Executive Brief: How to Create a World-Class Corporate Sustainability Report for Your Organization

This primer outlines how to create a corporate sustainability report in conformance with the new draft European Corporate Sustainability Directive, which is now in effect. This report is designed for boards, CEOs, C-suite executives and any management involved with the creation of a formal stakeholder management, metrics, and reporting strategy.

Click here for an Enterprise Engagment Alliance YouTube show outlining key elements of the new law.
Click here for a comprehensive list of all the qualitative and quantitative disclosures required by the law compiled by Nossadata.
Click here for the Enterprise Engagement Alliance People Impact Value Calculator, enabling organizations to easily manage, track, and correlate all the stakeholder data in one place with the organization's purpose, goals, and objectives, financial and otherwise, and the tactics employed to achieve them.

Table of Contents

Introduction

Part I: Overview of the CSRD Law
General Principles of CSRD
Key Metrics Disclosed
Goals Related to Risks and Opportunities
Applicable International Standards

Part II. Strategy and Implementation
The Formal Plan for Stakeholder Management, Metrics, and Reporting
Assembling and Training the Team
Creating and Communicating the Story
Monitoring Results
Continuous Improvement
The Role of Your Legal Advisors

Part III. Sample Corporate Sustainability Report Outline

Part IV. Estimated Time and Fees

Appendix—An Overview of the Draft Standards
Own Workforce
Workforce of Customers
Communities
Customers

By Bruce Bolger, with Dr. Heiko Mauterer

Bolger and Mauterer are among a handful of people who have created and/or audited Corporate Sustainabilty Reports in conformance with ISO (International Organization for Standardization) 30414 human capital management and ISO 10018 people engagement standards.

Introduction

How organizations treat their stakeholders is so material to their investors, customers, employees, supply chain and distribution partners, and communities, that their purpose, practices, and metrics must be disclosed in a public database so that all interested parties can determine the extent to which companies create value for or externalize costs onto stakeholders and society.

That’s the essence of the new European Union Corporate Sustainabilty Reporting Directive (CSRD), which requires a level of stakeholder management disclosures never before seen in business anywhere, including: employee turnover; gender diversity; gender pay disparities; executive to worker pay ratios; worker voice and representation; unionization rates; incidents of discrimination; programs to access skills development; number and nature of performance reviews; injury rates, and more. For details on the implications of the new law, click here for an Enterprise Engagement Alliance YouTube show with Carmen Lu, Corporate Counsel, ESG, for Wachtell, Lipton, Rosen, and Katz, and Dr. Heiko Mauterer, Board Member and Principal Consultant, 4 C Group Management Consulting, Germany, and auditor of ISO 30414 standards for DWS, Allianz, and Deutsche Bank.

The environmental aspects of sustainability have received most of the attention over the last decade. This report focuses on the "S" or social, which in this case means stakeholders--the customers, employees, distribution and supply chain partners, and supportive communities without whose support no organize can optimize returns for investors.

Even before the European Union passed the CSRD covered in this executive brief, the pressure was coming from investors, customers, talent, communities, supply chain and distribution partners for organizations to publish Corporate Sustainability Reports. This is because, in multiple surveys, people are increasingly making it clear that they make investing, buying, or job decisions based on their perceptions of how the organization treats its people. These reports, usually published alongside financial reports by public companies, outline the organization’s purpose, goals, and objectives; its methods of value creation; the practices related to employees, those of its supply chain and distribution partners, as well as related to communities, and customers, and the trade-offs it is making in the implementation of its strategies on a year-to-year basis.

In this new law, the European Union, the world’s third largest economy after China and the US, has embraced a stakeholder approach to management and the concept of double materiality by passing the Corporate Sustainability Reporting Directive, effective now, with the first mandatory disclosures due in 2025 for 2024. It will require an unprecedented level of disclosures by large companies—starting at 250 or more employees—on their own workforce management practices and those of their distribution and supply chain partners; as well as their practices and metrics for managing customers and communities. Moreover, the reports, anticipated to include about 82 metrics, will have to be audited by independent, and eventually certified third parties through a process yet to be established. Double materiality refers to the risks faced by an organization financially as well as from social, environmental, or governance issues.

Because the EU CSRD disclosure framework exceeds any disclosure requirements envisaged in the US, China, or other economies, organizations can safely use it as a universal framework for a Corporate Sustainability Reporting likely to far exceed requirements in their home countries. This law has the potential to bring multinational corporations what they have asked for all along in the domain of reporting, a single worldwide accepted standard that provides some level of safe harbor in the case of litigation. While the full force of the law affects only large companies starting with 250 employees, it will have broad impact because the companies that must comply with the law will in most cases prefer to do business with suppliers and distribution partners whose operations comply with the spirit of the disclosure requirements; i.e., through the publication of their own Corporate Sustainability Reports. This is what happened in the world of total quality management, when the major US companies adopting ISO 9000 quality management standards in the 1990s began to ask their leading supply chain partners to do the same.

These new disclosure requirements do not preempt the ISO 30414 Human Capital reporting and ISO 10018 People Engagement and other human capital standards, nor the Stakeholder Capitalism metrics established by the World Economic Forum, the Global Reporting Institute (GRI), Sustainability Accounting Standards Board (SASB), or others for that matter. (See section below on applicable international covenants and standards.) In fact, other than providing prescribed formulas for key turnover and pay calculations, the disclosure requirements do not prescribe specific standards but explicitly encourage the use of recognized standards and benchmarks as long as they are consistently applied, or any change in their use explained.

All companies complying with the law will have to use the European Reporting Sustainability Reporting Standards format for reporting. Sector specific standards are expected to be released in the coming years. In the case of those complying with the CSRD law, the information must be reported electronically for access to the general public in an EU-managed database.

The implementation of voluntary ISO (International Organization for Standardization) 9001 quality standards in the 1990s provides a clear roadmap for how to implement a strategic and proactive approach to people management and Corporate Sustainability Reporting that will now be required by law. Many companies choose to view standards and reporting as a compliance issue, and do as much as possible to "check off the boxes" without embracing the spirit of the disclosures, which is to increase efficiency and stakeholder experiences through the free-market pressures of a level playing field. The minor of companies that embrace quality management standards and reporting do so because they believe they gain a competitive edge through enhanced quality and productivy and the retention and referral benefits derived from high levels of customer and employee satisfaction.

The demonstrated return on investment of a strategic and systematic approach to the management of stakeholders across the enterprise is: higher share price performance for publicly held companies; more sustainable profitability as a result of having more engaged customers, employees, distribution and supply chain partners, and communities; lower costs and better experiences due to a culture of continuous improvement, more word-of-mouth talent and customer referrals, less litigation and more welcoming communities. In effect, a Corporate Sustainability Reporting strategy combines the efficiency, economic, and experiential benefits of a total quality management approach to people management with the marketing benefits that come from substantiating claims made to customers, employees, supply chain and distribution partners, and communities through transparent, audited reporting.

To learn first hand about the process for creating and having audited an ISO conforming Corporate Sustainability Report, click here for an interview with the CHRO of an SME (small- to medium-size enterprise) and here for an interview with the CHROs of Allianz and Infineon technologies, all three of which have produced audited ISO 30414 conforming human capital reports. Click here for the model of a stakeholder management report that includes many of the elements required in the EU CSRD law.

Part I. Overview of the CSRD Law

If you have a senior management position at a public or large company that does business in the European Union, or if your company does business with such a company, expect to hear about this new law from your boards, attorneys, or clients through requests for information on your organization's environment, human capital, and governance practices. If you are an investor, consumer, employee, supply chain or distribution partner, community member, or otherwise engaged with such an organization, you will in the coming years be able to access and compare surprisingly detailed information on how many organizations manage their stakeholder relationships, including their rates of employee turnover, pay equity, discrimination claims, and injury rates, etc.

This is why it makes sense in most cases to create a Corporate Sustainability Report consistent with the CSRD framework; it is unlikely that anyone could request information beyond the scope of these requirements. And, for those companies that are not legally bound by the law, they do not have to publish the same level of details to still benefit from a meaningful Corporate Sustainability Report, because this could put them at a competitive dis-advantage if competitors do not have to comply--contrary to the stated intent of the law to level the playing field.

Effective dates by company size. The EU law will affect all publicly held companies, as well as companies with:

More than 250 employees, turnover of more than 40 million euros ($43 million) or total assets exceeding 20 million euros ($22 million.)
Non-EU companies with at least one subsidiary in the EU and a net turnover of more than 160 million euros ($165 million.)
Reporting begins in January of 2025 for companies already subject to the European disclosure laws based on 2024 data, and January 2026 for all other companies based on 2025 data.
Note that there are special provisions for subsidiaries and select exemptions to be finalized as well.

Number of companies affected. For the European Union, the overall number is estimated to be as many as 50,000. It is difficult to estimate how many US organizations this may affect, since the regulations will include: most organizations with 250 or more employees in Europe and soon even a smaller number yet to be determined; any size organization that does business with a European company in the US, or a US company that is subject to the disclosure rules. A recent report in the Wall Street Journal estimates about 3,000 companies in the US.

According to a report published by the US Chamber of Commerce, 64% of global investment in the US comes from Europe; there is about $750 billion in trade between Europe and the US; and Europe-owned companies account for over half of US exports. There are an estimated 23 million companies in the EU, of which over 135,000 have multinational operations. ESM has not yet found an estimate of US companies with offices in the EU nor of an estimate of how many do business with organizations covered by the new regulations.

Others to be affected by the law. As with ISO 9001 quality management standards (which are not mandatory), distribution and supply chain partners will be affected, as complying organizations must disclose workforce information on their major business partners as well. Because many of these related companies would not otherwise meet the thresholds for legal reporting, they will only have to provide Corporate Sustainability Reports or have them audited if insisted upon by a large customer, and there will be no legal obligation to publicly report any information in the US or to a European Union database.

Reporting access. The new regulations mean that starting in 2025, investors, consumers, employees, supply chain and distribution partners, communities, lawyers, activists, recruiters, shareholders etc., will be able to access a free public web site to obtain highly detailed, standardized information not only on the composition and interests of the organization's stakeholders, but; how they treat them, and which metrics they use and how. Such information will presumably be in a format comparable with claims made in marketing, recruitment, investment decisions, or other forms of engagement with a firm, as well as in a manner comparable with the reports of other organizations.

Attorneys urge it’s time to begin preparations now. The rules will require the largest organizations to account for their activities in 2024, even though the reports will not be published until 2025. The longer organizations take to accumulate the required information and metrics, the longer it will take to proactively address any salient issues, such as high turnover.

Stakeholders entailed. The European Union Sustainability Reporting Standards (ESRS) include the following four detailed disclosures about all stakeholders, including practices used to engage with them, address multiple key issues, and metrics.

1.The organization's own workforce: The report must enable readers to understand how the undertaking affects the company’s own workforce by covering working conditions, access to equal opportunities and other work-related rights, work-life balance, diversity, health and safey, social dialog, professional development, people with disabilities, along with detailed disclosures on workforce demographics.

2.Workers in the value chain: The report must set out how the company affects workers in its value chain through its own operations and its upstream and downstream value chain (including its products and services, its business relationships, and its supply chain). This includes disclosures on processes for engaging with such workers, channels through which such workers can raise concerns, targets related to managing material impacts on such workers, and remediation of material impacts on such workers, among others, along with the same types of disclosures required of a company's own workforce.

3.Affected communities: The report must enable readers to understand how the undertaking affects local communities through the company’s own operations and its upstream and downstream value chain (including its products and services, its business relationships, and its supply chain), any actions taken, and how the undertaking manages risks and opportunities relating to impacts and dependencies on affected communities.

4.Consumers and end users: The report must set out policies and targets that address the management of the material impacts its products and services have on consumers and end users – including impacts to a consumers’ privacy or health, processes for consumer and end-user engagement concerning actual and potential impacts, mechanisms through which consumers and end users can raise concerns, and approaches to mitigating material risks and remediating actual impacts. This includes claims made in marketing and reputational risk for failure to deliver those claims, including communications and even product assembly instructions.

General Principles of CSRD

Whether an organization is directly affected by the CSRD, indirectly as a supply chain or distribution partner, or if an organization simply wishes to publish a Corporate Sustainability Report with the widest credibility, the CSRD provides in effect a global reporting framework that leaves each organization the freedom to identify its own purpose, value proposition, goals and objectives, and to use the processes and metrics of its own choosing as long as they are verifiable and consistent from year to year. The explicit goal of the European Union is to in effect level the playing field: make it easier for stakeholders to objectvely compare organizations based on metrics generally understood to impact the bottom line; customers, employees, supply chain and distribution partners, and communities.

The disclosures seek to clarify:

An organization’s value proposition and purpose;
The risks and opportunities it creates for employees, supply chain and distribution partners, communities, and customers;
The benefits they create for stakeholders and the costs externalized onto society because of substandard wages and benefits, supply chain and distribution partner management, poor community relations, or pollution;
The verifiable processes and metrics to monitor progress; and any changes in strategies and corresponding reasons.

When disclosing targets in relation to any stakeholder, the disclosures should include:

The intended outcomes to be achieved in the lives of the stakeholders, being as specific as possible;
Verification that these are measurable/verifiable;
Assurance of their stability over time in terms of definitions and methodologies to allow for continuity in the data points derived from the targets, and/or
Standards or commitments on which the targets are based are to be clearly defined in the reporting (for instance code of conducts, sourcing policies, global frameworks, or industry codes).

Notably, the authors of the law wish to see how addressing a risk or problem creates a business opportunity: “For example, a target to ensure equal access to finance for underserved consumers could both reduce discrimination impacts on those consumers and enlarge the undertaking’s pool of customers.”

For each category of stakeholder, the disclosures include their key characteristics; the value created for them and risks entailed; what is being done to obtain meaningful feedback; what the processes are for addressing that feedback, what consistent metrics are being used; and what changes in strategy have occurred and for what reason.

Of particular importance in explaining all stakeholder relationships are:

How an organization is balancing short, mid- and long-term issues, risks, marketplace and financial factors.
The effects of risks and opportunities, related to the undertaking’s impacts and dependencies on stakeholder, on the undertaking’s development, including cash flows, financial position, and financial performance over the short-, medium- and long-term.
What are the short-, mid-, and long-term impact of key policies and decisions.

Other key areas of disclosures common to all stakeholder groups:

Tradeoffs. Any trade-offs being made to create opportunities or to address risks that have an impact on key stakeholders and how they are being communicated, mitigated, measured, and addressed.
Communication. The specific means of communication and/or training in order to communicate to relevant stakeholders opportunities, risks, and tradeoffs.
Voice. The specific means used to engage stakeholders or their appropriate representatives on their specific concerns, complaints, or other issues; what is the process for taking action, measuring results, and continually improving.
Taking action. The authors are focused on learning what specific actions organizations are taking to create value and to address opportunities and risks, as well as on any course corrections and why.
Outcomes. The disclosure requirements emphasize the results of efforts to create opportunity or to address risks and how to make sure there is a process for continuous improvement.
Human rights, social protection, and worklife balance Throughout the disclosures, the authors seek information ensuring that organizations are doing everything possible to ensure ethical employment and pay practices consistent with UN and other international standards specified in the draft standards.
Accountability. For every area of stakeholder engagement, it should be clear who is accountable for results; whether they are a full or part-time employee, and the training required for effective management.

Key Metrics Disclosed

In most cases, the new law includes the specific recommended formulas to be used for calculating the disclosures. In all, it is estimated that the law will require about 82 metrics.

Employees
Essentially, the draft requirements relate to managing material negative impacts, advancing positive impacts, and managing material risks and opportunities. When disclosing the organization’s targets, it shall consider disclosing, where applicable:

”The intended outcomes to be achieved in the lives of value chain workers, customers, and communities being as specific as possible;
That these are measurable/verifiable and how;
That the metrics are stable “over time in terms of definitions and methodologies to allow for continuity in the datapoints derived from the targets;
Standards or commitments which the targets are based on are to be clearly defined in the reporting (for instance code of conducts, sourcing policies, global frameworks, or industry codes).”

The objective of the standard “is to specify disclosure requirements which will enable users of the sustainability statements to understand the undertaking’s material impacts on its workforce, as well as related material risks and opportunities, including:

How the undertaking affects its own workforce, in terms of material positive and negative actual or potential impacts;
Any actions taken, and the result of such actions, to prevent, mitigate or remediate actual or potential negative impacts;
The nature, type and extent of the undertaking’s material risks and opportunities related to its impacts and dependencies on its own workforce, and how the undertaking manages them; and
The financial effects on the undertaking over the short-, medium- and long-term time horizons of material risks and opportunities arising from the undertaking’s impacts and dependencies on its own workforce.

In order to meet the objective, this standard also requires an explanation of the general approach the undertaking takes to identify and manage any material actual and potential impacts on its own workforce in relation to the following social, including human rights, factors or matters, working conditions, including:

Secure employment;
Working time;
Adequate wages;
Social dialogue;
Freedom of association, the existence of works councils and the information, consultation and participation rights of workers;
Collective bargaining, including the rate of workers covered by collective agreements;
Work-life balance and health and safety;
Equal treatment and opportunities for all, including:
Gender equality and equal pay for work of equal value;
Training and skills development;
Employment and inclusion of persons with disabilities;
Measures against violence and harassment in the workplace and diversity;
Other work-related rights, including: child labor; forced labor; adequate housing, and
privacy.

Metrics include:

Employee turnover
Gender diversity
Gender pay disparities
Executive to worker pay ratios
Worker voice and representation
Unionization rates
Incidents of discrimination
Programs to access skills development .
No. and nature of performance reviews.
Injury rates.

Employees of Supply Chain and Distribution Partners

Organizations subject to the law will have to report on employees of supply chain and distribution partners, as well as practices for customers and communities. “The objective of this standard is to specify disclosure requirements which will enable users of the sustainability statements to understand material impacts on value chain workers caused or contributed to by the undertaking, as well as material impacts which are directly linked to the undertaking’s own operations, products or services through its business relationships and its related material risks and opportunities, including:

How the undertaking affects workers in its value chain, in terms of material positive and negative actual or potential impact;
Any actions taken, and the result of such actions, to prevent, mitigate or remediate actual or potential negative impact;
The nature, type and extent of the undertaking’s material risks and opportunities related to its impacts and dependencies on workers in the value chain, and how the undertaking manages them; and
The financial effects on the undertaking over the short-, medium- and long-term time horizons of material risks and opportunities arising from the undertaking’s impacts and dependencies on workers in the value chain.
In order to meet the objective, this [draft] Standard requires an explanation of the general approach the undertaking takes to identify and manage any material actual and potential impacts on value chain workers in relation to:
Working conditions (for example, secure employment, working time, adequate wages, social dialogue, freedom of association, including the existence of work councils, collective bargaining, work-life balance and health and safety);
Equal treatment and opportunities for all (for example, gender equality and equal pay for work of equal value, training and skills development, the employment and inclusion of persons with disabilities, measures against violence and harassment in the workplace, and diversity);
Other work-related rights (for example, child labor, forced labor, adequate housing, water and sanitation and privacy).

