ESRS principles are changing how you do business

A fundamental principle of European Sustainability Reporting Standard (ESRS) 1 is ‘double materiality,’ which promotes a two-way view of business impacts. Rather than focusing solely on prescribed targets, leaders are prompted to proactively assess whether their business activities have broader, material impacts beyond the company itself. This requires leaders to evaluate how various operational decisions – such as, sourcing practices and production methods or worker wage levels, as well as governance decisions – such as business conduct – materially impact environmental, social and governance (ESG) factors across their wider ecosystem.

For instance, fair wages and equitable employment practices contribute to employee wellbeing and retention within the company and can affect the economic resilience of communities. By paying a living wage, businesses help support local economic stability, reduce poverty and contribute to societal welfare, creating positive ripple effects that reinforce ESG objectives. Similarly, sourcing raw materials responsibly helps prevent environmental degradation and supports sustainable resource management, which benefits both the business and the surrounding community.

Conversely, ESRS 1 also asks how factors materially impact the business. For example, if you have operations in high drought regions, how could this impact business? Recognizing this interconnectivity enables businesses to better avoid risks or identify opportunity for development. Another critical perspective shift introduced by ESRS 1 is an expanded scope of accountability, extending beyond traditional business boundaries to encompass the entire value chain. This broader definition means businesses should consider how their goods and services are produced and assess their impact on elements like local water supply. After-sales responsibility similarly demands attention to how customers might reuse, repair or dispose products. This requires a holistic perspective across communities, customers and suppliers impacted by the company’s operations and partnerships.

These dimensions are not merely essential to understanding the spirit of the CSRD – they are intended to help quantify ESG risks and opportunities which can then be applied to reframe strategic thinking by clarifying how a business fits into the wider world. By embracing these perspectives, leaders can better identify a comprehensive range of impacts, opportunities and risks across markets, operations, and relationships. There’s no question that both physical and business environments are changing, leaving organizations with a strategic choice: to respond reactively and simply comply, or consider the longer-term risk of inaction, potentially earlier identifying misplaced investments where a product or service is not sustainable, and think proactively and establish themselves as frontrunners in sustainable business transformation.

How to navigate this pragmatically?

Developing a strategy road map to achieve corporate goals

To help drive a successful sustainably supply chain transformation, companies should first use the process of double materiality to identify where they face the biggest risks and can potentially have the biggest opportunities and impact. From here, they can evaluate their performance across each of the ESG areas along critical value chain functions and prioritise areas of greatest importance to a broad range of stakeholders – not just investors – focusing on where excellence can drive long-term success.

Set the right target level

After evaluating what is material, the next crucial step is defining a clear sustainability vision. This vision should consider several factors: What are the regulatory expectations? Where are competitors setting new benchmarks? What do customers and other stakeholders, including investors, expect?

Focusing on some common examples–human rights and working conditions, decarbonization, and circular economy–helps establish a range of targets, from foundational and readily achievable to more ambitious goals that can be embedded across the organization and its wider network. These targets should be grounded in realistic assumptions and actionable plans. A solid understanding of the key levers and technical possibilities for meeting these goals is essential for setting a viable path forward.

Optimizing resources by viewing the value chain as a collaborative network

Understanding the value chain as a collaborative network rather than isolated functions empowers CEOs to adopt forward-looking strategies. With a comprehensive perspective on supplier practices, production and end-user impacts, leaders can identify opportunities for innovation and develop products that align with circular economy principles. This holistic approach enhances resilience, enabling businesses to thrive within a sustainable economy.

Achieving this shift requires high-level, integrated thinking that goes beyond the silos of procurement or sales. Instead, it calls for a strategic approach that sees the value chain as a dynamic ecosystem. Leaders that align on what to collectively focus on and create meaningful targets to measure progress can better anticipate and mitigate risks, optimize resource use and respond more effectively to evolving market demands.

