In the world of corporate sustainability, we celebrate a “15% reduction in global water use” or a “net-zero commitment for 2040” as if these figures, when aggregated onto a shiny spreadsheet, tell the whole story of a company’s environmental footprint.

But environmental data is often meaningless at a global aggregate level. In fact, for topics like pollution and water, “the average” is often a mask that hides the most significant risks a business faces.

What you will read in this article:

✅ Why global averages hide existential operational and reputational risks.

✅ How “strategic disaggregation” reveals the truth about your footprint.

✅ Why pollution and water stress are fundamentally “local” issues.

✅ The path from reporting data to building genuine corporate resilience.

2. The problem with the “global average”

Imagine a multinational beverage company. Its global sustainability report proudly states it has reduced its water intensity by 10% across all operations. On paper, this looks like a win.

However, dig deeper, and you find that 90% of those savings came from a bottling plant in rainy Scotland, where water is abundant. Meanwhile, at its facility in the drought-stricken Central Valley of California, water use actually increased. By looking only at the aggregate, investors and stakeholders miss the fact that the company is facing an existential operational and reputational risk in California.

This is the “Averaging Trap.” For environmental impacts, context is everything.

3. Breaking down the silos of data

To avoid the trap, businesses must move from simple aggregation (lumping everything together) to strategic disaggregation (breaking data down by site or region). Information should be presented in a way that reflects where significant variations in risks or opportunities actually arise.

This shift requires looking at:

• Geography and asset: A factory in a protected ecosystem or a water-scarce basin is not the same as a factory in an industrial park with a surplus of resources.

• The “Obscurity” risk: High-level reporting can often obscure material information. If a company’s total emissions are stable, but they are increasingly concentrated in a community with strict new air-quality laws, the “average” fails to signal a major looming cost.

The CSRD perspective:

Under the European Sustainability Reporting Standards (ESRS):

• ESRS 1 (General Requirements): Mandates that companies must disaggregate information by country, site, or significant asset whenever presenting it at a higher level would “obscure material information” about impacts, risks, or opportunities.

• ESRS E2 (Pollution): Requires site-specific screening to identify actual pollution-related impacts, focusing on where emissions to air, water, and soil are most material.

• ESRS E3 (Water): Explicitly requires companies to disclose total water consumption specifically in areas of high water stress.

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3. Why pollution is a “local” issue

When we talk about pollution, we are rarely talking about a global atmospheric phenomenon (with the notable exception of greenhouse gases). Most pollution—whether it is nitrogen runoff into a river, microplastics on a specific coastline, or sulfur dioxide in a local community’s air—is felt at the site or basin level.

Reporting “1,000 tonnes of material emissions” globally doesn’t tell a user if that emission is happening in a desert or a wetland. The former might have a negligible impact on local biodiversity, while the latter could lead to a total ecosystem collapse—a “severe” impact defined by its scale, scope, and irremediable character.

4. Water stress: the ultimate contextual challenge

Water is the most context-sensitive resource of all. To manage it effectively, companies must look beyond their own fences. “water stress” is a combination of quantity (scarcity), quality, and accessibility.

When a company reports a single water figure, it treats every liter of water as having equal “value.” But a liter of water in a water-stressed basin in the Sahara is infinitely more important to the business and the environment than a liter of water in the Great Lakes. True sustainability leadership requires identifying which operations are located in these high-pressure basins and managing them with site-specific targets.

5. The path forward: from reporting to resilience

This shift toward context-specific data isn’t just a compliance exercise; it is a fundamental shift in how we understand corporate resilience.

• True materiality: By breaking down data, companies can identify which specific assets are at risk of regulatory shutdowns, local community backlash, or physical resource failure.

• Meaningful stakeholder engagement: You cannot engage with an “aggregate” community. You engage with the people living next to a specific plant. Their local knowledge is a key input for understanding your actual impact.

• Ecological thresholds: Sophisticated companies are beginning to set targets based on ecological thresholds—the “tipping points” of a specific local environment. This ensures that corporate actions are actually solving the problems that matter most in that specific spot.
  

The next step: Mapping your context with LEAP

Transitioning from global averages to local resilience requires a structured methodology. One of the most effective tools for this, is the LEAP approach.

Developed by the Taskforce on Nature-related Financial Disclosures (TNFD), LEAP provides a four-phase journey to move a business from an “operational blind spot” to strategic water and nature management, read more about it here:

By adopting the LEAP framework, companies can systematically dismantle the “Averaging Trap,” ensuring that their sustainability strategy is as localized as the environmental challenges we face.

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Relevant Sources

ESRS 1 General Requirements

ESRS E2 Pollution

ESRS E3 Water

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The Internet of Things (IoT) is one of the invisible engines of sustainability transformation. Across corporate sectors — from manufacturing and logistics to energy, construction, and facilities management — networks of sensors and connected devices are quietly generating real-time insight into resource use, emissions, and performance. Understanding how these devices communicate is therefore fundamental to any sustainability strategy that relies on digital measurement and automation.

At its core, IoT communication describes how data travels from a physical sensor to a digital system — through wires, radio waves, gateways, and cloud platforms. This chain of interaction allows businesses to track, optimize, and verify environmental and operational outcomes. In sustainability reporting, such data underpins frameworks like the EU Corporate Sustainability Reporting Directive (CSRD), the GHG Protocol, and emerging standards such as ISO 14091 on climate risk assessment.

In this article, you will learn:

✅ What the key wired and wireless communication protocols are and how they differ.

✅ How messaging and application protocols (like MQTT and CoAP) move data through networks.

✅ How gateways and cloud layers integrate diverse devices into one coherent system.

✅ Why these technical layers matter for sustainability data.

✅ How emerging standards such as Thread and Matter may simplify interoperability in future smart systems.

By the end, you’ll understand not just the technical chain behind IoT communication, but how it enables reliable, verifiable, and efficient data flows that support corporate sustainability and ESG objectives.

This article focuses on the communication part of IoT, if you want to learn more about IoT in general, I advice you to visit this webpage:

IoT Basics | opentechdiary

2. The starting point: sensors and local communication

Every IoT ecosystem begins with sensors — devices that measure temperature, humidity, energy consumption, vibration, or other physical properties. But sensors themselves are only the eyes and ears of a system. For their observations to be useful, they must communicate with a processor that can read, interpret, and share the data.

Inside a machine or device, this usually happens through short wired connections using simple protocols:

• I²C (Inter-Integrated Circuit) — a two-wire system where one wire carries timing and one carries data. A master controller (for instance, a small embedded computer) asks sensors for readings in sequence. It is ideal for short, on-board communication.

• SPI (Serial Peripheral Interface) — a four-wire connection offering faster speeds. One wire provides timing, one sends data, one receives data, and one selects which component is active. SPI is used when sensors or memory modules need to exchange information quickly.

• UART/RS-232 (Serial Port) — a point-to-point link sending bits one after another. It connects only two devices, often used for debugging or configuration in IoT prototypes.

These internal protocols are the first mile of communication. They operate over centimeters or meters inside machines but form the foundation for more complex networks that span buildings, factories, or cities.

3. Expanding the network: industrial and field protocols

In larger environments such as factories, logistics hubs, or energy systems, sensors and machines are spread out. Here, stronger communication methods are needed — ones that can handle noise, distance, and industrial conditions.

Read more

1. Introduction

Setting strong Environmental, Social, and Governance (ESG) targets is how companies move from good intentions to measurable impact. While values express what an organization stands for, and policies describe how those values are put into practice, targets make progress tangible — defining specific, time-bound goals that show whether commitments are being met.

Well-designed ESG targets translate ambition into action. They create accountability, allow progress to be tracked, and align business strategy with stakeholder expectations and regulatory requirements.

This article will walk you through:

✅ What ESG targets are and how they differ from values and policies
✅ Turning priorities into actionable goals aligned with global frameworks
✅ Embedding ESG targets into strategy, governance, and performance management
✅ Tracking progress, managing trade-offs, and learning from real-world examples like Microsoft and Amazon

2. What ESG targets are and why they’re different from values and policies

Values express what a company stands for.
Policies define how those values are put into practice.
Targets, in turn, set measurable performance expectations that show whether the company is living up to its commitments.

In other words:

• A value might be “We believe in gender equality.”

• A policy could state “We promote equal opportunities and fair pay.”

• A target makes it measurable: “Increase women in management to 35% by 2026.”

Well-designed ESG targets translate ambition into action. They are specific, measurable, and time-bound, allowing stakeholders to track real progress rather than intentions.