Consumers

A brief description of the types of consumers and/or end-users subject to material impacts by its own operations or through its value chain, and specify whether they are: i. consumers and/or end-users of products that are inherently harmful to people and/or increase risks for chronic disease; ii. consumers and/or end-users of services that potentially negatively impact their rights to privacy, have their personal data protected, freedom of expression and nondiscrimination; iii. consumers and/or end-users who are dependent on accurate and accessible product- or service- related information, such as manuals and product labels, to avoid potentially damaging use of a product or service; iv. consumers and/or end-users who are particularly vulnerable to health or privacy impacts or impacts from marketing and sales strategies, such as children or financially vulnerable individuals.

The undertaking shall disclose its general processes for engaging with consumers and end- users and their representatives about actual and potential material impacts on them.

The undertaking shall describe the processes it has in place to provide for or cooperate in the remediation of negative impacts on consumers and end-users that the undertaking has identified it has caused or contributed to, as well as channels available to consumers and end- user to raise concerns and have them addressed.

Communities

When responding to ESRS 2 SBM-3, the undertaking shall disclose: whether and how actual and potential impacts on affected communities as identified in ESRS 2 IRO-1 Description of the processes to identify and assess material impacts, risks and opportunities: (i) originate from or are connected to the undertaking’s strategy and business models, and (ii) inform and contribute to adapting the undertaking’s strategy and business model(s); and the relationship between its material risks and opportunities arising from impacts and dependencies on affected communities and its strategy and business model(s).

The organization shall disclose “a brief description of the types of communities subject to material impacts by its own operations or through its upstream and downstream value chain, and specify whether they are:

Communities directly living or working around the undertaking’s operating sites, factories, facilities or other physical operations, or more remote communities affected by activities at those sites (for example by downstream water pollution);
Communities along the undertaking’s value chain (for example, those affected by the operations of suppliers’ facilities or by the activities of logistics or distribution providers);
Communities at one or both endpoints of the value chain (for example, at the point of extraction of metals or minerals or harvesting of commodities, or communities around waste or recycling sites);
Communities of indigenous peoples.

The undertaking shall describe its policies that address the management of its material impacts on communities, as well as associated material risks and opportunities; and provide a summary of the content of the policies.
The undertaking shall disclose its general processes for engaging with affected communities and their representatives about actual and potential material impacts on them.

The undertaking shall disclose its approaches to taking action on material impacts on affected communities, and to mitigating material risks and pursuing material opportunities related to affected communities and effectiveness of those actions.

Goals Related to Risks and Opportunities

The law's authors underline the importance of focusing on both goals and results. “Targets related to risks and opportunities may be the same as or distinct from targets tied to impacts. Therefore, no distinction is to be made per se, but what the target is aiming at is to be disclosed (i.e. impact and/or risks and opportunities). For example, a target to reach living wages for supply chain workers could both reduce impacts on those workers and reduce associated business risks in terms of the quality and reliability of supply.”

The importance of disclosing the time-frame of risks is also stressed. “The undertaking may also distinguish between short-, medium-, and long-term targets covering the same policy commitment. For example, an undertaking may have a long-term target to achieve an 80% reduction in health and safety incidents affecting its delivery drivers by 2030 and a near- term target to reduce the overtime hours of delivery drivers by x% while maintaining their income by 2024.”

Accounting for changes in goals: “When modifying or replacing a target in the reporting period, the undertaking may explain the change by linking it to significant changes in the business model(s) or to broader changes in the accepted standard or legislation from which the target is derived to provide contextual information.”

Applicable International Standards

UN and Other International Frameworks
The CSRD encourages organizations to use already established and recognized standards in accordance with the principles of the United Nations and other international labor and business organizations.
UN Guiding Principles on Business and Human Rights
Universal Declaration of Human Rights
UN Declaration on the Rights of Indigenous Peoples
The International Labor Organization’s Convention
Global Framework Agreements
OECD Guidelines for Multinational Enterprises
UN Sustainable Development Goals (SDGs).

Human Capital Disclosure Frameworks
ISO 30414 Human Capital standards
ISO 10018 People Engagement standards
World Economic Forum Measuring Stakeholder Capitalism
SASB
GRI (Global Reporting Initiative)
Integrated Reporting Framework

Part II. Strategy and Implementation

The history of ISO 9001 quality management standards provides a solid foundation for predicting what will happen now that the European Union has made such disclosures law. A certain percentage of affected organizations will view the disclosures as a competitive opportunity. On the other hand, perhaps 50% or more will view it strictly as a compliance issue. While this guide is for organizations who view the disclosures as an opportunity, the simple advice for all others is to assemble a legal team well-versed in the law recognizing that all reporting will be subject to independent audit in the case of companies that meet the disclosure thresholds and that the metrics in terms of turnover, diversity, and pay equity will be available for public view and comparable from year to year.

It is critical to understand that in viewing the new disclosure law as a business opportunity, CEO and C-suite commitment are required, as well as a strategic and systematic approach to establishment of purpose, goals, and objectives; fully aligned tactical implementation across the enterprise; very clear metrics related to purpose, goals and objectives, and a continuous improvement process. The law can become a guiding light toward a more sustainable stakeholder approach to enhancing returns or a burden to be avoided at the cost of public reputation risks or worse.

The law is are specific in the intent to encourage organizations to create value by addressing social issues, i.e., benefiting from an increased pool of talent or customers by helping to uplift marginalized groups. They do not ask organizations to divert profits to unrelated social causes.

In order to gain maximum value from this investment in time and money, organizations need expertise in not only the spirit and actual implementation process of the CSRD, but in actual implementation at the front lines of human resources; sales, marketing and customer service; finance; operations, administration, etc.

The Formal Plan for Stakeholder Management, Metrics and Reporting

Organizations that already have a strategic and systematic approach to stakeholder management, metrics, and reporting will find the creation of a EU-compliant Corporate Sustainability Report relatively easy, because they already have a formal written plan, collaboratively developed with people accountable for each group of stakeholders, that includes:

The organization’s purpose, goals, and objectives, and the premise upon which it was created;
The tactical plan to fulfill that purpose and achieve the goals across the enterprise, and how it will be measured and continuously improved.

The Stakeholder Management plan includes organization’s purpose, goals, and objectives; the specific processes for engaging all stakeholders toward that common purpose, including who is accountable; the metrics that will be used to measure progress, and how those metrics will be used to continuously improve experiences and results.

Assembling and Training the Team

Assuming your organization views the disclosures as an opportunity to develop and implement a strategic and systematic approach to value creation through people, the process starts by identifying a cross-functional team lead by the CEO, CFO, or executive with the most experience working cross-functionally across the enterprise. If your organization already has a business operating system, the implementation process can easily be baked into an already existing decision-making and implementation framework. If not, now is a good time to consider implementing a business operating process, often led by an internal executive or outside consultant knowledgeable in stakeholder management, business operating systems, and reporting, as these processes actually save time. In any case, all of your department heads will require basic training in the principles of stakeholder management, metrics, and reporting, and on the EU Corporate Sustainability Reporting directive.

Creating the Story

In the simplest terms, the law requires organizations large enough to have a societal impact to disclose what type of corporate citizen they are; that they verify the practices of their distribution and supply chain partners, and that they disclose how they add value to and/or create risks for customers, communities, and all stakeholders, and what they do to learn about, address, and continually enhance their processes. See Part 3, the sample Table of Contents for a EU-conforming Corporate Sustainability Report.

Monitoring Results

Any organization with a business operating system or equivalent will have little difficulty publishing an EU Corporate Sustainability Report. The cross-functional teams will continually receive all the same metrics throughout the year and address their implications, possible course corrections, etc. as a way of doing business. In order to avoid publishing embarrassing results, first-timers to this process will need time to take action.

Continuous Improvement

The disclosure law is clear: organizations need to report on the processes they use not only to gain feedback from stakeholders on the risks and opportunities posed by its actions, but to be transparent about the process for implementation.

The Role of Your Legal Advisors

Whether an organization is fully dedicated to viewing the Corporate Sustainability Report as a business opportunity or as a disclosure requirement, the legal team must be involved. In the case of an organization that views the disclosures as an opportunity, the process needs to be run by a trained, qualified business executive (not a lawyer) knowledgeable about the operations and organizational chart of your organization, supported by the legal team, or qualified outside counsel. In the case of organizations that view a Corporate Sustainability Report as a disclosure requirement, it’s probably best to put the process in the hands of a highly qualified ESG attorney with the authority to coordinate the necessary information and draft the report with the key stakeholder department leaders.

Part III: Sample Corporate Sustainability Report Outline

Given that the EU comprises the world’s third’s largest economy, and that neither China nor the US (Nos. 1 or 2) are known to be considering standards of this nature and breadth, organizations can benefit from following the European Union model if they see the benefits of publishing a Corporate Sustainability Report for competitive purposes.

Note: if a company is not legally bound to follow the CSRD law, it does not have to make publicly available its complete Corporate Sustainability Report simply because it’s competitors do not have to do so, creating anything but the level playing field intended by the law.

Here is a general table of contents.

1. General Principles, Goals, and Objectives of the Organization

An organization’s general value proposition and purpose;
The risks and opportunities it creates for employees, supply chain and distribution partners, communities, and customers;
The benefits its create for stakeholders and the costs externalized onto society in terms substandard wages and benefits, health and safety risks, supply chain and distribution partner management, poor community relations, or pollution;
The verifiable processes and metrics to monitor progress; and any changes in strategies and corresponding reasons made in the previous year;
How what the organization does creates value by addressing societal challenges; i.e., increasing its talent pool by encouraging diversity in recruitment, professional development, and training.

2. Employees, Employees of Supply Chain and Distribution Partners, Customers, and Communities
For each of the stakeholder groups, explain how the intended outcomes to be achieved will affect the lives of the stakeholders, being as specific as possible, including both opportunities and risks and that:

They are measurable/verifiable;
They are consistent over time in terms of definitions and methodologies to allow for continuity in the data points derived from the targets, and/or,
The standards or commitments on which the targets are based are to be clearly defined in the reporting (for instance code of conducts, sourcing policies, global frameworks, or industry codes).

Each section should address:

The key characteristics of each stakeholder group, the value created for them and risks entailed; what is being done to obtain meaningful feedback; what the processes are for addressing that feedback;
What consistent metrics are being used;
What changes in strategy have occurred and for what reason;
How an organization is balancing short, mid- and long-term issues, risks, marketplace and financial factors;
What are the effects of risks and opportunities, related to the organization’s impacts and dependencies on stakeholder group, on the organization’s development, including cash flow, financial position, and financial performance over the short-, medium- and long-term;
What are the short-, mid-, and long-term impact of key policies and decisions.

Finally, where relevant, the report should disclose:

Tradeoffs. Any trade-offs being made to create opportunities or to address risks that have an impact on key stakeholders and how they are being communicated, mitigated, measured, and addressed.
Communication. The specific means of communication and/or training in order to communicate to relevant stakeholders opportunities, risks, and tradeoffs.
Stakeholder Voice. The specific means used to engage stakeholders or their appropriate representatives on their specific concerns, complaints, or other issues; what is the process for taking action, measuring results, and continually improving.
An Action Plan. The authors are focused on learning what specific actions organizations are taking to create value and to address opportunities and risks, as well as on any course corrections and why.
Outcomes. The disclosure requirements emphasize the results of efforts to create opportunity or to address risks and how to make sure there is a process for continuous improvement.
Human rights, social protection, safety, and worklife balance. Throughout the disclosures, the authors seek information ensuring that organizations are doing everything possible to ensure ethical employment and pay practices consistent with UN and other international standards specified in the draft standards.
Accountability. For every area of stakeholder engagement, it should be clear who is accountable for results; whether they are a full or part-time employee, and the training required for effective management.

Part IV. Estimated Time and Costs for SMEs and Large Enterprises

The looming question for organizations is: how much is this going to cost? The good news is that the Enterprise Engagement Alliance and its affiliates have first-hand experience: ours are almost the only companies in the world that have created human capital reports and conducted audits for both very large comapnies and an SME (small- to medium-size enterprise), providing us with first-hand experience of the time and expertise involved; the cost, and scalability factors.

Public Cost Estimates
Before sharing the Enterprise Engagement Alliance’s estimates, here are two different views for the basis of comparison. Neither estimate appears to include all of the cost factors outlined below, and both appear to overestimate the actual cost of what is included.

A recent article in the Wall Street Journal shares the EFRAG (European Financial Reporting Advisory Group) estimate that “related yearly auditing costs for ‘limited assurance’ can range from 0.013% to 0.026% of revenue; or $130,000 to $260,000 per year for every $10 million in revenue. This estimate does not include the cost of creating and implementing the Corporate Sustainability Reporting plan.
The company One Trust estimates that it will cost large companies up to $218 million in the first year and $152 million for following years, with average recurring administrative costs at $89,500 euro per year, of which about 40% can be attributed to legal costs. It estimates that large companies will pay an estimated $109,000 for assurance services (a preliminary audit) on average, while smaller companies will pay between $30,500 and $46,000 on average.”

As the only organization that has along with its affiliates created and audited human capital reports aligned with the new EU CRSD law, this report includes the Enterprise Engagement Alliance’s own time estimates based on actual practices at an SME to large-scale multinationals. The good news is that the cost can potentially be much lower than the above estimates, especially if a company views compliance as an opportunity rather than an obligation and makes use of its Corporate Sustainability Report as a business operating system and marketing tool, rather than as a disclosure requirement.

Cost Factors
A fundamental factor in estimating your organization’s cost in terms of outside advisory and legal fees, as well as internal management time, varies based in part on whether your organization views Corporate Sustainability Reporting as an opportunity or a compliance issue. When viewed as an opportunity, there is less extra time required of your team after the first year’s investment because the processes are built into the organization’s operating system and because the Corporate Sustainability Report is considered a marketing investment. When viewed as an obligation, all of the activities in this executive brief are “sunk” costs.

Compliance versus opportunity considerations. When viewed as compliance, every moment diverted from management’s time is a cost. Therefore, the four hours or so a month required of each stakeholder leader to review reports, practices, and metrics; share findings with other stakeholder heads in monthly meetings, and to implement improvement processes, are all unfunded costs; the same applies to the legal and communications costs. The risks of viewing the reports as compliance is that the metrics reported will be inferior to the company's competitors.

When viewed as an opportunity, after the first-year launch process, there is much less incremental cost in terms of management time because the requirements and Corporate Sustainability Report overlay with the management, measurement, and continuous improvement processes they would conduct anyway. Viewed as a marketing activity to engage investors, talent, customers, supply chain and distribution partners and communities, the communications, design, layout and related public relations and other costs to create the Corporate Sustainability Report are part of the strategic marketing plan.

Below is a breakdown of the cost factors. When engaging an advisory firm, it should be able to develop an estimate of hours and costs based on its hourly fees after a preliminary gap analysis process at your organization.

1. Executive briefings and leadership training. This is a relatively fixed cost that involves a combination of group and individual self-learning to grasp the basic principles of stakeholder management and reporting.
Estimated management time: A half- to full-day group session, plus three to five days of self-training for those in charge of implementation.
Estimated advisor time for on-site or live training: 50 hours, including pre-program prep, facilitation, and a formal report.

2. Management of strategic plan development, implementation, reporting, and the continuous improvement process across the enterprise. This process involves:
General oversight. At a large company, in the first year, this can require one full-time senior-level executive with cross functional business experience, or a part-time senior executive supported by qualified outside consultants in the Environment, Social, and Governance domains.
Strategic plan development: An off-site 1½-day meeting includes the head of every department reporting to the CEO, meaning the COO, CFO, CMO, CHRO, IT, Operations, Research, Legal, etc. This is no different than any other strategic planning meeting except that the agenda includes all the key practices, metrics, and risk and opportunity analysis contained in the EU CSRD or outline for the Corporate Sustainability Report.
Management and coordination hours (whether provided internally or with an outside advisory firm): About 80 hours blended senior and mid-level support time to organize, communicate, facilitate, and provide a written report.
Implementation: The actual process of implementing the plan is based almost solely on the current state of stakeholder management at the organization. If it already has a business operating system for managing its people resources, the process is relatively seamless. If not, the process of streamlining an organization through implementation of a business operating system can require from six months to a year. The good news is that in year 2, there will be no need to repeat this process. Managing and coordinating a business operating system requires about 24 hours a month to manage meetings, communications, information sharing, and reporting at an SME and easily double that for a large enterprise.
Deliverable. A formal, consensus-based stakeholder management, measurement, and continuous improvement plan based on fulfilling the organization’s purpose and achieving its goals and objectives. The entire plan should be summarized in no more than two pages, including key metrics aligned with the EU CSRD.

3. Information Technology. This includes data collection, management, reporting, and security and includes human resources systems for turnover, pay, diversity, safety, and wellness; learning and professional development; incentives, rewards, and recognition; workplace or customer-related legal actions; discrimination, harassment, and fraud claims, etc. The goal is to create a dashboard that overlays with the EU CSRD reporting requirements.

The first-year IT costs include:
A. Setting up the data reporting framework in compliance with the soon to be published European digital reporting framework—this process should be incorporated into the strategic planning meeting so that the implementation begins the first business day after the meeting.
B. The IT plan includes establishing the internal distribution and action plan; finding and consolidating the data from the various related departments and getting it to the right place at the right time, through APIs when required.
Estimated IT time. This depends completely on the state of data management at the organization but can easily range from 100 at a SME to 1,000 hours at a large company.

Second-year costs and beyond: Once again, if viewed as compliance, the potentially thousands of hours required to fully modernize stakeholder management reporting into convenient dashboards for everyone with management accountability might be viewed as a cost; for other companies, it’s a good reason to provide management with the information they need to continually improve experiences, quality, and productivity and to report on it in Corporate Sustainability Reports to engage investors, employees, customers, supply chain and distribution partners, and communities.

