The European Sustainability Reporting Standards (ESRS) S2 represents an important part of the Corporate Sustainability Reporting Directive (CSRD), specifically focusing on workers in the value chain. This standard aims to boost supply chain transparency and emphasizes the impacts on workers throughout a company’s entire value chain.

As organizations prepare to comply with CSRD, understanding and correctly implementing ESRS S2 has become essential for sustainability reporting. ESRS S2 is all about workers in your value chain – the people who work for your suppliers, distributors, and other business partners. It's one of the four social standards you need to follow under the CSRD.

The standard requires you to report on:

• How your business affects these workers.
• What you're doing to prevent negative impacts.
• How you manage risks and opportunities.
• The financial impact of these risks and opportunities on your company.

In this article, we’ll look at what ESRS S2 actually is, what data points this standard covers, how it interacts with the border CSRD implementation, and how businesses can prepare for it. Read on for everything you need to know to approach this standard with confidence.

Quick recap: What are the ESRS?

Before going into the details, let’s recap what the ESRS are all about. 

The ESRS are a set of guidelines that provide a framework for companies to report on sustainability. The ESRS aims to advance the scope and quality of corporate sustainability reporting, promoting sustainable development through increased transparency and accountability.

They’re made up of two cross-cutting standards applicable to all companies and ten standards covering environmental, social, and governance (ESG) topics. 

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How ESRS S2 focuses on workers in the value chain

ESRS S2 looks at how your business affects workers throughout your entire supply chain. Think of it as your roadmap for showing how your business affects – and is affected by – the people working in your supply chain.

This means you need to consider everyone from the factory workers making your components to the delivery drivers distributing your products. What are the negative impacts that your business has on them? What about the positive ones? Where are the risks and what action should be taken to minimize them?

The standard includes 71 data points spread across five disclosure requirements. Don't worry – we'll break these down into manageable chunks later in this guide.

How workers in the value chain relate to the CSRD

The CSRD requires you to report on your company's social impact across four social topics. The first is ESRS S1 which covers your own employees. ESRS S2 is the specific standard that tells you how to report on workers in your value chain. ESRS S3 addresses how companies impact and interact with communities affected by their operations and value chain. ESRS S4 focuses on a company's impact on consumers and end-users of its products or services.

The ESRS social standards seek to standardize ESG reporting across companies, making it easier to measure and compare social performance. This standardization enhances transparency and allows stakeholders to access more reliable information about a company's sustainability performance in social areas.

Plus, it's worth noting that while ESRS S1 deals with numbers and metrics, ESRS S2-S4 take a different approach, primarily focusing on qualitative information. This approach makes sense because you can't always put a number on things like worker wellbeing or community relationships.  

The 7 disclosure requirements for ESRS S2 (and how to interpret them)

Strategy

Disclosure Requirement SBM-2: Interests and views of stakeholders

Under SBM-2, companies must show how their business strategy and model considers the interests of workers throughout their value chain. This includes demonstrating:

• Key stakeholder impacts: Identify how your business decisions and operations affect the rights, interests, and views of value chain workers.
• Human rights considerations: Explain how you respect and protect worker human rights, include these considerations in strategic planning and adjust business practices based on worker feedback.
• Stakeholder engagement process: Detail your approach to collecting worker feedback and concerns, incorporating worker perspectives into decision-making and monitoring and addressing potential impacts.

This requirement helps stakeholders understand how well your company integrates worker interests into its core business strategy and ensures human rights are respected throughout the value chain.

Disclosure Requirement SBM-3: Material impacts, risks and opportunities and business model interaction

Under SBM-3, companies must provide a comprehensive analysis of how their business model affects value chain workers and vice versa. This includes:

• Impact assessment: How your strategy and business model create impacts on workers, how these impacts influence your strategic decisions, and the connection between worker-related risks/opportunities and business strategy.
• Worker categories: Non-employee workers at company sites, upstream value chain workers (raw material suppliers), downstream value chain workers (distributors), joint venture workers, and vulnerable groups (migrants, women, young workers).
• Risk analysis: Geographic locations with high risk of labor issues, commodities with significant child or forced labor risks, systemic issues in specific regions, individual incidents, and transition risks from green initiatives.
• Positive impact opportunities: Activities creating positive worker impact, job creation and upskilling opportunities, regional impacts, and 'just transition' initiatives.

This requirement helps stakeholders understand the full scope of your company's interaction with value chain workers and assess how well you manage associated risks and opportunities.

Impact, risk and opportunity management

Disclosure Requirement S2-1 – Policies related to value chain workers

Under S2-1, companies must describe their policies for managing impacts on value chain workers. This includes:

• Policy scope: Policies that identify, assess, manage, and remediate impacts on value chain workers, including whether these policies apply to specific worker groups or all value chain workers.
• Human rights commitments: Processes to monitor compliance with UN Guiding Principles, International Labour Organization (ILO) Declaration, and OECD Guidelines, focusing on respect for worker rights, worker engagement, and remediation measures.
• Specific policy areas: Explicit policies addressing human trafficking, forced labor, and child labor, including whether the company has a supplier code of conduct.
• International alignment: How policies align with international standards, and disclosure of any reported cases of non-compliance with UN Guiding Principles, ILO Declaration, or OECD Guidelines.