For example:

“Reduce Scope 1 and 2 greenhouse gas emissions by 50% by 2030 (baseline year: 2020).”

This clarity enables accountability and comparability, which is why frameworks such as the European Sustainability Reporting Standards (ESRS) under the CSRD require companies to disclose measurable targets for material ESG topics.

Determining which topics warrant targets begins with a materiality assessment — identifying the environmental, social, and governance issues that matter most to the business and its stakeholders.

3. Build your ESG targets

Engage stakeholders and use due diligence insights

It is important to bring relevant stakeholders into the conversation early, which is also done during the materiality assessment. This ensures your targets reflect real-world expectations rather than internal assumptions.

Stakeholder engagement can take many forms — surveys, interviews, focus groups, or community roundtables. What matters is that you gather diverse input.

Ask yourself:

• What outcomes do stakeholders want to see?

• What does success look like from their perspective?

• What are their main concerns or ideas?

Example:
Employees might focus on diversity or workplace safety. Investors might push for stronger climate targets. Local communities may care about pollution, water, or jobs.

In parallel, use ESG due diligence findings to shape your targets. This involves assessing where your company may cause or contribute to environmental or human rights impacts, and where controls may be weak.

In short, combine what stakeholders expect with what your due diligence reveals. That intersection produces relevant, credible targets — and avoids setting goals that look good but miss the real issues.

Turn priorities into SMART targets

Once you’ve identified what matters most, the next step is to turn priorities into clear, measurable commitments.

The SMART framework is a simple but powerful way to make ESG targets actionable and trackable across all themes — environmental, social, and governance.

Some environmental targets, such as for GHG emissions, should also align with science-based thresholds. Read more about science based targets here:

Align targets with international frameworks

Once targets are defined, align them with recognized frameworks. This adds credibility, consistency, and comparability.

You don’t need to reference every framework. Focus on those most relevant to your sector and stakeholders.

Key frameworks to know:

• ESRS (under the EU’s CSRD): Companies in scope must disclose measurable targets and progress for material sustainability topics, based on a double materiality assessment.
  Read more: Sustainability reporting | EFRAG

• GRI Standards: The world’s most widely used sustainability reporting framework, including topic-specific standards (e.g., GRI 305 for emissions, GRI 403 for health & safety). These define disclosure requirements and performance indicators often used as the basis for setting ESG targets.
  Read more: GRI Standards

• TCFD / SBTi (climate focus):

  • TCFD recommends disclosing climate-related risks, opportunities, metrics, and targets.
    Read more: TCFD

  • SBTi validates GHG reduction targets aligned with the Paris Agreement.
    Read more: SBTi

• UN Global Compact & SDGs: Encourages companies to align strategies and targets with its Ten Principles and contribute to the UN Sustainable Development Goals (e.g., SDG 13: Climate Action, SDG 5: Gender Equality, SDG 8: Decent Work).
  Read more: UN Global Compact SDGs

• UN Guiding Principles & OECD Guidelines: Set expectations for human rights, due diligence, and responsible business conduct across operations and value chains.
  Read more: UN Guiding Principles on Business and Human Rights (UNGPs) | OECD Guidelines for Multinational Enterprises on Responsible Business Conduct
  

Alignment ensures your targets are part of a broader sustainability narrative rather than standalone commitments. By linking them to recognized global frameworks, you create a shared language that investors, regulators, and rating agencies already understand and trust.

3. Turning targets into action and accountability

Defining ESG targets is only half the journey. The harder and more important part is putting them into action and tracking progress.

Read more

Sustainability challenges inside companies increasingly come down to data. Leaders need to know how much carbon their operations produce, what portion of energy use comes from renewables, or whether their suppliers meet environmental and social standards. Yet the reality is that this information is often scattered across systems, locked inside PDFs, or updated far too slowly to be useful for decision-making.

This is where APIs—Application Programming Interfaces—come in. They may not sound exciting, but they provide the invisible infrastructure that allows sustainability data to move quickly, securely, and in a standardized format.

For companies under pressure to comply with regulations, satisfy investors, and act on climate goals, APIs are an essential tool.

In this article, you will learn:

✅ What an API is
✅ Why APIs are useful for sustainability data challenges
✅ The benefits and challenges of using APIs in a corporate sustainability strategy

2. What is an API?

An API is like a translator or “messenger” that lets two pieces of software talk to each other. Instead of building everything from scratch, developers can use APIs to connect to existing data or services.

Everyday example: When you check the weather on your phone, the app sends a request to a weather service’s API with details like your location and the data you want (e.g., hourly temperature). The service processes that request—often by querying databases and forecast models—and returns only the data you asked for, in a structured format (usually JSON).

Think of an API like a restaurant workflow.

• Menu = API documentation (what you can ask for and how).

• Your order = the request (with options/parameters).

• Waiter = the API endpoint that receives your order.

• Kitchen = the back-end service that prepares the result (it may use a database as ingredients).

• Served dish = the response returned to you.

You don’t walk into the kitchen to cook; you follow the menu and place an order through the waiter. Likewise, apps don’t dig around in someone else’s database; they use the API to request exactly what they need.

Example

If you want to retrieve data you send something that is called a GET request:

GET https://api.open-meteo.com/v1/forecast?latitude=52.37&longitude=4.90&hourly=temperature_2m

You are asking:
“Give me the hourly temperature in Amsterdam (lat 52.37, lon 4.90).”

If you submitted the request successfully (HTTP 200), you get a response like this:

{
  "latitude": 52.37,
  "longitude": 4.90,
  "generationtime_ms": 0.221,
  "utc_offset_seconds": 0,
  "timezone": "GMT",
  "hourly": {
    "time": [
      "2025-09-20T09:00",
      "2025-09-20T10:00"
    ],
    "temperature_2m": [
      17.2,
      18.0
    ]
  }
}

In other words, the API replies:
“At 09:00 UTC it’s 17.2°C, at 10:00 UTC it will be 18.0°C.”

The app does not need to know the science of weather prediction. It only needs to know how to ask the question and interpret the structured answer. This same principle applies when the question is about emissions, supplier compliance, or energy flows.

3. Two examples of APIs in sustainability

Carbon footprint tracking

APIs can make scope 2 emissions calculations much more accurate. Normally, companies add up their electricity use (kWh) from electricity bills over a month or

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1. Introduction

Environmental, Social, and Governance (ESG) policies have become essential instruments for aligning business strategy with ethical responsibility and long-term value creation. A well-designed ESG policy addresses reputational risk, regulatory compliance and it reflects how a company understands its role in society and the economy.

An ESG policy formally defines an organization’s vision, values, and commitments around sustainability. It articulates how the company will manage issues ranging from carbon emissions and labor rights to data privacy and board accountability.

Corporate ESG policies are being shaped by global frameworks such as the United Nations Global Compact (UNGC), OECD Guidelines, ISO 26000, and the Corporate Sustainability Reporting Directive (CSRD). These standards emphasize stakeholder engagement, measurable goals, continuous improvement, and alignment with global sustainability goals.

This guide will walk you through:

✅ What a high-quality ESG policy consists of and why each element matters
✅ How to structure and develop an ESG policy step by step
✅ Which international frameworks provide guidance
✅ Examples of ESG policies in global companies

By the end of this guide, you’ll understand how to create an ESG policy.

2. Defining a strong ESG policy: core components and expectations

A strong ESG policy serves as a roadmap for how a company addresses its environmental, social, and governance responsibilities. It sets out clear values, defines areas of focus, and connects sustainability goals with business strategy. This section outlines the key building blocks of an effective ESG policy, from defining scope and setting measurable goals to ensuring accountability and continuous improvement.

Clarity of purpose and scope

An effective ESG policy is grounded in a clear expression of values and purpose. It should define the company’s core commitments, such as reducing emissions, protecting human rights, or promoting fair business practices. The policy should align with the mission and strategic goals.

A helpful benchmark here is ISO 26000, an international standard developed to guide organizations on social responsibility. ISO 26000 outlines key areas companies should cover in their sustainability efforts such as:

• governance,

• human rights,

• labor practices,

• environmental protection,

• fair operating practices,

• consumer issues,

• and community engagement

Policies should make explicit what topics are covered and ensure that no essential issue is left out.

Alignment with global frameworks

To build credibility, companies often base their ESG policies on widely accepted international standards.

• The UN Global Compact offers Ten Principles covering human rights, labor, the environment, and anti-corruption. Companies that commit to the Compact are expected to integrate these principles into their strategies and operations. Read more here.

• The OECD Guidelines for Multinational Enterprises provide recommendations on how businesses should behave responsibly across areas like labor, environment, and ethics. Read more here.

