Your client sources raw materials from four countries, uses a logistics subcontractor with 200 drivers on zero-hours contracts, and has never audited a supplier for labour practices. The double materiality assessment (DMA) flags workers in the value chain as material. You now have to document disclosures under ESRS S2 for workers your client has never met, in facilities your client has never visited. The practical challenge of S2 is not the standard’s complexity. It is that the data sits outside the reporting boundary.
ESRS S2 requires companies reporting under the CSRD to disclose policies, engagement processes, actions, and targets related to material impacts on workers in their upstream and downstream value chain, including supplier employees, contractors, outsourced service providers, and workers connected to the company through business relationships (ESRS S2, paragraphs 1–4).
Key Takeaways
- How the four ESRS S2 disclosure requirements work in practice, with paragraph references for your working papers (WPs)
- What the November 2025 Amended ESRS changed, including the new mandatory datapoint on substantiated human rights incidents
- How to structure the S2 section of a sustainability assurance file when the data comes from outside the reporting entity
- Where the boundary falls between S2 (value chain workers) and S1 (own workforce), and why getting it wrong creates a classification finding
- When ESRS S2 applies and who it covers
- The four disclosure requirements explained
- What the November 2025 amendments changed
- The S1/S2 boundary: which workers go where
- Worked example: documenting S2 for a Dutch food manufacturer
- Practical checklist for your current engagement
- Common mistakes to avoid
When ESRS S2 applies and who it covers
ESRS S2 is materiality-gated. It applies only when the DMA identifies material impacts, risks, or opportunities related to workers in the value chain. No special justification is required if the topic is assessed as not material. Standard ESRS 1 paragraph 30 treatment applies.
S2’s scope is broad. “Workers in the value chain” covers everyone who works in the company’s upstream or downstream value chain but falls outside ESRS S1 Own Workforce. That includes supplier employees, workers at sub-suppliers further down the chain, outsourced workers performing services on the company’s premises, workers at contract manufacturers, and independent contractors in the downstream distribution chain. If a person performs work connected to the company’s products or business relationships and is not counted in the S1 workforce, they fall under S2.
Sub-topics covered by S2 mirror those in S1: working conditions, and equal treatment and opportunities for all. Specific issues within these sub-topics include forced labour, trafficking in human beings, child labour, adequate wages, social dialogue, collective bargaining, health and safety in the supply chain, and work-life balance. Companies assess materiality at sub-topic level, so a client with material forced labour risks in its upstream supply chain can report on that sub-topic without reporting on work-life balance, provided the DMA supports the conclusion.
In our experience, the practical materiality trigger for S2 fires most often for companies with manufacturing supply chains in high-risk geographies, those using outsourced labour at scale, and those sourcing agricultural commodities from regions with documented labour rights issues. But it can also be material for service companies. A professional services firm outsourcing data processing to a provider using gig workers in a jurisdiction with weak labour protections has a potential S2 exposure.
The four disclosure requirements explained
The November 2025 Amended ESRS restructured S2 from five disclosure requirements to four, aligning with the simplified ESRS social architecture: policies, engagement and grievance mechanisms, actions, and targets. S2-1 through S2-4 map directly to the ESRS 2 General Disclosure Requirements (GDR-P, GDR-A, GDR-T).
S2-1: policies related to workers in the value chain (paragraph 10)
The company discloses its policies for managing material impacts on value chain workers, per ESRS 2 GDR-P. The disclosure must specify whether policies cover all value chain workers or specific groups (workers in a particular country or factory, a specific age group). Paragraph 10 requires the company to describe whether it has committed to human rights standards relevant to value chain workers.
The amended draft points practitioners to specific policy content: whether the policy addresses trafficking in human beings and forced labour, whether it covers child labour, and whether a supplier code of conduct is in place. For assurance, the test is whether a documented policy exists and whether the disclosed description matches the actual document. A supplier code of conduct that mentions “fair labour practices” without referencing any of the ILO core conventions or the UN Guiding Principles on Business and Human Rights (UNGP) is a qualitative gap.
