Why organizations should evaluate their value chain

The activities of companies and institutions are constantly shifting towards an increased emphasis on environmental, social and governance aspects (ESG). This is partly due to pressure from consumers and investors; it has been shown that reputational risk has a great influence on the performance of companies today. At the same time, there is pressure from the legislature to increase the emphasis on sustainability.

New legislation on the horizon
The European Union has decided to tighten current legislation regarding ESG information as early as January 2023, which will affect the Icelandic business environment. CSRD legislation obliges managers in the financial sector, among other things, to provide information on risks related to sustainability and how this is taken into account in the investment process, which ESG criteria are used and how investment decisions are assessed that have possible negative consequences when it comes to sustainability. EU Taxonomy aims to guide potential investments towards activities that promote carbon neutrality. Considering ESG factors is therefore a good way to map the long-term performance of a company and its success in the business environment, heeding the need to pay more and more attention to climate-related risks, social factors and governance.

Organizational units are mostly dependent on their relationship with other companies. For example, companies that operate in wholesale and retail are heavily dependent on collaboration with other suppliers and financial institutions rely on the good operations of the companies in which they choose to invest. As a result, there may be a risk of not monitoring its value chain on the basis of ESG factors, which means that potential risks in the external environment of a company are not being monitored. (Value chain refers to those companies that have a direct or indirect effect on the company's operations.)

How to monitor the value chain
Organizations can monitor their value chain by sending out sustainability assessments. In this way, they also exercise the power they have in a good way and can subsequently choose from their value chain the companies that are most desirable for their operations when it comes to ESG aspects. At the same time, sending out sustainability assessments to companies can have an encouraging effect on those who are less likely to set goals to do better and keep up with their competitors. Considering the sustainability aspects of its business and the factors that have a direct or indirect effect on its operations is therefore an important risk management as well as good and ethical operation.

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