As the backbone of our interconnected economy, supply chain management has become a focal point of EU regulatory requirements. The proposal for the Corporate Sustainability Due Diligence Directive on (CSDDD) is in the final stages of approval, which concerns the protection of human rights and environmental responsibility across value chains [1, 2]. Accordingly, these goals are embedded in the Corporate Sustainability Reporting Directive (CSRD). In particular, the ESRS S2 standard specifically addresses the welfare and rights of workers at each level of the value chain . The disclosure requirements aim to increase supply chain transparency and place emphasis on reporting identified material impacts on workers in the value chain associated with companies’ operations, products, and services. This includes:
- Actions, risks and opportunities, and financial effects
- Adequate wage, social dialogue, collective bargaining, and work-life balance
- Equal treatment, training and development
- Child labor and forced labor
- Dependencies on value chain workers
S2 Workers in the Value Chain – Content
The Standard ESRS S2 is divided into general disclosures; Strategy; Impacts, Risks and Opportunities; as well as Metrics and Targets.
In addition to the general requirements of ESRS 1 and ESRS 2, ESRS S2 requires a description of how the entity’s strategy and business model may affect the interests and rights of supply chain workers, representing a key group of affected stakeholders (ESRS 2 SBM-2).
Impacts, Risks, and Opportunities
Four disclosure requirements are covered in this section:
- S2-1 – Policies related to value chain workers: Description of policies for managing significant impacts on value chain workers, associated risks and opportunities, human rights commitments, alignment with international standards, and any reported instances of unalignment or non-compliance in the value chain.
- S2-2 – Processes for engaging with value chain workers about impacts: The company is to describe its engagement with value chain workers, or credible representatives about the actual and potential impacts on them. The disclosure should indicate whether and how employee perspectives and interests are considered in decision-making, how responsibilities are allocated, whether there are agreements on employee rights, and whether vulnerable employees are included. If such procedures are not in place, this must be disclosed along with a timeframe for implementation.
- S2-3 – Processes to remediate negative impacts and channels for value chain workers to raise concerns: Disclosure on how negative impacts on value chain workers are addressed and the channels through which workers can speak up. There needs to be an understanding of how workers can communicate problems and how effective the respective channels are. Accordingly, remedial actions, their support, retaliation measures, and worker trust should be comprehensible.
- S2-4 – Taking action on material impacts on value chain workers, and approaches to managing material risks and pursuing material opportunities related to value chain workers, and effectiveness of those actions: Actions and their effectiveness to address significant impacts, risks and opportunities related to value chain workers should be described. Preventive measures of negative impacts as well as measures for achieving positive outcomes for workers should be understood. This should provide insights into action plans, tracking effectiveness, and respective responses to identified negative impacts as well as methods for mitigation and prevention methods.
Metrics and Targets
One disclosure requirement is covered in this section:
- S2-5 – Targets related to managing material negative impacts, advancing positive impacts, and managing material risks and opportunities: Disclosure of time-bound and results-oriented targets set by the company in relation to its value chain workers. Objectives should relate to the reduction of negative impacts, advancement of positive outcomes, and the management of risks and opportunities for workers. The underlying purpose is to comprehend how targets are used to measure progress and derive appropriate actions in alignment with ESRS 2 MDR-T.
The issue of Workers in the Value Chain is likely to prove material for a large number of companies. This is due to the increasingly strict regulations, which not only impose legal but also social and ethical requirements . With the Supply Chain Act (Lieferkettengesetz), which was passed at the beginning of the year, the upcoming (CSDDD) and now also with the CSRD, the requirements for companies to create more transparency across their value chains is becoming essential. In addition to ESRS S2, CSRD is addressing affected communities as well as consumers and end-users (ESRS S3 and S4, respectively) and demanding higher degrees of disclosure on social and ethical questions regarding companies’ value chains. These correlations show that S2 is becoming an important issue, especially for companies with high level of global network structures.
Challenge: Demand for more transparency in global value chains
The challenges lie primarily in creating more transparency and monitoring processes for globally interconnected supply chains. In addition, companies need to find a balance between economic, social and ethical objectives while complying with the legal requirements of their respective industry. The ESRS S2 standard, similar to ESRS S3 and S4, requires the involvement of key stakeholder groups and the establishment of channels through which their voices are heard and considered in the company’s decision-making. Accordingly, it is important to define quality criteria for action plans that advocate for human rights and provide better access to remedies for victims and socially disadvantaged groups.
Where is your company currently on the path to meeting CSRD reporting requirements and when are you expected to act? These and other questions are at the forefront of most agendas of sustainability managers right now. At DFGE, we can help you assess your status quo, select and focus on the biggest gaps. From there, we create a prioritized roadmap to address CSRD challenges in a timely manner.
Our supply chain management experts can also help you identify measures and activities to avoid negative impacts. We would be happy to support your company in this important topic. If you have any questions, please contact us via or by phone 08192-99733-20.