Some companies also link their ESG policies to the United Nations Sustainable Development Goals (SDGs). Which is a set of 17 global goals including climate action, gender equality, and decent work. This helps show how their efforts contribute to broader global priorities.

Stakeholder engagement and materiality

An effective ESG policy reflects not only what the company thinks is important, but also what matters to people affected by its actions, its stakeholders. These include employees, customers, investors, suppliers, local communities, and others.

To determine what’s most relevant, companies conduct a materiality assessment. This is a process that identifies the ESG issues that are most significant for both the company and its stakeholders. Standards like the Global Reporting Initiative (GRI) and ISO 26000 recommend doing this.

Measurable targets and performance metrics

A good ESG policy turns goals into action. Strong policies include measurable targets, like cutting greenhouse gas emissions by a certain percentage, setting diversity goals, or committing funds to local communities.

This approach supports transparency and accountability. For instance, a policy might say:
“We aim to reduce greenhouse gas emissions by 30% by 2030, using 2020 as a baseline.”

ISO 26000 also emphasizes the importance of tracking progress and continuously improving based on what the company learns.

Governance and accountability structures

Effective ESG policies clearly assign responsibility. Some companies give ESG oversight to their board or a sustainability committee, often supported by a Chief Sustainability Officer. Some firms link executive pay to ESG goals like emissions or diversity.

Integration into strategy and operations

Strong policies are embedded. It is important to align ESG policy with business planning, R&D, supply-chain decisions, and risk management.

For example, a company might require all new capital projects to pass an ESG risk assessment, or embed ESG criteria into supplier contracts. Training employees and integrating ESG into company culture is essential for implementation.

Continuous improvement and regular review

Sustainability is a moving target. Reviewing ESG policies every one to two years, using performance results and new insights to raise the company’s level of ambition.

ISO’s Plan–Do–Check–Act (PDCA) model also supports this idea. It encourages organizations to:

1. Plan (set goals),

2. Do (implement them),

3. Check (measure results),

4. Act (improve based on findings).

This cycle keeps the policy relevant and effective over time.

Authenticity and coherence

A company’s ESG policy must reflect what it does. Companies should avoid “policy–practice decoupling”: companies publish impressive-sounding policies but don’t follow through.

To avoid this, ESG policies should:

• Match the company’s real actions,

• Align with other internal rules (like codes of conduct or HR policies),

• Be consistent with public statements.

The UN Global Compact emphasizes that performance must be balanced across all ESG areas. For example, strong climate performance does not excuse poor treatment of workers. Sustainability must be authentic and holistic.

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3. Step-by-step: how to build your ESG policy

Designing an ESG policy involves a structured process and adherence to guidance from global frameworks. Below is a consolidated step-by-step approach, reflecting common recommendations from standards and experts.

1. Baseline assessment and materiality
   Start with a quick review of your environmental and social impacts. What ESG topics are most relevant to your business and stakeholders? These are your “material” issues. You can use basic stakeholder feedback, regulatory checks, or peer comparisons to get started. This ensures your policy focuses on what really counts.company’s context.

2. Use global frameworks as a guide

   Align your policy with trusted standards like:

   • The UN Global Compact (human rights, labor, environment, anti-corruption)

   • The OECD Guidelines (responsible business conduct)

   • The Corporate Sustainability Reporting Directive

   You don’t need to follow everything, but referencing these frameworks adds credibility and helps structure your commitments.

3. Write clear commitments and goals
   Once you’ve identified your key ESG topics, turn them into clear, structured commitments. A good way to do this is by organizing your policy into three main pillars:

   • Environment – Focus on areas like reducing greenhouse gas emissions, minimizing waste, conserving water, or switching to renewable energy.

   • Social – Cover issues such as fair labor practices, workplace diversity, employee well-being, community engagement, or respecting human rights across your supply chain.

   • Governance – Include topics like anti-corruption, ethical business conduct, data privacy, and transparency in decision-making.

   For each area, describe:

   • What you want to achieve

   • How you plan to get there

   • When you expect to reach your goals

   Try to make your commitments measurable and time-bound when possible. For example:

   ✅ “We aim to cut energy use by 20% by 2028 compared to our 2022 baseline.”
   🚫 Avoid vague language like: “We will be more energy efficient.”

   Even if you're just starting out, setting small but clear goals shows intent and helps track progress over time.

4. Assign responsibility and make it part of daily work
   Say who is responsible. It could be a board committee, a sustainability manager, or the business owner.

   Make sure ESG isn’t just on paper. Embed it into decisions, like choosing suppliers, launching products, or planning budgets. For small companies, this might mean training staff or updating key processes.

5. Stay connected to stakeholders

   Good policies reflect what people care about. Make space for input from employees, customers, or communities and revisit it regularly. Even a simple annual survey or team discussion helps keep the policy relevant.

6. Track progress and report

   Pick a few key metrics (like emissions, diversity, or safety) and check progress regularly. If possible, report your ESG efforts publicly. For example, on your website, in a short PDF, or through a sustainability report.

7. Review and improve
   Plan to review your policy at least every one to two years. Use this time to check:

   

   This review process helps you raise your ambition as your company learns and evolves. For example, if you’ve already met your original goal for waste reduction, you might set a higher target next time.

   Also, look for ways to improve based on new data or best practices from your industry. ESG expectations are always changing, so a strong policy should stay flexible and keep improving over time.

4. Frameworks and standards shaping ESG policies

Strong ESG policies often follow well-known global standards. These frameworks help companies shape responsible, credible, and consistent policies.

Read more

1. Introduction

Poka-yoke, which means “mistake-proofing” in Japanese, is a quality control approach that makes it nearly impossible to make mistakes in a process. While originally developed to improve product quality, its environmental applications are significant: by preventing defects, companies prevent material waste, energy overuse, and pollution.

In this article, you will learn:

✅ How poka-yoke works and the principles behind it
✅ Why error prevention is also environmental prevention
✅ Real-world examples from industries like automotive, electronics, healthcare, and logistics
✅ How poka-yoke maps to ESRS reporting standards
✅ How to apply poka-yoke in your own business

This guide will show how poka-yoke helps your business to get more sustainable.

2. What is poka-yoke?

Poka-yoke is a Lean Six Sigma tool developed by Shigeo Shingo in the Toyota Production System to prevent human error in manufacturing. The goal is zero defects through simple, built-in process modifications.

Key principles include:

• Error prevention by design: Parts or steps are configured so mistakes are physically impossible.

• Immediate error detection: If a mistake occurs, it’s identified instantly through sensors or signals.

• Low-cost simplicity: Devices are often physical stops, limit switches, or color codes. Affordable and user-friendly.

• Jidoka (built-in quality): Automation halts the process if conditions are unsafe or incorrect.

• Continuous improvement culture: Workers are empowered to identify and solve error risks.

Poka-yoke ensures quality is built into the process and not inspected after the fact.

3. Why poka-yoke matters for environmental sustainability

Errors reduce product quality and they also waste materials, water, energy, and can even cause pollution. Poka-yoke eliminates these problems at their root.

Key environmental benefits:

• Reduced scrap and solid waste: Defects often lead to scrapped material. Poka-yoke prevents these errors and avoids waste disposal.

• Fewer rework emissions: Reprocessing defective items consumes extra energy. Avoiding rework lowers carbon emissions.

• Pollution prevention: Mistakes in process setups can cause leaks, spills, or unauthorized discharges. Error-proofing mitigates this risk.

• Resource efficiency: Preventing overuse of raw materials, electricity, or water conserves valuable inputs.

• Cleaner, leaner operations: Lean waste equals environmental waste. Streamlined, error-free processes are more sustainable.

In short, preventing errors means preventing waste of materials and energy.

4. Industry case insights: poka-yoke in action

These examples show poka-yoke's flexibility: from physical devices to digital checks, all serve to reduce environmental impact through error prevention. Here are some more Poka-Yoke examples:

Automotive: Pokayoke Torque Wrench

Electronics: 3 Examples of Poka-Yoke in Electronics Manufacturing

Healthcare: Mistake-proofing healthcare: Why stopping processes may be a good start

Logistics: Barcode Solutions for Logistics

5. Aligning poka-yoke with ESRS environmental standards

Poka-yoke contributes to compliance and performance under multiple ESRS standards:

• ESRS E1 (Climate Change): Mistake-proofing reduces energy-intensive rework and lowers Scope 1 and 2 emissions. For example, a 10% reduction in scrap lowers operational carbon.

• ESRS E2 (Pollution): Preventing spills and emissions through interlocks and sensors supports zero-pollution objectives.

