Questions & Answers
When addressing the required entity-specific disclosure, which are the datapoints or the Disclosure Requirements to consider from ESRS 2?
- Entity-specific disclosures
Background
ESRS 1 paragraph 11 states: ‘In addition to the disclosure requirements laid down in the three categories of ESRS, when an undertaking concludes that an impact, risk or opportunity is not covered or not covered with sufficient granularity by an ESRS but is material due to its specific facts and circumstances, it shall provide additional entity-specific disclosures to enable users to understand the undertaking’s sustainability-related impacts, risks or opportunities. Application requirements AR 1 to AR 5 provide further guidance regarding entity-specific disclosures.’
In particular, ESRS paragraph AR 2 states: ‘When developing entity-specific disclosures, the undertaking shall ensure that … (b) its disclosures include, where applicable, all material information related to the reporting areas of governance; strategy; impact, risk and opportunity management; and metrics and targets (see ESRS 2 chapters 2 to 5).’
ESRS 1 paragraph 30 states: ‘When the undertaking concludes that a sustainability matter is material as a result of its materiality assessment on which ESRS 2 IRO-1, IRO-2 and SBM-3 set disclosure requirements, it shall:
(a) disclose information according to the Disclosure Requirements (including Application Requirements) related to that specific sustainability matter in the corresponding topical and sector-specific ESRS; and
(b) disclose additional entity-specific disclosures (see paragraph 11 and AR 1 to AR 5 of this Standard) when the material sustainability matter is not covered by an ESRS or is covered with insufficient granularity.’
ESRS 1 paragraph 12 states the following regarding ‘Reporting areas and minimum content disclosure requirements on policies, actions, targets and metrics’: ‘The Disclosure Requirements in ESRS 2 in topical ESRS and in sector-specific ESRS are structured into the following reporting areas:
(a) Governance (GOV): the governance processes controls and procedures used to monitor, manage and oversee impacts, risks and opportunities (see ESRS 2 Chapter 2 Governance);
(b) Strategy (SBM): how the undertaking’s strategy and business model interact with its material impacts, risks and opportunities, including how the undertaking addresses those impacts, risks and opportunities (see ESRS 2 Chapter 3 Strategy);
(c) Impact, risk and opportunity management (IRO): the process(es) by which the undertaking:
a. identifies impacts, risks and opportunities and assesses their materiality (see IRO-1 in Section 4.1 of ESRS 2);
b. manages material sustainability matters through policies and actions (see Section 4.2 of ESRS 2);
(d) Metrics and targets (MT): the undertaking’s performance including targets it has set and progress towards meeting them (see ESRS 2 Chapter 5 Metrics and targets).’
ESRS 2 paragraph 60 on minimum disclosure requirements on policies and actions states: ‘This section sets out minimum disclosure requirements to be included when the undertaking discloses information on its policies and actions to prevent, mitigate and remediate actual and potential material impacts, to address material risks and/or to pursue material opportunities (collectively, to “manage material sustainability matters”). They shall be applied together with the Disclosure Requirements, including Application Requirements, provided in the relevant topical and sector-specific ESRS. They shall also be applied when the undertaking prepares entity-specific disclosures.’
ESRS 2 paragraph 70 on metrics and targets states: ‘This chapter sets out Minimum Disclosure Requirements that shall be included when the undertaking discloses information on its metrics and targets related to each material sustainability matter. They shall be applied together with the Disclosure Requirements, including Application Requirements, provided in the relevant topical ESRS. They shall also be applied when the undertaking prepares entity-specific disclosures.’
Answer
The datapoints or the Disclosure Requirements from ESRS 2 to consider, if applicable, when addressing a required entity-specific disclosure are: ESRS 2 Disclosure Requirement GOV-1 to GOV-5, SBM-1 to SBM-3, IRO-1 and the Minimum Disclosure Requirements on policies and actions on metrics and targets, respectively.
ESRS 1 paragraph AR 1 to 5 provides Application Requirements on entity-specific disclosures.
In situations where a sustainability matter is not covered by an ESRS, the entity-specific disclosures to consider from ESRS 2 could potentially relate to any reporting area of ESRS 2 (for the reporting areas of ESRS 2, see ESRS 1 paragraph 12), that is:
(a) governance;
(b) strategy;
(c) impact, risk and opportunity management; and
(d) metrics and targets.
This is insofar as information regarding the entity-specific sustainability matter and its impact, risk and opportunity is relevant (ESRS 1 paragraph 31) and it needs to be disclosed under the ESRS 2 Disclosure Requirements.
Therefore, if applicable, impacts, risks and opportunities of the entity-specific matter could be addressed by the following ESRS 2 Disclosure Requirements:
(a) GOV-1: regarding roles and responsibilities and access to expertise and skills with regard to the entity-specific sustainability matter;
(b) GOV-2: regarding information related to the entity-specific sustainability matter provided to and addressed by the undertaking’s administrative, management and supervisory bodies;
(c) GOV-3: regarding integration of the entity-specific sustainability matter in incentive schemes;
(d) GOV-4: regarding entity-specific due diligence processes;
(e) GOV-5: regarding risk management and internal controls over the sustainability process, including the entity-specific sustainability matter;
(f) SBM-1: regarding its strategy relating to the entity-specific sustainability matter;
(g) SBM-2: regarding interests and views of stakeholders with respect to the entity-specific sustainability matter;
(h) SBM-3: regarding the description, the interaction with strategy and business model and other information required by paragraph 48 of ESRS 2 on the material impacts, risks and opportunities connected with the entity-specific matter (including ESRS 2 paragraph 48 (h)); and
(i) IRO-1: regarding a description of the process to identify and assess the entity-specific material impacts, risk and opportunities.
