Educational session on draft ESRS S2, S3 & S4

Summary

John Houston from Devrax Sustainability introduces the EU’s draft sustainability reporting standards ESRS S2, S3, and S4, focusing on workers in the value chain, affected communities, and consumers. He outlines how these standards, part of the EU Corporate Sustainability Reporting Directive (CSRD), require companies to report on their social and human rights impacts. The standards emphasize stakeholder engagement, materiality assessments, risk management, and the alignment with international frameworks such as the UN Guiding Principles on Business and Human Rights. Updates from the public consultation have led to clarifications and simplifications in the reporting requirements.

Takeaways

• 😀 The EU sustainability reporting standards (ESRS) focus on reporting social impacts, specifically on workers in the value chain (S2), affected communities (S3), and consumers and end-users (S4).
• 😀 ESRS S2, S3, and S4 follow a similar structure, with each targeting different stakeholder groups but addressing common sustainability and human rights issues.
• 😀 Companies are required to align their reporting with internationally recognized frameworks such as the UN Guiding Principles on Business and Human Rights and the OECD Guidelines.
• 😀 The CSRD (Corporate Sustainability Reporting Directive) mandates that companies report on social factors, including both actual and potential adverse impacts on their stakeholders.
• 😀 Each standard (S2, S3, and S4) includes specific issues for companies to consider in their materiality assessments, including economic, social, and cultural rights, as well as civil and political rights.
• 😀 Stakeholder engagement is a key part of the reporting process, with companies required to disclose how they engage with affected groups, such as workers and communities, to identify and manage impacts.
• 😀 The standards require companies to disclose policies, processes, and strategies related to managing material impacts on stakeholders, as well as the effectiveness of these actions.
• 😀 Companies must provide information on grievance mechanisms and remediation processes for negative impacts, ensuring transparency and accountability in how they address stakeholder concerns.
• 😀 A strong emphasis is placed on setting time-bound and outcome-oriented targets to manage risks and opportunities related to social impacts on stakeholders.
• 😀 The standards have evolved over time, with clarifications and simplifications made in response to feedback from stakeholders, including the merging of certain disclosure requirements and strengthening the alignment with global human rights standards.

Q & A

What is the focus of the EU sustainability reporting standards discussed in the presentation?

The focus of the presentation is on three EU sustainability reporting standards: ESRS S2 on workers in the value chain, ESRS S3 on affected communities, and ESRS S4 on consumers and end users. These standards provide a framework for companies to disclose information on their social impacts, risks, and opportunities related to these stakeholder categories.

What is the relationship between the EU sustainability reporting standards and international frameworks?

The EU sustainability reporting standards are aligned with internationally recognized frameworks and principles, such as the UN Guiding Principles on Business and Human Rights, the OECD Guidelines for Responsible Business Conduct, and other relevant human rights and sustainability instruments. This alignment ensures that the standards are globally relevant and that companies' disclosures reflect internationally accepted norms.

What are the key stakeholder categories that ESRS S2, S3, and S4 address?

The key stakeholder categories addressed by the three standards are: workers in the value chain (ESRS S2), affected communities (ESRS S3), and consumers and end users (ESRS S4). Each standard focuses on the impacts, risks, and opportunities related to these specific groups.

How are companies expected to approach their materiality assessments for social standards?

Companies are expected to conduct materiality assessments to identify and assess the social impacts, risks, and opportunities that are relevant to their business activities. These assessments help determine which issues are material and should be reported according to the ESRS standards. The standards outline specific subtopics and issues to consider when conducting these assessments.

What is the structure of the ESRS social pillar and how does it relate to the standards on workers, communities, and consumers?

The ESRS social pillar consists of four subtopics: own workforce, workers in the value chain, affected communities, and consumers and end users. Each of the standards (S2, S3, and S4) covers one of these subtopics, focusing on specific impacts, risks, and opportunities related to each stakeholder category. The subtopics and related issues help guide companies' disclosures on their material impacts.

What types of disclosure requirements are included in the ESRS S2, S3, and S4 standards?

The disclosure requirements in ESRS S2, S3, and S4 are divided into two main categories: impact, risk, and opportunity management, and metrics and targets. These disclosures require companies to report on their policies, engagement processes with stakeholders, remediation efforts for negative impacts, and actions taken to mitigate risks and pursue opportunities. They also require companies to set targets and measure progress on these issues.

What is the purpose of disclosure requirement 1 in ESRS S2, S3, and S4?

Disclosure requirement 1 focuses on companies' policies related to human rights and their alignment with internationally recognized standards. Companies are required to disclose their human rights policy commitments concerning workers in the value chain, affected communities, and consumers and end users, and how these policies are aligned with global frameworks such as the UN Guiding Principles on Business and Human Rights.

How does disclosure requirement 3 address stakeholder engagement in the ESRS standards?

Disclosure requirement 3 focuses on the processes through which companies engage with affected stakeholders about actual or potential impacts. This includes explaining how companies have established channels for stakeholders to raise concerns (e.g., grievance mechanisms) and how these concerns are followed up and addressed. This is part of the company's due diligence process to prevent and remediate negative impacts.

What is the role of materiality assessments in determining which impacts are reported?

Materiality assessments are crucial for determining which social impacts, risks, and opportunities are significant enough to be reported. Companies are required to identify and disclose material impacts based on their own assessments, focusing on the areas that are most relevant to their operations and stakeholders. The ESRS standards provide guidance on conducting these assessments, but also include some mandatory disclosures regardless of the assessment outcomes.

How have the standards evolved from the April to the November drafts?

The ESRS S2, S3, and S4 standards have undergone several changes between the April exposure drafts and the November drafts. These include clarifications on the scope of disclosures, simplification of requirements (such as merging two disclosure requirements into one), strengthening alignment with international guidelines, and improving definitions for certain terms like 'end users' and 'affected communities.' These revisions were based on feedback from the public consultation process.