• ESRS E3 (Water and Marine Resources): Automatic shut-offs and process checklists prevent water overuse and contamination.

• ESRS E5 (Circular Economy): Reducing defects conserves materials and extends product life—key to circular design and resource decoupling.

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6. How to apply poka-yoke in your own business

Applying poka-yoke doesn’t require sophisticated technology or huge capital investments. Here’s a step-by-step approach to help you get started:

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1. Introduction

Sustainability reporting can feel complicated and costly, especially for smaller companies. The VSME Digital Template and XBRL Taxonomy make it much easier. They give you a free Excel workbook where each cell is already linked to a digital tag, so you can turn your report into a clean, machine-readable file with just one click. EFRAG released this toolkit in May 2025 to help unlisted companies with fewer than 250 employees report their sustainability data more easily.

In this article you will learn:

✅ What the VSME Standard is and who it’s for
✅ How the VSME Digital Template helps SMEs report sustainability data in Excel
✅ How the XBRL Taxonomy automatically turns each cell into a digital datapoint
✅ A step-by-step guide to going from data entry to validated Inline XBRL output
✅ The benefits and limitations of the toolkit—and what updates EFRAG is planning next

By the end you’ll understand how to plug this open-source kit into your sustainability process.

2. What is the VSME?

The VSME standard is a voluntary framework aimed at micro, small, and medium-sized enterprises (SMEs) that want to enhance their sustainability practices and reporting without the complexity of larger frameworks. Learn more about the VSME and to whom it applies here:

3. What is the VSME digital template and XBRL taxonomy?

EFRAG’s VSME toolkit is made up of three connected parts, designed to make sustainability reporting simple, structured, and digital for non-listed SMEs:

• Excel Digital Template (v1.0.0): A user-friendly workbook that covers every disclosure in the VSME Standard, both Basic (B-series) and Comprehensive (C-series). Companies choose either Option A (Basic only) or Option B (Basic + Comprehensive), and the template adapts automatically. Rows appear or hide based on checkbox selections.
  Features include built-in formulas for totals, drop-downs for semi-narrative responses, real-time validation alerts, and clickable links to the relevant VSME paragraphs. See the Excel here: VSME-Digital-Template-1.0.1.xlsx

• VSME XBRL Taxonomy: A machine-readable data model that gives each cell in the template a unique XBRL tag. The taxonomy is deliberately kept simple: no more than one dimension per table and a few placeholder fields for custom use. Unlike other standards (like ESRS Set 1), there’s no need to manually tag anything, the structure is already built into the Excel file.

  

• Digital Template-to-XBRL Converter: A lightweight tool (written in Python) that takes your filled-out Excel file and instantly generates a complete XBRL package, including Inline XBRL (iXBRL), XBRL-CSV, and a human-readable XHTML viewer. Like the rest of the toolkit, it’s free to use under the MIT open-source licence.

Together with a step-by-step explanatory note and an upcoming video tutorial, these tools form a complete starter kit for digital sustainability reporting. Which can be found on the website of EFRAG: VSME Digital Template and XBRL Taxonomy | EFRAG.

4. Integrating the toolkit into corporate sustainability reporting

The VSME Digital Template and XBRL Taxonomy are designed to slot naturally into the typical annual sustainability reporting workflow of an SME. Here’s how the process works step-by-step:

Read more

1. Introduction

In the face of planetary crises, from biodiversity collapse to freshwater scarcity, business as usual is no longer sustainable. A key reason is that many environmental systems function within ecological thresholds, or tipping points, beyond which damage becomes irreversible or exponentially worse. These thresholds are central to understanding both risk and responsibility. Under the EU’s Corporate Sustainability Reporting Directive (CSRD), companies are now required to measure and report against them.

What you will learn

✅ What ecological thresholds are, and why they matter for sustainability disclosures

✅ How CSRD and the European Sustainability Reporting Standards (ESRS) reference ecological limits

✅ How companies can operationalize thresholds using tools like SBTN’s science-based targets

✅ Why thresholds are essential for assessing double materiality

By the end, you’ll understand why aligning with ecological thresholds is beneficial.

2. What are ecological thresholds?

Ecological thresholds mark the points at which a small additional impact can cause a disproportionate, often abrupt, shift in an ecosystem’s structure or function. For example:

• A wetland may absorb pollutants until a threshold is crossed, beyond which it can no longer purify water.

• A forest may maintain biodiversity until cumulative land-use change disrupts its regeneration capacity.

These thresholds define what is safe and just for nature and society. Operating within them is critical to maintaining Earth’s life-support systems.

This diagram illustrates how ecosystems can shift between stable states when ecological thresholds are crossed. The ball represents the system; the curve represents ecosystem stability. As pressures increase, the system moves toward a tipping point—the ecological threshold—marked at the peak. Once crossed, the system transitions into a new, often degraded state, which can be difficult or impossible to reverse. Understanding where these thresholds lie is critical for setting sustainability targets that truly protect ecosystem integrity.

3. How the CSRD integrates ecological thresholds

The CSRD and its European Sustainability Reporting Standards (ESRS) refer to ecological thresholds as operational criteria for setting science-based targets and evaluating corporate impacts.

ESRS E2 – Pollution

In ESRS E2, undertakings are encouraged to state whether and how ecological thresholds—such as biosphere integrity, ocean acidification, and atmospheric aerosol loading—were considered when setting pollution-related targets (E2-3). This includes describing:

• The thresholds identified and methods used

• Whether thresholds are entity-specific

• Allocation of responsibility for respecting them

ESRS E3 – Water and marine resources

ESRS E3-3 requires disclosure of water-related targets and explicitly allows undertakings to report whether those targets are based on ecological thresholds and entity-specific allocations (para. 24). It further references the Science-Based Targets Network (SBTN) as a scientifically grounded methodology for identifying such thresholds (AR 22). Companies may also disclose:

• Whether thresholds are local, national, or global

• How they relate to areas at water risk or high water stress

• How responsibility for respecting them is distributed internally

ESRS E4 – Biodiversity and ecosystems

Here, the language is explicit and mandatory. Under Disclosure Requirement E4-4, companies must report:

• Whether ecological thresholds and allocations of impacts were applied when setting biodiversity targets

• The thresholds identified and their methodologies

• How responsibility for those thresholds is distributed across the organisation

ESRS E5 – Resource use and circular economy

ESRS E5-3 allows companies to refer to ecological thresholds to justify circular economy targets and explicitly cites the Science-Based Targets Network (SBTN) as a source of scientifically acknowledged methodologies. These thresholds may be local, national, or global.

4. SBTN: A pathway to operationalize thresholds

The Science-Based Targets Network (SBTN) defines ecological thresholds as the biophysical limits required to maintain Earth system stability and function . Its approach offers businesses a methodical way to respect these boundaries:

• Step 3 of SBTN (“Measure, Set & Disclose”) requires companies to align their targets with scientific thresholds—e.g., maximum safe levels of nutrient runoff or permissible land-use change.

• These thresholds are context-specific: what’s sustainable in one location may not be in another. That’s why SBTN emphasizes location-based baselines and targets .

• The concept of thresholds informs SBTN’s ambition-setting—companies must go beyond incremental improvements and align their activities with what science says ecosystems can tolerate.

This threshold-based method matches the spirit and structure of the CSRD. Where CSRD asks for targets “in line with policy goals and scientific consensus” (ESRS E4-4), SBTN provides the means to deliver.

Check out the target setting proces here:
Overview – Science Based Targets Network

5. Why thresholds matter for materiality

Under the CSRD, companies must identify material sustainability matters through a double lens: impact and financial materiality.

Ecological thresholds play a pivotal role in both:

• Impact materiality: A company’s operations might push a watershed beyond its nitrogen threshold, harming aquatic biodiversity—a clear negative impact.

• Financial materiality: That same threshold breach could expose the company to legal penalties, reputational damage, or resource shortages.

Thus, understanding and respecting thresholds helps companies better define materiality, avoid greenwashing, and prepare for scrutiny by auditors and stakeholders.

Check out this article to learn how to perform a materiality assessment:

6. What’s next?

If your company is preparing for CSRD-aligned disclosures, ecological thresholds can be very important and usefull. Here’s how to move forward:

1. Start integrating thresholds now
Begin by mapping where your company’s operations intersect with environmental thresholds. Prioritize geographies and activities most likely to exceed safe limits, whether it’s nitrogen pollution, freshwater withdrawals, or habitat loss.

