CSRD in focus: Workforce impact

Understanding the EU's Corporate Sustainability Reporting Directive: Transparency on Social Impacts and Value Chain through ESRS S1/S2 Standards

Corporations across the globe are acknowledging responsibility in managing the environmental and social impacts of business operations. With growing pressure from shareholders and customers, companies are facing increased demands for transparency regarding social impacts, particularly concerning employees and workers in the value chain, both upstream and downstream.

The EU’s Corporate Sustainability Reporting Directive (CSRD) is set to become the most extensive regulatory-disclosure requirement, driving swift adoption and heightened scrutiny of corporate sustainability practices and reporting. The directive requires companies to report according to the European Sustainability Reporting Standards (ESRS), which provides a framework and methodology for reporting on sustainability issues.

ESRS S1: Own Workers

The ESRS S1 standard pertains to a company’s “own workers,” or workers who a company directly contracts with. This standard requires corporations to disclose essential workforce information that includes not only key metrics relating to employee characteristics; diversity, equity, and inclusion; working conditions; and human rights; but also details on the policies and processes to manage both negative and positive impacts to employees, the effectiveness of employee programs, and how the company ensures that best practices are implemented.

These metrics are important because reporting this data fosters transparency. By requiring companies to disclose information about the composition of an organization’s workforce, workforce policies that a company has in place, and how a company continuously assesses and adapts the enforcements of these policies, the CSRD ensures that organizations can then be held accountable for all employment practices. This transparency helps stakeholders assess the company's commitment to fair employment practices, employee engagement, and overall employee well-being. It also allows shareholders and customers to make informed decisions about supporting or investing in the business.

ESRS S2: Workers in the Value Chain

Moving further upstream and downstream in the value chain, we come to the ESRS S2 standard, which focuses on “workers in the value chain.” Workers in the value chain include all upstream and downstream workers who are materially impacted by a company’s activities. This standard aims to shed light on the social implications of a company's entire supply chain beyond the workers that it directly employs. It's no longer sufficient to ensure fair labor practices only within the corporate walls; the spotlight now extends to the global network of suppliers, subcontractors, and customers.

Similar to the ESRS S1 own workers standard, this standard requires businesses to disclose their approach to identifying and managing impacts on workers in the value chain relating to working conditions, equal treatment and opportunities, and human rights. This includes how labor rights violations, including child labor, forced labor, and other social risks, are identified and addressed. By reporting on these aspects, companies demonstrate a commitment to ethical and sustainable supply chain management.

Disclosure requirements and benefits

The disclosure requirements outlined in ESRS S1 and S2 are not just about ticking regulatory boxes; they have far-reaching benefits for businesses and society as a whole.

• Enhanced reputation and trust: Transparent reporting on own workers and value chain workers builds trust with stakeholders. When companies are open about their workforce practices and supply chain efforts, they are more likely to earn a positive reputation with both external and internal stakeholders, such as current and potential employees.
• Risk mitigation: By proactively identifying and addressing labor-related risks within operations and the value chain, companies can mitigate potential issues before they escalate into major crises. This not only reduces reputational and business continuity risk but also helps ensure a more stable and ethical business environment.
• Competitive advantage: Adhering to the ESRS S1 and S2 standards can be a powerful differentiator among competitors and can help attract customers who value ethical practices and promote the company as a leader in sustainability and corporate responsibility.
• Internal improvements: Focusing on the welfare of own workers and those in the value chain can lead to happier, more engaged employees, which often translates to increased productivity, employee retainment, and attractiveness, and better long-term business performance.
• Global progress: The implementation of the ESRS S1 and S2 standards aligns with the broader global goal of improving labor rights and supply chain ethics, contributing to a more equitable and sustainable world.

Challenges and opportunities

While adopting the ESRS S1 and S2 standards is essential, it is not without complications. Companies may struggle with data collection, verification, and ensuring that supply chain partners comply with these standards. However, these challenges also present opportunities for growth and innovation. Developing more robust data-collection methods and forging partnerships with diverse and ethical suppliers can be a long-term advantage.

BSI is proud to partner with companies that are taking the initiative to build responsible and sustainable supply chains. We have the expertise to help companies meet regulatory requirements, implement robust employee programs, and tackle the complexity of social and ethical corporate risk management and compliance.

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About the author

Shanayia Munoz, GARP SCR® , Consultant, specializing in sustainability: Shay specializes in ESG reporting, GHG accounting and decarbonization, and climate risk assessments and adaptation.

Kimberly Rodriguez , Consultant, specializing in sustainable supply chains: Kimi leads the development and implementation of supplier improvement programs that focus on capacity building for clients’ tier-n suppliers.