Basis for Preparation
The “Basis of Preparation” in ESRS 2 pertains to the fundamental requirements and guidelines for how companies should prepare their sustainability statements, ensuring clarity, consistency, and comprehensibility for all stakeholders. Key aspects in Basis for preparation in ESRS includes BP-1 and BP-2.
BP-1 – General basis for preparation of the sustainability statement
Preparation Scope
Companies must state whether the sustainability statement is prepared on a consolidated basis or for an individual entity.
Scope of Consolidation
For consolidated statements, it must be confirmed whether this scope matches that of the financial statements or explain any deviations.
Value Chain Coverage
The extent of the sustainability statement’s coverage over the company’s upstream and downstream value chain should be detailed.
Omission of Sensitive Information
Companies may omit sensitive information related to intellectual property or innovations, and must declare if any exemption has been used for non-disclosure of pending developments or negotiations.
BP-2 – Disclosures in relation to specific circumstances
This involves disclosing any unique or specific conditions affecting the preparation of the sustainability statement, aiming to elucidate the impact of these circumstances on the presented sustainability information.
Time Horizons
Companies must describe their own definitions of medium or long-term time horizons, especially if they deviate from the standard definitions provided by ESRS, and explain the reasons for these definitions.
Value Chain Estimation
When sustainability metrics involve estimated data from the value chain using proxies like sector averages, companies should explain the basis of these estimates, the accuracy levels, and future steps to improve this accuracy.
Sources of Estimation and Outcome Uncertainty
Companies need to identify which parts of their disclosed information involve significant estimation uncertainty and explain the sources and assumptions behind these estimates.
Changes in Preparation or Presentation of Sustainability Information
Companies are required to explain any changes made to the preparation and presentation methods of sustainability information compared to prior periods. This includes providing reasons for these changes, presenting revised comparative figures where possible, or explaining why such adjustments were impracticable.
Reporting Errors in Prior Periods
If material errors from previous periods are identified, companies must disclose the nature of these errors, corrections made for each prior period as feasible, and explain any impracticability in making corrections.
Disclosures Stemming from Other Legislation or Generally Accepted Sustainability Reporting Pronouncements:
When a sustainability statement includes information required by other legislation or generally accepted sustainability standards and frameworks, companies must disclose this fact. If only parts of other standards are applied, the specific paragraphs applied must be referenced.
Incorporation by Reference
Companies can incorporate certain information by reference, indicating which parts of the ESRS or specific datapoints are included in this manner. This approach is intended to avoid duplication and enhance clarity by referring to information provided elsewhere.
Use of Phase-In Provisions in Accordance with Appendix C of ESRS 1:
Smaller entities or groups, specifically those with fewer than 750 employees, can opt to omit information required by other specific ESRS standards but must still disclose if the sustainability topics covered by these omissions have been assessed as material. For each material topic, companies must disclose a variety of details including the relevant issues assessed, the targets set, policies, actions taken, and relevant metrics.
Governance
In ESRS 2, governance is detailed to ensure organizations disclose the structures, processes, and strategies employed to oversee and manage sustainability-related matters effectively. These are disclosed in GOV-1 – GOV 5.
GOV-1 – The Role of the Administrative, Management, and Supervisory Bodies
Disclosure Requirement GOV-1 – The Role of the Administrative, Management, and Supervisory Bodies outlines the necessity for organizations to provide detailed information on the structure, roles, responsibilities, and capabilities of their governing bodies in relation to sustainability oversight. This disclosure requirement aims to give stakeholders a clear understanding of how sustainability matters are governed within the organization.
Summary of key Requirements of ESRS GOV-1:
Composition and Diversity
Organizations must disclose the makeup of their administrative, management, and supervisory bodies, including the number of executive and non-executive members, representation of employees, and diversity aspects such as gender and independence. This includes detailing the percentage of independent members, which varies depending on the structure of the board (unitary or dual).
Roles and Responsibilities
The disclosure should clearly outline the specific roles and responsibilities of the administrative, management, and supervisory bodies in managing sustainability-related impacts, risks, and opportunities. This includes information on how these responsibilities are incorporated into the organization’s governance frameworks, such as terms of reference and board mandates.