This requirement helps stakeholders understand how your company protects worker rights and manages worker-related risks throughout the value chain.

Disclosure Requirement S2-2: Processes for engaging with value chain workers

Under S2-2, companies must explain how they engage with value chain workers about impacts that affect them. This includes:

• Engagement approach: Whether engagement happens directly with workers, through representatives, or via credible proxies, including the stages, types, and frequency of engagement
• Operational responsibility: The function and senior role responsible for ensuring engagement happens and results influence company decisions
• Framework agreements: Any global agreements with union federations related to worker rights, including how these help understand worker perspectives
• Vulnerable workers: Steps taken to understand perspectives of potentially vulnerable or marginalized workers (e.g., women, migrants, workers with disabilities)

This requirement helps stakeholders understand how your company includes worker perspectives in its decision-making processes and manages impacts on value chain workers.

Disclosure Requirement S2-3: Processes to remediate negative impacts and channels for raising concerns

Under S2-3, companies must describe their processes for addressing negative impacts on value chain workers and how workers can raise concerns. This includes:

• Remediation approach: General processes for providing or contributing to remedy when negative impacts occur, including how the company assesses remedy effectiveness
• Communication channels: Specific channels (both company-operated and third-party) available for workers to raise concerns, including how these channels are made available in workers' workplaces
• Monitoring and protection: How issues are tracked and addressed, how channel effectiveness is ensured, and policies protecting workers from retaliation when using these channels
• Channel assessment: How the company evaluates workers' awareness and trust in these channels, including stakeholder involvement in effectiveness monitoring

This requirement helps stakeholders understand how your company addresses worker concerns and provides effective remediation processes throughout the value chain.

Disclosure Requirement S2-4: Taking action on material impacts and managing risks and opportunities

Under S2-4, companies must comprehensively document their approach to managing impacts on value chain workers. This includes:

Action planning and resources

• Documented action plans for preventing, mitigating, and remediating negative impacts.
• Resource allocation for impact management.
• Processes for identifying appropriate actions.
• Integration with business practices and decision-making.

Impact management approach

• Prevention and mitigation strategies for negative impacts.
• Initiatives to create positive impacts.
• Remediation processes for actual impacts.
• Effectiveness tracking and assessment methods.

Risk and opportunity management

• Plans to address material risks from worker impacts and dependencies.
• Strategies to pursue opportunities related to value chain workers.
• Performance monitoring and effectiveness tracking.
• Industry collaboration and capacity building initiatives.

Business practice integration

• Actions to prevent negative impacts through procurement and sales practices.
• Approach to balancing impact prevention with business pressures.
• Human rights incident reporting and management.
• Resource allocation for impact management.

This requirement helps stakeholders understand how your company actively manages worker-related impacts, risks, and opportunities throughout the value chain.

Metrics and targets

Disclosure Requirement S2-5: Targets related to managing impacts and opportunities

Under S2-5, companies must disclose their time-bound and outcome-oriented targets for value chain workers. This includes:

• Target categories: Specific targets for reducing negative impacts, advancing positive impacts, and managing material risks and opportunities related to value chain workers
• Target setting process: How targets are established, including engagement with workers or their representatives in setting targets, tracking performance, and identifying improvements
• Performance tracking: How the company measures progress against targets and implements lessons learned from performance assessment
• Worker engagement: How workers, their representatives, or credible proxies are involved in target setting, performance monitoring, and improvement processes

This requirement helps stakeholders understand how your company measures and drives progress in managing worker-related impacts throughout the value chain.

Practical tips on implementing ESRS S2 disclosure requirements

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1. Understand your ESRS S2 reporting timeline

If your company has fewer than 750 employees, you have more flexibility in implementing social ESRS standards. The European Commission (EC) has created a practical phase-in approach that gives smaller companies up to two extra years to prepare their reporting systems.

This means you can temporarily postpone reporting on value chain worker matters under ESRS S2, giving your organization valuable time to:

• Build proper data collection systems.
• Spread out initial compliance costs.
• Develop effective monitoring processes.
• Train relevant staff.
• Establish reporting frameworks.

The EC designed this approach specifically to help smaller businesses manage the transition while maintaining reporting quality. Use this extra time strategically to develop robust systems that will serve your long-term reporting needs. While you have flexibility on timing, start planning early to ensure a smooth transition to full ESRS S2 compliance.