2. Use the SBTN framework as a practical entry point
The Science-Based Targets Network provides step-by-step guidance for assessing impacts, setting context-specific thresholds, and disclosing targets. Start with available tools and data to align your efforts with scientifically credible boundaries.

3. Strengthen internal capacity and governance
Threshold-based disclosure demands collaboration across sustainability, risk, operations, and finance teams. Establish cross-functional working groups and ensure leadership understands the strategic implications of operating within ecological limits.

4. Prepare for deeper disclosure and third-party scrutiny
The CSRD will drive more granular, auditable data demands. Build data systems that can localize impacts and track performance relative to ecological ceilings.

By taking these steps, your company will build resilience.

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Relevant Sources

Corporate-manual-for-setting-SBT-for-Nature

Overview – Science Based Targets Network

The first science-based targets for nature – Science Based Targets Network

Relevant Standards

ESRS E2

Disclosure Requirement E2-3 – Targets related to pollution

ESRS E3

Disclosure Requirement E3-3 – Targets related to water and marine resources

ESRS E4

Disclosure Requirement E4-4 – Targets related to biodiversity and ecosystems

ESRS E5

Disclosure Requirement E5-3 – Targets related to resource use and circular economy

The Corporate Sustainability Reporting Directive (CSRD) is a major EU law (effective Jan 2023) that expands and modernises how companies report on environmental, social and governance (ESG) issues. It replaces the earlier Non-Financial Reporting Directive (NFRD) and requires large and listed companies to disclose reliable sustainability information so that investors, consumers and the public can assess corporate ESG performance. Companies in scope must use the EU’s new European Sustainability Reporting Standards (ESRS). The first reports under CSRD cover the 2024 financial year.

But in early 2025, the European Commission proposed changes to make CSRD simpler. These “Omnibus” proposals aim to ease the burden for smaller firms and refocus reporting on the biggest players.

This article will help you understand:
✅ What the Omnibus simplification package is
✅ Key 2025 developments, including the “Stop-the-Clock” delay
✅ What different company types need to do to prepare
✅ Practical next steps for compliance

By the end, you’ll have a clear picture of where EU sustainability reporting is headed and what your company can do to stay ahead.

2. What is Omnibus?

The “Omnibus” Directive (package) refers to a set of simplification proposals introduced by the European Commission in February 2025 to amend CSRD and related rules. This Omnibus package (first proposed in Feb 2025) is intended to reduce red tape, focusing sustainability reporting obligations on the largest companies and easing burdens on smaller firms. It includes (Omnibus I) a draft directive amending CSRD, the Audit and Accounting Directives and the new Corporate Sustainability Due Diligence Directive (CSDDD), plus (Omnibus II) changes to sustainable finance rules and the EU Taxonomy.

In practice, the Omnibus proposals would raise thresholds (so only companies with >1,000 employees and either turnover >€50m or assets >€25m report), remove sector‑specific reporting standards, keep assurance at limited level, and introduce a voluntary SME reporting standard to shield smaller firms.

3. Key 2025 developments

Omnibus simplification proposals (Feb 2025):
On 26 Feb 2025 the Commission adopted an Omnibus package of proposals to simplify sustainability rules. Key intended changes include:

• Scope narrowed: ~80% of companies would be removed from CSRD scope. Going forward, only very large firms (with >1,000 employees and high turnover/assets) would be mandated to report.

• SME relief: A new voluntary reporting standard (based on the EFRAG SME standard) will be created for smaller companies. Large companies could only ask suppliers/SMEs (≤1,000 employees) for that limited information, reducing the “trickle-down” burden.

• Simpler standards: Sector-specific ESRS would be scrapped and only the core standards retained, cutting down mandatory data points. The mandate to move from limited to reasonable assurance is removed, so auditors will continue to provide only limited assurance on CSRD reports.

• Non-EU firms: For non-EU companies, the EU revenue threshold rises from €150m to €450m (aligning with CSDDD).

• Value-chain cap: The existing cap on information requested from value-chain partners would explicitly cover all companies with ≤1,000 employees (not just SMEs).

• Reporting delays: As a separate parallel measure, the Commission proposed postponing by two years the reporting obligations for many companies (see next section).

“Stop-the-Clock” Directive (Apr 2025): In early April 2025, the European Parliament and Council fast-tracked a directive to delay CSRD (and CSDDD) deadlines. This “stop-the-clock” measure shifts the application dates as follows:

• Large companies (non-NFRD) originally due to report in 2026 (for FY2025) will instead report in 2028.

• Listed SMEs and other small entities originally due in 2027 (for FY2026) will report in 2029.

• (No change for first-wave NFRD companies or non-EU companies: they still report in 2025 and 2029 respectively.)

This gives legislators time to agree the Omnibus changes without forcing companies to start, stop and restart reporting. The directive was published in April 2025 and EU states must transpose it by end-2025.

Other Milestones:

• 2022–2023: CSRD was formally adopted on 14 Dec 2022 and entered into force 5 Jan 2023finance.ec.europa.eu. The first ESRS were adopted in late 2023, ready for use by companies reporting FY2024.

• 2025: Negotiations on the Omnibus proposals are underway. The Commission expects co-legislators to reach a rapid agreement on final rulesfinance.ec.europa.eu. According to EU leaders’ guidance, the aim is to finalise these simplifications by the end of 2025consilium.europa.eu.

4. Reporting implementation phases

CSRD rollout occurs in waves. Under the original rules, companies are grouped by size/type with staggered start dates. The stop-the-clock delays mean the revised timeline is:

The changes above come from the Omnibus proposals and final Stop-the-Clock directive. In practice, large companies in Waves 2 and 3 will begin reporting later than originally planned, giving them extra preparation time. Wave 1 and Wave 4 deadlines remain unchanged.

5. Implications by company size and industry

Very large companies: Those still in scope (typically global enterprises with >1,000 employees) should prepare robust ESG reporting processes. Even with simplifications, they must collect a broad range of data (climate, biodiversity, human rights, governance, etc.) and follow the ESRS framework. The move to limited assurance means audit costs stay predictable, but companies should gear up for mandatory external review of their disclosures.

Mid-sized groups: Companies on the cusp of the thresholds must check if they still qualify under the new tests (employees + turnover/assets). If they fall out of scope, they can opt into voluntary reporting using the EU SME standard to signal sustainability leadership. Those with listed securities should plan for Wave 3 timing.

Small and micro firms: Most will be exempt from CSRD. However, many small businesses have large customers in scope; these larger clients may require sustainability information (albeit limited by the value-chain cap). Small firms should therefore start basic ESG record-keeping and consider early adoption of simplified reporting practices to facilitate sales and finance relationships. Adopting the forthcoming EFRAG voluntary SME standard can prepare them for eventual downstream demands.

High-impact industries: Companies in pollution-intensive or high-risk sectors should invest early in robust sustainability strategies and metrics (energy use, emissions, waste, labor practices, etc.), as these will dominate reporting content. Even with lighter requirements, they must demonstrate concrete climate transition plans and compliance with EU Taxonomy rules.

Service and financial firms: These sectors often have complex value chains. Financial companies (banks, insurers, asset managers) will not only report their own ESG impacts but also enforce due diligence on clients’ sustainability (per CSDDD). Service companies should emphasize social governance practices, diversity policies and digital governance in their reports.

6. What’s next?

Here are some practical steps for CSRD compliance:

1. Check if you’re in scope
   See if your company meets Omnibus thresholds (staff, turnover, assets) or is a listed SME or non-EU company affected.

2. Do a gap analysis
   Compare your current ESG data and practices with CSRD (ESRS) requirements. Identify what’s missing.

3. Set up internal processes
   Appoint a sustainability lead and start integrating ESG data into your operations. Start early: even with delayed deadlines, the first report may come in 2028.

4. Use existing frameworks
   Align current disclosures (e.g. GRI, CDP, IFRS S1/S2) with ESRS. This helps ease the transition.

5. Consider voluntary reporting
   If you’re not in scope but in someone’s value chain, look at the upcoming SME standard. It helps meet partner demands without too much burden.

6. Invest in data systems
   Implement or upgrade IT systems (ESG reporting software or modules) to track environmental and social data (energy use, emissions, HR stats, etc.). Automating data flows now will pay off when official reporting begins.

7. Plan for assurance
   Even “limited” assurance needs preparation. Early discussions with auditors can clarify the depth of the audit needed and help refine reporting quality.

8. Train and communicate
   Make sure your teams understand CSRD. Talk to suppliers and customers about what data you’ll need from them.