It should also describe the processes and controls these bodies use to oversee these sustainability matters, including how management roles are defined, the delegation of responsibilities to specific positions or committees, and the reporting lines to higher governance bodies.
Expertise and Skills
The requirement emphasizes the need for these bodies to possess or have access to the necessary expertise and skills related to sustainability. Organizations must describe the sustainability-related competencies of their governing bodies and how these are applied or developed, including the use of training programs or external experts.
Monitoring and Target Setting
Organizations must explain how their governance bodies participate in setting and monitoring targets related to significant sustainability impacts, risks, and opportunities. This includes an overview of the mechanisms and processes in place to track progress and make adjustments as necessary.
GOV-2 – Information Provided to and Addressed by the Governance Bodies
Disclosure Requirement GOV-2 – Information Provided to and Addressed by the Governance Bodies focuses on the communication and decision-making processes related to sustainability within an organization’s governing bodies. This requirement aims to ensure transparency in how these bodies are kept informed about sustainability issues and how they address them. It also assesses the adequacy and effectiveness of this information flow in enabling these bodies to perform their oversight responsibilities effectively.
Summary of key Requirements of ESRS GOV-2:
Information Flow
Organizations must disclose the mechanisms through which their administrative, management, and supervisory bodies are informed about sustainability-related matters. This includes detailing who provides the information, how often it is provided, and the nature of the information related to material impacts, risks, and opportunities.
The disclosure should also cover the processes of implementing due diligence and the effectiveness of policies, actions, metrics, and targets set for addressing sustainability matters.
Decision-Making Processes
The requirement highlights the need to disclose how the governance bodies use the information received to make decisions regarding the organization’s strategy, major transactions, and risk management. This includes how these bodies assess and weigh the trade-offs associated with various sustainability impacts, risks, and opportunities.
Addressing Material Impacts, Risks, and Opportunities
Organizations must list the specific material impacts, risks, and opportunities that were addressed by the governance bodies during the reporting period. This should include a discussion on how these matters were handled, providing insight into the effectiveness of the governance structure in managing sustainability issues.
Importance of ESRS GOV-2
This disclosure helps stakeholders understand the role and effectiveness of an organization’s governance bodies in managing sustainability. It ensures that the governance structures are not only informed but are actively engaging with and addressing sustainability challenges. By showcasing how information is used to guide strategic decisions and risk management, GOV-2 reinforces the accountability and responsiveness of governance bodies to sustainability issues, enhancing stakeholder confidence in the organization’s sustainability governance.
GOV-3 – Integration of Sustainability-Related Performance in Incentive Schemes
Disclosure Requirement GOV-3 – Integration of Sustainability-Related Performance in Incentive Schemes, focuses on the ways in which sustainability performance influences compensation within an organization. This requirement compels an undertaking to disclose if and how its incentive schemes for the administrative, management, and supervisory bodies incorporate sustainability-related criteria.
Key Characteristics of Incentive Schemes
The company must describe the main features of the incentive schemes that are applicable to the governance bodies. This includes the general structure and basis of the incentives, emphasizing the integration of sustainability goals.
Assessment Against Sustainability Targets/Impacts
It should be disclosed whether the performance evaluations for incentive schemes consider specific sustainability-related targets or impacts. If so, the details of these targets or impacts must be specified, explaining how they are measured and evaluated.
Use of Sustainability Metrics in Remuneration Policies
The disclosure should state whether sustainability-related performance metrics are used as benchmarks in the remuneration policies of the company. This includes how these metrics are incorporated into the overall evaluation process for determining compensation.
Proportion of Variable Remuneration Linked to Sustainability
The undertaking needs to specify the proportion of variable compensation (bonuses, stock options, etc.) that is tied directly to achieving sustainability-related targets or managing sustainability impacts.
Approval and Update of Incentive Terms
Information must be provided about the organizational level at which the terms of these incentive schemes are approved and the frequency with which they are reviewed or updated. This helps in understanding the governance structures in place for overseeing the alignment of incentives with sustainability performance.
GOV-4 – Statement on Due Diligence
Disclosure Requirement GOV-4, “Statement on Due Diligence,” concerns the transparency of an organization’s due diligence processes related to sustainability matters. This requirement emphasizes how these processes are integrated and depicted within the organization’s sustainability statement. Overviev of what should be disclosed under GOV-4:
Mapping the Due Diligence Process
The organization must provide a detailed mapping that demonstrates how and where each aspect and step of its due diligence process is reported within the sustainability statement. This mapping should clearly show the linkage between the reported information and the specific due diligence practices implemented by the organization.
