ESRS principles are changing how you do business

Customers increasingly demand ethically sourced Products, making it crucial to understand and shape workers' experiences throughout the value chain. This approach strengthens Market credibility, reputation and investment appeal and helps mitigate the risks of human rights violations - which can arise from unexpected parts of a supply chain and potentially cause serious harm to a business.

With the CSRD, businesses likely face a significant shift in how they approach their workforce - people aren’t simply a resource; they must be seen as a responsibility and a strategic asset. At the core of this transition is the concept of ‘human performance,’ which illustrates the deep connection between social and business value. These form a mutually reinforcing cycle, helping drive shared benefits for workers, organisations and society.

By adopting this Perspective early and placing people at the centre of transformation efforts, businesses can mitigate reputational risks, generate meaningful social value and strengthen business outcomes. The ESRS S2 social standards are central to the CSRD and focus on the treatment of workers across the entire value chain.

While compliance with these standards is a regulatory requirement, their principles are grounded in long-standing frameworks established by the United Nations (UN) and Organisation for Economic Co-operation and Development (OECD). Many organisations already have voluntary action that aligns with existing guidelines, but the statutory framework of ESRS S2 will now help drive greater focus and alignment across businesses.

Like other ESRS standards, ESRS S2 signals a broad shift toward more integrated and globally aligned Perspective on Sustainability. Compliance with ESRS S2 also positions businesses to meet the requirements of other frameworks, such as the EU’s Corporate Sustainability Due Diligence Directive (CSDDD), provisions of the US Dodd-Frank Act and modern slavery initiatives. These frameworks reflect the UN principles and OECD guidelines and demonstrate a Global trend toward greater accountability for social impacts.

While most companies recognise workers’ conditions as very important, ESRS S2 broadens this scope. It moves beyond pay and working conditions to include factors influencing workers’ overall experiences. Organisations are expected to map and assess social risks across their operations and value chains. These insights should then be reflected into their practices. This approach can help to meet compliance requirements, strengthen workforce engagement and enhance business outcomes.

How to navigate this pragmatically?

Deloitte’s Global Human Capital Trends reveals that only 48% of businesses currently look beyond traditional metrics of employee performance. Furthermore, just 17% consider themselves highly effective at evaluating the broader wellbeing of each worker. The introduction of ESRS S2 provides an opportunity to help bridge this gap. By aligning with its framework, organisations can take a better approach to understanding and enhancing human performance, as well as their well-being.

Identify risks across the value chain

ESRS S2 extends beyond the experience of the direct workforce to encompass workers across the value chain. Meeting this obligation could require a level of visibility that many businesses currently lack. Supply chain performance can no longer be assessed solely by metrics such as cost, quality and speed; factors like fair wages, worker safety, diversity and inclusion must also be evaluated. 

A challenge lies in recognising that Reporting responsibilities extend beyond direct suppliers to include risks further down the chain, such as Tier 2 or 3 suppliers. While risks associated with Industry like mining or cacao production are often well-documented, businesses may uncover previously unexamined concerns. Creating a structured overview of the value chain, aligned with the CSRD framework, is essential to map risks and reveal how specific business activities are connected to them, either directly or indirectly.

The task of evaluating each supplier’s treatment of workers is substantial, particularly for organisations with extensive or complex value chains. However, a Clear and comprehensive risk assessment can enable the identification and prioritisation of material risk areas, allowing for targeted mitigation efforts.

Existing supplier contracts that address health and safety or supplier risk management can provide a strong foundation. Nevertheless, human rights due diligence under ESRS S2 requires a broader, more integrated approach, one that may be unfamiliar to many businesses.

Steps that could help to navigate these challenges effectively include:

1. Implement and inspire meaningful metrics: Develop indicators beyond traditional compliance to help drive the impact of policies and actions on human Sustainability throughout the value chain.
2. Make public commitments: Transparency encourages accountability. Publicly committing to enhancing human Sustainability demonstrates an intention to address social risks and aligns internal and external stakeholders.
3. Consider local and Global risks: While many human rights violations can be linked to Global value chains, local suppliers, contractors and employment agencies also present potential risks. This can include ensuring compliance with local labour laws, especially in cases involving migrant workers or temporary employment arrangements.

By systematically identifying and addressing these risks, businesses can strengthen their value chain, improve workforce conditions and build resilience in response to growing regulatory and stakeholder expectations.