9. Stay updated
   The Omnibus proposals are not final law yet. Companies should watch final EU legislation (likely by late 2025) and any delegated acts (e.g. the detailed ESRS revisions). Stay informed with guidance from the European Commission, EFRAG, and industry groups for practical tips.

10. Use Available Support
    Use resources from EU and national authorities. For example, the EC’s Q&A on Omnibus and official guidelines (when published) will clarify details. Joining industry networks or working groups can provide peer insights on implementation challenges and solutions.

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Relevant Sources

Omnibus simplification proposals and related press materials:

commission.europa.eu

finance.ec.europa.eu

finance.ec.europa.eu

consilium.europa.eu

finance.ec.europa.eufinance.ec.europa.eu

ISO standards offer structured approaches to managing business operations, from quality and environmental impact to information security, occupational health, and energy efficiency. While each framework has distinct objectives, they share common methodologies, particularly the Plan-Do-Check-Act (PDCA) cycle, and can be integrated to create a comprehensive management system. Understanding their scope, applications, and overlaps can help organizations optimize compliance. However, with the CSRD arises a new question: How can these different ISO standards be integrated with the CSRD? This article will try to answer this question for five of the most popular ISO standards.

2. Five ISO standards

Many organizations already use ISO standards to structure their management systems. Understanding how ISO 9001 (quality), ISO 14001 (environmental), ISO 27001 (information security), ISO 45001 (occupational health and safety), and ISO 50001 (energy management) align with CSRD requirements can simplify compliance. But first a short description of each of these standards follows.

ISO 9001: quality management

ISO 9001 is the gold standard for quality management systems (QMS), focusing on customer satisfaction, process efficiency, and continual improvement. Organizations that adopt ISO 9001 establish clear policies, standardized processes, and metrics for performance evaluation. The core principles include risk-based thinking, leadership involvement, and evidence-based decision-making.

ISO 14001: environmental management

ISO 14001 addresses environmental sustainability, guiding organizations in minimizing their ecological footprint. This standard requires organizations to identify environmental aspects, set objectives for improvement, and comply with legal requirements. It emphasizes resource conservation, pollution prevention, and lifecycle thinking, making it a key tool for businesses aiming to meet corporate social responsibility (CSR) goals.

ISO 27001: information security management

Cyber threats and data breaches have made ISO 27001 increasingly relevant. This standard provides a framework for establishing an information security management system (ISMS), ensuring the confidentiality, integrity, and availability of data. It mandates risk assessments, security controls, and continuous monitoring, aligning well with regulatory requirements like GDPR and industry-specific cybersecurity frameworks.

ISO 45001: occupational health and safety

ISO 45001 focuses on workplace health and safety, replacing OHSAS 18001 as the international standard for occupational health and safety management systems (OH&S). It requires organizations to identify hazards, assess risks, and implement controls to prevent work-related injuries and illnesses. Employee participation and compliance with legal obligations are central to its approach.

ISO 50001: energy management

ISO 50001 provides a framework for energy efficiency and reduction of greenhouse gas emissions. By adopting this standard, organizations can systematically improve their energy performance through monitoring, benchmarking, and process optimization.

Key overlaps between the standards

While standards may address different topics, they overlap in certain areas:

1. Shared PDCA methodology: All five standards follow the PDCA cycle, ensuring continuous improvement.

2. Risk-based approach: Each standard emphasizes proactive risk assessment, whether in quality, security, environmental impact, or workplace safety.

3. Management commitment: Leadership involvement is a prerequisite for successful implementation.

4. Legal and regulatory alignment: Compliance with national and international regulations is a common requirement.

5. Documentation and performance monitoring: Metrics, audits, and documented processes underpin all standards.

3. Overlap with the CSRD

The ISO standards align with the CSRD's requirements for reporting on sustainability matters, particularly in areas like environmental impact, workforce management, and governance. The CSRD requires companies to disclose material impacts, risks, and opportunities related to sustainability, which often correspond to the management systems established under ISO standards.

General overlap

The CSRD requires companies to disclose material impacts, risks, and opportunities related to sustainability, which often correspond to the management systems established under ISO standards. For example:

• ISO 9001 (Quality Management) may indirectly support governance and process-related disclosures in ESRS G1 and other standards.

• ISO 14001 (Environmental Management) aligns with ESRS environmental topics (e.g., E1 Climate Change, E2 Pollution, E3 Water and Marine Resources).

• ISO 27001 (Information Security Management) may overlap with consumer and end-user diclosures in ESRS S4 Consumers and End-users, particularly in managing risks related to data security and privacy.

• ISO 45001 (Occupational Health and Safety) overlaps with ESRS social topics (e.g., S1 Own Workforce, S2 Workers in the Value Chain).

• ISO 50001 (Energy Management) aligns with ESRS E1 Climate Change, particularly in energy consumption and efficiency disclosures.

Overlap between ISOs and disclosures

Several ESRS disclosure requirements (DRs) are supported by ISO standards:

Environmental disclosures:

• Energy and climate change: ISO 14001 and ISO 50001 help fulfill DR E1-4 (GHG emissions reduction targets) and DR E1-5 (energy consumption and mix) by establishing sustainability policies and tracking energy consumption.

• Energy policy and targets: ISO 50001 requires organizations to set an energy policy and efficiency targets, supporting DR E1-2 (climate change mitigation policies) and DR E1-4 (climate change mitigation targets).

• Pollution control: ISO 14001 supports DR E2-1 (pollution-related policies) and DR E2-2 (pollution mitigation actions) by providing structured pollution management.

• Resource use and circular economy: ISO 14001 helps with DR E5-1 (resource use policies) and DR E5-2 (actions related to circular economy) by managing waste and resource consumption.

• Environmental impact monitoring: ISO 14001 supports IRO-1 disclosures by identifying environmental impacts and by monitoring the impacts it may help with DR E2-4 (pollution in air, water, and soil), DR E2-5 (hazardous substances), and DR E5-4 (resource inflows).

Social disclosures:

• Workforce and consumer risks: ISO 45001 and ISO 27001 assist in identifying risks and opportunities related to employees and consumers, supporting DR IRO-1 under ESRS 2.

• Workforce policies: The policies required under ISO 45001 align with DR S1-1 (own workforce policies), while ISO 27001 supports DR S4-1 (consumer and end-user policies).

• Health, safety, and training: ISO 45001 supports DR S1-14 (workplace health & safety) and DR S1-13 (employee training and skills development) by providing information about health & safety and training programs.

• Value chain safety: ISO 45001 extends workplace safety to suppliers and contractors, supporting DR S2-4 (actions on material impacts on value chain workers).

Governance disclosures:

• Governance and internal processes: ISO 9001 may indirectly support governance disclosures under ESRS G1 by ensuring structured quality management and internal control frameworks.

4. Conclusion

Integrating ISO standards with CSRD reporting requirements is a practical and effective way for organizations to ensure compliance. ISO 9001, 14001, 27001, 45001, and 50001 each contribute to different aspects of ESG reporting, from quality management and environmental impact to workplace safety and energy efficiency. As sustainability regulations evolve, organizations that proactively align their management systems with CSRD requirements will be better positioned.

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Relevant Sources

ISO-onderzoek 2021; een overzicht van de belangrijkste ISO-normen

ISO 9001, 14001, 27001, 45001, and 50001.

Sustainability reporting isn’t just for large companies anymore. The Corporate Sustainability Reporting Directive (CSRD) brings new challenges for businesses of all sizes, requiring transparent disclosures about their environmental, social, and governance (ESG) impacts. While large corporations have their European Sustainability Reporting Standards (ESRS) to follow, what about smaller businesses that don’t have the same resources or expertise?

This is where the Voluntary Sustainability Reporting Standard (VSME) comes into the picture. The VSME is a simpler framework designed for Micro, Small, and Medium-sized Enterprises). Let’s break down what the VSME is.

2. What is the VSME?

The VSME standard is a voluntary framework aimed at micro, small, and medium-sized enterprises (SMEs) that want to enhance their sustainability practices and reporting without the complexity of larger frameworks. Its key objectives include:

1. Streamlining sustainability reporting to meet the demands of larger companies, banks, and investors.

2. Simplifying access to finance by offering reliable sustainability data to financial institutions.

3. Encouraging better sustainability management to improve resilience and competitive growth.

4. Contributing to a sustainable and inclusive economy by making reporting accessible to smaller players.

While SMEs are exempt from the CSRD’s mandatory reporting requirements, the VSME offers them a way to participate voluntarily.

The VSME applies to:

3. How to Report Using the VSME

The VSME is designed to be flexible and easy to use, addressing SMEs’ limited resources and expertise. Reporting under the VSME consists of two modules:

1. Basic Module: This entry-level module focuses on key disclosures across 11 metrics, covering the minimum information SMEs need to provide.