Objective of the Disclosure
The main goal of this disclosure requirement is to enhance the understanding of the organization’s due diligence processes concerning sustainability matters. It aims to ensure that stakeholders can clearly see how the organization identifies, assesses, and manages the sustainability-related impacts, risks, and opportunities.
Detailed Explanation of Due Diligence Practices
The undertaking should detail the main aspects and steps involved in its due diligence process as defined under ESRS 1, Chapter 4 (“Due Diligence”). This should include how these practices are applied across various domains of the organization and how they relate to both cross-cutting and specific topical disclosure requirements under the ESRS framework.
Non-Prescriptive Nature of the Requirement
It is important to note that GOV-4 does not impose specific behavioral actions regarding due diligence, nor does it modify the existing roles of the administrative, management, and supervisory bodies as prescribed by other legislations or regulations. Instead, it focuses on reporting and transparency of existing processes.
Illustration of Actual Practices
The disclosure should effectively illustrate the actual due diligence practices being followed by the organization, providing stakeholders with a realistic view of how sustainability matters are handled within organizational processes and decision-making frameworks.
Summarized, GOV-4 is designed to ensure that there is clear and transparent reporting on how an organization’s due diligence processes related to sustainability are implemented, thereby fostering greater accountability and stakeholder confidence in the organization’s sustainability initiatives.
GOV-5 – Risk Management and Internal Controls Over Sustainability Reporting
Disclosure Requirement GOV–5 – Risk management and internal controls over sustainability reporting specifies that organizations must comprehensively disclose how they manage and control risks specifically related to their sustainability reporting. This requirement aims to enhance the transparency and reliability of sustainability disclosures by detailing the systems and processes that ensure accurate and consistent reporting of sustainability data.
Summary of key requirements of ESRS GOV–5
Scope and Features of Risk Management and Internal Controls
Organizations are required to disclose the scope, main features, and components of their risk management and internal control systems that are dedicated to sustainability reporting. This includes outlining the frameworks, tools, and mechanisms in place that ensure the integrity and accuracy of the sustainability data reported.
Risk Assessment Approach
The disclosure must detail the risk assessment methodologies used by the organization to identify and prioritize risks associated with sustainability reporting. This should include the criteria and processes used to evaluate the likelihood and impact of potential risks to the sustainability data and reporting processes.
Identification and Mitigation of Risks
Organizations need to specify the main risks identified through their risk assessment processes and describe the strategies and controls implemented to mitigate these risks. This ensures stakeholders understand the steps taken to prevent or reduce the impact of identified risks on the sustainability reporting.
Integration of Risk Assessment Findings
There should be a detailed description of how the findings from the risk assessments and the functioning of internal controls are integrated into the organization’s broader management processes. This part of the disclosure demonstrates how risk management is woven into the daily operations and decision-making processes related to sustainability reporting.
Periodic Reporting to Governance Bodies
Lastly, organizations must describe how the outcomes and findings from the risk management and internal control assessments are periodically reported to administrative, management, and supervisory bodies. This ensures ongoing oversight and accountability by the organization’s leadership regarding the effectiveness of the risk management strategies and internal controls for sustainability reporting.
When following the Mentcon model all this information is inserted of GOV 5 in the equivalent Data point and can be adjusted company specific where needed.
Strategy
In ESRS 2, the strategy section is critical for elucidating how an organization integrates sustainability into its strategic planning, business model, and value chain. This section comprises several disclosure requirements, each aiming to provide a deep understanding of the interconnections between the organization’s operations and its sustainability commitments and impacts.
SBM-1 – Strategy, Business Model, and Value Chain
The Disclosure Requirement SBM-1 – Strategy, Business Model, and Value Chain is integral to ESRS 2, aiming to provide stakeholders with a comprehensive understanding of how a company’s strategy, business model, and value chain are aligned with sustainability matters. This requirement ensures transparency about the company’s strategic objectives related to sustainability and how these objectives are integrated throughout its operations and external relationships.