Unlocking opportunities beyond compliance

Expanding social value influence across the value chain

Even when companies recognise that social responsibility spans their whole value chain, many can feel their influence is limited to contracts with immediate Tier 1 suppliers. However, extending this sphere of influence can significantly enhance value chain performance while positioning the business as a leader in social well-being.

Workers’ conditions are generally widely acknowledged as a material Topics, but initial efforts often focus on broader challenges such as human rights. With experience, businesses can identify specific areas for action such as ensuring a living wage, where targeted interventions are more effective at mitigating risks and improving performance.

Focusing on areas where action will have the most significant impact can be critical. For instance, mitigating certain risks in a Tier 3 supplier may be difficult, particularly when those suppliers are unknown. However, stronger, trusted relationships with Tier 1 suppliers can create opportunities to influence their practices and, in turn, the practices of their suppliers and so on. Encouraging Tier 1 suppliers to adopt Governance models, guidance and leading practices and share these with their networks can establish common performance standards that ripple through the value chain.

Strategically, ESRS S2 offers a framework to strengthen relationships across the value chain. By strengthening these connections, businesses can gain greater clarity and control over a range of risks, including operational and resource-related risks. This level of engagement is especially valuable in sectors with significant public exposure, such as retail and extractive Industry, where leading companies are already crafting more comprehensive supply chain narratives to engage customers and Media.

Striking the balance between business goals and social responsibility is crucial. Still, the principle is Clear: human rights violations should never be justified as a cost of doing business, particularly in supply chain management. For example, a company must Ask itself whether pressuring the most cost-effective supplier to minimise margins indirectly drives human rights violations, such as inadequate wages and breaches of labour rights. Adopting a secondary supplier with better social outcomes can be a pragmatic Solutions in such cases. This enhances reported performance under frameworks like ESRS E2 and contributes to supply chain resilience.

Building sustainable value chains through Data

CSRD introduces the need for comprehensive human performance measures across the value chain. While this can be a complex exercise, leveraging Data and technology enables businesses to manage performance effectively, supporting both compliance and strategic goals.

Digital Solutions can map the supply chain, integrate with public databases to identify high-risk areas, segment suppliers and effectively target actions. Advanced analytics and AI further enhance risk management by analysing vast datasets - including News, weather and social Media - to predict disruptions like labour unrest, extreme weather or resource scarcity. Real-time Data and digital twins simulate social and environmental scenarios to aid strategic decision-making, resilience and long-term Sustainability.

Competitors are also advancing their compliance efforts. Platforms that analyse industrywide social performance offer benchmarking insights, which generally enables businesses to adopt the leading practices, gain a competitive edge and make a strategic leap forward.

The process of Digital Transformation fosters collaboration and trust across supply chains. Sharing Data promotes a sense of shared Purpose, collaboration and trust with suppliers. Building those relationships will equip businesses to help drive improvements and build a resilient, sustainable workforce that delivers social and business value.

Embedding human performance across the business 

In businesses that already address social risks voluntarily, this responsibility often falls under roles like the chief Sustainability officer or human rights officer. However, the statutory requirements expand this responsibility to functions like Finance, Legal and Procurement, as well as their external relationships.

Managing social performance as a cross-functional responsibility is essential. While internal workforce matters may fall under Human Resources and supplier challenges under Procurement, there is no simple or standard approach. Organisations should tailor their strategies to their specific value chains and business objectives, ensuring compliance and advancing broader strategic outcomes.

Measurable performance requires carefully developed key performance indicators (KPIs) that go beyond standard CSRD metrics to align with the organisation’s strategic goals and values. These KPIs should reflect the relationship between human, social value and business success, applying across employees, business units and suppliers. Weighting these metrics to emphasise the importance of social performance with financial metrics signals a balanced and integrated approach.

Awareness of social risks should be fundamental to the company’s operations and supplier interactions. Leaders in Sustainability and related functions should communicate the strategic and compliance importance of a human-centric approach. Interactive tools such as chatbots, gamification, feedback processes and knowledge-sharing platforms can improve communication, increase worker engagement and help drive the organisationwide adoption of social performance priorities. 

Deloitte can help you

Businesses are increasingly judged on their treatment of the workforce. Adding the right strategic Perspective, aligned with ESRS S2, can assure business activity, transform compliance obligations into genuine social and business value and foster long-term resilience.

Deloitte’s human performance, strategy and Sustainability specialists can provide the guidance needed to help understand the full value chain and position businesses as leaders in creating social value.