2. Comprehensive Module: This optional module expands on the Basic Module with nine additional metrics, catering to the needs of more advanced SMEs or those responding to specific demands from banks, investors, or corporate clients.

SMEs can choose their level of reporting based on their capabilities and stakeholders’ needs. However, once a module is selected, it must be completed in its entirety. While, the ESRS requires a detailed materiality analysis to determine what to report, this is not required for the VSME.

4. Basic Module

The Basic Module serves as the foundation for sustainability reporting, offering a clear and structured approach to disclosing key environmental, social, and governance (ESG) metrics. Here’s a snapshot of its core elements:

What does the Basic Module cover?

1. General information
   Organizations must report their:

   • Reporting scope: Basic Module alone or with Comprehensive Module.

   • Legal structure, financials (balance sheet size, turnover), and workforce data.

   • Sustainability certifications, if any.

2. Environmental metrics

   • Energy & GHG emissions: Total energy consumption (renewable and non-renewable) and emissions broken down by Scope 1 (direct) and Scope 2 (indirect from purchased energy).

   • Pollution: Reporting on emissions to air, water, and soil, aligned with existing regulations.

   • Biodiversity: Impact on sensitive areas (e.g., land use in hectares).

   • Water use: Total water withdrawal, especially in high-stress areas.

   • Circular economy: Waste management practices and material flows.

3. Social metrics

   • Workforce breakdown by gender, contract type, and location.

   • Health and safety, including accident rates and fatalities.

   • Pay equity, training hours, and collective bargaining coverage.

4. Governance metrics

   • Instances of corruption or bribery (convictions and fines).

Who should use the Basic Module?

Small and medium-sized enterprises (SMEs) or organizations beginning their sustainability journey. It’s designed to balance clarity and comprehensiveness while keeping reporting manageable.

5. Comprehensive Module

The Comprehensive Module is for organizations seeking to provide detailed insights into their sustainability practices, catering to the needs of investors, banks, and other stakeholders.

What makes it comprehensive?

1. Strategic insights

   • Business model and strategy, especially regarding sustainability.

   • Practices and policies for transitioning to a sustainable economy.

2. Enhanced environmental metrics

   • Scope 3 GHG emissions: Indirect emissions from the value chain, e.g., transportation or product use.

   • GHG reduction targets: Detailed goals for emissions reductions, including specific actions.

   • Climate risks: Assessment of climate-related hazards and their impact on financial performance.

3. Expanded social metrics

   • Female-to-male ratio in management.

   • Policies addressing human rights, such as child labor and discrimination.

   • Reporting confirmed incidents of human rights violations and mitigation actions.

4. Governance focus

   • Revenues from sensitive sectors (e.g., fossil fuels, controversial weapons).

   • Gender diversity in governance bodies.

Basic vs. Comprehensive Module

Why choose the Comprehensive Module?

It’s ideal for organizations needing to meet regulatory requirements or providing in-depth data for business partners assessing sustainability risks.

6. Conclusion

The VSME is more than just a scaled-down version of ESRS. It’s a thoughtful framework designed to help SMEs navigate the growing demand for sustainability reporting without overwhelming them. With its modular design, simplified language, and focus on accessibility, the VSME empowers businesses to showcase their sustainability efforts. Whether starting with the Basic Module or advancing to the Comprehensive Module, SMEs now have a practical and flexible tool to meet the growing demands of stakeholders and contribute to a more sustainable economy.

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Relevant Sources

EFRAG Cover Letter for the VSME.pdf

VSME Standard.pdf

The EU’s Sustainable Finance Disclosure Regulation, commonly referred to as the SFDR, is a major step in aligning financial markets with sustainability goals. Introduced by Regulation (EU) 2019/2088, the SFDR imposes new transparency requirements on the financial sector. Its main objective is to provide clear, consistent information on how financial institutions incorporate sustainability into their investment decisions and advice.

Let's dive into what the SFDR entails, who it applies to, and how it relates to the CSRD.

2. What is the SFDR?

The SFDR is a European Union regulation that mandates financial institutions to disclose how they handle sustainability risks, adverse impacts on sustainability, and sustainable investment goals. These disclosures are intended to enhance transparency for investors, ensuring they have the information needed to make environmentally and socially informed choices.

In simple terms, the SFDR requires that financial firms reveal the environmental, social, and governance (ESG) factors they consider when making investment decisions or advising clients. By standardizing this information, the SFDR helps investors to assess and compare the sustainability of different financial products and services across the EU.

Full compliance, including periodic disclosures and additional technical reporting standards, became mandatory by the end of 2022.

3. Who Needs to Comply with the SFDR?

The SFDR applies to a wide range of financial entities, including:

These entities must evaluate how sustainability factors impact their investment processes and disclose relevant information about their sustainability approaches on their websites, in pre-contractual information, and in periodic reports.

4. Key SFDR Requirements

The SFDR’s requirements focus on three primary areas:

1. Transparency of sustainability risks

Financial institutions must disclose how they integrate sustainability risks—like environmental, social, or governance issues that could impact an investment’s financial performance—into their decision-making and advisory processes. For example, a portfolio manager should explain whether or not they consider risks related to climate change when selecting investments, along with any potential impacts on returns.

2. Consideration of adverse sustainability impacts

Institutions also need to disclose if, and how, they consider the principal adverse impacts of their investments on sustainability factors, such as carbon emissions, water use, or human rights. Larger companies with more than 500 employees are specifically required to consider and report on these adverse impacts, while smaller entities can choose whether to do so.

3. Transparency of sustainable investment objectives

For products marketed as “sustainable” or that promote specific ESG characteristics, financial firms must provide detailed information on these goals and how they plan to achieve them. For instance, a fund with a goal to reduce carbon emissions must disclose how this goal is measured, including details about benchmarks or indices used.

5. Classification of Financial Products under the SFDR

The SFDR introduces three categories for financial products:

For financial products with Article 8 or 9 designations, annual reporting must demonstrate the actual outcomes of their sustainability initiatives, comparing these to any benchmarks used.

6. How the SFDR and CSRD Work Together to Drive Sustainable Finance

While the SFDR primarily focuses on the financial sector's disclosure requirements, the CSRD sets out corporate reporting obligations for large companies. Together, they help create a holistic framework for sustainability information.

The CSRD is essential to the SFDR because it provides critical sustainability data that financial market participants need for their SFDR reporting. Companies affected by the CSRD—mainly large and listed companies in the EU—are required to report specific ESG metrics, including greenhouse gas emissions, water usage, waste production, and more. Financial institutions, in turn, use this information to fulfill their SFDR obligations by assessing the sustainability risks and performance of their investments.

• SFDR compliance needs CSRD data: SFDR requires financial institutions to report on how their products align with sustainability factors and the EU Taxonomy. The CSRD’s disclosures give financial institutions access to standardized ESG data, enabling them to assess and report on sustainability risks, adverse impacts, and ESG alignment.

• Double materiality in the CSRD: Not all SFDR data points are mandatory under the CSRD. Therefore, the CSRD introduces the concept of double materiality, requiring companies to report on ESG topics that are material to them. It covers how sustainability affects their financial performance and also their impacts on the environment and society. This broader perspective aligns with the SFDR’s objective of giving investors a comprehensive view of both sustainability risks and opportunities associated with their investments.

Both the SFDR and CSRD rely on the EU Taxonomy, a classification system that identifies environmentally sustainable activities, as their foundation for ESG reporting:

1. The EU Taxonomy: Defines economic activities that can be considered sustainable based on criteria like climate change mitigation, adaptation, and environmental objectives. More information about the EU Taxonomy can be found here.

2. The CSRD: Requires companies to disclose their performance based on Taxonomy-aligned metrics, which gives financial institutions a reliable benchmark for evaluating ESG alignment.

3. The SFDR: Obligates financial market participants to disclose how their products promote sustainability, using the EU Taxonomy as a reference for evaluating environmental alignment.

Together, these regulations create a transparent system where companies report their sustainability metrics (CSRD), and financial institutions disclose how these metrics impact their investment products (SFDR).

7. Conclusion

The SFDR requires financial market participants to disclose the sustainability impacts of their products, while the CSRD facilitates this process by providing companies with a standardized framework to report the necessary data.

By mandating transparency on both corporate and investment levels, these regulations reduce “greenwashing” risks, ensure consistent reporting, and support the EU’s overarching objective of directing capital toward sustainable activities. While still in the early stages of implementation, this integrated approach is set to shape sustainable finance in the EU, giving investors and companies the tools and information to make impactful, sustainability-focused decisions.

