S2-4 – Taking action on material impacts on value chain workers, and approaches to managing material risks and pursuing material opportunities related

🗂️ ESRS S2 Workers in the value chain, page 8

The undertaking shall disclose how it takes action to address material impacts on value chain workers, and to manage material risks and pursue material opportunities related to value chain workers and the effectiveness of those actions.
The objective of this Disclosure Requirement is twofold. Firstly, it is to enable an understanding of any actions or initiatives through which the undertaking seeks to:

(a) prevent, mitigate and remediate the negative material impacts on value chain workers; and/or

(b) achieve positive material impacts for value chain workers.

Secondly, it is to enable an understanding of the ways in which the undertaking is addressing the material risks and pursuing the material opportunities related to workers in the value chain.

The undertaking shall provide a summarised description of the action plans and resources to manage its material impacts, risks, and opportunities related to value chain workers as per ESRS 2 MDR-A Actions and resources in relation to material sustainability matters.

In relation to material impacts, the undertaking shall describe:

(a) actions taken, planned or underway to prevent or mitigate material negative impacts on value chain workers;

(b) whether and how it has taken action to provide or enable remedy in relation to an actual material impact;

(c) any additional actions or initiatives it has in place with the primary purpose of delivering positive impacts for value chain workers; and

(d) how it tracks and assesses the effectiveness of such actions and initiatives in delivering intended outcomes for value chain workers.

In relation to paragraph 30, the undertaking shall describe:

(a) the processes through which it identifies what action is needed and appropriate in response to a particular actual or potential negative impact on value chain workers;

(b) its approach to taking action in relation to specific material negative impacts on value chain workers, including any action in relation to its own purchasing or other internal practices, as well as capacity- building or other forms of engagement with entities in the value chain, or forms of collaborative action with industry peers or other relevant parties; and

(c) how it ensures that processes to provide or enable remedy in the event of material negative impacts are available and effective in their implementation and outcomes.

In relation to material risks and opportunities, the undertaking shall describe:

(a) what action is planned or underway to mitigate material risks for the undertaking arising from its impacts and dependencies on value chain workers and how it tracks effectiveness in practice; and

(b) what action is planned or underway to pursue material opportunities for the undertaking in relation to value chain workers.

The undertaking shall disclose whether and how it takes action to avoid causing or contributing to material negative impacts on value chain workers through its own practices, including, where relevant, in relation to procurement, sales and data use. This may include disclosing what approach is taken when tensions arise between the prevention or mitigation of material negative impacts and other business pressures.
The undertaking shall also disclose whether severe human rights issues and incidents connected to its upstream and downstream value chain have been reported and, if applicable, disclose these.
When disclosing the information required under paragraph 32 (c), the undertaking shall consider ESRS 2 (see ESRS 2 MDR-T Tracking effectiveness of policies and actions through targets) if it evaluates the effectiveness of an action by setting a target.
The undertaking shall disclose what resources are allocated to the management of its material impacts, with information that enables users to gain an understanding of how the material impacts are managed.

Application Requirements

AR 28. It may take time to understand negative impacts and how the undertaking may be involved with them through its value chain, as well as to identify appropriate responses and put them into practice. Therefore, the undertaking shall consider:

(a) its general and specific approaches to addressing material negative impacts;

(b) its initiatives aimed at contributing to additional material positive impacts;

(d) its aims for continued improvement.

AR 29. Appropriate action can vary according to whether the undertaking causes or contributes to a material impact or whether the material impact is directly linked to its own operations, products or services through a business relationship.

AR 30. Given that material negative impacts affecting value chain workers that have occurred during the reporting period may also be linked to entities or operations outside its direct control, the undertaking may disclose whether and how it seeks to use its leverage in its business relationships to manage those impacts. This may include using commercial leverage (for example, enforcing contractual requirements with business relationships or implementing incentives), other forms of leverage within the relationship (such as providing training or capacity-building on workers’ rights to entities with which the undertaking has a business relationships) or collaborative leverage with peers or other actors (such as initiatives aimed at responsible recruitment or ensuring workers receive an adequate wage).

