – Processes to remediate negative impacts and channels for own workforce to raise concerns
DR S1-4 – Taking action on material impacts on own workforce, approaches to mitigating material risks and pursuing material
opportunities related to own workforce, and the effectiveness of those actions
DR S1-5 – Targets related to managing material negative impacts, advancing positive impacts and managing material risks
and opportunities
DR S1-6 – Characteristics of the undertaking’s employees
DR S1-7 – Characteristics of non-employee workers in the undertaking’s own workforce
DR S1-8 – Collective bargaining coverage and social dialogue
DR S1-9 – Diversity metrics
DR S1-10 – Adequate wages
DR S1-11 – Social protection
DR S1-12 – Persons with disabilities
DR S1-13 – Training and skills development metrics
DR S1-14 – Health and safety metrics
DR S1-15 – Work-life balance metrics
DR S1-16 – Compensation metrics (pay gap and total compensation)
DR S1-17 – Incidents, complaints and severe human rights impacts

ESRS S2 - Workers in the value chain

DR S2-1 – Policies related to value chain workers
DR S2-2 – Processes for engaging with value chain workers about impacts
DR S2-3 – Processes to remediate negative impacts and channels for value chain workers to raise concerns
DR S2-4 – Taking action on material impacts on value chain workers, approaches to managing material risks and pursuing
material opportunities related to value chain workers, and the effectiveness of those actions
DR S2-5 – Targets related to managing material negative impacts, advancing positive impacts and managing material risks
and opportunities

ESRS S3 - Affected communities

DR S3-1 – Policies related to affected communities
DR S3-2 – Processes for engaging with affected communities about impacts
DR S3-3 – Processes to remediate negative impacts and channels for affected communities to raise concerns
DR S3-4 – Taking action on material impacts on affected communities, approaches to managing material risks and pursuing
material opportunities related to affected communities, and the effectiveness of those actions
DR S3-5 – Targets related to managing material negative impacts, advancing positive impacts and managing material risks
and opportunities

ESRS S4 - Consumers and end users

DR S4-1 – Policies related to consumers and end users
DR S4-2 – Processes for engaging with consumers and end users about impacts
DR S4-3 – Processes to remediate negative impacts and channels for consumers and end users to raise concerns
DR S4-4 – Taking action on material impacts on consumers and end users, approaches to managing material risks and
pursuing material opportunities related to consumers and end users, and the effectiveness of those actions
DR S4-5 – Targets related to managing material negative impacts, advancing positive impacts and managing material risks
and opportunities

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ESRS G1 - Business conduct

DR G1-1 – Business conduct policies and corporate culture
DR G1-2 – Management of relationships with suppliers
DR G1-3 – Procedures to address corruption or bribery
DR G1-4 – Incidents of corruption or bribery
DR G1-5 – Political influence and lobbying activities
DR G1-6 – Payment practices

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