In addition (following ESRS 1 paragraph AR 2):
(a) policies, actions and targets shall be included where applicable, i.e. when the undertaking has them in place, to manage the relevant entity-specific matter/IRO; and
(b) metrics shall be included where applicable. In assessing when this is applicable, the reference is ESRS 1 AR 1: the entity-specific disclosures shall enable users to understand the undertaking’s material IROs. In general, to provide a relevant and fair representation of an impact, risk or opportunity, metrics are useful and should be included.
ESRS paragraph AR 3 supports the determination of when entity-specific metrics are useful, i.e.:
(a) when they support the understanding of (1) how effective the practices are in reducing negative impacts and increasing positive impacts and (2) how likely the financial effects arising from risks and opportunities are;
(b) when they result in a reliable outcome (see ESRS 1 paragraph AR 3 (b)); and
(c) when they are accompanied by sufficient contextual information (see ESRS 1 paragraph AR 3 (c)).
ESRS 2 Minimum Disclosure Requirements on policies and actions (ESRS 2 paragraph 60) and metrics and targets (ESRS 2 paragraph 70) shall be applied in the preparation of this disclosure.
Relations
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Obtaining value chain information could also be challenging in the case of SMEs and other upstream and/or downstream value chain entities that are not in the scope of the sustainability reporting required by Articles 19a and 29a of Directive 2013/34/EU (see ESRS 2 BP-2 Disclosures in relation to specific circumstances). | |
These international instruments identify a number of steps in the due diligence process, including the identification and assessment of negative impacts connected with the undertaking’s own operations and its upstream and downstream value chain, including through its products or services, as well as through its business relationships. Where the undertaking cannot address all impacts at once, the due diligence process allows for action to be prioritised based on the severity and likelihood of the impacts. It is this aspect of the due diligence process that informs the assessment of material impacts (see section 3.4 of this Standard). The identification of material impacts also supports the identification of material sustainability risks and opportunities, which are often a product of such impacts. | |
When the undertaking concludes that a sustainability matter is material as a result of its materiality assessment, on which ESRS 2 IRO-1, IRO-2 and SBM-3 set disclosure requirements, it shall: | |
In addition to the disclosure requirements laid down in the three categories of ESRS, when an undertaking concludes that an impact, risk or opportunity is not covered or not covered with sufficient granularity by an ESRS but is material due to its specific facts and circumstances, it shall provide additional entity-specific disclosures to enable users to understand the undertaking’s sustainability-related impacts, risks or opportunities. Application requirements AR 1 to AR 5 provide further guidance regarding entity-specific disclosures. | |
Obtaining value chain information could also be challenging in the case of SMEs and other upstream and/or downstream value chain entities that are not in the scope of the sustainability reporting required by Articles 19a and 29a of Directive 2013/34/EU (see ESRS 2 BP-2 Disclosures in relation to specific circumstances). | |
These international instruments identify a number of steps in the due diligence process, including the identification and assessment of negative impacts connected with the undertaking’s own operations and its upstream and downstream value chain, including through its products or services, as well as through its business relationships. Where the undertaking cannot address all impacts at once, the due diligence process allows for action to be prioritised based on the severity and likelihood of the impacts. It is this aspect of the due diligence process that informs the assessment of material impacts (see section 3.4 of this Standard). The identification of material impacts also supports the identification of material sustainability risks and opportunities, which are often a product of such impacts. | |
When the undertaking concludes that a sustainability matter is material as a result of its materiality assessment, on which ESRS 2 IRO-1, IRO-2 and SBM-3 set disclosure requirements, it shall: | |
In addition to the disclosure requirements laid down in the three categories of ESRS, when an undertaking concludes that an impact, risk or opportunity is not covered or not covered with sufficient granularity by an ESRS but is material due to its specific facts and circumstances, it shall provide additional entity-specific disclosures to enable users to understand the undertaking’s sustainability-related impacts, risks or opportunities. Application requirements AR 1 to AR 5 provide further guidance regarding entity-specific disclosures. | |
Obtaining value chain information could also be challenging in the case of SMEs and other upstream and/or downstream value chain entities that are not in the scope of the sustainability reporting required by Articles 19a and 29a of Directive 2013/34/EU (see ESRS 2 BP-2 Disclosures in relation to specific circumstances). | |
In addition to the disclosure requirements laid down in the three categories of ESRS, when an undertaking concludes that an impact, risk or opportunity is not covered or not covered with sufficient granularity by an ESRS but is material due to its specific facts and circumstances, it shall provide additional entity-specific disclosures to enable users to understand the undertaking’s sustainability-related impacts, risks or opportunities. Application requirements AR 1 to AR 5 provide further guidance regarding entity-specific disclosures. |