Part 2 Flashcards
(23 cards)
What is sustainability information, what does it cover, and how have ESG reporting frameworks evolved?
Covered Topics:
- Environmental: Climate change
- Social: Labor practices
- Governance: Corporate governance
Scope of Coverage:
- Topics – e.g., climate, working conditions
- Management of Topics – risks, impacts, policies, strategies, and performance
Purpose: To provide relevant and reliable information to stakeholders such as investors, regulators, and the public.
Evolution of Reporting Frameworks:
- Early ESG reporting was fragmented with overlapping standards (“alphabet soup”)
- Key frameworks have since aligned or merged globally for consistency:
What are the ESRS, how are they structured, and what are their key requirements?
The European Sustainability Reporting Standards (ESRS) are mandatory for large EU companies under the Corporate Sustainability Reporting Directive (CSRD).
Structure:
1.Cross-cutting standards:
- ESRS 1: How to report (principles, scope)
- ESRS 2: What to report (core disclosures)
2.Topical standards:
- Environment (E1–E5): Climate, pollution, water, biodiversity, circular economy
- Social (S1–S4): Workforce, value chain workers, communities, consumers
- Governance (G1): Business conduct
Key Requirements:
- Report material ESG risks and opportunities
- Perform a materiality assessment to determine what must be disclosed
- Cover not just topics, but also how they are governed, managed, and measured
What are the key characteristics of the GRI, ISSB, and SASB sustainability reporting frameworks?
GRI (Global Reporting Initiative):
- Global, stakeholder-focused
- Covers ESG topics broadly
- Compatible with ESRS
ISSB (International Sustainability Standards Board, under IFRS):
- Focuses on financial materiality for investors
- Serves as a global baseline for ESG reporting
SASB (Sustainability Accounting Standards Board):
- Now part of ISSB
- Provides industry-specific metrics
What are the IFRS Sustainability Disclosure Standards (IFRS S1 & S2), and how do they compare to the ESRS?
IFRS Sustainability Disclosure Standards
IFRS S1 – General Requirements
- Aligns sustainability with financial reporting
- Covers: Governance, Risk management, Strategy, Metrics and targets
IFRS S2 – Climate Disclosures
- Focuses on climate-related risks and opportunities
- Requires disclosure on:
- Strategic impact
- Business model resilience
- Climate metrics and targets
What are the four key sections of the ESRS reporting structure and what does each cover?
1.1 General Information (Mandatory – ESRS 2)
Covers: Business model, strategy, governance, and IRO (impacts, risks, opportunities) processes
Includes:
- Required general disclosures from ESRS 2
- Additional disclosures from topical standards (if relevant)
- Applied standards and cross-referenced regulations
1.2 Environmental Disclosures (ESRS E1–E5)
Report only if material
Topics: Climate change, pollution, water/marine resources, biodiversity, resource use
- Special note: If climate change (E1) is not material, a justification is required
- Must include required EU Taxonomy disclosures
- Structure: Policies, Actions, Targets, Metrics (PATM)
1.3 Social Disclosures (ESRS S1–S4)
Report only if material
- Topics: Own workforce, value chain workers, affected communities, consumers
- Structure: PATM
1.4 Governance Disclosures (ESRS G1)
Report only if material
- Focus: Business conduct, ethics, corruption, lobbying
- Structure: PATM
Step 1 of ESRS Reporting: What mandatory general information must all companies disclose under ESRS 2?
Step 1: Disclose Mandatory General Information (ESRS 2)
Required for all companies, regardless of materiality
Purpose: Provide the foundation for sustainability reporting
Core Disclosure Areas:
- Basis for Preparation (BP): Scope, estimates used, value chain coverage
- Governance (GOV): ESG responsibilities, oversight, integration into governance structures
- Strategy & Business Model (SBM): Link between sustainability and the business model
- Impacts, Risks, and Opportunities (IROs): Identification and management processes
Note: Some disclosures (e.g., IRO-1, SBM-3) are expanded within topical standards.
