CSRD's ESRS 2: General Disclosures, Part 2

May 17, 2024
Sustainability in Business
In Part 2 of the CSRD series, we review the remaining disclosure requirements in CSRD’s ESRS 2 General Disclosures. They are related to strategy and business models (SBMs), impacts, risks and opportunities (IROs), and minimum disclosure requirements on policies, actions, metrics, and targets (MDRs).

In Part 2 of the CSRD series, we review the remaining disclosure requirements in CSRD’s ESRS 2 General Disclosures. They are related to strategy and business models (SBMs), impacts, risks and opportunities (IROs), and minimum disclosure requirements on policies, actions, metrics, and targets (MDRs).

Strategy and business model

Under strategy and business model (SBM), organizations are expected to address elements of strategy related to sustainability matters, reflecting stakeholder input in the strategy, and integrating sustainability impacts, risks, and opportunities into the strategy and business model.

For SBM-1, Strategy, business model and value chain, the reporting organization is required to provide a comprehensive description of its business, including segmentation of its products and services, markets and customers. Additionally, the breakdown of total revenue by significant ESRS sectors should be reconciled with the requirements under IFRS 8 Operating Segments in its financial statements. Other essential details to be reported include the total number of employees with a breakdown by geographic areas and a list of banned products and services (where applicable). Moreover, a description of its business model and value chain is also required, covering its input and output along with the main features of its value chain.

If the business is active in certain sectors, such as fossil fuel (coal, oil and gas), chemical production, controversial weapons, and the cultivation and production of tobacco, a statement along with related revenue is required (e.g., separately for those revenues derived from coal, from oil and from gas, and revenue derived from Taxonomy-aligned economic activities).

The reporting organization should report its sustainability-related goals in relation to its major groupings of products and services, customers, geographies and relationships with stakeholders. An assessment of its current activities against its sustainability-related goals including progress, challenges, and critical solutions.

SBM-2 requires companies to report how the interests and views of their stakeholders are incorporated into their strategy and business model. This includes a description of the stakeholder engagement process and a report of the outcome expressing views of the stakeholders. The companies should also describe how such stakeholder inputs are incorporated into their strategy and business model, and how the governance (administrative, management, and supervisory) bodies are informed of the views of the affected stakeholders regarding sustainability-related impacts. This disclosure is also part of the Topical Standards ESRS S1, S2, S3, and S4 on its own workforce, workers in the value chain, affected communities, and consumers/end-users.

In SBM-3, the companies are required to report their material impacts, risks, and opportunities resulting from the materiality assessment process, and how they trigger changes in the company’s strategy and business model including its resource allocation. Linking with IRO-1, the companies should report the outcome of its materiality assessment including a brief description of its material impacts, risks and opportunities in this section. This disclosure is also part of the Topical Standards ESRS-E1 Climate Change, ESRS E4, Biodiversity and ecosystems, ESRS S1 to S4 covering own workforce, workers in the value chain, affected communities, and consumers/end-users. The companies are also required to report the current and anticipated effects of its material impacts, risks and opportunities, and how they respond (or plan to respond) to these effects.

Current and anticipated effects include those effects on its financial position, financial performance and cash flows, and the material risks and opportunities that could result in a material adjustment of assets and liabilities in the financial statements in the short, medium and long-run. For the medium and long-run outlook (anticipated effects), information on investment and disposal plans, planned sources of funding, and information about the resilience of the strategy and business model to its material risks and opportunities. For anticipated financial effects of material impacts, some phase-in allowances are given in Appendix C of ESRS 1.

Impacts, risks and opportunities

The IRO-1 disclosure requirement includes detailed disclosures on the process and outcome of the materiality assessment, in line with the principles outlined in ESRS 1 Section 3 Materiality. The objective is to provide an understanding of the process to identify impacts, risks and opportunities and assess their materiality. This includes a description of the process of gathering stakeholder inputs, the analysis of stakeholder inputs, and the criteria to assess positive and negative impacts (based on scale, scope, and likelihood). This disclosure is also part of the Topical Standards ESRS-E1 to E5 on climate change, pollution, water and marine resources, biodiversity and ecosystems, resource use and circular economy, and ESRS-G1 on business conduct.

Based on the output of the materiality assessment as reported in IRO-1, IRO-2 is the disclosure of the list of ESRS 2 Disclosure Requirements applicable to the reporting entity. This could be presented as a content index. An explanation of how the determination of whether a topic is material and should be disclosed should be disclosed.

Minimum disclosure requirements on policies and actions

This section refers to minimum disclosure requirements to be included when companies disclose policies and actions in relation to the impacts, risks and opportunities identified in the materiality assessment. These disclosures should be made alongside the disclosures in the relevant ESRS related to the material impacts, risks and opportunities that have been identified.

MDR-P refers to policies that are adopted or plan to be adopted to manage material sustainability matters. The content, scope, and accountability of the relevant policies should be reported.

MDR-A refers to actions and resources in relation to sustainability matters. This includes action plans and resource allocation plans.

Metrics and targets are included in the MDR-M and MDR-T disclosures. Metrics include any that it uses to evaluate performance and effectiveness, in relation to a material impact, risk or opportunity. In addition to the metric itself, the companies should disclose the methodologies and assumptions behind the calculation and whether the metric is validated by an external body other than the assurance provider.

When disclosing targets, the companies should report whether and how the effectiveness of their actions is tracked through targets and the progress towards the adopted targets over time. The measurable, time-bound, and outcome-oriented targets should include a description of the relation between the target and the policy objectives, the scope, baseline value and year of the target, the method and significant assumptions used when setting targets, the involvement of the stakeholders, and its performance against the targets.

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