Key Aspects of ESRS SBM-1
Strategy Related to Sustainability Matters
Product and Service Offerings: Companies must describe their significant product groups and services, noting any changes such as new offerings or discontinued items during the reporting period. This includes detailing how these offerings are linked to sustainability objectives.
Market and Customer Segmentation: Information on significant market segments and customer groups, including any shifts in market focus or customer demographics, is crucial for understanding the company’s strategic direction in sustainability.
Geographical Employee Distribution: Disclosing where employees are based geographically helps stakeholders understand the company’s operational footprint and associated sustainability impacts.
Regulated or Banned Products/Services: Where relevant, companies should disclose products or services that are restricted or banned in certain markets due to regulatory issues or sustainability concerns.
Financial Breakdown by Sustainability Sectors
Companies are required to provide a breakdown of total revenue by significant ESRS sectors, integrating this data with standard financial segment reporting where possible. This allows stakeholders to assess financial exposure to various sustainability-related sectors.
Additional significant sectors should be identified that may not be directly reflected in traditional financial statements but are relevant due to their sustainability impacts.
Industry-Specific Activities
Disclosure of involvement in sectors like fossil fuels, chemicals, controversial weapons, and tobacco, including specific financial details related to these sectors, is crucial for evaluating the sustainability challenges and risks the company faces.
Sustainability Goals and Performance Assessment
Companies need to articulate their sustainability-related goals concerning products, services, customer groups, and geographic areas.
An assessment of how current products and services align with these sustainability goals is required to demonstrate progress and pinpoint areas needing improvement.
Business Model and Value Chain
Inputs: Description of the resources and processes involved in acquiring and managing inputs essential for the business operations.
Outputs and Outcomes: Insight into the products or services produced and their broader impacts on customers, stakeholders, and the environment, highlighting the benefits and potential sustainability implications.
Value Chain Features: Detailed explanation of the upstream and downstream activities, including key business relationships with suppliers, customers, and other business partners. This also covers the company’s role within its value chain and how it manages these relationships to foster sustainability.
Multi-Value Chain Disclosure
For companies with diverse operations, a comprehensive overview of all significant value chains is necessary. This should include how each value chain is managed in terms of sustainability and the specific sustainability challenges and opportunities within these chains.
Compliance and Flexibility:
Companies must comply with local regulations regarding financial disclosures, and where exemptions apply (such as in some EU member states), these should be noted, but a detailed listing of significant ESRS sectors involved must still be provided.
Overall, SBM-1 seeks to ensure that companies not only disclose the economic aspects of their operations but also how these operations are interwoven with social and environmental responsibilities, thereby offering a holistic view of their strategic approach to sustainability. This disclosure helps stakeholders understand the extent to which sustainability is embedded within the core strategy and operations of the company.
SBM-2 – Interests and Views of Stakeholders
The Disclosure Requirement SBM-2 – Interests and Views of Stakeholders is designed to ensure that an undertaking transparently communicates how it incorporates the perspectives and needs of its stakeholders into its strategic and business model frameworks. This requirement is fundamental in demonstrating a company’s commitment to stakeholder inclusivity in sustainability discussions, which can significantly influence corporate governance and strategic direction.
Key Components of SBM-2
Stakeholder Engagement Description
Identification of Key Stakeholders: The company must identify who its key stakeholders are, which can include shareholders, employees, customers, suppliers, local communities, governments, and NGOs, among others.
Engagement Practices: The company should describe how it engages with these stakeholders, detailing the frequency and form of these engagements (e.g., surveys, focus groups, public consultations).
Organizational Structure of Engagement: Information on how stakeholder engagement is organized internally, whether through dedicated teams, cross-departmental efforts, or through external facilitators.
Purpose of Engagement: The company needs to clarify the objectives behind engaging with stakeholders, such as gathering feedback on sustainability practices, informing corporate strategy, or addressing community concerns.
Outcome Utilization: How the outcomes of stakeholder engagements are integrated into the company’s operational and strategic decisions, demonstrating the tangible impacts of stakeholder input on the business.
Understanding and Integrating Stakeholder Interests
Analysis of Stakeholder Interests: The company must explain how it analyzes and understands the interests and views of its stakeholders, particularly how these perspectives relate to the company’s strategy and business model.
