In the evolving landscape of corporate sustainability, the value chain plays a critical role in determining a company's overall impact and success. The International Financial Reporting Standards (IFRS) S1 and S2 emphasize the importance of understanding and managing the value chain to enhance transparency, accountability, and sustainability performance.
Value chain defined under IFRS S1 and S2
IFRS S1 - General requirements for sustainability-related disclosures
IFRS S1 requires companies to provide comprehensive disclosures on a wide range of environmental, social, and governance (ESG) factors. Under IFRS S1, value is defined broadly to encompass not only financial performance but also the sustainability-related impacts of a company's operations across the entire value chain. The standard emphasizes the need to disclose information on how these activities create or erode value for both the company and its stakeholders.
IFRS S2 - Climate-related disclosures
IFRS S2 focuses specifically on climate-related risks and opportunities. Under this standard, value is defined in terms of the financial implications of climate-related risks and opportunities across the value chain. Companies are required to disclose information on how climate change affects their operations. This includes evaluating physical risks (such as extreme weather events) and transition risks (such as regulatory changes) that could impact the value chain. The goal is to provide stakeholders with a clear understanding of how climate-related factors influence the company's value creation processes.
How to apply it
Applying the concept of value chain under IFRS S1 and S2 involves several steps:
- Mapping the value chain: The first step is to comprehensively map the company's value chain. This includes identifying all the stages involved. Companies should consider upstream and downstream activities.
- Identifying key ESG and climate-related factors: Once the value chain is mapped, companies need to identify the key ESG and climate-related factors that impact each stage. This involves assessing the environmental and social impacts of activities, as well as the climate-related risks and opportunities. Companies should engage with stakeholders to gather insights and prioritize the most material issues.
- Assessing value creation and erosion: Companies should evaluate how ESG and climate-related factors create or erode value at each stage of the value chain. This involves analyzing both positive and negative impacts. Quantifying these impacts can provide a clearer picture of the company's overall value creation.
- Integrating findings into reporting: The insights gained from assessing the value chain should be integrated into the company's sustainability reporting. This includes providing detailed disclosures on how ESG and climate-related factors influence the value chain, as well as the strategies implemented to mitigate risks and enhance value creation. Transparency is key to building stakeholder trust and demonstrating accountability.
Key considerations
When integrating value chain management into IFRS sustainability reporting, companies should consider the following key aspects:
- Stakeholder engagement: Engaging with stakeholders is essential to understand their concerns and expectations regarding value chain impacts. This includes collaborating with suppliers, customers, employees, and communities to gather diverse perspectives and insights. Effective stakeholder engagement can help companies identify material issues and develop more relevant and impactful sustainability strategies.
- Data collection and analysis: Collecting accurate and comprehensive data on value chain activities is crucial for effective reporting. Companies should implement robust data collection systems and processes to gather information on ESG and climate-related factors. This includes leveraging technology and digital tools to enhance data accuracy and efficiency.
- Risk management: Managing risks across the value chain is critical for sustaining value creation. Companies should develop and implement risk management strategies to address ESG and climate-related risks. This includes conducting scenario analysis to assess potential future impacts and developing contingency plans to mitigate adverse effects.
Conclusion
The nexus between IFRS sustainability standards and the value chain highlights the critical role that value chain management plays in corporate sustainability reporting. By understanding and applying the concept of value under IFRS S1 and S2, companies can enhance their transparency, accountability, and sustainability performance. By considering stakeholder engagement, companies can navigate the complexities of sustainability reporting and drive positive impact across their value chain.
This article was supported by Zacharias Malik, Assistant Manager, ESG Services.
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