Responsible Value Chain – strategic overview

For businesses with complex and layered value chains, this new and
more involved disclosure requirement will require a systematic plan both to
achieve compliance and to reap the competitive benefits that compliance will
confer on those who are ahead of the pack. At Deloitte, we are working
with clients now to help them unravel the complexities and take
steps to be in the right shape at the right time. In this first article of
[two] on responsible value chains, we provide an overview of the challenges
involved and the actions that can be taken to address all the issues in a
planned approach. Our next article will focus specifically on the technological
issues and remedies that are proving useful.

Compliance and opportunity

A ‘responsible value chain’ is one where the environmental, social and economic impacts of goods and services are managed throughout their lifecycle – including in areas outside the organisation’s immediate control. Scope 3 emission reporting requirements already cover carbon reporting, but the latest EU directives mandate that this extends to other ESG domains, including how the organisation’s strategy, governance and working practices are affecting its products and services along the length of its value chain. To comply means having greater transparency and proactive reporting based on data from many unfamiliar sources. How the transition to compliance will work out for every company is unclear – and there remains significant confusion for many on the precise terminology and detailed requirements within the legislation – but we know from experience that there are tangible, practical and manageable steps to be taken now. Some will begin the journey towards compliance, others will aim to improve competitiveness, through having more sustainably attractive offerings, and by augmenting the quality of strategic decision-making thanks to having richer data to hand.

Wholesale change

What we see from clients is that the journey towards compliance must be a mainstream activity within the business, not a sideshow. The journey starts with a committed executive team taking ownership, and joining the dots within the business to work in concert. By building on existing supplier and procurement management processes and procedures – and making fundamental changes to how these operate in practice – businesses can make efficient use of what’s already in place, to build a suitable ecosystem of new value chain procedures and data-collection, monitoring, and reporting activities that will be fit for purpose and integrated into both existing and new business processes. The tasks go beyond supplier management and procurement, and will need carefully orchestrated cooperation and collaboration from operations, finance, marketing, compliance, IT and sustainability teams to be successful. The outputs must not only comply with the forthcoming legislation, but also serve an ongoing performance management purpose. This matrixed approach will be step-change for many businesses.

Practical steps

Due to the complexity and scale of the change involved, it’s vital that each business has a plan that lays solid foundations upon which to build for later changes. Below are the steps we recommend.

1. Conduct a materiality assessment, to provide crucial insights into the high-risk and high-impact activities within the overall value chain that need to be prioritised and dealt with first. This will require internal expertise coupled with industry knowledge and professional guidance. For complex and extensive value chains, this step can involve considerable levels of research to determine the upstream sustainability impacts of business activities – both environmentally, and in terms of social outcomes, such as in labour exploitation.
2. Define how impacts need to be measured within the new regime, and to what degree of detail and sensitivity – both from within the organisation, and including all external data where agreements need to be in place to source what’s required (or by recourse to social and environmental impact databases). Engaging with external suppliers is essential to both obtaining the information needed and to encourage sustainability improvements later on. The hybrid (external plus internal) information management requirement also lays the foundation for the approaches to technology specification, to be covered in our forthcoming article.
3. Design the desired ecosystem for data collection and management, and determine how this ecosystem dovetails with what’s already in place. This step will involve modelling and testing the collection and monitoring processes needed for the high risk and high impact areas of operation. Establishing more supplier involvement in the sustainability agenda, and engaging suppliers towards a joined-up solution, are vital, and business and its suppliers may need to invest in common information platforms that are shared within the industry

These steps pave the way for a live and transparent system of reporting – one that takes stock of the current value chain impacts, and leads to progress towards more sustainable business activities and economies involving far higher levels of value chain collaboration than currently in place within most industries. The new information should also prove valuable in key decision-making, and in reshaping the value proposition of the business for investors, customers and other stakeholders. 

Our part in the change

Deloitte is committed to helping clients identify and take the right steps towards compliance and improvement. We are familiar with the complexity involved, and are on hand to advise management teams on how to get their house in order. By necessity, our teams include experts from the worlds of risk advisory; accounting and reporting; digital risk services; supply chain consulting; and technology, to ensure the line-up is right for each business’s needs.

To discuss any of the themes raised in this article, or for an assessment of your current position and potential, contact Andrea Vogel, Frits Klaver or Birthe van der Voort.