4. Communications to write and publish the report. An effective Corporate Sustainability Report starts with a short summary of the organization’s purpose, goals, and objectives in each stakeholder category, along with key metrics for each goal and process. Many current reports are as many as 60 pages long; given the attention span of today’s busy citizen, half that length is advisable, even including space for visuals.

Once again, the first-year cost is higher to create the template, design, table of contents and boiler plate statistics in a way that can be easily updated from year to year. The number hours for an experienced senior writer’s time can vary from about 120 hours for a SME to triple that for a large company. This does not include design and layout fees for PDFs or printed materials, which could easily amount $500 per page for a large company in the US and half that for a SME.

5. Qualified legal counsel. While companies that view the Corporate Sustainability Report as a business opportunity do not employ attorneys to run the process, a qualified attorney is critical at every step of the way to 1) review the strategic plan, reporting criteria, and initial reports to identify early risks, and 2) to read the final report to identify overlooked risks or opportunities and ensure alignment (when applicable) to the EU reporting requirements.
Estimated legal time: For an SME, the job can be accomplished in about 80 to 120 hours the first year, and half that the second year. For large companies, the cost is easily triple that based on the number of subsidiaries.

6. Audits. Because of the lack of experienced talent available for conducting stakeholder management audits, organizations will have a challenge finding people who have conducted audits and/or who are qualified to do so. Based on the experience of the Enterprise Engagement Alliance and its affiliates, a stakeholder management audit takes anywhere from about 60 to 80 hours at a SME to at least 180 hours or more at a major company with many separately reporting business units.

The audits, which must be completed by someone unaffiliated with the entity aiding in the creation of the stakeholder management business plan and Corporate Sustainability Report, examine the stakeholder management business plan, practices, and metrics, including how they are calculated. The process includes one-on-one meetings with department heads as well as with random stakeholders as necessary to determine that the practices are being carried out as reported. The deliverable is a final report and a score based on the CSRD criteria and ISO 30414 human capital reporting and ISO 10018 people engagement standards.

Note that companies below $50 million in sales and/or that don't have to comply with CSRD standards can create effective Corporate Sustainability Reports for a fraction of these costs.

Time and Cost Estimates

Fee Category	SMEs ($50 million+ sales)	Large companies ($1 billion+ sales)
1. Executive briefings and leadership training.	*50 hours prep time by internal or outsourced manager. (Four to 30 hours for management depending on need for further training. )	*50 hours prep time by internal or outsourced manager. (Four to 30 hours for management depending on need for further training. )
2. Management of strategic plan development, implementation, reporting, and the continuous improvement process across the enterprise.	*250 hours of internal or blended outsourced time, including 60 hours to facilitate and create the stakeholder management plan and about 10 hours a month to monitor progress.	*500 hours of internal or blended outsourced time, including 120 hours to facilitate and create the stakeholder management plan; then about 20 hours a month to monitor progress.
3. Information technology.	Year one—100 to 200 hours. Year two—minimal updating and distribution costs.	Year one—500 hours plus Year two—minimal updating and distribution costs.
4. Communications.	Year one—Up to 120 blended hours for writing, editing, design, etc. Year two—About 100 hours.	Year one—Up to 360 blended hours for writing, editing, and design. Year two—About 300 hours.
5. Legal.	Year one—Up to 80 hours. Year two—Up to 60 hours.	Year one—Up to 240 hours. Year two—Up to 200 hours.
6. Audits (second year).	*60 to 80 hours.	*180 to 240 hours.
Deliverable	A formal Corporate Sustainability Report and metrics in conformance with the EU CSRD.	Same as SMEs
Estimated hours (For developed nations, use $400 per hour blended rate for outside advisors.)	First year: 650 advisor hours ($260,000) Second year: 550 advisor hours ($220,000)	First year: 1,750 advisor hours ($700,000) Second year: 1,400 advisor hours ($560,000)

Appendix

Own Workforce
Workforce of Customers
Communities
Customers

Below are verbatim excerpts from the appendices for each stakeholder category outlining the intent and scope of the disclosure requirements.

Own Workforce ESRS S 1
Click here for the draft regulations.

Objectives

1. The objective of this draft standard is to specify disclosure requirements which will enable users of the sustainability statements to understand material impacts on its workforce, as well as related material risks and opportunities, including:
(a) How the undertaking affects its own workforce, in terms of material positive and negative actual or potential impacts;
(b) Any actions taken, and the result of such actions, to prevent, mitigate or remediate actual or potential adverse impacts;
(c) The nature, type and extent of the undertaking’s material risks and opportunities related to its impacts and dependencies on own workforce, and how the undertaking manages them; and
(d) The effects of risks and opportunities, related to the undertaking’s impacts and dependencies on own workforce, on the undertaking’s development, including cash flows, financial position, and financial performance over the short, medium and long term.

2. In order to meet the objective, this draft standard also requires an explanation of the general approach the undertaking takes to identify and manage any material actual and potential impacts on its own workforce in relation to the following social, including human rights, factors or matters:
(a) Working conditions, including:
i. Secure employment;
ii. Working time;
iii. Adequate wages;
iv. Social dialogue;
v. Freedom of association including existence of works councils and the information, consultation and participation rights of workers;
vi. Collective bargaining, including the rate of workers covered by collective agreements;
vii. Work-life balance; and
viii. Health and safety.

(b) Equal treatment and opportunities for all, including:
i. Gender equality and equal pay for work of equal value;
ii. Training and skills development;
iii. Employment and inclusion of persons with disabilities;
iv. Measures against violence and harassment in the workplace; and diversity.

(c) Other work-related rights related to:
i. Child labor;
ii. Forced labor;
iii. Adequate housing; and
iv. Privacy.

3. This draft standard also requires an explanation of how such impacts, as well as the undertaking’s dependencies on its own workforce, can create material risks or opportunities for the undertaking. For example, on the matter of equal opportunities, discrimination in hiring and promotion against women can reduce the undertaking’s access to qualified labor and harm its reputation. Conversely, policies to increase the representation of women in the workforce and in upper levels of management can have positive effects, such as increasing the pool of qualified labor and improving the undertaking’s reputation.

4. This draft standard covers an undertaking’s own workforce, which is understood to include both workers who are in an employment relationship with the undertaking (employees) and non-employee workers who are either individuals with contracts with the undertaking to supply labor (“self-employed workers”) or workers provided by undertakings primarily engaged in “employment activities” (NACE Code N78). Refer to Application Requirements for examples of who falls under own workforce.

5. This draft standard does not cover workers in the undertaking’s upstream or downstream value chain; these categories of workers are covered in ESRS S2 Workers in the value chain.

6. The draft standard requires undertakings to describe their own workforce, including key characteristics of the employees and non-employee workers that are part of it. This description provides users with an understanding of the structure of the undertaking’s own workforce and helps to contextualize information provided through other disclosures.

7. The terms “own workforce” and “own workers” are used interchangeably in this draft standard.

Key Provisions

AR 1. The undertaking may also highlight special issues relevant to a material impact for a shorter period of time, for instance initiatives regarding the health and safety of own workers during a pandemic.

AR 2. The overview of social matters is not meant to imply that all these issues should be reported on in each Disclosure Requirement in this draft standard. Rather, they provide a list of matters derived from the CSRD that undertakings shall consider for the ESRS 2 materiality assessment related to own workforce and, subsequently, report as material impacts, risks, and opportunities within the scope of this draft standard.

AR 3. Examples of workers that fall within the scope of own workforce are:
(a) Examples of contractors (self-employed persons) in own workforce include:
i) Contractors hired by the undertaking to perform work that would otherwise be carried out by an employee.
ii) Contractors hired by the undertaking to perform work in a public area (e.g., on a road, on the street).
iii) Contractors hired by the undertaking to deliver the work/service directly at the workplace of a client of the undertaking.

(b) Examples of workers employed by a third party engaged in ‘employment activities’ include:
i) Workers who perform the same work that employees carry out, including: workers who fill in for employees who are temporarily absent (due to illness, holiday, parental leave, etc.) and workers performing work additional to regular employees;
ii) workers who are dispatched temporarily from another EU member state to work for the undertaking.

AR 4. Impacts on its own workers can originate in an undertaking’s business model or strategy in a number of different ways. For example, impacts may relate to the undertaking’s value proposition (e.g., providing lowest cost products or services, or high-speed delivery, in ways that put pressure on labor rights in its own operations), or its cost structure and the revenue model (e.g., shifting inventory risk to suppliers, with knock-on effects on the labor rights of their own workers).

AR 5. With regard to paragraph 10, impacts on its own workers that originate in the business model or strategy can also bring material risks to an undertaking. For example, risks arise if some own workers are at risk of forced labor, and the undertaking is importing products into countries where the law allows for the confiscation of imported goods that are suspected of being made with forced labor. An example of opportunities for the undertaking may result from providing opportunities for the workforce such as job creation and upskilling in the context of a ”just transition”. Another example, in the context of a pandemic or other severe health crisis, relates to the undertaking potentially relying on contingent labor with little to no access to sick care and health benefits that may face severe operational and business continuity risks as workers have no choice but to keep working while sick, further exacerbating the spread of the disease and causing major supply chain breakdowns. Reputational and business opportunity risks linked to the exploitation of low-skilled, low-paid workers in sourcing geographies with minimal protections for them are also increasing with media backlash and consumer preferences moving to more ethically sourced or sustainable goods.

AR 6. Examples of particular characteristics of own workers that shall be considered by the undertaking when responding to paragraph 17 relate to young workers that may be more susceptible to impacts on their physical and mental development, or women workers in a context where women are routinely discriminated against in the terms and conditions of work, or migrant workers in a context where the market for the supply of labor is poorly regulated and workers are routinely charged recruitment fees. For some workers, the inherent nature of the activity that they are required to undertake may put them at risk (e.g., workers required to handle chemicals or operate certain equipment or low paid workers who are on “zero hours” contracts).

AR 7. The business risks, which can lead to material financial risks, could also arise because of the undertaking’s dependency on its own workers where low-likelihood but high-impact events may affect the undertaking’s future cash flows; for example, where a global pandemic leads to severe health impacts on workers resulting in major disruptions to production and distribution. Other examples of business risk related to the undertaking’s dependency on workers include a shortage in skilled workers or political decisions or legislation affecting its own operations and own workforce.

ESRS 2- SBM 2 - S1
Interests and Views of Stakeholders

AR 8. The Section on ESRS 2 Disclosure Requirements SBM 2 requires the undertaking to provide an understanding of if and how it considers whether its strategy and business model(s) play a role in creating, exacerbating or (conversely) mitigating significant material impacts on own workers, and whether and how the business model(s) and strategy are adapted to address such material impacts.

AR 9. While own workers may not be engaging with an undertaking at the level of its strategy or business model(s), their views can inform the undertaking’s assessment of its strategy and business model(s). The undertaking shall consider reporting on the views of the (actual or potential) materially affected own workers’ legitimate representatives (trade unions or works councils) that have insight into their situation.

Impacts, Risks and Opportunities Management: Disclosure Requirement S1-1
Policies related to own workforce.

AR 10. The summary shall include the key information necessary to ensure a faithful representation of the policies in relation to own workers and, therefore, the undertaking shall consider disclosing explanations of significant changes to the policies adopted during the reporting year (e.g., new expectations for foreign subsidiaries, new or additional approaches to due diligence and remedy). This includes policies and commitments of the undertaking to prevent or mitigate the risks and negative impacts of reducing carbon emissions and transitioning to greener and climate- neutral operations on workers as well as to provide opportunities for the workforce such as job creation and upskilling, including explicit commitments to a ‘just transition’.

AR 11. The policy may take the form of a stand-alone policy regarding own workers or be included in a broader document such as a code of ethics or a general sustainability policy that has already been disclosed by the undertaking as part of another ESRS. In those cases, the undertaking shall provide an accurate cross-reference to identify the aspects of the policy that satisfy the requirements of this Disclosure Requirement.

AR 12. In reporting on its alignment of its policies with the UN Guiding Principles on Business and Human Rights, the undertaking shall consider that the Guiding Principles refer to the International Bill of Rights, which consist of the Universal Declaration of Human Rights and the two Covenants that implement it, as well as the International Labor Organization’s Declaration on Fundamental Rights and Principles at Work and the core conventions that underpin it, and may report on alignment with these underlying standards.

AR 13. When explaining how external-facing policies are embedded, undertakings may, for example, consider internal policies of responsible sourcing, and alignment with other policies relevant to own workers, for example, regarding forced labor. With regard to supplier codes of conduct that the undertaking may have, the summary shall indicate whether they include provisions addressing the safety of workers, including precarious work (i.e. use of workers on short-term or limited hours contracts, workers employed via third parties, sub-contracting to third parties or use of informal workers), human trafficking, the use of forced labor or child labor, and whether such provisions are fully in line with applicable ILO standards.

AR 14. As an illustration of the types of communication of its policies to those individuals, group of individuals or entities for whom they are relevant, either because they are expected to implement them (for example, the undertaking’s employees, contractors and suppliers), or because they have a direct interest in their implementation (for example, own workers, investors), to help ensure that the policy is accessible and that they understand its implications, the undertaking may disclose communication tools and channels (e.g., flyers, newsletters, dedicated websites, social media, face to face interactions, workers’ representatives) and / or the identification and removal of potential barriers for dissemination, such as through translation into relevant languages or the use of graphic depictions.

AR 15. Discrimination in employment and occupation occurs when someone is treated differently or less favorably because of characteristics that are not related to merit or the inherent requirements of the job. These characteristics are commonly defined in national laws. Besides the grounds mentioned in the Disclosure Requirement, undertakings shall consider other grounds for discrimination prohibited under national legislation.

AR 16. Discrimination can arise in a variety of work-related activities. These include access to employment, particular occupations, training and vocational guidance and social security. Moreover, it can occur with respect to the terms and conditions of employment, such as: recruitment, remuneration, hours of work and rest, paid holidays, maternity protection, security of tenure, job assignments, performance assessment and advancement, training opportunities, promotion prospects, occupational safety and health, termination of employment. The undertaking may address these areas specifically when disclosing its policies and underlying procedures to fulfill the disclosure requirement.

AR 17. The disclosure may further address whether the undertaking has or is planning to have:

(a) Policies and procedures which make qualifications, skills and experience the basis for the recruitment, placement, training and advancement of workers at all levels, while accounting for the fact that some individuals may have more difficulty than others to acquire such qualifications, skills and experience;
(b) Assigned responsibility for equal employment issues at a high level, issue clear company-wide policies and procedures to guide equal employment practices, and link advancement to desired performance in this area;
(c) Staff training on non-discrimination policies and practices, with a particular focus on middle and upper management to raise awareness and address resolution strategies for preventing and addressing systemic and incidental discrimination;
(d) Made adjustments to the physical environment to ensure health and safety for workers, customers and other visitors with disabilities;
(e) Evaluations whether a distinction is an inherent requirement of a job, and avoid applications of job requirements in a way that would systematically disadvantage certain groups;
(f) Up-to-date records on recruitment, training and promotion that provide a transparent view of opportunities for employees and their progression within the organization;
(g) Where discrimination is identified, grievance procedures to address complaints, handle appeals and provide recourse for employees (especially in the context of negotiations and collective agreements), and is alert to formal structures and informal cultural issues that can prevent employees from raising concerns and grievances; and
(h) Programs to promote access to skills development.

AR 18. When describing what function or role has operational responsibility for such engagement and/or ultimate accountability, and whether it requires certain skills of, or provides training or capacity-building for, relevant staff to undertake engagement. The undertaking may disclose whether this is a dedicated role or function or part of a broader role or function. If it cannot identify such a position or function, it may state so. This requirement could also be fulfilled with reference to ESRS 2 GOV 1.

AR 19. When preparing the disclosures described in paragraph 28 b) and c), the following illustrations may be considered:
(a) For stage(s) at which engagement occurs, examples could be in determining mitigation approaches or in evaluating their effectiveness;
(b) For type of engagement, these could be participation, consultation and/or information;
(c) For the frequency of the engagement, information may be provided on whether engagement occurs on a regular basis, at certain points in a project or business process, for example, when a new harvest season begins or a new production line is opened), as well as whether it occurs in response to legal requirements and/or in response to stakeholder requests and whether the result of the engagement is being integrated into the undertaking's decision-making processes; and
(d) For the role with operational responsibility, whether it requires certain skills of, or provides training or capacity building to relevant staff to undertake engagement.

AR 20. Global Framework Agreements (GFA) serve to establish an ongoing relationship between a multinational enterprise and a Global Union Federation to ensure that the undertaking adheres to the same standards in every country in which it operates.

AR 21. To illustrate how the perspectives of own workers have informed specific decisions or activities of the undertaking, the undertaking may provide examples from the current reporting period.

AR 22. Where the undertaking has agreements with national, European, or international trade unions or works councils related to the rights of its own workers, this can be disclosed to illustrate how the agreement enables the undertaking to gain insight into those workers’ perspectives.

AR 23. Where possible, the undertaking shall consider providing examples from the reporting period to illustrate how the perspectives of its own workers and workers' representatives have informed specific decisions or activities of the undertaking.

AR 24. The undertaking shall consider the following aspects when fulfilling this Disclosure Requirement:
(a) The type of worker engagement (e.g., information, consultation or participation) and its frequency (e.g., ongoing, quarterly, annually);
(b) How worker feedback is recorded and integrated into decision-making, and how workers are informed about the way in which their feedback has influenced decisions;
(c) Whether worker engagement activities take place at the organizational level or at a lower level, such as at the site or project level, and in the latter case, how information from worker engagement activities is centralized;
(d) The resources (e.g., financial or human resources) allocated to worker engagement; and
(e) How it engages with workers and workers’ representatives on the impacts on its own workforce that may arise from reducing carbon emissions and transitioning to greener and climate-neutral operations, in particular restructuring, employment loss or creation, training and up/reskilling, gender and social equity and safety and health.

AR 25. The undertaking may also explain:
(a) How it engages with at-risk or vulnerable groups (e.g. whether it takes specific approaches and gives special attention to potential barriers);
(b) How it takes into account potential barriers to worker engagement (e.g. language and cultural differences, gender and power imbalances, divisions within a community or group);
(c) How it provides workers with information that is understandable and accessible through appropriate communication channels;
(d) Any conflicting interests that have arisen among different workers and how the undertaking has resolved these conflicting interests; and
(e) How it seeks to respect the human rights of all stakeholders engaged, for example, their rights to privacy, freedom of expression, and peaceful assembly and protest.