Step 2 of ESRS Reporting: How is materiality of sustainability-related IROs assessed?
Step 2: Assess the Materiality of Sustainability-Related IROs
Used to determine which topics must be reported.
Sub-step 2.1 – Understand the Context
- Analyze activities, value chain, stakeholder groups
- Map connections to impacts (cause, contribute, linked)
Sub-step 2.2 – Identify Potential IROs
- Use ESRS-defined topics (E, S, G)
- Add entity-specific topics as needed
- Classify as upstream/downstream or financial
- Review annually
Sub-step 2.3 – Assess Double Materiality
Impact Materiality (Inside–Out):
- Focus: How company affects people/environment
- Scope: Operations, value chain, relationships
- Criteria: Scale, Scope, Irremediability, Likelihood
Financial Materiality (Outside–In):
- Focus: How sustainability affects the company
- Criteria: Magnitude and Probability of financial effects
- Tool: Use a Materiality Matrix to visualize both perspectives.
How are disclosures structured in Step 3 of the ESRS reporting process (Topical Standards)?
Step 3: Disclose Material Topics Using Topical Standards
Report only on topics deemed material in Step 2.
Applies ESRS topical standards: E1–E5 (Environment), S1–S4 (Social), G1 (Governance)
Disclosure must follow the PATM Framework:
- Policies (MDR-P): Objectives, accountability, stakeholder input, alignment
- Actions (MDR-A): Measures, timing, outcomes, resource allocation, remediation
- Targets (MDR-T): Quantified goals, baseline, timeframe, stakeholder involvement
- Metrics (MDR-M): Indicators, methods, validation, units, currency
Requirements:
- Must be clear, auditable, and aligned with the materiality assessment
- Designed for comparability and decision-usefulness
What are the qualitative characteristics required for disclosures in Step 4 of the ESRS reporting process?
Step 4: Ensure Information Quality (Qualitative Characteristics)
All information must meet ESRS quality principles.
How can the 4-step ESRS reporting process be summarized in a simple, logical way?
Simplified Summary of the ESRS 4-Step Reporting Process:
Step 1 – Identify What Exists
→ Disclose all mandatory general information under ESRS 2, including business model, governance, IRO processes, and preparation basis.
Step 2 – Assess What Matters
→ Use a double materiality assessment to determine which topics are impact material (affect people/environment) or financially material (affect the company’s financials).
Step 3 – Structure the Reporting
→ For all material topics, apply the relevant topical standards and organize disclosures using the PATM framework (Policies, Actions, Targets, Metrics).
Step 4 – Verify Information Quality
→ Ensure that reported data is complete, comparable, auditable, and aligned with ESRS principles — covering the full value chain and relevant time horizons.
What should a company do if a sustainability topic is not material under ESRS?
If a topic is not material, the company:
- Is not required to report disclosures from the related topical standard (e.g., ESRS E2–E5, S1–S4, G1).
→ Exception: Climate change (ESRS E1) requires a comply-or-explain approach. - Must still mention that the topic was assessed and found non-material.
→ This is important for transparency and auditability. - Must justify non-materiality for ESRS E1 (Climate Change) specifically:
- The company needs to provide a clear explanation if climate is considered not material.
- This is due to the EU’s prioritization of climate-related disclosures.
1. May still choose to disclose voluntarily if they believe the information is relevant for stakeholders.
What are the disclosure requirements under ESRS E1 – Climate Change?
What are the disclosure requirements under ESRS E2 – Pollution?
Objective: Show how the company impacts the environment through pollution and manages associated risks.
1. Strategic Integration: Align pollution-related matters with the company’s overall strategy (no specific mandatory disclosures)
2. IRO Assessment: Identify risks related to pollution, including legal liability, regulatory exposure, and reputational harm
3. Policies & Actions:
- Describe pollution control policies and operational measures for air, water, and soil pollution
- Include approaches to handling substances of concern and microplastics
4. Metrics & Targets:
- Report pollution levels, reduction targets, and financial impacts
- Disclose use of hazardous substances and progress in reducing them
What are the disclosure requirements under ESRS E3 – Water & Marine Resources?