Influence on Strategy and Business Model: Details on how stakeholder feedback has shaped the company’s strategic decisions and business practices, including any significant shifts in approach or focus resulting from stakeholder input.
Adaptation and Amendments
Adjustments to Strategy/Business Model: The undertaking should disclose specific changes made to its strategy or business model in response to stakeholder feedback, outlining the nature of these amendments.
Planned Changes: Future plans for strategy or business model adjustments based on ongoing or anticipated stakeholder feedback, including the expected timeline for these changes.
Impact on Stakeholder Relationships: An evaluation of whether these changes are expected to alter the relationship with stakeholders, potentially affecting how stakeholders view the company.
Reporting to Governance Bodies
Informing Leadership: How information regarding stakeholder views and interests is reported to the company’s administrative, management, and supervisory bodies.
Role of Governance in Stakeholder Engagement: The extent to which governance bodies are involved in reviewing and acting on stakeholder feedback, and how they ensure that stakeholder interests are considered in corporate governance and sustainability strategies.
Importance of SBM-2
This disclosure requirement serves multiple strategic purposes.
Enhances Transparency: It builds trust with external parties by showing that the company values and acts upon the input of its diverse stakeholders.
Improves Decision-Making: By incorporating a wide range of perspectives, companies can make more informed and holistic decisions that consider the potential impacts on all stakeholders.
Strengthens Stakeholder Relations: Demonstrating responsiveness to stakeholder concerns can strengthen relationships and enhance corporate reputation.
Mitigates Risks: Understanding stakeholder perspectives can help anticipate and mitigate risks related to social and environmental issues.
Overall, SBM-2 ensures that stakeholders have a meaningful influence on the strategic direction of the company, reinforcing the importance of sustainable and inclusive business practices.
SBM-3 – Material Impacts, Risks, and Opportunities and Their Interaction with Strategy and Business Model
The Disclosure Requirement SBM-3 – Material Impacts, Risks and Opportunities and Their Interaction with Strategy and Business Model is a crucial aspect of ESRS reporting. It focuses on detailing how material sustainability issues influence, and are influenced by, the business’s strategic and operational frameworks. This disclosure ensures stakeholders understand the interdependencies between the organization’s sustainability issues and its broader strategy, decision-making processes, and financial planning.
Summary of Components of SBM-3
Materiality Assessment Results
Description of Material Issues: The organization must provide a summary of the material impacts, risks, and opportunities identified through its materiality assessment process. This includes specifying where within its operations, business model, or value chain these issues are most pronounced.
Concentration Areas: Detailing the specific parts of the business model, operations, or value chain where these material issues have the most significant impact.
Impact on Strategy and Business Model
Current and Anticipated Effects: Disclosure of how material sustainability issues currently affect, and are expected to affect, the organization’s business model, strategy, and decision-making processes. This should include any adjustments made or planned in response to these issues.
Response Strategies: Description of strategic changes or adaptations made to mitigate risks, capitalize on opportunities, or manage the impacts.
Nature and Origin of Impact
Effect on People and Environment: Explanation of how the material impacts (both negative and positive) affect individuals and the environment, considering potential future impacts.
Connection to Business Strategy: Analysis of how these impacts are linked to or arise from the company’s strategy and business model.
Involvement via Business Activities: Detailing whether the organization is involved in these impacts through its direct activities or through its business relationships, with a description of the nature of these relationships.
Financial Implications
Current Financial Effects: An account of how material risks and opportunities are impacting the organization’s financial position, performance, and cash flows currently.
Anticipated Financial Effects: Projections on how these impacts are expected to affect the organization’s finances in the short, medium, and long term. This includes details on investment plans, funding strategies, and potential financial adjustments due to these risks and opportunities.
Resilience of Strategy and Business Model
Assessment of Resilience: The company should provide a qualitative (and quantitative, where applicable) analysis of its strategic and business model resilience in the face of identified material impacts, risks, and opportunities. This analysis should outline the applied time horizons and methodologies.
Capacity to Manage Impacts: Information on the organization’s ability to address its material impacts and risks effectively and to seize related opportunities.
Changes and Trends:
Comparison with Previous Reporting: Outline of any changes to the material impacts, risks, and opportunities since the last reporting period, providing a dynamic view of how material issues evolve over time.