AR 26. The undertaking may also report information about the effectiveness of processes for engaging with own workers from previous reporting periods. This applies in cases where the undertaking has assessed the effectiveness of these processes or derived lessons during the current reporting period. Processes used to track the effectiveness can include internal or external auditing or verification, impact assessments, measurement systems, stakeholder feedback, grievance mechanisms, external performance ratings, and benchmarking. The undertaking shall state what process was used to track effectiveness, and what the outcome was.

Disclosure Requirement S1- 3
Processes to remediate negative impacts and channels for own workers to raise concerns.

AR 27. In fulfilling the requirements set out by the disclosure criteria of ESRS S1-3, the undertaking may be guided by the content of the UN Guiding Principles on Business and Human Rights and the OECD Due Diligence Guidance for Responsible Business Conduct focused on remediation and grievance mechanisms.

AR 28. Channels for raising concerns or needs include grievance mechanisms, hotlines, trade unions (where workers are unionized), works councils, dialogue processes or other means through which own workers or workers’ representatives can raise concerns about impacts or explain needs that they would like the undertaking to address. This could include both channels provided by the undertaking directly and channels provided by the entities where their own workers are working and are to be reported in addition to any other mechanisms an undertaking may use to gain insight into the management of impacts on workers, such as compliance audits. Where the undertaking is relying solely on information about the existence of such channels provided by its business relationships to answer this requirement, it may state that.

AR 29. Third party mechanisms could include those operated by the government, NGOs, industry associations and other collaborative initiatives. With regard to the scope of these mechanisms, the undertaking may disclose whether these are accessible to all own workers who may be potentially or actually materially impacted by the undertaking (or workers’ representatives or, in their absence, individuals or organizations acting on their behalf or who are otherwise in a position to be aware of adverse impacts), through which its own workforce (or workers’ representatives or, in their absence, individuals or organizations acting on their behalf or who are otherwise in a position to be aware of adverse impacts), can raise complaints or concerns related to the undertaking’s own activities.

AR 30.   The undertaking shall consider whether and how own workers that may be affected and their workers' representatives are able to access channels at the level of the undertaking they are employed by, or contracted to work for, in relation to each material impact. Relevant channels may include hotlines, trade unions (where workers are unionized) or works councils, or other grievance mechanisms operated by the relevant undertaking or by a third party.

AR 31. In explaining whether and how the undertaking knows that own workers are aware of and trust any of these channels, the undertaking may provide relevant and reliable data about the effectiveness of these channels from the perspective of own workers themselves. Examples of sources of information are surveys of workers that have used such channels and their levels of satisfaction with the process and outcomes.

AR 32. In describing the effectiveness of channels for own workers and workers’ representatives to raise concerns, the undertaking may be guided by the following questions, based on the “effectiveness criteria for non-judicial grievance mechanisms”, as laid out in the UN Guiding Principles on Business and Human Rights. The considerations below may be applied to individual channels or to a collective system of channels:
(a) Do the channels have legitimacy by providing appropriate accountability for their fair conduct and building stakeholder trust?
(b) Are the channels known and accessible to stakeholders?
(c) Do the channels have clear and known procedures, with indicative timeframes?
(d) Do the channels ensure reasonable access for stakeholders to sources of information, advice and expertise?
(e) Do the channels offer transparency by providing sufficient information both to complainants and, where applicable, to meet any public interest?
(f) Do outcomes achieved through the channels accord with internationally recognised human rights?
(g) Does the undertaking identify insights from the channels that support continuous learning in both improving the channels and preventing future impacts?
(h) Does the undertaking focus on dialogue with complainants as the means to reach agreed solutions, rather than seeking to unilaterally determine the outcome?

For more information, see Principle 31 of the UN Guiding Principles on Business and Human Rights.

Disclosure Requirement S1-4
Taking action on material impacts and approaches to mitigating material risks and pursuing material opportunities related to own workforce, and effectiveness of those actions and approaches.

AR 33. It may take time to understand negative impacts and how the undertaking may be involved with them through its own workforce, as well as to identify appropriate responses and put them into practice). Therefore, the undertaking shall consider disclosing:
(a) Its general and specific approaches to addressing material negative impacts;
(b) Its initiatives aimed at contributing to additional material positive impacts;
(c)how far it has progressed in its efforts during the reporting period; and
(d) Its aims for continued improvement.

AR 34. Appropriate action can vary according to whether the undertaking causes or contributes to a material impact, or whether it is involved because the impact is directly linked to its operations, products or services by a business relationship.

AR 35. Given that material negative impacts affecting own workers that have occurred during the reporting period may not be caused or contributed to by the undertaking alone and may be linked to entities or operations outside its direct control, the undertaking may disclose whether and how it seeks to use its leverage with relevant business relationships to manage those impacts. This may include using commercial leverage (for example, enforcing contractual requirements with business relationships or implementing incentives), other forms of leverage within the relationship (such as providing training or capacity-building on workers’ rights to business relationships) or collaborative leverage with peers or other actors (such as initiatives aimed at responsible recruitment or ensuring workers receive a living wage).

AR 36. When the undertaking reports on its participation in an industry or multi-stakeholder initiative as part of its actions to address material negative impacts, the undertaking may disclose how the initiative, and its own involvement, is aiming to address the material impact concerned. It may report under ESRS S1-5 regarding any relevant targets set by the initiative and progress towards them.

AR 37. The undertaking may also disclose examples in connection with whether and how it considers actual and potential impacts on own workers in decisions to terminate business relationships and whether and how it seeks to address any negative impacts that may result from termination.

AR 38. Processes used to track the effectiveness of actions can include internal or external auditing or verification, court proceedings and/or related court decisions, impact assessments, measurement systems, stakeholder feedback, grievance mechanisms, external performance ratings, and benchmarking.

AR 39. Reporting on effectiveness is aimed at enabling the understanding of the links between actions taken by an undertaking and the effective management of impacts. Additional information that the undertaking may provide includes data showing a decrease in the number of incidents identified.

AR 40. With regard to initiatives or processes whose primary aim is to deliver positive impacts for the undertaking’s own workforce that are based on affected workers’ needs and their level of implementation, the undertaking may disclose: AR 41. Information about whether and how own workers and workers’ representatives play a role in decisions regarding the design and implementation of these programs or processes; and AR 42. Information about the intended or achieved positive outcomes for the undertaking’s own workforce of these programs or processes.

AR 43. The undertaking may explain whether any such initiatives are designed also to support the achievement of one or more Sustainable Development Goals. For example, an undertaking committing to SDG 8 to “promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all” may be actively working towards eliminating forced or compulsory labor or supporting higher levels of productivity on activities in developing countries through technological upgrades and training of local labor, which can benefit both the specific own workers targeted by the actions, but also their local communities.

AR 44. When reporting on the intended or achieved positive outcomes of its actions for own workers a distinction is to be made between evidence of certain activities having occurred (e.g., that x number of workers have received financial literacy training) from evidence of actual outcomes for workers (e.g., that x workers report that they are able to better manage their household budgets so as to meet their savings goals).

AR 45. In the case of impacts on own workforce that arise from the transition to a greener, climate- neutral economy, the undertaking shall include information on any measures taken to mitigate negative impacts, such as training and reskilling, employment guarantees, and in the case of downscaling or mass dismissal, measures such as job counselling, coaching, intra-company placements and early retirement plans. This includes measures to comply with prevailing regulation. In taking action, companies may draw on resources such as the UN Global Compact Guidance on Just Transition for Business, which builds on the ILO’s Guidelines for a just transition towards environmentally sustainable economies and societies for all. The undertaking shall highlight present and/or expected external developments that influence whether dependencies turn into risks. This includes consideration of impacts that may arise from the transition to greener and climate-neutral operations.

AR 46. When disclosing the financial risks and opportunities related to an undertaking’s impacts or dependencies on own workers, the undertaking may consider the following business risks that could lead to financial risks:
(a) Business risks related to an undertaking’s impacts on its own workers might include the reputational or legal exposure where workers are found to be subject to forced or child labor;
(b) Business risks related to an undertaking’s dependencies on its own workers might include the loss of business continuity where significant employee turnover or lack of skills/training development threaten the undertaking’s business; and
(c) Business opportunities related to an undertaking’s impacts on its own workers might include market differentiation and greater customer appeal from guaranteeing decent pay and conditions for its gig workers.

AR 47. When explaining whether dependencies turn into risks, the undertaking shall consider external developments.

AR 48. When disclosing policies, targets, action plans and resources related to the management of material risks and opportunities, in cases where risks and opportunities arise from a material impact, the undertaking may cross-reference its disclosures on policies, targets, action plans and resources in relation to that impact.

AR 49. The undertaking shall consider the extent to which its processes to manage material risks related to own workers are integrated into its existing risk management and how.

AR 50. When reporting on resources allocated to the management of material impacts, undertakings may explain which internal functions are involved in managing the impacts and what types of action they take to address negative and advance positive impacts.

Metrics and Targets

Disclosure Requirement S1-5
Targets related to managing material impacts, advancing positive impacts, as well as to risks and opportunities.

AR 51. When disclosing the targets, the undertaking shall consider disclosing, where applicable:

(i) The intended outcomes to be achieved in the lives of a certain number of its own workers;
(j) That these are measurable/verifiable;
(k) Their stability over time in terms of definitions and methodologies to allow for continuity in the datapoints derived from the targets; and/or
(l) Standards or commitments which the targets are based on are to be clearly defined in the reporting (for instance code of conducts, sourcing policies, global frameworks, or industry codes).

AR 52. Targets related to risks and opportunities may be the same as or distinct from targets tied to impacts. Therefore, no distinction is to be made per se, but what the target is aiming at is to be disclosed (i.e. impact and/or risks and opportunities). For example, a target to reach adequate wages for non-employee workers could both reduce impacts on those workers and reduce associated business risks in terms of the quality and reliability of their output.

AR 53. The undertaking may also distinguish between short, medium- and long-term targets covering the same policy commitment. For example, an undertaking may have a long-term target to achieve an 80% reduction in health and safety incidents affecting its delivery drivers by 2030 and a near-term target to reduce the overtime hours of delivery drivers by x% while maintaining their income by 2024.

AR 54. When modifying or replacing a target in the reporting period, the undertaking may explain the change by cross-referencing it to significant changes in the business model or to broader changes in the accepted standard or legislation from which the target is derived to provide contextual information.

Disclosure Requirement S1-6
Characteristics of the Undertaking’s Employees

AR 55. This Disclosure Requirement covers all employees who perform work for any of the undertaking’s entities included in its sustainability reporting. An employee is an individual who is in an employment relationship with the undertaking according to national law or practice.

AR 56. Providing a breakdown of employees by country gives insight into the distribution of activity across countries. The number of employees in each country is also a key trigger for many information, consultation and participation rights for workers and workers' representatives, both in the EU labor law (e.g. the European Works Councils Directive and the Information and Consultation Directive) and in national law (e.g. rights to establish a works council or to have board level employee representation). Providing a breakdown of employees by gender and type of employment relationship gives insight into gender representation across the undertaking. Additionally, providing a breakdown of employees by region gives insight into regional variations. A region can refer to a country or other geographic locations, such as a city or a world region.

AR 57. The undertaking shall disclose the requested disclosures in the following tabular formats: Table 1: Template for presenting information on employee head count by gender:
Gender Number of employees (head count): Male, Female, Other, Not reported, Total Employees

Table 2: Template for presenting employee head count in countries with at least 50 employees
Country Number of employees (head count): Country A, Country B, Country C     , Country D.

Table 3: Template for presenting information on employees by contact type, broken down by gender: (head count or FTE).

Table 4: Template for presenting information on employees by contract type, broken down by region: (head count or FTE) (reporting on full-time and part-time employees is voluntary)

AR 58. The definitions of permanent, temporary, non-guaranteed hours, full-time, and part-time employees differ between countries. If the undertaking has employees in more than one country, it shall use the definitions as per the national laws of the countries where the employees are based to calculate country-level data. The country-level data shall then be added up to calculate total numbers, disregarding differences in national legal definitions. Non-guaranteed hours employees are employed by the undertaking without a guarantee of a minimum or fixed number of working hours. The employee may need to make themselves available for work as required, but the undertaking is not contractually obligated to offer the employee a minimum or fixed number of working hours per day, week, or month. Casual employees, employees with zero-hour contracts, and on-call employees are examples that fall under this category.

AR 59. Reporting the number of employees at the end of the reporting period provides information for that point in time, without capturing fluctuations during the reporting period. Reporting these numbers in averages across the reporting period takes into account fluctuations during the reporting period.

AR 60. Quantitative data, such as the number of temporary or part-time employees, is unlikely to be sufficient on its own. For example, a high proportion of temporary or part-time employees could indicate a lack of employment security for employees, but it could equally signal workplace flexibility when offered as a voluntary choice. For this reason, the undertaking is required to report contextual information to help information users interpret the data. The undertaking can explain the reasons for temporary employment. An example of such a reason is the recruitment of employees to undertake work on a temporary or seasonal project or event. Another example is the standard practice to offer a temporary contract (e.g., six months) to new employees before an offer of permanent employment is made. The undertaking may also explain the reasons for non-guaranteed hours employment.

AR 61. For the own employee turnover calculation, the undertaking shall calculate the aggregate of the number of employees who leave voluntarily or due to dismissal, retirement, or death in service. The undertaking shall use this number for the numerator of the employee turnover rate and may determine the denominator used to calculate this rate and describe its methodology.

AR 62. Where data is not available for detailed information, the undertaking shall use an estimation of the employee number or ratios, in accordance with ESRS 1, and clearly identify where the use of estimates has taken place.

Disclosure Requirement S1-7
Characteristics of non-employee workers in the undertaking’s own workforce

AR 63. This Disclosure Requirement provides insight into the undertaking’s approach to employment, as well as the scope and nature of impacts arising from its employment practices. It also provides contextual information that aids an understanding of the information reported in other disclosures. This disclosure covers both individual contractors supplying labor to the undertaking (“self-employed workers”) and workers provided by undertakings primarily engaged in “employment activities” (NACE Code N78). If all the workers performing work for the undertaking are employees and the undertaking does not have any workers who are not employees, this Disclosure Requirement is not material for the undertaking; notwithstanding, the undertaking may state this fact when disclosing the information required by DR S1-6 as contextual information as this information can be relevant for the users of the Sustainability Statements.

AR 64. Examples of contractors (self-employed persons) in own workforce include: contractors hired by the undertaking to perform work that would otherwise be carried out by an employee; contractors hired by the undertaking to perform work in a public area (e.g., on a road, on the street); and contractors hired by the undertaking to deliver the work/service directly at the workplace of a client of the organization. Examples of workers employed by a third party engaged in ‘employment activities’ whose work is under the direction of the undertaking include: workers who perform the same work that employees carry out, such as workers who fill in for employees who are temporarily absent (due to illness, holiday, parental leave, etc.); workers performing regular work at the same site as employees; and workers who are dispatched temporarily from another EU member state to work for the undertaking (‘posted workers’). Examples of value chain workers (and thus of workers not in own workforce and reported under the scope of ESRS S2 Workers in the value chain ) include: workers for a supplier contracted by the undertaking who work on the supplier’s premises using the supplier’s work methods; workers for a ‘downstream’ firm which purchases goods or services from the undertaking; and workers of an equipment supplier to the undertaking who, at one or more of the undertaking’s workplaces , perform regular maintenance on the supplier’s equipment (e.g., photocopier) as stipulated in the contract between the equipment supplier and the undertaking.

AR 65. If the undertaking cannot report exact figures, it shall use estimates according to the provisions in ESRS 1 to disclose the number of workers who are not employees to the nearest ten or, where the number of workers who are not employees is greater than 1,000, to the nearest 100, and explain this. In addition, it shall clearly identify the information that derives from actual data and estimates.

AR 66. Reporting the number of workers in own workforce who are not employees at the end of the reporting period provides information for that point in time without capturing fluctuations during the reporting period. Reporting this number as an average across the reporting period considers fluctuations during the reporting period and can provide more insightful and relevant information for the users.

AR 67. The information disclosed by the undertaking allows stakeholders to understand how the number of non-employee workers in its own workforce varies during the reporting period or compared to the previous reporting period (i.e., whether the numbers have increased or decreased). It may also include the reasons for the fluctuations. For example, an increase in the number of non-employee workers in its own workforce during the reporting period could be due to a seasonal event. Conversely, a decrease in the number of non-employee workers in its own workforce compared to the previous reporting period could be due to the completion of a temporary project. It is the criteria of the undertaking to determine which fluctuations in the number of workers it considers significant to report and to describe its threshold for determining significant fluctuations. If there are no significant fluctuations in the number of non-employee workers in its own workforce during the reporting period or between the current and previous reporting period, the undertaking may disclose this information.

Disclosure Requirement S1-8
Collective bargaining coverage and social dialogue

Collective bargaining coverage

AR 68. The percentage of employees, non-employee workers, and own workers covered by collective bargaining agreements is calculated using the following formulas:
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠 𝑐𝑜𝑣𝑒𝑟𝑒𝑑 𝑏𝑦 𝑐𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑣𝑒 𝑏𝑎𝑟𝑔𝑎𝑖𝑛𝑖𝑛𝑔 𝑎𝑔𝑟𝑒𝑒𝑚𝑒𝑛𝑡𝑠 𝑥 100
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑛𝑜𝑛 − 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒 𝑤𝑜𝑟𝑘𝑒𝑟𝑠 𝑐𝑜𝑣𝑒𝑟𝑒𝑑 𝑏𝑦 𝑐𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑣𝑒 𝑏𝑎𝑟𝑔𝑎𝑖𝑛𝑖𝑛𝑔 𝑎𝑔𝑟𝑒𝑒𝑚𝑒𝑛𝑡𝑠 𝑥 100
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑛𝑜𝑛 − 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒 𝑤𝑜𝑟𝑘𝑒𝑟𝑠
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑤𝑛 𝑤𝑜𝑟𝑘𝑒𝑟𝑠 𝑐𝑜𝑣𝑒𝑟𝑒𝑑 𝑏𝑦 𝑐𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑣𝑒 𝑏𝑎𝑟𝑔𝑎𝑖𝑛𝑖𝑛𝑔 𝑎𝑔𝑟𝑒𝑒𝑚𝑒𝑛𝑡𝑠 𝑥 100
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑤𝑛 𝑤𝑜𝑟𝑘𝑒𝑟𝑠

AR 69. The employees and non-employee workers in own workforce covered by collective bargaining agreements are those individuals to whom the undertaking is obliged to apply the agreement. This means that if none of the employees and non-employee workers in its own workforce are covered by a collective bargaining agreement, the percentage reported is zero. An employee and non-employee worker in own workforce covered by more than one collective bargaining agreement only needs to be counted once.