Human rights policy disclosure was moved to ESRS 2 General Disclosures in the November 2025 draft. If the client has a standalone human rights policy that covers both own workforce and value chain workers, we check that the S2-1 disclosure cross-references ESRS 2 rather than duplicating it.
S2-2: engagement with workers in the value chain and channels to raise concerns (paragraphs 12–15)
This requirement combines two 2023-version disclosures into one. The company must describe how it engages with value chain workers (or their legitimate representatives), how it gains insight into vulnerable or marginalised workers (such as migrant workers or workers with disabilities), whether grievance channels exist for workers to raise concerns, and how the company tracks whether engagement leads to changes.
The amended draft references the UNGP effectiveness criteria (Principle 31) when assessing grievance channel quality. A grievance mechanism is only meaningful under S2-2 if workers can actually access it and are protected from retaliation. For assurance purposes, the question is whether the company can demonstrate that the mechanism meets the effectiveness criteria, or at least describe what steps it has taken toward meeting them. A hotline number in a supplier code of conduct that no one has ever called is not a functioning grievance channel. We have seen this on about half the engagements where S2 is material.
S2-2 also requires disclosure of whether substantiated human rights incidents connected with value chain workers have been reported during the period. This is a new mandatory datapoint introduced in the November 2025 draft (paragraph 19). “Substantiated” means confirmed through the company’s own processes or through external mechanisms. The disclosure aligns with SFDR principal adverse impact indicator #14 in Table III of Annex I of Commission Delegated Regulation (EU) 2022/1288.
S2-3: actions and resources related to workers in the value chain (paragraphs 16–18)
The company discloses its key actions taken or planned to prevent or remediate material negative impacts on value chain workers, per ESRS 2 GDR-A. The disclosure must include the approach taken when tensions arise between protecting workers and other business pressures (for example, practices around pricing or termination of supplier relationships). AR 32 asks whether the company considers impacts on value chain workers when deciding to terminate a business relationship.
This is one of the more difficult disclosures to document because it requires the client to be honest about trade-offs. Nobody enjoys writing up the paragraph where the client admits they dropped a supplier without a transition plan for the affected workers. A company that did so has a different disclosure from a company that engaged the supplier in a corrective action programme. Neither is inherently wrong under the standard, but the disclosure must describe what actually happened. We test consistency between the disclosed actions and any evidence of how the company actually managed these situations during the period.
S2-4: targets related to workers in the value chain (paragraph 20)
Targets per ESRS 2 GDR-T. Targets can be qualitative or quantitative and must link to actions and engagement. “Improve supplier labour conditions” is not a target. “Achieve 80% completion of social audits across Tier 1 suppliers by December 2027” is. If no targets have been set, the company must disclose this fact and explain why.
What the November 2025 amendments changed
EFRAG submitted the Amended ESRS to the European Commission in November 2025, restructuring all four social standards (S1 through S4) to reduce narrative load and concentrate on material disclosures. The overall ESRS set saw a 61% reduction in mandatory datapoints (EFRAG, Technical Advice on Draft Simplified ESRS, 3 December 2025). For S2 specifically, four changes matter.
First, restructuring from five to four disclosure requirements. The 2023 version had separate requirements for engagement (S2-2), grievance and remediation (S2-3), actions (S2-4), and targets (S2-5). The November 2025 draft merges engagement and grievance into S2-2, renumbers actions as S2-3, renumbers targets as S2-4, and drops the separate remediation requirement. The substance is preserved but the structure is cleaner.
Second, a new mandatory datapoint on substantiated human rights incidents. Paragraph 19 now requires disclosure of whether human rights incidents connected with value chain workers have been reported and substantiated during the period. This was not mandatory in the 2023 version. It aligns with SFDR adverse impact indicators and creates a binary testable datapoint for assurance.