AR 31. When the undertaking discloses its participation in an industry or multi-stakeholder initiative as part of its actions to address material negative impacts, the undertaking may disclose how the initiative, and its own involvement, is aiming to address the material impact concerned. It may disclose under ESRS S2-5 the relevant targets set by the initiative and progress towards them.

AR 32. When disclosing whether and how the undertaking considers actual and potential impacts on value chain workers in decisions to terminate business relationships and whether and how it seeks to address any negative impacts that may result from termination, the undertaking may include examples.

AR 33. In disclosing how it tracks the effectiveness of its actions to manage material impacts during the reporting period, the undertaking may disclose any lessons learned from the previous and current reporting periods.

AR 34. Processes used to track the effectiveness of actions can include internal or external auditing or verification, court proceedings and/or related court decisions, impact assessments, measurement systems, stakeholder feedback, grievance mechanisms, external performance ratings, and benchmarking.

AR 35. Reporting on effectiveness is aimed at enabling the understanding of the links between actions taken by the undertaking and the effective management of impacts. For example, to show the effectiveness of its actions to support its suppliers with improving their working conditions, the undertaking may disclose survey feedback from the suppliers’ workers showing that working conditions have improved since the time the undertaking began working with those suppliers. Additional information that the undertaking may provide includes data showing a decrease in the number of incidents identified through for instance, independent audits.

AR 36. With regard to initiatives or processes the undertaking has in place that are based on affected workers’ needs and with regard to progress in the implementation of such initiatives or processes, the undertaking may disclose:

(a) information about whether and how value chain workers and legitimate representatives or their credible proxies play a role in decisions regarding the design and implementation of these programmes or processes; and

(b) information about the intended or achieved positive outcomes for value chain workers of these initiatives or processes.

AR 37. The undertaking may disclose whether any initiatives or processes whose primary aim is to deliver positive impacts for value chain workers are designed also to support the achievement of one or more of the UN Sustainable Development Goals (SDGs). For example, through a commitment to advance UN SDG 8 to “promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all” the undertaking may be providing capacity-building to smallholders in its supply chain, resulting in increases in their income; or it may be supporting training to increase the proportion of women able to take delivery jobs in its downstream value chain.

AR 38. When disclosing the intended or achieved positive outcomes of its actions for value chain workers a distinction is to be made between evidence of certain activities having occurred (e.g., that x number of workers have received financial literacy training) from evidence of actual outcomes for workers (e.g., that x workers report that they are able to better manage their household budgets so as to meet their savings goals).

AR 39. When disclosing whether initiatives or processes also play a role in mitigating material negative impacts, the undertaking may e.g., consider programmes that aim to advance women workers’ financial literacy that have resulted in more women being promoted as well as in reports of reduced sexual harassment in the workplace.

AR 40. When disclosing the material risks and opportunities related to the undertaking’s impacts or dependencies on value chain workers, the undertaking may consider the following:

(a) risks related to the undertaking’s impacts on value chain workers may include the reputational or legal exposure where value chain workers are found to be subject to forced labour or child labour;

(b) risks related to the undertaking’s dependencies on value chain workers may include disruption of business operations where a pandemic closes significant parts of its supply chain or distribution network;

(c) opportunities related to the undertaking’s impacts on value chain workers may include market differentiation and greater customer appeal from guaranteeing decent pay and conditions for non-employee workers; and

(d) business opportunities related to the undertaking’s dependencies on value chain workers might include the achievement of a future sustainable supply of a commodity by ensuring smallholder farmers earn enough to persuade future generations to keep farming that crop.

AR 41. When disclosing whether dependencies turn into risks, the undertaking shall consider external developments.

AR 42. When disclosing policies, actions and resources and targets related to the management of material risks and opportunities, in cases where risks and opportunities arise from a material impact, the undertaking may cross-reference its disclosures on policies, action and resources and targets in relation to that impact.

AR 43. The undertaking shall consider whether and how its process(es) to manage material risks related to value chain workers are integrated into its existing risk management process(es).

AR 44. When disclosing the resources allocated to the management of material impacts, the undertaking may disclose which internal functions are involved in managing the impacts and what types of action they take to address negative and advance positive impacts.