AR 70. This requirement is not aimed at obtaining the percentage of employees represented by a works council or belonging to trade unions, which can be different. The percentage of employees covered by collective bargaining agreements can be higher than the percentage of unionized employees when the collective bargaining agreements apply to both union and non-union members. Alternatively, the percentage of employees covered by collective bargaining agreements can be lower than the percentage of unionized employees. This may be the case when there are no collective bargaining agreements available or when the collective bargaining agreements do not cover all unionized employees.

Social Dialogue

AR 71. For calculating the information required by paragraph 103 (a), the undertaking shall identify in which European Economic Area (EEA) countries it has significant employment (i.e. at least 50
employees). For these countries it shall report the percentage of employees in that country which are employed in establishments in which employees are represented by workers’ representatives at the establishment level. Establishment is defined as any place of operations where the undertaking carries out a non-transitory economic activity with human means and goods. Examples include: a factory, a branch of a retail chain, or an undertaking’s headquarters. For countries in which there is only one establishment the percentage reported shall be either 100% or 0%.
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠 𝑤𝑜𝑟𝑘𝑖𝑛𝑔 𝑖𝑛 𝑒𝑠𝑡𝑎𝑏𝑙𝑖𝑠ℎ𝑚𝑒𝑛𝑡𝑠 𝑤𝑖𝑡ℎ 𝑤𝑜𝑟𝑘𝑒𝑟𝑠! 𝑟𝑒𝑝𝑟𝑒𝑠𝑒𝑛𝑡𝑎𝑡𝑖𝑣𝑒𝑠
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠 𝑥 100

AR 72. The information required by this Disclosure Requirement shall be reported as follows

Disclosure Requirement S1-9 – Diversity indicators

AR 73. In preparing the disclosure on gender at top management, the undertaking shall use the definition of top management as one and two levels below the administrative and supervisory bodies unless this concept has already been defined with the undertaking’s operations and differs from the previous description. If this is the case, the undertaking can use its own definition for top management and disclose that fact and its own definition.

Disclosure Requirement S1-10 – Adequate Wages

AR 74. The lowest wage shall be calculated for the lowest pay category, excluding interns and apprentices. This is to be based on the basic wage plus any fixed additional payments that are guaranteed to all own workers. The lowest wage shall be considered separately for each country in which the undertaking has operations, except outside the EEA when the relevant adequate or minimum wage is defined at a sub national level.

AR 75. The adequate wage benchmark used for comparison with the lowest wage shall not be lower than:
(a) In the EEA: the minimum wage set in accordance with the Directive 2022/2041 of 19 October 2022 on adequate minimum wages in the European Union; and

(b) Outside of the EEA: any existing national or sub-national legislation based on an assessment of an adequate wage needed for a decent standard of living, or absent that, any national or sub- national minimum wage established by legislation or collective bargaining.

AR 76. The Directive 2022/2041 of 19 October 2022 on adequate minimum wages in the European Union references both indicative reference values commonly used at international level such as 60% of the gross median wage and 50% of the gross average wage, and/or indicative reference values used at national level. Data for the indicative values of 60% of the national median gross wage or 50% of the national average gross wage can be obtained from the European Labor Force Survey. For countries outside the EEA, any benchmark that meets the criteria set out by the Sustainable Trade Initiative (IDH) may be used, including applicable benchmarks aligned with the Anker methodology, or provided by the Wage Indicator Foundation or Fair Wage Network. For countries outside the EEA where there are different adequate wage benchmark figures for different sub-national regions, the applicable benchmarks shall be used.

Disclosure Requirement S1-11
Social protection

AR 77. Social protection are all the measures that provide access to health care and income support in cases of challenging life events such as the loss of a job, being sick and in need of medical care, giving birth and raising a child, or retiring and in need of a pension.

AR 78. The denominators for the percentages reported under Paragraph 80 shall be calculated on the basis of the total head count figures provided for employees under ESRS S1-6 and non- employee workers in own workforce in ESRS S1-7. The numerators shall be calculated on the basis of head count of employees and non-employee workers that have some form of social protection through public programs or benefits offered by the undertaking.

Disclosure Requirement S1-12 – Persons with disabilities

AR 79. When disclosing the information required in paragraph ss regarding persons with disabilities, the undertaking shall provide any contextual information necessary to understand the data and how the data has been compiled (methodology). For example, information about the impact of different legal definitions of persons with disabilities in the different countries in which the undertaking has operations.

Disclosure Requirement S1-13 – Training and Skills Development indicators

AR 80. A regular performance review is defined as a review based on criteria known to the worker and his or her superior undertaken with the knowledge of the worker at least once per year. The review can include an evaluation by the worker’s direct superior, peers, or a wider range of employees. The review can also involve the human resources department. In order to disclose the information required by paragraph 61 (a), the undertaking shall use the employee headcount figures provided in ESRS S1-6 in the denominator to calculate the:
(a) Number/proportion of performance reviews per employee; and
(b) Number of reviews in proportion to the agreed number of reviews by the management.

AR 81. To disclose the average required per paragraph 61 (b), the undertaking shall perform the following calculation: total number of training hours offered to and completed by employees divided by the total number of employees in each respective group (i.e. employee category and gender, separately). For the total training average and the average by gender, the head count figures for total employment and employment by gender reported in Disclosure Requirement ESRS S1-6 shall be used.

AR 82. Employee categories are a breakdown of employees by level (such as senior management, middle management) or function (such as technical, administrative, production). This information is derived from the undertaking’s own human resources system. In categorizing the workforce, the undertaking shall define reasonable and meaningful employee categories which enable users of the information to understand different performance measures between the categories. At a minimum, undertakings shall present a category for executive and non-executive employees.

Disclosure Requirement S1-14
Health and Safety Indicators

AR 83. In relation to paragraph 66 (a), the number and percentage of its own workers who are covered by the undertaking’s health and safety management system shall be disclosed on a head count basis rather than a full-time equivalent basis.

AR 84. With regard to paragraph 66 (f), when the undertaking’s health and safety management system, or certain parts thereof, has been subject to an internal audit or external certification, the undertaking may state this fact, or absence thereof, and the underlying standards for such audits/certifications, as applicable.

AR 85. The undertaking shall disclose information associated with work-related injuries, work- related ill health and work-related fatalities of its own workers, and for those workers working on its sites for datapoints b) on fatalities.

AR 86. Fatalities may be reported separately for those resulting from work-related injuries and those resulting from work-related ill health.

Guidance on “work-related”

AR 87. Work-related injuries and work-related ill health arise from exposure to hazards at work. Notwithstanding, other types of incidents can occur that are not connected with the work itself. For example, the following incidents are not considered to be work related:

(a) A worker suffers a heart attack while at work that it is not connected with work;
(b) A worker driving to or from work is injured in a car accident (when driving is not part of the work and where the transport has not been organized by the undertaking); and
(c) A worker with epilepsy has a seizure at work that it is not connected with work.

AR 88. With regard to travelling for work purposes, injuries and ill health that occur while a worker is travelling are work related if, at the time of the injury or ill health, the worker was engaged in work activities “in the interest of the employer”. Examples of such activities include travelling to and from customer contacts; conducting job tasks; and entertaining or being entertained to transact, discuss, or promote business (at the direction of the employer). If the undertaking is responsible for the transport commuting, incidents occurred while commuting are considered to be work-related. Nonetheless, incidents which arise during travel, outside of the undertaking’s responsibility (i.e. regular commuting to and from work), may be reported separately provided that the undertaking has such data available across the undertaking.

AR 89. With regard to working from home, injuries and ill health that occur when working from home are work related, if the injury or ill health occurs while the worker is performing work from home; and the injury or ill health is directly related to the performance of work rather than the general home environment or setting.

AR 90. With regard to mental illness, it is considered to be work related, if it has been notified voluntarily by the worker and it is supported by an opinion from a licensed healthcare professional with appropriate training and experience; and if such opinion states that the illness is work related.

AR 91. Health issues resulting, for example, from smoking, drug and alcohol abuse, physical inactivity, unhealthy diets, and psychosocial factors unrelated to work are not considered work- related.

AR 92. Occupational diseases are not considered work-related injuries but are covered under work-related ill health.

Guidance on Computing the Rate

AR 93. In computing the rate of work-related injuries, the undertaking shall divide the respective number of cases by the number of total hours worked by own workers and multiplied by 1,000,000. Thereby, these rates represent the number of respective cases per one million hours worked. A rate based on 1,000,000 hours worked indicates the number of work-related injuries per 500 full-time workers over a one-year timeframe. For comparability purposes a rate of 1,000,000 hours worked shall be used also for undertakings with less than 500 workers.

AR 94. If the undertaking cannot directly calculate the number of hours worked, it may estimate this on the basis of normal or standard hours of work, taking into account entitlements to periods of paid leave of absence from work (e.g., paid vacations, paid sick leave, public holidays) and explain this in its disclosures.

AR 95. An undertaking shall include fatalities as a result of work-related injury in the calculation of the number and rate of recordable work-related injuries.

Guidance on recordable work-related ill health

AR 96. Work-related ill health can include acute, recurring, and chronic health problems caused or aggravated by work conditions or practices. These include musculoskeletal disorders, skin and respiratory diseases, malignant cancers, diseases caused by physical agents (e.g., noise induced hearing loss, vibration-caused diseases), and mental illnesses (e.g., anxiety, posttraumatic stress disorder). For the purpose of the required disclosures, the undertaking shall, at a minimum, include in its disclosure those cases outlined in the ILO List of Occupational Diseases.

AR 97. In the context of this [draft] Standard, work-related musculoskeletal disorders are covered under work-related ill health (and not injuries).

AR 98. The incidents to be disclosed in paragraph 63 relate to cases of work-related ill health notified to the undertaking or identified by the undertaking through medical surveillance, during the reporting period. The undertaking might be notified of cases of work-related ill health through reports by affected workers, compensation agencies, or healthcare professionals. The disclosure may include cases of work-related ill health that were detected during the reporting period among former workers.

Guidance on the number of days lost

AR 99. The undertaking shall count the number of days lost as such that the first full day and last day of absence shall be included. Days on which the affected individual is not scheduled for work (e.g. weekends, public holidays) do not count as lost days.

Disclosure Requirement S1-15 – Work-life balance

AR 100. Family-related leaves include maternity leave, paternity leave, parental leave, and carers’ leave. For the purpose of this [draft] Standard, these concepts are defined as:
(a) Maternity leave (also called pregnancy leave): employment-protected leave of absence for employed women directly around the time of childbirth (or, in some countries, adoption);
(b) Paternity leave: leave from work for fathers or, where and in so far as recognised by national law, for equivalent second parents, on the occasion of the birth of a child for the purposes of providing care;
(c) Parental leave: leave from work for parents on the grounds of the birth or adoption of a child to take care of that child;
(d) Carers’ leave from work: leave for workers to provide personal care or support to a relative, or a person who lives in the same household, in need of significant care or support for a serious medical reason, as defined by each Member State.

AR 101. With regard to paragraph 70 (a), workers entitled to family-related leave are those workers that are covered by regulations, organizational policies, agreements, contracts or collective bargaining agreements that contain family-related leave entitlements and have reported their entitlement to the undertaking or the undertaking is aware of the entitlement.

Disclosure Requirement S1-16
Compensation indicators (pay gap and total compensation)

AR 102. When compiling the information required under paragraph 86 (a) for the gap in pay between women and men (also known as the “male-female pay gap”) the undertaking shall use the following methodology:
(a) Include all employees’ gross hourly earnings; and
(b) Apply the following formula to calculate the male-female pay gap:
(Average gross hourly earnings of male employees - average gross hourly earnings of female employees) x 100.

AR 103. When disclosing the information required under paragraph 86 (a), the undertaking shall provide any contextual information necessary to understand the data and how the data has been compiled (methodology). Information regarding how objective factors such as type of work and country of employment influence the male-female pay gap may be reported.

AR 104. The measure of the undertaking’s male-female pay gap shall be reported for the current reporting period and, if reported in previous sustainability reports, for the previous two reporting periods.

Total Compensation Ratio

AR 105. When compiling the information required by paragraph 86 (b), the undertaking shall:
(a) Include all employees;
(b) Consider, depending on the undertaking’s remuneration policies, all the following:

i. Base salary, which is the sum of guaranteed, short-term, and non-variable cash compensation;
ii. Total cash compensation, which is the sum of the base salary and cash allowances, bonuses, commissions, cash profit-sharing, and other forms of variable cash payments; and
iii. Direct compensation, which is the sum of total cash compensation and total fair value of all annual long-term incentives (e.g., stock option awards, restricted stock shares or units, performance stock shares or units, phantom stock shares, stock appreciation rights, and long-term cash awards).

AR 106. Apply the following formula for the annual total compensation ratio:
Annual total compensation for the undertaking's highest paid individual
Median employee annual total compensation (excluding the highest-paid individual)

AR 107. To illustrate the contextual information, the undertaking may provide an explanation to understand the data and how the data has been compiled (methodology). Quantitative data, such as the annual total compensation ratio, may not be sufficient on its own to understand pay disparity and its drivers. For example, pay ratios can be influenced by the size of the undertaking (e.g., revenue, number of employees), its sector, its employment strategy (e.g., reliance on outsourced workers or part-time employees, a high degree of automation), or currency volatility.

Disclosure Requirement S1-17
Incidents and severe cases of human rights issues and incidents

Discrimination incidents

AR 108. When compiling the information required related to corrective actions, the undertaking shall consider the following:
(a) An incident is no longer subject to action if it is resolved, the case is completed, or no further action is required by the undertaking. For example, an incident for which no further action is required can include cases that are withdrawn or where the underlying circumstances that led to the incident no longer exist;
(b) Remedial action is typically (and shall be) directed toward the alleged harasser and the alleged victim. Remedial action toward the victim may include offering to pay his/her expenses for counselling sessions, offering the victim some paid time off, offering to reinstate sick/vacation days if the victim has incurred any expenses due to the harassment (such as having used sick or vacation days); and
(c) Remedial action toward the harasser may include giving the harasser a verbal and/or written warning, mandating anti-harassment counselling or sending the harasser to an appropriate seminar, harassment awareness and prevention training. A suspension without pay may also be an option. If the harasser has been disciplined earlier but his/her harassment does not cease, then more serious discipline may be required.

Severe cases of human rights issues and incidents

AR 109. Severe human rights issues and incidents include instances of lawsuits, formal complaints through the undertaking or third-party complaint mechanisms, serious allegations in public reports or the media, where these are connected to the undertaking’s own workforce, and the fact of the incidents is not disputed by the undertaking, as well as any other severe impacts of which the undertaking is aware. Human trafficking is defined as the recruitment, transportation, transfer, harboring or receipt of people through force, fraud or deception, with the aim of exploiting them for profit. Confirmed incidents include incidents of child or forced labor or human trafficking that have been found to be substantiated. Confirmed incidents do not include incidents of child or forced labour or human trafficking that are still under investigation.

2. Supply Chain: ESRS S2 Workers in the value chain
Click here for the compete regulations.

Objectives

The objective of this draft standard is to specify disclosure requirements which will enable users of the sustainability statements to understand material impacts on value chain workers caused or contributed to by the undertaking through its activities, as well as impacts which are directly linked to the undertaking’s operations, products and services through its business relationships and its related material risks and opportunities, including:

How the undertaking affects workers in its value chain through its own activities and its business relationships in its upstream and downstream value chain, including in relation to its products and services and its supply chain, in terms of material positive and negative actual or potential impacts;
Any actions taken, and the result of such actions, to prevent, mitigate or remediate actual or potential adverse impacts;
The nature, type and extent of the undertaking’s material risks and opportunities related to its impacts and dependencies on workers in the value chain, and how the undertaking manages them; and
The effects of risks and opportunities, related to the undertaking’s impacts and dependencies on workers in the value chain, on the undertaking’s development, including cash flows, financial position, and financial performance over the short-, medium- and long-term.

In order to meet the objective, this draft standard requires an explanation of the general approach the undertaking takes to identify and manage any material actual and potential impacts on value chain workers in relation to:

Working conditions (including secure employment, working time, adequate wages, social dialogue, freedom of association, existence of work councils, collective bargaining, work-life balance and health and safety);
Access to equal opportunities (including gender equality and equal pay for work of equal value, training and skills development, the employment and inclusion of people with disabilities, measures against violence and harassment in the workplace, and diversity);
Other human rights (e.g. child labor and forced labor, privacy, adequate housing and water and sanitation).
This draft standard also requires an explanation of how such impacts, as well as the undertaking’s dependencies on value chain workers, can create material financial risks or opportunities for the undertaking. For example, negative impacts on value chain workers may disrupt an undertaking’s operations (through customers refusing to buy its products or state agencies impounding its goods) and harm its reputation. Conversely, respect for workers’ rights and active support programs (for example through financial literacy initiatives) can bring business opportunities, such as more reliable supply or widening of the future consumer base.

This draft standard covers all workers in the undertaking’s upstream and downstream value chain who are or can be materially impacted in connection with the undertaking’s products, services, and activities. This includes all workers who are not included in the scope of own workforce (own workforce includes employees, individual contractors, i.e., self-employed workers, and workers provided by third party undertakings primarily engaged in employment activities). Own workforce is covered in ESRS S1 Own workforce. Refer to AR 2 for examples of what is included in the scope of this draft standard.

Key Provisions

AR 1. The undertaking may highlight special issues relevant to a material impact for a shorter period of time, for instance initiatives regarding the health and safety of workers in the value chain during a pandemic.

AR 2. Examples of workers that fall within the scope of this draft standard are:

Workers of outsourced services working in the workplace of the undertaking (e.g., third party catering or security workers);
Workers of a supplier contracted by the undertaking who work on the supplier’s premises using the supplier’s work methods;
A worker for a ‘downstream’ firm which purchases goods or services from the undertaking;
Workers of an equipment supplier to the undertaking who, at a workplace controlled by the undertaking, perform regular maintenance on the supplier’s equipment (e.g., photocopier) as stipulated in the contract between the equipment supplier and the undertaking; and
Workers deeper in the supply chain who are extracting commodities that are then processed into components that go in the undertaking’s products.