Third, stronger alignment with UNGP and OECD due diligence frameworks. S2-2 now points to UNGP Principle 31 (effectiveness criteria for grievance mechanisms) and the OECD due diligence guidance. The amended text references these frameworks more explicitly than the 2023 version. For companies already operating under the Corporate Sustainability Due Diligence Directive (CSDDD), the alignment reduces duplication.
Fourth, transitional relief was extended. Under the amended ESRS 1 transitional provisions, Wave 1 companies may omit all S2 disclosure requirements for financial year 2026. This gives an additional year of preparation before S2 reporting becomes mandatory. For Wave 2 companies (delayed to FY 2028 by the stop-the-clock directive), S2 preparation has a longer runway. But the DMA must still cover value chain workers even during the transitional period. If the topic is material, at least high-level narrative disclosures covering policies and actions are expected per ESRS 1.
The S1/S2 boundary: which workers go where
Getting the S1/S2 classification right is a prerequisite. ESRS S1 paragraph 3 defines the boundary: S1 covers people in an employment relationship with the undertaking (“employees”) and people who are non-employees but work for the undertaking (such as agency workers or self-employed persons who perform work for the reporting entity). Everyone else in the value chain falls under S2.
Where it gets messy is outsourced and agency workers. A temporary agency worker placed at the client’s own production facility is typically S1 (non-employee performing work for the undertaking). A temporary agency worker placed at a supplier’s facility is S2. The same person, doing similar work, can fall under different standards depending on who they work for.
For assurance, the test is straightforward: does the worker perform work for the reporting entity? If yes, S1. If they perform work for a business partner in the value chain, S2. Misclassification creates a double error: understating S1 headcount or metrics while simultaneously understating S2 scope. We always check the client’s outsourcing and contractor arrangements against this boundary before drafting the sustainability statement.
One further boundary question arises with the CSDDD. The due diligence obligations under the CSDDD overlap substantially with S2 disclosure requirements. Where a company has already mapped its supply chain for CSDDD purposes, that mapping feeds directly into the S2 materiality assessment and the policy disclosures. So we check whether the client’s S2 disclosures are consistent with any CSDDD due diligence reports or supply chain mapping exercises already completed.
How to document S2 when your client has limited supply chain visibility
S2 is the standard where the gap between disclosure requirements and available data is widest. For most mid-market companies, direct data on value chain workers (headcount, working conditions, wage levels, grievance outcomes) is either unavailable or limited to Tier 1 suppliers. This is not PIOOMA territory; the data genuinely does not exist in most supply chains below Tier 1.
The amended ESRS 1 transitional provisions acknowledge this. For the first two years of ESRS application, companies may limit value chain information where data is not yet available, provided they explain the gaps and describe plans to improve coverage. This relief is a disclosure tool, not an exemption. The company still reports on S2 if it is material. But it can state “we have social audit data covering 17% of our upstream cocoa supply chain; we plan to increase coverage to 40% by FY 2030” rather than remaining silent.
For assurance, we test whether the disclosed limitations are consistent with the client’s actual supply chain management capabilities. A company that claims it has no data on Tier 1 supplier working conditions but operates a supplier management platform with annual performance reviews has an internal consistency issue. The lack of data must be genuine, not convenient.
Worked example: documenting S2 for a Dutch food manufacturer
Below is a worked example showing how the file should tell a story for an S2 engagement. We have simplified it, but the structure reflects how we build the WP set in practice.
Van Houten Zuivel B.V., an Amersfoort-based dairy products manufacturer with €92M revenue and 340 employees. Sources milk from 45 Dutch dairy farms (all owned and operated by independent farmers). Imports cocoa powder from two West African suppliers through an intermediary in Rotterdam. Uses a logistics subcontractor (85 drivers) for Benelux distribution.