Building transparency 

Achieving transparency and credibility requires investment in data and analytics. Traceability across supply chains remains a complex challenge, underscoring the need for companies to prioritize sustainability data for their products and services from the outset and develop robust analytical capabilities.

A transformation of this scale likely impacts each function within an organization; and each area can contribute to advancing sustainability – from purchasing, production and logistics to marketing and customer service. Implementation relies on collaboration, with key individuals in each division responsible for gathering function-specific data points and sustainability metrics, including:

• Environment: Emissions across the value chain, resource extraction, deforestation
• Social: Worker wellbeing, including human rights
• Governance: Management of relationships with suppliers

This comprehensive approach creates a foundation for accountability, enabling meaningful progress across the supply chain.

Unlocking opportunities beyond compliance

Although most companies are focusing on achieving compliance right now we do believe companies are and should increasingly be looking to seek competitive advantage from CSRD reporting.

A lack of insight into the value chain can introduce significant legal, reputational, market and liquidity risks for companies. As citizens and non-governmental organizations (NGOs) increasingly hold businesses accountable, the CSRD may require new data to drive accountability and demonstrate responsible action. Understanding the environmental and social impacts across the value chain and the mutual dependencies within it should enable companies to anticipate and address emerging risks, building resilience and trust in the process.

Then building on this, in a market driven by transparency, communicating the extended social and environmental impact of a company’s value chain that ESRS 1 requires is crucial for helping build a strong brand reputation and stakeholder trust. It not only demonstrates a robust awareness of their impacts, but also accountability for being part of the ecosystem-wide change needed to reach global sustainable goals.  This requires a mindset shift and a commitment to gathering comprehensive ESG data, not only for CSRD compliance but also to identify opportunities for improvement. This data can unlock critical benefits, enabling companies to communicate their positive impact, optimize resources and collaborate with suppliers to help drive efficiencies and innovation.

Closer collaboration can be crucial for deepening understanding of the value chain and achieving systemic change, making it essential for senior leaders to prioritize trust-building and data-sharing with supply chain partners. Suppliers within the value chain may also have CSRD obligations, creating opportunities for mutual benefits and fostering collaboration.

This is not an immediate process; at first, data from suppliers might meet CSRD requirements. As relationships strengthen, companies can gain more significant influence, encouraging performance improvements among suppliers, ultimately enhancing results across the value chain. While direct influence over Tier 2 or 3 suppliers is limited, improvements in immediate relationships can raise Tier 1 performance, potentially cascading positive changes through the value chain.

Blockchain and other digital technologies offer potential solutions for navigating the complexities of multi-tiered supply chains, creating a shared platform for transparency and initiative tracking. Taking the lead in such initiatives can build expertise and momentum within the supply chain, offering a competitive edge and a compelling external narrative to stakeholders.

Balancing transparency demands with suppliers’ commercial interests is critical. Progress cannot be achieved in isolation and a gradual trust-building approach may be needed, especially where suppliers are initially cautious. Early stages may yield efficiency savings, while deeper trust and collaboration could uncover risks, such as unsafe working conditions, before they reach public attention and impact brand reputation.

The benefits of enhanced value chain collaboration are closely tied to CSRD compliance and the new data requirements it entails. Digital transformation provides a crucial lever for reshaping business activities, connections, and relationships within an organization and across the value chain, setting a strong foundation for sustainable business practices.

Using CSRD as a catalyst for long-term strategic change

Understanding the guiding principles behind the CSRD can inspire a re-evaluation of a company’s role in the broader world, but it can also transform your strategic outlook. You’ll have a broader view, be able to spot markets and opportunities that lie further ahead or across your value chain and move before the competition does.

Deloitte can help your transformation, not just to comply with CSRD, but to change your business and value chain relationships. Our specialists in digital, sustainability and strategy can help you turn compliance into a new world of opportunity.

Discover how the insights gained from CSRD can be pragmatically navigated to drive business value.