Objective: Explain how the company uses and affects water and marine resources, and how related risks are managed.
1. Strategic Integration: Integrate water-related risks and dependencies into the company’s ESG and business strategy
2. IRO Assessment:
Apply the LEAP approach:
- Locate water/marine interactions
- Evaluate dependencies
- Assess risks and opportunities
- Prepare responses
3. Policies & Actions:
- Describe policies on water stewardship and marine ecosystem protection
- Explain actions taken to reduce consumption and pollution
4. Metrics & Targets:
- Report total water consumption and discharge
- Set and disclose water efficiency targets
- Estimate financial impacts from water-related issues
What are the disclosure requirements under ESRS E4 – Biodiversity & Ecosystems?
Objective: Explain how the company affects biodiversity and ecosystems and what it does to protect or restore nature.
1. Strategic Integration:
- Integrate biodiversity considerations into strategic and transition planning
- Describe how biodiversity risks and opportunities affect the business model
2. IRO Assessment:
- Identify risks from deforestation, habitat degradation, species decline, and ecosystem dependency
- Assess exposure to regulatory and stakeholder pressure
3. Policies & Actions:
- Describe policies and efforts for ecosystem conservation and restoration
- Include prevention of biodiversity loss and enhancement of ecosystem services
4. Metrics & Targets:
- Report on biodiversity status, conservation targets, and progress
- Estimate financial effects of biodiversity risks and mitigation efforts
What are the disclosure requirements under ESRS E5 – Resource Use & Circular Economy?
Objective: Show how the company manages material use, waste, and applies circular economy principles.
1. Strategic Integration: Reflect circularity principles in the company’s ESG and business strategy
2. IRO Assessment: Identify risks from inefficient resource use, material scarcity, waste management, and regulation
3. Policies & Actions:
- Describe strategies for improving resource efficiency and minimizing waste
- Include design-for-circularity, reuse, recycling, and lifecycle thinking
4. Metrics & Targets:
- Report material inflows and outflows
- Disclose circularity goals (e.g., reuse/recycling rates)
- Quantify financial implications of circular economy practices
How do ESRS E1–E5 connect with the EU Taxonomy, and what is the integration process?
Integration Flow – From ESRS to EU Taxonomy KPIs:
- Disclose ESG data using ESRS E1–E5
- Identify eligible activities under the EU Taxonomy
- Assess alignment based on: Substantial contribution, Do No Significant Harm (DNSH), Minimum social safeguards
- Calculate KPIs: % Turnover, % CapEx, % OpEx aligned
- Report under CSRD
Final Notes for Application:
- Use ESRS to structure sustainability disclosures
- Use the EU Taxonomy to evaluate which activities qualify as environmentally sustainable
- Ensure alignment across:
- Company strategy
- Environmental performance
- Investor communication
What should companies report under ESRS S1 – Own Workforce?
Only General SBM Disclosure needed
What should companies report under ESRS S2 – Workers in the Value Chain?
Goal: Show how the company impacts non-employee workers (e.g. contractors, suppliers’ workers).
Governance: No special governance disclosures required
What should companies report under ESRS S3 – Affected Communities?
Goal: Explain how the company’s activities affect local communities (e.g. pollution, health, access to resources).
Governance: No specific governance reporting required
What should companies report under ESRS S4 – Consumers and End-Users?
Goal: Show how the company manages its impact on customers and product users (e.g. safety, digital rights, misinformation).
Governance: No specific governance reporting required
What should companies report under ESRS G1 – Business Conduct?
Objective: Ensure transparency on business ethics, anti-corruption, political influence, and fair business practices.
No SBM disclosure; only GOV-1: Role of governing bodies in overseeing business conduct
What are the key disclosure requirements across ESRS S1–S4 and G1 at a glance?
- SBM-2/3 = Stakeholder views + how IROs affect strategy/business model
- GOV-1 = Role of governing bodies in oversight