ESRS 2 General disclosures
Disclosure Requirement related to ESRS 2 SBM-3 Material impacts, risks and opportunities and their interaction with strategy and business model(s)

AR 3. Impacts on value chain workers can originate in an undertaking’s business model(s) or strategy in a number of different ways. For example, impacts may relate to the undertaking’s value proposition (e.g. , providing lowest cost products or services, or high speed delivery, in ways that put pressure on labour rights in the upstream and downstream value chains), its value chain (e.g., relying on commodities of unclear provenance, without visibility to impacts on workers), or its cost structure and the revenue model (e.g. shifting inventory risk to suppliers, with knock-on effects on the labor rights of their workers).

AR 4. Impacts on value chain workers that originate in the business model(s) or strategy can also bring material risks to an undertaking. For example, in the context of a pandemic or other severe health crisis, undertakings that rely on contingent labor with little to no access to sick care and health benefits may face severe operational and business continuity risks as workers have no choice but to keep working while sick, further exacerbating the spread of the disease and causing major supply chain breakdowns. Or where selling goods premised on the cheapest prices for customers create operational risks as suppliers under extreme price pressure may sub-contract production, leading to lower quality, and a longer, less transparent, and less controllable supply chain. Reputational and business opportunity risks linked to the exploitation of low-skilled, low-paid workers in sourcing geographies with minimal protections for them are also increasing with media backlash and consumer preferences moving to more ethically sourced or sustainable goods.

AR 5. Examples of particular characteristics of workers in the value that may be considered by the undertaking when responding to paragraph 12 relate to young workers that may be more susceptible to impacts on their physical and mental development, or women workers in a context where women are routinely discriminated against in the terms and conditions of work, or migrant workers in a context where the market for the supply of labor is poorly regulated and workers are routinely charged recruitment fees. For some workers, the inherent nature of the activity that they are required to undertake may put them at risk (e.g., workers required to handle chemicals or operate certain equipment or low paid workers who are on “zero hours” contracts).

AR 6. With regard to paragraph 13, the business risks, which can lead to material financial risks, could also arise because of the undertaking’s dependency on value chain workers where low likelihood but high impact events may affect the undertaking’s future cash flows, for example, where a global pandemic leads to severe health impacts on workers at all stages of the value chain resulting in major disruptions to production and distribution. Other examples of business risk related to the undertaking’s dependency on value chain workers include a shortage in skilled workers or political decisions or legislation affecting value chain workers working for logistics providers.

AR 7. Disclosure Requirement related to ESRS 2 SBM-2 Interests and views of stakeholders Disclosure Requirement ESRS 2 SBM-2 requires the undertaking to provide an understanding of if and how it considers whether its strategy and business model(s) play a role in creating, exacerbating or (conversely) mitigating significant material impacts on value chain workers, and whether and how the business model(s) and strategy are adapted to address such material impacts.

AR 8. While value chain workers may not be engaging with an undertaking at the level of its strategy or business model(s), their views can inform the undertaking’s assessment of its strategy and business model(s). The undertaking shall consider reporting on the views of the (actual or potential) materially affected value chain workers’ legitimate representatives (trade unions or works councils) or those of credible proxies that have insight into their situation.

Impact, Risk and Opportunity Management
Disclosure Requirement S2-1 – Policies related to value-chain workers

AR 9. If the policies are limited to the undertaking’s own workforce and do not cover workers in upstream and downstream entities and relationships, they shall be disclosed under ESRS S1 and not in relation to this requirement.

AR 10. If reporting under ESRS S1 includes information relevant for workers in the value chain, a reference to this can be made here; reporting on the remaining elements shall then be fulfilled under this Disclosure Requirement.

AR 11. The summary shall include the key information necessary to ensure a faithful representation of the policies in relation to value chain workers and, therefore, the undertaking shall consider disclosing explanations of significant changes to the policies adopted during the reporting year (e.g., new expectations for suppliers, new or additional approaches to due diligence and remedy).

AR 12. The policy may take the form of a stand-alone policy regarding value chain workers or be included in a broader document such as a code of ethics or a general sustainability policy that has already been disclosed by the undertaking as part of another ESRS. In those cases, the undertaking shall provide an accurate cross-reference to identify the aspects of the policy that satisfy the requirements of this Disclosure Requirement.

AR 13. In reporting on its alignment of its policies with the UN Guiding Principles on Business and Human Rights, the undertaking shall consider that the Guiding Principles refer to the International Bill of Rights, which consist of the Universal Declaration of Human Rights and the two Covenants that implement it, as well as the International Labor Organization’s Declaration on Fundamental Rights and Principles at Work and the core conventions that underpin it, and may report on alignment with these underlying standards.

AR 14. When explaining how external-facing policies are embedded, undertakings may, for example, consider internal policies of responsible sourcing, and alignment with other policies relevant to value chain workers, for example, regarding forced labor. With regard to supplier codes of conduct that the undertaking may have, the summary shall indicate whether they include provisions addressing the safety of workers, including precarious work (i.e. use of workers on short-term or limited hours contracts, workers employed via third parties, sub-contracting to third parties or use of informal workers), human trafficking, the use of forced labor or child labor, and whether such provisions are fully in line with applicable ILO (International Laborr Organization) standards.

AR 15. As an illustration of the types of communication of its policies to those individuals, group of individuals or entities for whom they are relevant, either because they are expected to implement them (for example, the undertaking’s employees, contractors, and suppliers), because they have a direct interest in their implementation (for example, value chain workers, investors), or both. To help ensure that the policy is accessible and that they understand its implications, the undertaking may disclose communication tools and channels (e.g., flyers, newsletters, dedicated websites, social media, face to face interactions, unions and/or workers representatives) and / or the identification and removal of potential barriers for dissemination, such as through translation into relevant languages or the use of graphic depictions.

Disclosure Requirement S2-2 – Processes for engaging with value chain workers about impacts.

AR 16. Legitimate representatives who have knowledge of the interests, experiences or perspectives of value chain workers could include trade unions and worker representatives. Credible proxies could include expert organizations working on specific issues such as forced labor or child labor in local contexts.

AR 17. When describing which function or role has operational responsibility for such engagement and/or ultimate accountability, and whether it requires certain skills of, or provides training or capacity- building for, relevant staff to undertake engagement, the undertaking may disclose whether this is a dedicated role or function or part of a broader role or function. If it cannot identify such a position or function, it may state so. This disclosure could also be fulfilled with reference to Disclosure Requirement ESRS 2 GOV-1 The role of the administrative, management and supervisory bodies.

AR 18. When preparing the disclosures described in paragraph 24 b) and c), the following illustrations may be considered:

For stage(s) at which engagement occurs, examples could be in determining mitigation approaches or in evaluating their effectiveness;
For type of engagement, these could be participation, consultation and/or information.
For the frequency of the engagement, information may be provided on whether engagement occurs on a regular basis, at certain points in a project or business process, for example, when a new harvest season begins or a new production line is opened, as well as whether it occurs in response to legal requirements and/or in response to stakeholder requests and whether the result of the engagement is being integrated into the undertaking's decision- making processes; and for the role with operational responsibility, whether it requires certain skills of, or provides training or capacity building to relevant staff to undertake engagement.

AR 19. Global Framework Agreements (GFA) serve to establish an ongoing relationship between a multinational enterprise and a Global Union.

AR 20. To illustrate how the perspectives of value chain workers have informed specific decisions or activities of the undertaking, the undertaking may provide examples from the current reporting period.

Disclosure Requirement S2-3
Processes to remediate negative impacts and channels for value chain workers to raise concerns.

AR 21. In fulfilling the requirements set out by ESRS S2-3, undertakings may be guided by the content of the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises focused on remediation and grievance mechanisms.

AR 22. Channels for raising concerns or needs include grievance mechanisms, hotlines, trade unions (where workers are unionized), dialogue processes or other means through which value chain workers or their legitimate representatives can raise concerns about impacts or explain needs that they would like the undertaking to address. This could include both channels provided by the undertaking directly and channels provided by the entities where the value chain workers are working, and are to be reported in addition to any other mechanisms an undertaking may use to gain insight into the management of impacts on workers, such as compliance audits. Where the undertaking is relying solely on information about the existence of such channels provided by its business relationships to answer this requirement, it may state that.

AR 23. To provide greater insight into the information covered in Disclosure Requirement S2-3, undertakings may provide insight into whether and how value chain workers that may be affected are able to access channels at the level of the undertaking they are employed by, or contracted to work for, in relation to each material impact.

AR 24. Third party mechanisms could include those operated by the government, NGOs (non-government organizations), industry associations and other collaborative initiatives. With regard to the scope of these mechanisms, undertakings may disclose whether these are accessible to all workers who may be potentially or actually materially impacted by the undertaking, or individuals or organizations acting on their behalf or who are otherwise in a position to be aware of adverse impacts, and through which value chain workers (or individuals or organizations acting on their behalf or who are otherwise in a position to be aware of adverse impacts), can raise complaints or concerns related to the undertaking’s own activities.

AR 25. In relation to the protection of individuals that use the mechanisms against the retaliation, the undertaking may describe whether it treats grievances confidentially and with respect to the rights of privacy and data protection; and whether they allow for workers to use them anonymously (for example, through representation by a third party).
AR 26. In explaining whether and how the undertaking knows that value chain workers are aware of and trust any of these channels, the undertaking may provide relevant and reliable data about the effectiveness of these channels from the perspective of value chain workers themselves. Examples of sources of information are surveys of workers that have used such channels and their levels of satisfaction with the process and outcomes.

AR 27. In describing the effectiveness of channels for value chain workers to raise concerns, the undertaking may be guided by the following questions, based on the “effectiveness criteria for non-judicial grievance mechanisms”, as laid out in the UN Guiding Principles on Business and Human Rights. The below considerations may be applied to individual channels or to a collective system of channels:

Do the channels hold legitimacy by providing appropriate accountability for their fair conduct and building stakeholder trust?
Are the channels known and accessible to stakeholders?
Do the channels have clear and known procedures, with indicative timeframes?
Do the channels ensure reasonable access for stakeholders to sources of information, advice and expertise?
Do the channels offer transparency by providing sufficient information both to complainants and, where applicable, to meet any public interest?
Do outcomes achieved through the channels accord with internationally recognized human rights?
Does the undertaking identify insights from the channels that support continuous learning in both improving the channels and preventing future impacts?
Does the undertaking focus on dialogue with complainants as the means to reach agreed solutions, rather than seeking to unilaterally determine the outcome?

Disclosure Requirement S2-4
Taking action on material impacts and approaches to mitigating material financial risks and pursuing material financial opportunities related to value chain workers, and effectiveness of those actions and approaches.

AR 28. It may take time to understand negative impacts and how the undertaking may be involved with them through its value chain, as well as to identify appropriate responses and put them into practice. Therefore, the undertaking shall consider:

Its general and specific approaches to addressing material negative impacts;
Its initiatives aimed at contributing to additional material positive impacts;
How far it has progressed in its efforts during the reporting period; and
Its aims for continued improvement.

AR 29. Appropriate action can vary according to whether the undertaking causes or contributes to a material impact, or whether it is involved because the impact is directly linked to its operations, products or services by a business relationship.

AR 30. Given that material negative impacts affecting value chain workers that have occurred during the reporting period may not be caused or contributed to by the undertaking alone and may be linked to entities or operations outside its direct control, the undertaking may disclose whether and how it seeks to use its leverage with relevant business relationships to manage those impacts. This may include using commercial leverage (for example, enforcing contractual requirements with business relationships or implementing incentives), other forms of leverage within the relationship (such as providing training or capacity-building on workers’ rights to business relationships) or collaborative leverage with peers or other actors (such as initiatives aimed at responsible recruitment or ensuring workers receive a living wage).

AR 31. When the undertaking reports on its participation in an industry or multi-stakeholder initiative as part of its actions to address material negative impacts, the undertaking may disclose how the initiative, and its own involvement, is aiming to address the material impact concerned. It may report under Disclosure Requirement ESRS S2-5 regarding any relevant targets set by the initiative and progress towards them.

AR 32. When disclosing whether and how it considers actual and potential impacts on value chain workers in decisions to terminate business relationships and whether and how it seeks to address any negative impacts that may result from termination, the undertaking may include examples.

AR 33. In explaining how it tracks the effectiveness of its actions to manage material impacts during the reporting period, the undertaking may disclose any lessons learned from the previous and current reporting periods.

AR 34. Processes used to track the effectiveness of actions can include internal or external auditing or verification, court proceedings and/or related court decisions, impact assessments, measurement systems, stakeholder feedback, grievance mechanisms, external performance ratings, and benchmarking.

AR 35. Reporting on effectiveness is aimed at enabling the understanding of the links between actions taken by an undertaking and the effective management of impacts. For example, to show the effectiveness of its actions to support its suppliers with improving their working conditions, the undertaking may report survey feedback from the suppliers’ workers showing that working conditions have improved since the time the undertaking began working with those suppliers. Additional information that the undertaking may provide includes data showing a decrease in the number of incidents identified through for instance independent audits.

AR 36. With regard to initiatives or processes the undertaking has in place that are based on affected workers’ needs and their level of implementation, undertakings may disclose:

Information about whether and how value chain workers and legitimate representatives or their credible proxies play a role in decisions regarding the design and implementation of these programs or processes; and
Information about the intended or achieved positive outcomes for value chain workers of these initiatives or processes.

AR 37. The undertaking may explain whether any initiatives or processes whose primary aim is to deliver positive impacts for value chain workers are designed also to support the achievement of one or more of the UN Sustainable Development Goals (SDGs). For example, through a commitment to advance UN SDG 8 to “promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all” the undertaking may be providing capacity- building to smallholders in its supply chain, resulting in increases in their income; or it may be supporting training to increase the proportion of women able to take delivery jobs in its downstream value chain.

AR 38. When reporting on the intended or achieved positive outcomes of its actions for value chain workers a distinction is to be made between evidence of certain activities having occurred (e.g., that x number of workers have received financial literacy training) from evidence of actual outcomes for workers (e.g., that x workers report that they are able to better manage their household budgets so as to meet their savings goals).

AR 39. When disclosing whether initiatives or processes also play a role in mitigating material negative impacts, undertakings may e.g., consider programs that aim to advance women workers’ financial literacy that have resulted in more women being promoted as well as in reports of reduced sexual harassment in the workplace.

AR 40. When disclosing the financial risks and opportunities related to an undertaking’s impacts or dependencies on value chain workers, the undertaking may consider the following business risks that could lead into financial risks and business opportunities in pursuing opportunities:

Business risks related to an undertaking’s impacts on value chain workers might include the reputational or legal exposure where value chain workers are found to be subject to forced or child labor;
Business risks related to an undertaking’s dependencies on value chain workers might include the loss of business continuity where a pandemic closes significant parts of its supply chain or distribution network;
Business opportunities related to an undertaking’s impacts on value chain workers might include market differentiation and greater customer appeal from guaranteeing decent pay and conditions for its gig workers; and
Business opportunities related to an undertaking’s dependencies on value chain workers might include the achievement of a future sustainable supply of a commodity by ensuring smallholder farmers earn enough to persuade future generations to keep farming that crop.

AR 41. When explaining whether dependencies turn into risks, the undertaking shall consider external developments.

AR 42. When disclosing policies, targets, action plans and resources related to the management of material risks and opportunities, in cases where risks and opportunities arise from a material impact, the undertaking may cross-reference its disclosures on policies, targets, action plans and resources in relation to that impact.

AR 43. The undertaking shall consider the extent to which its processes to manage material risks related to value chain workers are integrated into its existing risk management processes and how.

AR 44. When reporting on resources allocated to the management of material impacts, undertakings may explain which internal functions are involved in managing the impacts and what types of action they take to address negative and advance positive impacts.

Metrics and Targets
Disclosure Requirement S2-5 – Targets related to managing material negative impacts, advancing positive impacts, and managing material risks and opportunities.

AR 45. When disclosing the targets, the undertaking shall consider disclosing, where applicable:

The intended outcomes to be achieved in the lives of value chain workers, being as specific as possible;
That these are measurable/verifiable;
Their stability over time in terms of definitions and methodologies to allow for continuity in the datapoints derived from the targets;
Standards or commitments which the targets are based on are to be clearly defined in the reporting (for instance code of conducts, sourcing policies, global frameworks, or industry codes).

AR 46. Targets related to risks and opportunities may be the same as or distinct from targets tied to impacts. Therefore, no distinction is to be made per se, but what the target is aiming at is to be disclosed (i.e. impact and/or risks and opportunities). For example, a target to reach living wages for supply chain workers could both reduce impacts on those workers and reduce associated business risks in terms of the quality and reliability of supply.

AR 47. The undertaking may also distinguish between short, medium, and long-term targets covering the same policy commitment. For example, an undertaking may have a long-term target to achieve an 80% reduction in health and safety incidents affecting its delivery drivers by 2030 and a near- term target to reduce the overtime hours of delivery drivers by x% while maintaining their income by 2024.

AR 48. When modifying or replacing a target in the reporting period, the undertaking may explain the change by linking it to significant changes in the business model(s) or to broader changes in the accepted standard or legislation from which the target is derived to provide contextual information.

3. Communities
Click here for the draft regulation.

Objectives
The objective of this draft standard is to specify disclosure requirements which will enable users of the sustainability statements to understand material impacts on affected communities, as well as related material risks and opportunities, including:

How the undertaking affects communities, in areas where risks are most likely to be present and most significant, through its own activities and its business relationships in its upstream and downstream value chain including in relation to its products and services and its supply chain, in terms of material positive and negative actual or potential impacts;
Any actions taken, and the result of such actions, to prevent, mitigate or remediate actual or potential adverse impacts;
The nature, type and extent of the undertaking’s material risks and opportunities related to its impacts and dependencies on affected communities, and how the undertaking manages them; and
The effects of risks and opportunities, related to the undertaking’s impacts and dependencies on affected communities, on the undertaking’s development, including cash flows, financial position and financial performance over the short-, medium- and long-term.

In order to meet the objectives, this draft standard requires an explanation of the general approach the undertaking takes to identify and manage any material actual and potential impacts on affected communities in relation to:

Communities’ economic, social and cultural rights (e.g. adequate housing, adequate food, water and sanitation, land-related and security-related impacts);
Communities’ civil and political rights (e.g. freedom of expression, freedom of assembly, impacts on human rights defenders); and
Particular rights of indigenous communities (e.g. free, prior and informed consent, self- determination, cultural rights).

This draft standard also requires an explanation of how such impacts, as well as the undertaking’s dependencies on affected communities, can create material financial risks or opportunities for the undertaking. For example, negative relationships with affected communities may disrupt an undertaking’s operations or harm its reputation, while constructive relationships can bring business benefits, such as stable and conflict-free operations and a greater ease of recruiting locally.