Confirm S2 materiality at sub-topic level
The DMA identifies two material sub-topics. First, child labour and forced labour risks in the upstream cocoa supply chain (West Africa, specifically Côte d’Ivoire). The intermediary purchases from cooperatives that source from smallholder farms, and the company has no direct relationship with the farmers. Second, working conditions for the logistics subcontractor’s drivers (zero-hours contracts, no collective bargaining agreement, reports of excessive working hours during peak seasons). We assess Dutch dairy farm workers as not material because all farms operate under Dutch CAO dairy farming, a collective labour agreement with strong worker protections.
Documentation note: record the materiality conclusion for each S2 sub-topic. For excluded sub-topics, reference the DMA WP and the specific data source (CAO coverage verification for Dutch farms). Document the rationale for including the logistics subcontractor under S2 rather than S1 (the drivers are employed by the subcontractor, not by Van Houten). File reference: WP S2-MAT-01.
Disclose policies (S2-1)
Van Houten has a Supplier Code of Conduct (last updated January 2025) that requires all Tier 1 suppliers to prohibit child labour and forced labour. The Code references the ILO Minimum Age Convention (No. 138) and the Worst Forms of Child Labour Convention (No. 182). It does not reference the UNGP. Our WP records the policy’s existence, its date, its scope (Tier 1 only), and the gap (no UNGP reference, no coverage of Tier 2 or beyond).
Documentation note: obtain the Supplier Code of Conduct. Confirm its approval date, scope, the specific international standards referenced, and its communication to suppliers. Record any coverage gaps. File reference: WP S2-POL-01.
Describe engagement and grievance channels (S2-2)
Van Houten participates in a cocoa industry initiative (the cocoa cooperative’s sustainability programme) that conducts annual social audits of participating farms. The company does not engage directly with cocoa farm workers. For the logistics subcontractor, Van Houten holds quarterly review meetings with the subcontractor’s management but has no direct channel to the drivers themselves. No grievance mechanism accessible to value chain workers exists.
Our WP records that no substantiated human rights incidents connected with value chain workers were reported during the period (paragraph 19 datapoint). It also records that the absence of a grievance mechanism means the company cannot demonstrate Principle 31 effectiveness criteria are met.
Documentation note: document the engagement method for each material worker group. Record the paragraph 19 incident disclosure (yes/no, and if yes, the nature of incidents). Flag the absence of a grievance mechanism as a gap against UNGP Principle 31. File reference: WP S2-ENG-01.
Disclose actions (S2-3)
Two actions documented. First, Van Houten requires its cocoa intermediary to provide annual social audit reports from the cooperative programme, and the company reviewed the 2024 audit report covering 312 of an estimated 1,800 smallholder farms (17% coverage). Second, Van Houten added a contractual clause to its logistics agreement in Q2 2025 requiring the subcontractor to limit driver working hours to the EU Drivers’ Hours Regulation maximum. No independent verification of compliance with this clause has been performed.
Our WP records both actions, their scope limitations, the absence of effectiveness tracking, and the timeline for planned improvements. Van Houten has not established a process for considering impacts on value chain workers when deciding to terminate a supplier relationship (the AR 32 disclosure).
Documentation note: for each action, document the scope, the evidence reviewed (audit reports, contract clauses), whether effectiveness tracking exists, and any planned next steps. Record the AR 32 disclosure explicitly. File reference: WP S2-ACT-01.
Disclose targets (S2-4)
Van Houten has not set formal S2 targets. The disclosure states this fact and explains the reason: the company is in its first reporting year under the CSRD and intends to set measurable targets after completing a supply chain risk mapping exercise planned for H1 2028.
Documentation note: if no targets exist, document the paragraph 20 disclosure (no targets, reason, expected timeline). Cross-reference with the ISA 520 analytical review calculator if the financial exposure from supply chain disruption is material to the client’s operations. File reference: WP S2-TGT-01.
