Value chain analysis as a strategic tool to drive sustainability

With the new Corporate Sustainability Reporting Directive (CSRD) and European Sustainability Reporting Standards (ESRS) in place, the significance of the value chain is exponentially increasing within the concept of double materiality. At the same time, having a sustainable supply chain is gaining momentum, as evidenced by S&P Global's last Corporate Sustainability Assessment, detailed in our previous article on Practical Steps for Implementing Sustainability in Your Supply Chain. It is therefore evident that understanding and improving a company’s impacts along the value chain holds the potential to serve as a strategic tool to accelerate sustainability. In this article we explore the reasons behind and methodologies for conducting a value chain analysis - a key element of your ESG strategy.

A value chain analysis, usually known as the process by which the strategic activities of a company are determined, related costs and value driver identified and optimised, brings a strategic advantage in driving the sustainability of a company when adapted to ESG criteria and performed in the double materiality assessment.

The double materiality matrix has in fact a strategic role for a business and, at the same time, as explained by ESRS, engagement with affected stakeholders is central to the undertaking’s on-going due diligence process and sustainability materiality assessment¹. 
Specifically, the value chain analysis is an added benefit to the double materiality process because it can be used as an input for two crucial activities:

• selection of stakeholders to engage during the double materiality analysis;
• starting point to develop the ESG Supplier Program.

Value chain analysis as a tool for stakeholder engagement

One fundamental step of the double materiality assessment is the stakeholder engagement. A practical way to ensure effective stakeholder selection is to engage with those that have a higher impact on the company’s sustainability performance and those who will directly contribute to overcoming sustainability challenges. However, identifying the right stakeholders can be challenging. To solve this issue, a value chain analysis can be used. One of the steps of the analysis focuses on the mapping of the impact generated at each stage of the value chain and for every material topic. This mapping provides a clear picture of where the greater impacts take place at a stakeholder level and for which topic. If, for instance, most of the impact is concentrated in one or more steps of the value chain, it can be strategically important to engage stakeholders that are part of that steps. In the download of this article is available a ready-to use framework for conducting the impact mapping that can be applied to any companies.

One best-practice example is to map the different impacts of each material topic on the society and environment per value chain activity, such as the bottling company Coca-Cola HBC has done.

Value chain analysis as a strategy driver:

The second reason to conduct a value chain analysis is that it can be used to guide the development of ESG Supplier Programs. As highlighted in the previous article, identifying the biggest sources of negative impact in the supply chain is not always easy. Therefore, the value chain analysis functions as an alternative strategic tool: the map of the impact shows which are the steps of the upstream value chain with the highest impact and then the materiality topics are used to drive the corrective measures. In this way a company can be sure to implement the most effective measures with its suppliers to decrease its overall impact.

How to perform the value chain analysis in three steps:

1. Identify the scope and key element of your value chain: identify for every stage – upstream, direct operations and downstream – the different activities that constitute your value chain, such as raw material extraction or transportation and distribution.
2. Develop a complete overview of your value chain: analyse each activities identified in the step before to assess the potential impact and stakeholders involved.
3. Map the impact of the value chain activities such as in the one provided in the framework of the article download: this will support companies to identify sources of major impact.

Ready to start your value chain analysis and accelerate your ESG performance?

Do you want to know more about how to accelerate your sustainability through double materiality and value chain analysis? Reach out to Johana@finchandbeak.com or +31 6 28 02 18 80 to discuss how Finch & Beak can assist you.

¹ ESRS 1 General Requirements, page 9.