Coverage of Impacts: A clear distinction between the impacts covered under ESRS requirements and those addressed through additional, entity-specific disclosures.
Importance of SBM-3
This disclosure requirement is fundamental as it:
Ensures comprehensive transparency about how sustainability is integrated into the core strategy and operations.
Helps stakeholders assess the robustness of the organization’s responses to material sustainability challenges.
Provides a basis for stakeholders to evaluate the financial and operational resilience of the organization in the context of sustainability risks and opportunities.
By fulfilling the SBM-3 disclosure, organizations not only comply with regulatory expectations but also demonstrate a proactive approach to integrating sustainability deeply into their strategic planning and risk management frameworks.
Impact, Risk, and Opportunity Management
Impact, Risk, and Opportunity Management in ESRS 2 focuses on ensuring organizations comprehensively evaluate their sustainability-related impacts, risks, and opportunities. This involves a detailed materiality assessment process that influences what is included in the sustainability statement. The related disclosures are outlined in two primary sections: IRO-1 and IRO-2, aiming to provide transparency and clarity on how these assessments are conducted and their results are integrated into organizational reporting.
IRO-1- Description of the Process to Identify and Assess Material Impacts, Risks, and Opportunities
IRO-1 – Description of the Process to Identify and Assess Material Impacts, Risks, and Opportunities is a critical component of ESRS 2, aimed at ensuring transparency and thoroughness in how an organization evaluates its sustainability impacts. This disclosure requirement is designed to give stakeholders a clear understanding of how an organization identifies, evaluates, and prioritizes its sustainability-related impacts, risks, and opportunities.
Key elements ESRS IRO-1
Methodologies and Assumptions
Organizations must describe the methodologies and assumptions used in the materiality assessment process. This includes detailing the specific approaches and frameworks employed to identify and assess impacts, such as lifecycle analysis, risk matrices, or stakeholder surveys.
- When using Mentcon model App this is generated automatically and can be adjusted with company specific assumptions and industry specific frameworks used.
Process Overview
The organization is required to provide a comprehensive overview of the process used to identify, assess, prioritize, and monitor potential and actual impacts on people and the environment.
- When using Mentcon model App this is generated automatically.
This process must incorporate the organization’s due diligence activities, demonstrating how it addresses specific activities, business relationships, geographical locations, or other factors that contribute to heightened risks.
Focus Areas of the Process
- The process must focus on:
- Specific Activities and Relationships: Highlighting how particular operations or business relationships contribute to sustainability impacts.
- Stakeholder and Expert Consultation: Involving affected stakeholders and external experts to ensure diverse perspectives are considered and the impacts are well-understood.
- Impact Prioritization: Determining the severity and likelihood of negative impacts and the scale, scope, and likelihood of positive impacts, using established materiality thresholds.
Financial Implications
- The process also includes assessing the financial implications of identified risks and opportunities. This involves:
- Evaluating how the organization’s impacts and dependencies might give rise to financial risks and opportunities.
- Using qualitative or quantitative thresholds to assess the magnitude and nature of these risks and opportunities.
- Prioritizing sustainability-related risks in comparison to other risks using specialized assessment tools.
Decision-making and Integration
- Details on how the findings from this assessment process are integrated into the organization’s decision-making and risk management frameworks. This includes:
- Describing how the process is aligned with the organization’s overall risk management and governance frameworks.
- Explaining how opportunities are integrated into strategic planning and management processes.
Input Parameters
Organizations need to disclose the input parameters used in the assessment process, such as the scope of operations covered, the data sources utilized, and the level of detail in the assumptions made.
Process Evolution
A description of any changes to the process since the last reporting period, including when the process was last modified and the anticipated future revisions. This helps stakeholders understand how the process is evolving in response to changing conditions or new insights.
IRO-2 – Disclosure Requirements in ESRS Covered by the Undertaking’s Sustainability Statement
Disclosure Requirement IRO-2 – Disclosure Requirements in ESRS Covered by the Undertaking’s Sustainability Statement is designed to ensure transparency and accountability in how organizations report compliance with the European Sustainability Reporting Standards (ESRS). This requirement plays a crucial role in aligning sustainability reporting with recognized standards, ensuring consistency and comparability across reports.