Practical checklist for your current engagement
Common mistakes to avoid
- First-cycle reporters frequently conflated S1 and S2 disclosures, treating all workers mentioned in the sustainability statement as “own workforce” even when they were employed by suppliers or subcontractors. ESMA’s 2025 enforcement review emphasised that the DMA must cover each social standard separately. A single materiality assessment that lumps “labour” into one category without distinguishing between S1 scope (own workforce) and S2 scope (value chain) creates a classification gap that an assurance provider will flag.
- Companies with limited supply chain visibility often disclosed S2 policies without describing the scope limitations. A policy that applies to Tier 1 suppliers only must say so. A policy that has never been communicated to the relevant worker groups must disclose that fact. CEAOB guidelines expect practitioners to test whether the disclosed scope of policies and actions matches the actual scope of the company’s supply chain management.
- Treating a supplier code of conduct as sufficient evidence for S2-1 without verifying that its content actually addresses the ILO conventions or UNGP. At firms like ours, we pull the code and check it line by line. A vague reference to “ethical sourcing” is not the same as a commitment to ILO Convention No. 138.
Related content
- Double materiality assessment on ciferi.com covers the IRO identification process that feeds directly into S2 materiality decisions for value chain workers.
- Our ISA 520 analytical review calculator can help assess whether the financial exposure from supply chain labour disruption is material to the client’s operations.
- ESRS S3 affected communities disclosure requirements covers the related standard for community-level impacts, which often overlaps with S2 where pollution or land use affects both workers and nearby communities.
- ESRS S1 own workforce guide is the companion standard covering workers inside the reporting boundary, and getting the S1/S2 split right is a prerequisite for both standards.
Related ciferi content
Related guides:
Put audit concepts into practice with these free tools:
Frequently asked questions
Who counts as a value chain worker under ESRS S2?
ESRS S2 covers everyone who works in the company’s upstream or downstream value chain but falls outside the scope of ESRS S1 Own Workforce. This includes supplier employees, workers at sub-suppliers, outsourced workers performing services for business partners, workers at contract manufacturers, temporary agency workers supplied to the company’s partners, and independent contractors in the downstream distribution chain.
What changed in ESRS S2 under the November 2025 amendments?
The November 2025 amendments restructured S2 from five to four disclosure requirements, introduced a new mandatory datapoint on substantiated human rights incidents at paragraph 19, strengthened alignment with UNGP and OECD due diligence frameworks, and extended transitional relief allowing Wave 1 companies to omit S2 disclosures for financial year 2026.
How does the S1/S2 boundary work for agency workers?
The boundary is defined by where the work is performed. A temporary agency worker placed at the client’s own production facility is typically S1 (non-employee performing work for the undertaking). A temporary agency worker placed at a supplier’s facility is S2. Misclassification creates a double error: understating S1 headcount while simultaneously understating S2 scope.
What qualifies as a target under ESRS S2-4?
Targets under S2-4 must follow ESRS 2 GDR-T and can be qualitative or quantitative. They must link to actions and engagement. A statement like “improve supplier labour conditions” is not a target. A measurable target such as “achieve 80% completion of social audits across Tier 1 suppliers by December 2027” meets the requirement. If no targets exist, the company must disclose this and explain why.
Can a company limit S2 disclosures if it has no supply chain data?
The amended ESRS 1 transitional provisions allow companies to limit value chain information for the first two years where data is not yet available, provided they explain the gaps and describe plans to improve coverage. This is a disclosure tool, not an exemption. The company still reports on S2 if it is material, but it can state the current coverage level and its improvement plans.
Further reading and sources
- ESRS S2, Workers in the Value Chain: the source standard governing disclosure requirements for value chain worker impacts, risks, and opportunities.
- ESRS 1, General Requirements: covers the double materiality assessment framework and transitional provisions for value chain data.
- UN Guiding Principles on Business and Human Rights: the international framework referenced by ESRS S2 for policy alignment and grievance mechanism effectiveness (Principle 31).
- OECD Guidelines for Multinational Enterprises: the due diligence framework referenced by the amended ESRS S2 for supply chain governance.