Key Provisions

AR 1. The undertaking may highlight special issues relevant to a material impact for a shorter period of time, for instance initiatives regarding the impacts on communities related to the undertaking’s operations due to extreme and sudden weather conditions.

ESRS 2 General Disclosures Strategy

ESRS 2 – SBM 3 – S3
Material impacts, risks and opportunities and their interaction with strategy and business model(s)

AR 2. Impacts on affected communities can originate in an undertaking’s business model(s) or strategy in a number of different ways. For example, impacts may relate to the undertaking’s value proposition (e.g., construction or commencement of projects with timelines that do not allow sufficient time for consultation with groups affected by the projects), its value chain (e.g., land use in countries in which ownership is often contested or records are unreliable or land users such as indigenous groups are unrecognized), or its cost structure and the revenue model (e.g., aggressive strategies to minimize taxation, particularly with respect to operations in developing countries).

AR 3. Impacts on affected communities that originate in the business model(s) or strategy can also bring material risks to an undertaking. For example, if an undertaking’s strategy involves moving into higher risk geographies in pursuit of certain commodities, if affected communities resist its presence or object to its local practices, this may create extensive and costly delays, and affect the undertaking’s ability to secure future land concessions or permits. Similarly, if an undertaking’s business model(s) relies on intensive water extraction at its plants, to the extent of affecting access to water for affected communities’ consumption, hygiene, and livelihoods, this may result in reputationally-damaging boycotts, complaints and lawsuits.

AR 4. With regard to paragraph 10, examples of particular characteristics of affected communities can be that the community is physically or economically isolated and is particularly susceptible to introduced diseases or has limited access to social services and therefore relies on infrastructure set up by the undertaking. It may be because where land worked by women is purchased by the undertaking and payments go to male heads of households, women become further disenfranchised in the community. It may also be because the community is indigenous, and its members seek to exercise cultural or economic rights to the land owned or used by the undertaking – or by one of its business relationships – in a context where their rights are not protected by the state. Special attention should be given to the intersectionality of characteristics such as ethnicity, socioeconomic status, migrant status and gender that may create overlapping risks of harm for certain communities – or for distinct parts of those communities, since communities are often heterogeneous in nature.

AR 5. With regard to paragraph 11, the business risks, which can lead to material financial risks, could also arise because of the undertaking’s dependency on affected communities where low likelihood but high impact events may affect the undertaking’s future cash flows, for example, where a natural disaster leads to a catastrophic industrial accident involving the undertaking’s operations, resulting in severe harm to affected communities.

ESRS 2 – SBM 2 – S3 Interests and views of stakeholders

AR 6. The section on ESRS 2 Disclosure Requirements SBM 2 requires the undertaking to provide an understanding of if and how it considers whether its strategy and business model(s) play a role in creating, exacerbating or (conversely) mitigating significant material impacts on affected communities, and whether and how the business model(s) and strategy are adapted to address such material impacts.

AR 7. While affected communities may not be engaging with an undertaking at the level of its strategy or business model(s), their views can inform the undertaking’s assessment of its strategy and business model(s). The undertaking shall consider reporting on the views of the (actual or potential) materially affected communities’ legitimate representatives or those of credible proxies that have insight into their situation.

Impacts, risks and opportunities management

Disclosure Requirement S3-1 – Policies related to affected communities

AR 8. The summary shall include the key information necessary to ensure a faithful representation of the policies in relation to affected communities and, therefore, the undertaking shall consider explanations of significant changes to the policies adopted during the reporting year (e.g., new or additional approaches to engagement, due diligence and remedy).

AR 9. The policy may take the form of a stand-alone policy regarding communities or be included in a broader document such as a code of ethics or a general sustainability policy that has already been disclosed by the undertaking as part of another ESRS. In those cases, the undertaking shall provide an accurate cross-reference to identify the aspects of the policy that satisfy the requirements of this Disclosure Requirement.

AR 10. In reporting on its alignment of its policies with the UN Guiding Principles on Business and Human Rights, the undertaking shall consider that the Guiding Principles refer to the International Bill of Rights, which consists of the Universal Declaration of Human Rights and the two Covenants that implement it, as well as the UN Declaration on the Rights of Indigenous Peoples, the International Labor Organization’s Convention concerning Indigenous and Tribal Peoples (ILO No. 169) and the core conventions that underpin it, and may report on alignment with these underlying standards.

AR 11. When explaining how external-facing policies are embedded, undertakings may, for example, consider internal-facing community engagement and resettlement policies and alignment with other policies relevant to affected communities.

AR 12. As an illustration of the types of communication of its policies to those individuals, group of individuals or entities for whom they are relevant, either because they are expected to implement them (for example, the undertaking’s employees, contractors and suppliers, joint venture partners), because they have a direct interest in their implementation (for example, communities, investors) or both. To help ensure that the policy is accessible and that they understand its implications, the undertaking may disclose communication tools and channels (e.g., flyers, newsletters, dedicated websites, social media, face to face interactions, community representatives and organizations), and/or the identification and removal of potential barriers for dissemination, such as through translation into relevant languages or the use of graphic depictions.

AR 13. When reporting on severe human rights issues and incidents connected to affected communities, the undertaking shall consider any legal disputes related to land rights and free prior and informed consent of indigenous peoples.

Disclosure Requirement S3-2 – Processes for engaging with affected communities about impacts

AR 14. The undertaking shall consider how the engagement includes a good faith negotiation with affected indigenous peoples to obtain their free, prior and informed consent (FPIC) where the undertaking affects the lands, territories or resources that indigenous peoples customarily own, occupy or otherwise use; or relocates them from land or territories subject to traditional ownership or under customary use or occupation; or affects or exploits their cultural, intellectual, religious and spiritual property.

AR 15. When describing which function or role has operational responsibility for such engagement and/or ultimate accountability, and whether it requires certain skills of, or provides training or capacity- building for, relevant staff to undertake engagement, the undertaking may disclose whether this is a dedicated role or function or part of a broader role or function. If it cannot identify such a position or function, it may state so. This disclosure could also be fulfilled with reference to ESRS 2 Disclosure Requirement GOV 1.

AR 16. When preparing the disclosures described in paragraph 21 b) and c), the following illustrations may be considered:

For stage(s) at which engagement occurs, examples could be in determining mitigation approaches or in evaluating their effectiveness;
For type of engagement, these could be participation, consultation and/or information;
For the frequency of the engagement, information may be provided on whether engagement occurs on a regular basis, at certain points in a project or business process, for example, when a new harvest season begins or a new production line is opened, as well as whether it occurs in response to legal requirements and/or in response to stakeholder requests and whether the result of the engagement is being integrated into the undertaking's decision- making processes; and
For the role with operational responsibility, whether it requires certain skills of, or provides training or capacity building to relevant staff to undertake engagement. In the case of material impacts, risks, and opportunities on indigenous peoples, this includes training on indigenous people’s rights, including on free, prior and informed consent.

AR 17. To illustrate how the perspectives of communities have informed specific decisions or activities of the undertaking, the undertaking may provide examples from the current reporting period.

AR 18. Explanations of how the undertaking takes into account and ensures respect of the particular right of indigenous communities to free, prior and informed consent, include information about processes to consult with indigenous peoples to obtain their free prior and informed consent.

Disclosure Requirement S3-3
Processes to remediate negative impacts and channels for affected communities to raise concerns

AR 19. In fulfilling the requirements set out by the disclosure criteria of ESRS S3-3, undertakings may be guided by the content of the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises focused on remediation and grievance mechanisms.

AR 20. Channels for raising concerns or needs, include grievance mechanisms, hotlines, dialogue processes or other means through which affected communities or their legitimate representatives can raise concerns about impacts or explain needs that they would like the undertaking to address. This could include channels provided by the undertaking directly and is to be reported in addition to any other mechanisms an undertaking may use to gain insight into the management of impacts on communities, such as compliance audits. Where the undertaking is relying solely on information about the existence of such channels provided by its business relationships to answer this requirement, it may state that.

AR 21. To provide greater insight into the information covered in Disclosure Requirement S3-3, undertakings may provide insight into whether and how communities that may be affected are able to access channels at the level of the undertaking they are affected by, in relation to each material impact. Relevant insights include information on whether affected communities can access channels in a language they understand, and whether they have been consulted in the design of such channels.

AR 22. Third party mechanisms could include those operated by the government, NGOs, industry associations and other collaborative initiatives. With regard to the scope of these mechanisms, undertakings may disclose whether these are accessible to all affected communities who may be potentially or actually materially impacted by the undertaking, or individuals or organizations acting on their behalf or who are otherwise in a position to be aware of adverse impacts, and through which affected communities (or individuals or organizations acting on their behalf or who are otherwise in a position to be aware of adverse impacts), can raise complaints or concerns related to the undertaking’s own activities.

AR 23. In relation to the protection of individuals that use the mechanisms against the retaliation, the undertaking may describe whether it treats grievances confidentially and with respect to the rights of privacy and data protection; and whether they allow for communities to use them anonymously (for example, through representation by a third party).

AR 24. When reporting on processes related to the provision of and enabling remedy for indigenous peoples, relevant information includes whether and how the undertaking has considered their customs, traditions, rules and legal systems.

AR 25. In explaining whether and how the undertaking knows that affected communities are aware of and trust any of these channels, the undertaking may provide relevant and reliable data about the effectiveness of these channels from the perspective of affected communities themselves. Examples of sources of information are surveys of community members that have used such channels and their levels of satisfaction with the process and outcomes.

AR 26. In describing the effectiveness of channels for affected communities to raise concerns, the undertaking may be guided by the following questions, based on the “effectiveness criteria for non-judicial grievance mechanisms”, as laid out in the UN Guiding Principles on Business and Human Rights. The below considerations may be applied on an individual channel basis or for the collective system of channels:

Do the channels hold legitimacy by providing appropriate accountability for their fair conduct and building stakeholder trust?
Are the channels known and accessible to stakeholders?
Do the channels have clear and known procedures, set timeframes and clarity on the processes?
Do the channels ensure reasonable access to sources of information, advice and expertise?
Do the channels offer transparency by providing sufficient information both to complainants and, where applicable, to meet any public interest at stake?
Do the outcomes achieved through the channels accord with internationally recognised human rights?
Does the undertaking identify insights from the channels that support continuous learning in both improving the channels and preventing future impacts?
Does the undertaking focus on dialogue with complainants as the means to reach agreed solutions, rather than seeking to unilaterally determine the outcome?

F or more information, see Principle 31 of the UN Guiding Principles on Business and Human Rights.

Disclosure Requirement S3-4
Taking action on material impacts, and approaches to mitigating material financial risks and pursuing material financial opportunities related to affected communities, and effectiveness of those actions and approaches.

AR 27. It may take time to understand negative impacts and how the undertaking may be involved with them through its value chain, as well as to identify appropriate responses and put them into practice. Therefore, the undertaking shall consider:

Its general and specific approaches to addressing material negative impacts;
Its social investment or other development programmes aimed at contributing to additional material positive impacts;
How far it has progressed in its efforts during the reporting period; and
Its aims for continued improvement.

AR 28. Appropriate action can vary according to whether the undertaking causes or contributes to a material impact, or whether it is involved because the impact is directly linked to its operations, products or services by a business relationship.

AR 29. Given that material negative impacts affecting communities that have occurred during the reporting period may not be caused or contributed to by the undertaking alone and may be linked to entities or operations outside its direct control, the undertaking may disclose whether and how it seeks to use its leverage with relevant business relationships to manage those impacts. This may include using commercial leverage (for example, enforcing contractual requirements with business relationships or implementing incentives), other forms of leverage within the relationship (such as providing training or capacity-building on indigenous rights to business relationships) or collaborative leverage with peers or other actors (such as initiatives aimed at minimizing security- related impacts on communities or participating in company-community partnerships).

AR 30. Impacts on communities may stem from environmental matters which are disclosed by undertakings under ESRS E1 to E5. Examples include:

Climate: The implementation of climate change adaptation plans may e.g. require undertakings to invest in renewable energy projects that may affect the lands, territories and natural resources of indigenous people. If the undertaking does not consult with the affected indigenous community as appropriate, it could negatively impact their right to free, prior, and informed consent.
Pollution: Undertakings may negatively impact communities by e.g. failing to protect them from polluting production plants, that cause them health-related issues;
Water and marine sources: Undertakings may e.g. negatively impact the access to clean drinking water of communities by failing to manage polluting emissions or when operating and withdrawing water in water stressed areas;
Biodiversity and ecosystem: Undertakings may negatively affect the livelihood of local farmers through e.g. operations that contaminate soil. Additional examples include the sealing of land through building new infrastructure, which can eradicate plant species that are critical for e.g. local biodiversity or to filter water for communities; or the introduction of invasive species (whether plants or animals) that can impact ecosystems and cause subsequent harm;
Resource use and circular economy: Undertakings may e.g. negatively impact the lives of communities by affecting their health through the mis-management of hazardous waste.

Where the connection between environmental impacts and local communities is addressed in ESRS E1-E5, undertakings may cross-reference such disclosures.

AR 31. When the undertaking reports on its participation in an industry or multi-stakeholder initiative as part of its actions to address material negative impacts, the undertaking may disclose how the initiative, and its own involvement, is aiming to address the material impact concerned. It may report under ESRS S2-54 Disclosure Requirement regarding any relevant targets set by the initiative and progress towards them.

AR 32. When disclosing whether and how it considers actual and potential impacts on affected communities in decisions to terminate business relationships and whether and how it seeks to address any negative impacts that may result from termination, the undertaking may include examples.

AR 33. In explaining how it tracks the effectiveness of actions to manage material impacts during the reporting period, the undertaking may disclose any lessons learned from the previous and current reporting periods.

AR 34. Processes used to track the effectiveness of actions can include internal or external auditing or verification, court proceedings and/or related court decisions, impact assessments, measurement systems, stakeholder feedback, grievance mechanisms, external performance ratings, and benchmarking.

AR 35. Reporting on effectiveness is aimed at enabling the understanding of the links between actions taken by an undertaking and the effective management of impacts.

AR 36. With regard to initiatives or processes the undertaking has in place that are based on affected communities’ needs and their level of implementation, undertakings may disclose:

Information about whether and how affected communities and legitimate representatives or their credible proxies play a role in decisions regarding the design and implementation of these investments or programs; and
Information about the intended or achieved positive outcomes for affected communities of these investments or programs.
An explanation of the approximate scope of affected communities covered by the described social investment or development programs, and, where applicable, the rationale for why selected communities were chosen for a given social investment or development program's implementation.

AR 37. The undertaking may explain whether any initiatives or processes whose primary aim is to deliver positive impacts for affected communities are designed also to support the achievement of one or more of the UN Sustainable Development Goals (SDGs). For example, through a commitment to advance UN SDG 5 to “achieve gender equality and empower all women and girls” the undertaking may be taking thoughtful measures to include women in the consultation process with an affected community to meet standards of effective stakeholder engagement, which can help empower the women in the process itself, but potentially also in their daily lives.

AR 38. When reporting on the intended positive outcomes of its actions for affected communities a distinction is to be made between evidence of certain activities having occurred (e.g., that x number of women community members have been provided with training on how to become local suppliers to the undertaking,) from evidence of actual outcomes for affected communities (e.g., that x women community members have set up small businesses and have had their contracts with the undertaking renewed year-on-year).

AR 39. When disclosing whether initiatives or processes also play a role in mitigating material negative impacts, undertakings may e.g. consider programs that aim to improve local infrastructure surrounding an undertaking’s operations, such as roads, that have led to a reduction in the number of severe traffic accidents involving community members.

AR 40. When disclosing the financial risks and opportunities related to an undertaking’s impacts or dependencies on affected communities, the undertaking may consider the following business risks that could lead into financial risks and business opportunities in pursuing opportunities:

Business risks related to an undertaking’s impacts on affected communities might include the reputational or legal exposure, as well as operational risks, where affected communities protest against resettlements or the loss of access to lands, leading to costly delays, boycotts, or lawsuits;
Business risks related to an undertaking’s dependencies on affected communities might include the loss of business continuity where indigenous communities decide to withdraw their consent to a project on their lands, forcing the undertaking to significantly modify or abandon the project;
Business opportunities related to an undertaking’s impacts on affected communities might include more easily financing projects and being a partner of choice for communities, governments and other businesses; and
Business opportunities related to an undertaking’s dependencies on affected communities might include the development of positive relationships between the undertaking and indigenous communities that enable existing projects to expand with strong support.

AR 41. In reporting about the above, undertakings may consider explanations of business risks and opportunities stemming from environmental impacts or dependencies (please refer to AR 30 for further details). Examples include reputational risks stemming from the impact on the health of communities of unmanaged polluting discharges; or the financial effects of protests that may disrupt or interrupt an undertaking’s activities, e.g., in response to operations in water stressed areas that may impact the lives of affected communities.

AR 42. When explaining whether dependencies turn into risks, the undertaking shall consider external developments.

AR 43. When disclosing policies, targets, action plans and resources related to the management of material risks and opportunities, in cases where risks and opportunities arise from a material impact, the undertaking may cross-reference its disclosures on policies, targets, action plans and resources in relation to that impact.

AR 44. The undertaking shall consider the extent to which its processes to manage material risks related to affected communities are integrated into its existing risk management processes and how.

AR 45. When reporting on resources allocated to the management of material impacts, undertakings may explain which internal functions are involved in managing the impacts and what types of action they take to address negative and advance positive impacts.

Metrics and Targets

Disclosure Requirement S3-5
Targets related to managing material negative impacts, advancing positive impacts, and managing material risks and opportunities.

AR 46. When disclosing the targets, the undertaking shall consider disclosing, where applicable:

The intended outcomes to be achieved in the lives of affected communities, being as specific as possible;
That these are measurable/verifiable;
Their stability over time in terms of definitions and methodologies to allow for continuity in the datapoints derived from the targets;
Standards or commitments which the targets are based on are to be clearly defined in the reporting (for instance code of conducts, sourcing policies, global frameworks or industry codes).

47. Targets related to risks and opportunities may be the same as or distinct from targets tied to impacts. Therefore, no distinction is to be made per se, but what the target is aiming at is to be disclosed (i.e. impact and/or risks and opportunities). For example, a target to fully restore livelihoods of affected communities following resettlement could both reduce impacts on those communities and reduce associated business risks such as community protests.