Key elements of ESRS IRO-2
Reporting on Compliance
Organizations are required to explicitly report which ESRS Disclosure Requirements they have complied with in their sustainability statements. This includes clearly stating the extent of their compliance and detailing how these requirements are addressed within the sustainability statement.
- In Mentcon model App this is generated automatically when following Mentcon model.
Content Index
A content index or a similar tool must be included in the sustainability statement. This index should list all the Disclosure Requirements addressed in the report, providing specific page numbers or paragraphs where these disclosures can be found. This helps stakeholders quickly locate and review compliance details.
In Mentcon model App this is generated automatically based on the materiality assessment.
Table of EU Legislation Data Points
Organizations must include a table listing all datapoints that are derived from other EU legislation, as outlined in Appendix B of the standard. This table should indicate where each datapoint is addressed within the sustainability statement. For datapoints deemed not material, organizations must mark these as “Not material” in the table, adhering to guidelines set forth in ESRS 1, paragraph 35.
- When using Mentcon model App this table is generated automatically with reference to where all datapoints derived from other EU legislation is addressed within the sustainability statement!
Materiality of Climate Change
If an organization determines that climate change is not material to its operations and therefore excludes related disclosures required under ESRS E1 Climate Change, it must provide a detailed explanation of this decision. This explanation should include an assessment of why climate change was not deemed material and a forward-looking analysis that might influence future materiality assessments regarding climate change.
Materiality of Other Topic
Similarly, if an organization concludes that other topics are not material and omits related disclosures, it must provide a rationale for these exclusions. This includes a brief explanation based on the materiality assessment that led to the conclusion that these topics do not warrant inclusion in the sustainability statement.
Explanation of Material Information Determination
Organizations must also explain how they determined which information to disclose concerning material impacts, risks, and opportunities. This includes describing the use of thresholds and criteria for materiality, as set out in ESRS 1, section 3.2 on Material Matters and Materiality of Information. This part of the disclosure ensures that stakeholders understand the basis on which materiality decisions were made, providing transparency into the assessment process and criteria used.
When using Mentcon model the explanation of material information determination is automatically inserted into the sustainability statement as performed in the Mentcon model process.
MDR-P – Policies adopted to manage material sustainability matters Purpose and Scope
ESRS MDR-P mandates disclosures about the policies an undertaking has established to manage identified material sustainability matters. These policies aim to prevent, mitigate, and remediate impacts, and to manage risks and opportunities related to sustainability.
The policies should be applicable across various sustainability aspects covered by both sector-specific and topical ESRS, and can also extend to entity-specific disclosures.
Disclosure Content
- Policy Details: Description of the policy, including its general objectives and the specific material impacts, risks, or opportunities it addresses, alongside the monitoring mechanisms in place.
- Scope: Clarification of the policy’s applicability concerning different activities, parts of the value chain, geographic areas, and relevant stakeholder groups.
- Accountability: Identification of the highest level within the organization responsible for the policy’s implementation.
- Standards and Initiatives: Reference to any external standards or sustainability initiatives that the policy aligns with.
- Stakeholder Consideration: Details on how the interests of key stakeholders have influenced the policy settings.
- Accessibility: Information on the availability of the policy to stakeholders who are impacted by or involved in its execution.
MDR-A – Actions and resources in relation to material sustainability matters
Purpose and Scope
ESRS MDR-A focuses on the actions and resources dedicated to implementing the policies under MDR-P. It encompasses actions intended to address the risks, impacts, and opportunities identified as material.
Disclosure Content
- Actions Taken and Planned: Comprehensive list of actions implemented during the reporting period and those planned for the future, including their expected outcomes and contributions to policy objectives.
- Scope of Actions: Coverage of these actions across activities, value chains, geographies, and affected stakeholder groups.
- Timeframes: Expected timelines for completing the actions.
- Remediation Efforts: Specific actions taken to remedy the adverse effects caused by the organization’s activities.
- Progress Reporting: Both qualitative and quantitative updates on the progress of ongoing actions or those from previous periods.
Resource Allocation
Operational and Capital Expenditures: Details about the financial and other resources allocated to action plans, including terms of sustainable finance instruments like green bonds or social loans, and the dependencies of these plans on external factors like financial support or policy developments.