2. Develop and communicate policies

Start by developing comprehensive policies that protect value chain worker rights, with explicit coverage of critical issues like human trafficking, forced labor, and child labor. Your policy framework should include a supplier code of conduct aligned with international standards such as the UN Guiding Principles and ILO conventions. Establish clear communication channels to ensure these policies reach all stakeholders, from suppliers to workers, and create mechanisms to monitor compliance and effectiveness. Remember to regularly review and update policies to reflect changing regulations and stakeholder needs.

3. Perform a double materiality assessment

ESRS S2 focuses on three key areas that encompass the fundamental aspects of worker rights and well-being throughout the value chain. Here's a more detailed breakdown of each subtopic:

ESRS S2 sub-topic 1 – Working conditions

• Core employment aspects: Covers secure employment, working time regulations, and adequate wage structures to ensure basic worker security.
• Worker representation: Encompasses social dialogue mechanisms, freedom of association, and collective bargaining rights to give workers a voice.
• Workplace environment: Addresses work-life balance and health and safety measures to maintain worker well-being.

ESRS S2 sub-topic 2 – Equal treatments and opportunities for all

• Fundamental equality: Focuses on gender equality, equal pay principles, and diversity initiatives to ensure fair treatment.
• Development opportunities: Includes training programs and skills development to support career growth.
• Protection measures: Addresses workplace harassment prevention and inclusion of persons with disabilities to create a safe, inclusive environment.

ESRS S2 sub-topic 3 – Other work-related rights

• Basic human rights: Addresses prevention of child labor and forced labor as fundamental worker protections
• Living conditions: Covers adequate housing, water, and sanitation requirements for workers
• Modern concerns: Includes data security and privacy protections in the digital workplace

By collecting data and reporting on these sub-topics, companies can demonstrate their commitment to maintaining ethical and sustainable practices throughout their value chain, addressing potential negative impacts, and promoting positive outcomes for workers.

4. Engage with value chain workers

Implement a robust worker engagement strategy that prioritizes two-way communication throughout your value chain. Set up regular channels for dialogue, such as worker committees and feedback sessions, supported by formal mechanisms for workers to raise concerns safely and confidentially. Document all engagement activities systematically, including outcomes and follow-up actions, while ensuring strong protections for workers who speak up. The key is creating an environment where workers feel secure in sharing their experiences and concerns, knowing their input will lead to meaningful action.

5. Define your grievance mechanisms

Develop accessible and secure channels for workers to report concerns without fear of retaliation. Design your system to accommodate different languages and literacy levels, with clear procedures for handling complaints and protecting those who speak up. Regular monitoring ensures the effectiveness of these channels.

6. Define (outcome-oriented) targets

Focus on defining targets that directly measure the impact on workers' lives rather than just tracking activities. For example, instead of setting a target like "conduct 10 supplier audits," aim for outcomes like "reduce serious safety incidents by X%" or "achieve living wage compliance across Y% of suppliers by 2030." Create specific KPIs that measure real change in working conditions, equal treatment, and fundamental rights. Each target should be:

• Focused on worker outcomes.
• Measurable through clear metrics.
• Time-bound with specific deadlines.
• Aligned with identified material impacts.
• Tracked through regular review cycles.

This outcome-oriented approach ensures your efforts drive meaningful improvements in worker wellbeing rather than just checking compliance boxes. Regular reviews help assess if targets are delivering the intended positive impact for workers throughout your value chain.

7. Make an action plan (including preventative measures)

A strong preventative approach is crucial for protecting worker rights throughout your value chain. Start by developing comprehensive screening protocols for suppliers and implementing robust pre-employment checks that can catch potential issues before they arise. Your organization should focus on building a culture of prevention rather than reaction. Key preventative measures include:

• Regular supplier due diligence and audits.
• Early warning systems for rights violations.
• Workplace safety inspection programs.
• Anti-discrimination protocols and training.
• Emergency response procedures.

Success depends on clear ownership and adequate resources for these measures. Regular training ensures your team can effectively implement preventative protocols, while open communication channels help identify and address potential issues early. Remember to review and update your preventative measures regularly to address emerging risks and maintain their effectiveness.

8. Identify risks and opportunities

Implement a proactive approach to identifying and managing both risks and opportunities related to value chain workers. Regular assessments help spot emerging issues early, while tracking the effectiveness of control measures ensures sustainable risk management.

9. Collect and report on ESRS S2 data

Build robust systems for collecting, verifying, and documenting worker-related data. Implement quality controls and clear reporting templates to ensure accurate and meaningful disclosure of information. This systematic approach supports both compliance and continuous improvement.

How to select the right software for your ESRS S2 reporting

To enhance compliance with ESRS S2 requirements, organizations should implement advanced tools and software for efficient data collection, analysis, and reporting on value chain worker matters. 

By automating data processes and integrating analytics, organizations can make informed, proactive decisions that improve worker management practices and support social sustainability goals, ultimately simplifying the reporting process and enhancing transparency. 

Coolset helps users achieve CSRD compliance by streamlining value chain worker data management and reporting. Try out our software below, or book a demo here.

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