AR 48. The undertaking may also distinguish between short, medium, and long-term targets covering the same policy commitment. For example, an undertaking may have as a main objective to employ community members at a local mining site, with the long-term goal of staffing 100% locally by 2025, and with the short-term objective of adding x percent of local employees every year up and until 2025.

AR 49. When modifying or replacing a target in the reporting period the undertaking may explain the change by linking it to significant changes in the business model or the broader changes in the accepted standard or legislation from which the target is taken to provide contextual information.

4. CSRD Consumers
Click here for the draft regulations.

The objective of this draft standard is to specify disclosure requirements which will enable users of the sustainability statements to understand material impacts on consumers and end-users, as well as related material risks and opportunities, including:
(a) How the undertaking affects the consumers and end-users of its products and/or services (referred to in this draft standard as “consumers and end-users”), in terms of material positive and negative actual or potential impacts;
(b) Any actions taken, and the result of such actions, to prevent, mitigate or remediate actual or potential adverse impacts;
(c) The nature, type and extent of the undertaking’s material risks and opportunities related to its impacts and dependencies on consumers and end-users, and how the undertaking manages them; and
(d) The effects of risks and opportunities, related to the undertaking’s impacts and dependencies on consumers and end-users, on the undertaking’s development, including cash flows, financial position and financial performance and position over the short-, medium- and long- term.

2. In order to meet the objective, this draft standard requires an explanation of the general approach the undertaking takes to identify and manage any material actual and potential impacts on the consumers and/or end-users related to their products and/or services in relation to:
(a) Information-related impacts for consumers/end-users, in particular privacy, freedom of expression and access to (quality) information;
(b) Personal safety of consumers/end-users, in particular health and safety, security of a person and protection of children;
(c) Social inclusion of consumers/end-users, in particular non-discrimination and access to products and services and responsible marketing practices.

3. This draft standard also requires an explanation of how such impacts, as well as the undertaking’s dependencies on consumers and end-users, can create material financial risks or opportunities for the undertaking. For example, negative impact on the reputation of the products and/or services can deteriorate business performance, while trust in products and/or services can bring business benefits, such as increased sales or widening of the future consumer base.

Objectives

AR 1. The undertaking may highlight special issues relevant to a material impact for a shorter period of time, for instance initiatives regarding the health and safety of consumers and end-users in relation to contamination of a product or severe breach of privacy due to a massive data leak.

ESRS 2 General disclosures

Strategy: Disclosure Requirement related to ESRS 2 SBM-3
Material impacts, risks and opportunities and their interaction with strategy and business model(s).

AR 2. Impacts of consumers and end-users can originate in an undertaking’s business model(s) or strategy in a number of different ways. For example, impacts may relate to the undertaking’s value proposition (e.g., providing online platforms with potential for online and offline harm, providing products that harm when overused, misused or when used as intended), its value chain (e.g., speed in developing products or services, or delivering projects, with risks to health and safety), or its cost structure and the revenue model (e.g., sales-maximizing incentives that put consumers at risk).

AR 3. Impacts on consumers and end-users that originate in the business model(s) or strategy can also bring material risks to an undertaking. For example, if an undertaking’s business model(s) depends on the use of facial recognition technology in its products, where these capabilities are misused by third parties to track and persecute individuals, the undertaking may face reputational risk or have to abandon or invest in changing its technology to address regulator, investor, or consumer concerns. If an undertaking’s business model(s) is premised on incentivizing its sales force to sell high volumes of a product or service (e.g., credit cards or pain medicine) at speed, and this results in large-scale harm to consumers, the undertaking may face lawsuits and public opprobrium affecting its future business and credibility.

AR 4. Examples of particular characteristics of consumers and end-users that may be considered by the undertaking when responding to paragraph 10 relate to young consumers and end-users that may be more susceptible to impacts on their physical and mental development, or they lack financial literacy and may be more susceptible to exploitative sales or marketing practices, or they are women in a context where women are routinely discriminated against in their access to particular services or in the marketing of particular products.

AR 5. With regard to paragraph 11, the business risks, which can lead to material financial risks, could also arise because of the undertaking’s dependency on consumers and end-users where low likelihood but high impact events may affect the undertaking’s future cash flows, for example, where a global pandemic leads to severe impacts on certain consumers’ livelihoods resulting in major changes in patterns of consumption.

Disclosure Requirement related to ESRS 2 SBM-2
Views and interests of stakeholders

AR 6. The Section on Disclosure Requirement ESRS 2 SBM-2 requires the undertaking to provide an understanding of if and how it considers whether its strategy and business model(s) play a role in creating, exacerbating or (conversely) mitigating significant material impacts on consumers and end-users, and whether and how the business model(s) and strategy are adapted to address such material impacts.

Draft ESRS S4 Consumers and end-users

AR 7. While consumers and end-users may not be engaging with an undertaking at the level of its strategy or business model(s), their views can inform the undertaking’s assessment of its strategy and business model(s). The undertaking shall consider reporting on the views of the (actual or potential) materially affected consumers and end-users’ legitimate representatives or those of credible proxies that have insight into their situation.

Disclosure Requirement S4-1 – Policies related to consumers and end-users

AR 8. The summary shall include the key information necessary to ensure a faithful representation of the policies in relation to consumers and end-users, and therefore, the undertaking shall consider explanations of significant changes to the policies adopted during the reporting year (e.g., new expectations for business customers, new or additional approaches to due diligence and remedy).

AR 9. The policy may take the form of a stand-alone policy regarding consumers and end-users or be included in a broader document such as a code of ethics or a general sustainability policy that has already been disclosed by the undertaking as part of another ESRS. In those cases, the undertaking shall provide an accurate cross-reference to identify the aspects of the policy that satisfy the requirements of this Disclosure Requirement.

AR 10. In reporting on its alignment of its policies with the UN Guiding Principles on Business and Human Rights, the undertaking shall consider that the Guiding Principles refer to the International Bill of Rights, which consists of the Universal Declaration of Human Rights and the two Covenants that
implement it and may report on alignment with these underlying standards.

AR 11. When explaining how external facing policies are embedded, undertakings may, for example, consider internal-facing sales and distribution policies and alignment with other policies relevant to consumers and end-users. The undertaking shall also consider its policies for safeguarding the veracity and usefulness of information provided to potential and actual consumers and end-users, both before and after the sale.

AR 12. As an illustration of the types of communication of its policies to those individuals, group of individuals or entities for whom they are relevant, either because they are expected to implement them (for example, the undertaking’s employees, contractors and business customers), because they have a direct interest in their implementation (for example, consumers and end-users, investors), or both. To help ensure that the policy is accessible and that they understand its implications, the undertaking may disclose communication tools and channels (e.g., flyers, newsletters, dedicated websites, social media, face to face interactions, consumer representative organizations) and/or the identification and removal of potential barriers for dissemination, such as through translation into relevant languages or the use of graphic depictions.

Disclosure Requirement S4-2
Processes for engaging with consumers and end-users about impacts.

AR 13. Credible proxies who have knowledge of the interests, experiences or perspectives of consumers and end-users could include national consumer protection bodies for some consumers.

AR 14. When describing which function or role has operational responsibility for such engagement and/or ultimate accountability, and whether it requires certain skills of, or provides training or capacity building for, relevant staff to undertake engagement, the undertaking may disclose whether this is a dedicated role or function or part of a broader role or function. If it cannot identify such a position or function, it may state so. This requirement could also be fulfilled with reference to Disclosure Requirement ESRS 2 GOV-1--The role of the administrative, supervisory and management bodies.

AR 15. When preparing the disclosures described in paragraph 15 b) and c), the following illustrations
may be considered:
(a) For stage(s) at which engagement occurs, examples could be in determining mitigation
approaches or in evaluating their effectiveness;
(b) For type of engagement, these could be participation, consultation and/or information;
(c) For the frequency of the engagement, information may be provided on whether engagement occurs on a regular basis, at certain points in a project or business process, as well as whether it occurs in response to legal requirements and/or in response to stakeholder requests and whether the result of the engagement is being integrated into the undertaking's decision-making processes; and (d) For the role with operational responsibility, whether it requires certain skills of, or provides training or capacity building to relevant staff to undertake engagement.

AR 16. To illustrate how the perspectives of consumers and end-users have informed specific decisions or activities of the undertaking, the undertaking may provide examples from the current reporting period.

Disclosure Requirement S4-3
Processes to remediate negative impacts and channels for consumers and end-users to raise concerns.

AR 17. In fulfilling the requirements set out by the disclosure criteria of ESRS S2-3, undertakings may be guided by the content of the UN Guiding Principles on Business and Human Rights and the OECD (Organization for Economic Cooperation and Development) Guidelines for Multinational Enterprises focused on remediation and grievance mechanisms.

AR 18. Channels for raising concerns or needs, include grievance mechanisms, hotlines, trade unions (where workers are unionized), dialogue processes or other means through which consumers and end-users or their legitimate representatives can raise concerns about impacts or explain needs that they would like the undertaking to address. This could include channels provided by the undertaking directly and is to be reported in addition to any other mechanisms an undertaking may use to gain insight into the management of impacts on consumers and end-users, such as compliance audits. Where the undertaking is relying solely on information about the existence of such channels provided by its business relationships to answer this requirement, it may state that.

AR 19. To provide greater insight into the information covered in Disclosure Requirement S4-3, undertakings may provide insight into whether and how consumers and end-users that may be affected are able to access channels at the level of the undertaking they are affected by, in relation
to each material impact.

AR 20. Third-party mechanisms could include those operated by the government, NGOs, industry associations and other collaborative initiatives. With regard to the scope of these mechanisms, undertakings may disclose whether these are accessible to all consumers and end-users who may be potentially or actually materially impacted by the undertaking, or individuals or organizations acting on their behalf or who are otherwise in a position to be aware of adverse impacts, and through which consumers and end-users (or individuals or organizations acting on their behalf or who are otherwise in a position to be aware of adverse impacts), can raise complaints or concerns related to the undertaking’s own activities.

AR 21. In relation to the protection of individuals that use the mechanisms against the retaliation, the undertaking may describe whether it treats grievances confidentially and with respect to the rights of privacy and data protection; and whether they allow for consumer and end-users to use them anonymously (for example, through representation by a third party).

AR 22. In explaining whether and how the undertaking knows that consumers and end-users are aware of and trust any of these channels, the undertaking may provide relevant and reliable data about the effectiveness of these channels from the perspective of consumers and end-users themselves. Examples of sources of information are surveys of consumers and end-users that have used such channels and their levels of satisfaction with the process and outcomes. To illustrate the usage level of such channels, the undertaking may disclose the number of complaints received from consumers and end-users during the reporting period.

AR 23. In describing the effectiveness of channels for consumers and end-users to raise concerns, the undertaking may be guided by the following questions, based on the “effectiveness criteria for nonjudicial grievance mechanisms”, as laid out in the UN Guiding Principles on Business and
Human Rights. The below considerations may be applied on an individual channel basis or for the collective system of channels:
(a) Do the channels hold legitimacy by providing appropriate accountability for their fair conduct
and building stakeholder trust?
(b) Are the channels known and accessible to stakeholders?
(c) Do the channels have known procedures, set timeframes, and clarity on the processes?
(d) Do the channels ensure reasonable access to sources of information, advice, and expertise?
(e) Do the channels offer transparency by providing sufficient information both to complainants
and where applicable, to meet any public interest at stake?
(f) Do the outcomes achieved from the channels accord with internationally recognized human
rights?
(g) Does the undertaking identify insights from the channels that support continuous learning in
both improving the channels and preventing future impacts?
(h) Does the undertaking focus on dialogue with complainants as the means to reach agreed
solutions, rather than seeking to unilaterally determine the outcome?

For more information, see Principle 31 of the UN Guiding Principles on Business and Human
Rights.

Disclosure Requirement S4-4
Taking action on material impacts, and approaches to mitigating material financial risks and pursuing material financial opportunities related to consumers and end-users and effectiveness of those actions and approaches.

AR 24. It may take time to understand negative impacts and how the undertaking may be involved with
them through its downstream value chain, as well as to identify appropriate responses and put them into practice). Therefore, the undertaking shall consider:
(a) Its general and specific approaches to addressing material negative impacts;
(b) Its initiatives aimed at contributing to additional material positive impacts;
(c) How far it has progressed in its efforts during the reporting period; and
(d) Its aims for continued improvement.

AR 25. Appropriate action can vary according to whether the undertaking causes or contributes to a material impact, or whether it is involved because the impact is directly linked to its operations, products or services by a business relationship.

AR 26. Given that material negative impacts affecting consumers and end-users that have occurred during the reporting period may not be caused or contributed by the undertaking alone and may be linked to entities or operations outside its direct control, the undertaking may disclose whether
and how it seeks to use leverage with relevant business relationships to manage those impacts. This may include using commercial leverage (for example, enforcing contractual requirements with business relationships or implementing incentives), other forms of leverage within the relationship (such as providing training or capacity-building on proper product use or sale practices to business relationships) or collaborative leverage with peers or other actors (such as initiatives aimed at responsible marketing or product safety).

AR 27. When the undertaking reports on its participation in an industry or multi-stakeholder initiative as part of its actions to address material negative impacts, the undertaking may disclose how the initiative, and its own involvement, is aiming to address the material impact concerned. It may report under Disclosure Requirement ESRS S2-4 regarding any relevant targets set by the initiative and progress towards them.

AR 28. When disclosing whether and how it considers actual and potential impacts on consumers and end-users in decisions to terminate business relationships and whether and how it seeks to address any negative impacts that may result from termination, the undertaking may include examples.

AR 29. In explaining how it tracks the effectiveness of actions to manage material impacts during the reporting period, the undertaking may disclose any lessons learned from the previous and current reporting periods.

AR 30. Processes used to track the effectiveness of actions can include internal or external auditing or verification, court proceedings and/or related court decisions, impact assessments, measurement systems, stakeholder feedback, grievance mechanisms, external performance ratings, and benchmarking.

AR 31. Reporting on effectiveness is aimed at enabling the understanding of the links between actions taken by an undertaking and the effective management of impacts.

AR 32. With regard to initiatives or processes the undertaking has in place that are based on affected consumers and end-users’ needs and their level of implementation, undertakings may disclose:
(a) Information about whether and how consumers and end-users and legitimate representatives
or their credible proxies play a role in decisions regarding the design and implementation of
these programs or processes; and
(b) Information about the intended or achieved positive outcomes for consumers and end-users
of these programs or processes.

AR 33. The undertaking may explain whether any initiatives or processes whose primary aim is to deliver positive impacts for consumers and end-users are designed to also support the achievement of one or more of the UN Sustainable Development Goals (SDGs). For example, through a commitment to advance UN SDG 3 to “ensure healthy lives and promote well-being for all at all ages” the undertaking may be actively working to make its products less addictive and harmful to physical and psychological health, which can benefit both the consumers and end-users themselves, but also their families and communities.

AR 34. When reporting on the intended positive outcomes of its actions for consumers and end-users a distinction is to be made between evidence of certain activities having occurred (e.g., that x number of consumers have received information about healthy eating habits) from evidence of actual outcomes for consumers and end-users (e.g., that x number of consumers have changed their eating habits and improved their overall health).

AR 35. When disclosing whether initiatives of processes also play a role in mitigating material negative impacts, undertakings may e.g. consider programs that aim to support heightened digital awareness of the risk of online scams, that have led to a reduction in the number of cases of endusers experiencing breaches of data privacy.

AR 36. When disclosing the financial risks and opportunities related to an undertaking’s impacts or dependencies on consumers and end-users, the undertaking may consider the following business risks that could lead into financial risks and business opportunities in pursuing opportunities:
(a) Business risks related to an undertaking’s impacts on consumers and end-users might include the reputational or legal exposure where poorly designed or defective products result in injuries or deaths;
(b) Business risks related to an undertaking’s dependencies on consumers and end-users might include the loss of business continuity where an economic crisis makes consumers unable to afford certain products or services;
(c) Business opportunities related to an undertaking’s impacts on consumers and end-users might include market differentiation and greater customer appeal from offering safe products or privacy-respecting services; and
(d) Business opportunities related to an undertaking’s dependencies on consumers and endusers might include the achievement of a loyal future consumer base by ensuring, for example, that LGBTQI communities are respected and included in the products or services offered by the undertaking.

AR 37. When explaining whether dependencies turn into risks, the undertaking shall consider external developments.

AR 38. When disclosing policies, targets, action plans and resources related to the management of material risks and opportunities, in cases where risks and opportunities arise from a material impact, the undertaking may cross-reference its disclosures on policies, targets, action plans and resources in relation to that impact.

AR 39. The undertaking shall consider the extent to which its processes to manage material risks related to consumers and end-users are integrated into its existing risk management processes and how.

AR 40. When reporting on resources allocated to the management of material impacts, undertakings may explain which internal functions are involved in managing the impacts and what types of action they take to address negative and advance positive impacts.

Metrics and Targets
Disclosure Requirement S4-5 – Targets related to managing material negative impacts,
advancing positive impacts, and managing material risks and opportunities

AR 41. When disclosing targets in relation to consumers and end-users, the undertaking shall consider
disclosing, where applicable:
(a) The intended outcomes to be achieved in the lives of consumers and end-users, being as
specific as possible;
(b) That these are measurable/verifiable;
(c) Their stability over time in terms of definitions and methodologies to allow for continuity in the
data points derived from the targets, and/or
(d) Standards or commitments on which the targets are based are to be clearly defined in the
reporting (for instance code of conducts, sourcing policies, global frameworks, or industry
codes).

AR 42. Targets related to risks and opportunities may be the same as or distinct from targets tied to impacts. Therefore, no distinction is to be made per se, but what the target is aiming at is to be disclosed (i.e., impact and/or risks and opportunities)". For example, a target to ensure equal access to finance for underserved consumers could both reduce discrimination impacts on those consumers and enlarge the undertaking’s pool of customers.

AR 43. The undertaking may also distinguish between short, medium, and long-term targets covering the same policy commitment. For example, an undertaking may have as a main objective to make its online services accessible to people with disabilities, with the long-term goal of having adapted 100% of its online services by 2025, and with the short-term objective of adding x number of accessible features every year up and until 2025.

AR 44. When modifying or replacing a target in the reporting period, the undertaking may explain the change by linking it to significant changes in the business model(s) or to broader changes in the accepted standard or legislation from which the target is derived to provide contextual information.

For More Information
Bruce Bolger, Founder
Enterprise Engagement Alliance
914-591-7600, ext. 230
Bolger@TheEEA.org

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