Metrics and targets
Purpose and Scope
This section outlines the requirements for disclosing metrics and targets that enterprises must adhere to, under the guidance of ESRS. These requirements help evaluate the effectiveness of strategies deployed to handle material sustainability impacts and financial risks and opportunities.
Integration with Other Requirements
The disclosures on metrics and targets must be integrated with other relevant ESRS disclosures and are typically positioned alongside them. These metrics and targets are crucial for both compliance with sector-specific standards and for supporting entity-specific disclosures.
Disclosure of Targets
If an enterprise has not established targets regarding a particular sustainability matter deemed significant, it must openly declare this absence and explain why these targets have not been set. Additionally, it should provide a timeline or rationale for potentially setting these targets in the future.
MDR-M – Metrics in relation to material sustainability matters
Enterprises must detail the metrics they use to assess the efficacy of their actions towards managing identified material sustainability matters.
The primary goal is to elucidate the metrics used by the enterprise to monitor the outcomes of its sustainability initiatives and policies.
Key Content of Disclosure MDR-M
Description of Metrics: This includes a thorough explanation of the metrics, outlining the methodologies and assumptions used, and addressing any limitations these methodologies might have.
Validation: Information on whether these metrics have undergone validation by external bodies apart from the assurance providers, enhancing credibility.
Definition and Clarity: Metrics should be clearly defined, labeled, and described so they are understandable and meaningful to external stakeholders.
Measurement Standards: If metrics involve monetary values, the presentation currency of the financial statements should be used.
MDR-T – Tracking Effectiveness of Policies and Actions Through Targets
Purpose and Scope
MDR-T specifies how organizations should disclose the targets they set concerning each material sustainability issue. This disclosure requirement aims to illustrate how enterprises track the effectiveness of their initiatives addressing material impacts, risks, and opportunities.
Detailed Disclosure Objectives
The primary goal of MDR-T is to provide a clear picture of the enterprise’s commitment and progress in managing material sustainability concerns through target-setting and tracking:
Tracking Effectiveness: It details how the enterprise monitors the efficacy of its actions against the set targets using various metrics.
Setting Measurable Targets: Enterprises must set clear, measurable, time-bound, and outcome-oriented targets that align with their policy objectives.
Monitoring Progress: It includes how progress towards these targets is measured over time.
Non-Existence of Targets: If no measurable targets have been set, the requirement outlines how the enterprise still tracks its performance and manages progress.
Disclosure Requirements
For each declared target, enterprises must disclose:
- Relationship to Policy Objectives: The connection between the targets and the broader policy aims of the sustainability efforts.
- Target Details: This includes the precise level of achievement envisioned, whether absolute or relative, and the units of measure.
- Scope and Boundaries: The extent of the target’s application within the organization’s operations, including any geographical limitations and its impact along the value chain.
- Baseline and Period: Starting points for measurement and the time period over which the target applies, including any intermediate milestones.
- Methodological Framework: The methodologies and assumptions used to define the targets, considering various scenarios, data sources, and alignment with broader policy goals.
- Stakeholder Involvement: How stakeholders are involved in setting these targets and the degree to which their input influences the sustainability strategies.
- Changes and Updates: Any adjustments to the targets or the methodologies used for their measurement, and the rationale behind these changes.
Review and Adaptation
The enterprise must regularly review and report on the attainment of these targets, providing insights into whether the progress aligns with the initial plans. This includes detailed trend analysis and significant changes in performance metrics.
If Targets Are Unset
If no specific targets have been established, the disclosure must explain why, and if applicable, outline the processes the enterprise uses to track policy effectiveness through other means.
Conclusion
MDR-T is fundamental in ensuring that enterprises maintain a clear, accountable approach to managing their sustainability impacts through well-defined, strategic targets.
Full list of disclosure requirements in ESRS 2 General Disclosures
Direct link to the topic ESRS 2 General Disclosures in ESRS: Consolidated TEXT: 32023R2772 — EN — 22.12.2023 (europa.eu)
Video of ESRS 2 General Disclosures
Mentcon is creating a new video that will replace this ono, but for now it hard to find any qualitative videos explaining ESRS 2 than this video.
This video is made for the draft of ESRS from the EU financed organization EFRAG who was responsible of creating the ESRS. The minor changes made in the final version of ESRS has not impacted the relevance of this video.
Read more in our FAQ section about ESRS 2 General Disclosures.