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Relevant Sources

Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector (Text with EEA relevance)

Key links between CSRD and SFDR

Relationships between CSRD, EU Taxonomy and SFDR

The Corporate Sustainability Reporting Directive (CSRD) is a new regulation that expands the scope of sustainability reporting for businesses operating within the European Union (EU). Its goal is to ensure that companies are transparent about their environmental, social, and governance (ESG) practices, allowing investors, consumers, and regulators to better understand their impact on society and the planet.

In this article, we'll break down the key aspects of the CSRD, who it applies to —both within and outside of the EU— and when the new reporting requirements take effect.

Here’s a summary of the reporting timeline under the CSRD:

• 2025: Businesses already covered by the NFRD start reporting on their 2024 financial data.

• 2026: Large EU companies and parent companies of large groups start reporting on their 2025 financial data.

• 2027: Listed SMEs begin reporting based on their 2026 financial data.

• 2029: Third-country companies with significant EU operations need to report on their 2028 financial data.

2. Who needs to comply with the CSRD?

The CSRD applies to a wide range of businesses, both within the EU and those based outside the EU with significant operations in Europe. Here’s a breakdown of which companies will need to report, and when:

• Companies already reporting under the Non-Financial Reporting Directive (NFRD): These businesses will need to comply with the CSRD starting in 2025, reporting on data from the 2024 financial year.

• Large EU businesses and parent companies of large groups: They will need to begin reporting in 2026, based on 2025 financial data. To qualify as a "large" undertaking, companies must meet at least two of the following criteria for two consecutive years:

  • A net turnover exceeding EUR 50 million.

  • A balance sheet total exceeding EUR 25 million.

  • An average of more than 250 employees.

• Listed Small and Medium-Sized Enterprises (SMEs): These will need to start reporting by 2027, covering their 2026 financial year.

• Third-country companies (those based outside the EU): Businesses headquartered outside the EU but with EU subsidiaries or branches, or whose securities are traded on EU markets, will need to comply by 2029, based on 2028 financial data. More about this in the next section.

3. How does the CSRD impact third-country companies?

The CSRD isn’t limited to EU-based companies. It also applies to companies outside the EU if they have a significant presence in the EU through subsidiaries, branches, or public securities listings. There are two key ways this can happen:

1. EU subsidiaries or branches: If a third-country company has large EU subsidiaries (meeting the criteria for large undertakings) or listed SMEs, it will be required to produce a group-level sustainability report by 2029.

2. Non-EU issuers: Any non-EU company with securities listed on a regulated market within the EU must comply with the CSRD and file sustainability reports according to European standards.

These companies must adhere to the European Sustainability Reporting Standards (ESRS), which are being developed to guide sustainability reporting in the EU. Exemptions may apply if subsidiaries are already covered in the parent company’s consolidated report and that report complies with EU standards.

4. Special cases and exemptions

Certain companies may qualify for exemptions or special reporting rules under the CSRD:

1. Subsidiaries covered by parent company reports: EU subsidiaries may be exempt from producing their own sustainability reports if they are already included in a parent company’s consolidated report. For this exemption to apply, the parent company’s report must meet the ESRS standards or, if the parent is outside the EU, be deemed equivalent by EU authorities.

2. Artificial consolidation for reporting purposes: Until 2030, companies can use a simplified reporting approach by consolidating all EU subsidiaries into a single sustainability report. The largest EU subsidiary, based on turnover, would take the lead in reporting on behalf of the entire group.

5. What happens if you do not comply?

Failing to meet the CSRD’s requirements can result in serious consequences, varying across EU member states. Potential penalties include:

• Fines and criminal charges: Each country will impose its own sanctions, which could involve significant fines or even criminal prosecution in some cases.

• Audit issues: Non-compliance could lead to audit failures, which might affect a company’s ability to operate or maintain investor trust.

• Reputational damage: Being publicly identified as non-compliant could harm your company’s reputation, leading to lost business or decreased investor confidence.

• Legal liability: Non-compliant businesses could also face litigation for failing to meet their reporting obligations.

The CSRD includes a requirement for external assurance on sustainability reports. Initially, businesses will need to obtain limited assurance, meaning an auditor will confirm that no significant misstatements have been found. Over time, this will evolve into reasonable assurance, which involves a more detailed audit of the sustainability data.

6. Key actions for businesses

As the CSRD rolls out, companies—especially those with EU operations or group structures—should start preparing now. Here are some important steps to take:

7. Conclusion

The CSRD represents a significant shift in how companies must report on their sustainability practices. With deadlines approaching over the next few years, businesses—especially those with complex group structures or operations within the EU—need to start preparing now. By understanding the requirements and planning ahead, companies can avoid penalties, ensure compliance, and meet investor and societal expectations.

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Relevant Standards

ESRS 1

5.1    Reporting undertaking and value chain

62. The sustainability statement shall be for the same reporting undertaking as the financial statements. For example, if the reporting undertaking is a parent company required to prepare consolidated financial statements, the sustainability statement will be for the group. This requirement does not apply where the reporting undertaking is not required to draw-up financial statements or where the reporting undertaking is preparing consolidated sustainability reporting pursuant to Article 48i of Directive 2013/34/EU.

63. The information about the reporting undertaking provided in the sustainability statement shall be extended to include information on the material impacts, risks and opportunities connected with the undertaking through its direct and indirect business relationships in the upstream and/or downstream value chain (“value chain information”). In extending the information about the reporting undertaking, the undertaking shall include material impacts, risks and opportunities connected with its upstream and downstream value chain:

    1. following the outcome of its due diligence process and of its materiality assessment; and

    2. in accordance with any specific requirements related to the value chain in other ESRS.

64. Paragraph 63 does not require information on each and every actor in the value chain , but only the inclusion of material upstream and downstream value chain information. Different sustainability matters can be material in relation to different parts of the undertaking’s upstream and downstream value chain. The information shall be extended to include value chain information only in relation to the parts of the value chain for which the matter is material.

65. The undertaking shall include material value chain information when this is necessary to:

    1. allow users of sustainability statements to understand the undertaking’s material impacts, risks and opportunities ; and/or

    2. produce a set of information that meets the qualitative characteristics of information (see Appendix B of this Standard).

66. When determining at which level within its own operations and its upstream and downstream value chain a material sustainability matter arises, the undertaking shall use its assessment of impacts, risks and opportunities following the double materiality principle (see chapter 3 of this Standard).

67. When associates or joint ventures, accounted for under the equity method or proportionally consolidated in the financial statements, are part of the undertaking’s value chain, for example as suppliers, the undertaking shall include information related to those associates or joint ventures in accordance with paragraph 63 consistent with the approach adopted for the other business relationships in the value chain. In this case, when determining impact metrics , the data of the associate or joint venture are not limited to the share of equity held, but shall be taken into account on the basis of the impacts that are connected with the undertaking’s products and services through its business relationships.

ESRS Implementation Q&A Platform – Compilation of Explanations January – May 2024

Question ID 148

Question ID 217

EFRAG IG 1: Materiality Assessment Implementation Guidance

FAQ 22

DIRECTIVE (EU) 2022/2464 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

Article 19a, 29a, 40a-d

Materiality assessment is the foundation of sustainability reporting under the European Sustainability Reporting Standards (ESRS). Understanding what to disclose is important for companies to align with these standards. In this article we will explain how you can determine what to disclose once you have performed your materiality assessment. How to perform the materiality assessment is covered in another article.

2. What to disclose?

The flowchart provides a step-by-step guide for companies on how to determine what information they need to disclose under the ESRS.

Here's a breakdown of the flowchart:

1. Perform materiality assessment: The first step is to perform a materiality assessment. This process helps the company determine which sustainability topics are material (important or significant) to their business.

2. Is the topic material and covered by a topical standard?

   • Yes: If the topic is material and covered by a topical standard, the company moves forward to assess the specific disclosure requirements related to metrics, policies, actions, and targets.

   • No: If the topic is not material or not covered by a topical standard, the company can skip all the disclosure requirements for that topic. However, if the topic is climate change (under ESRS E1), the company must provide a detailed explanation of why it deems climate change as not material. For other topics, the company may include a brief explanation of why the topic is not material.

3. Has the company established policies, taken actions, or set targets for the topic?:

   • Yes: If the company has established policies, taken actions, or set targets for the topic, it should disclose the Data Points from the topical standard along with the relevant Disclosure Requirements of ESRS 2 (as referenced in ESRS 2 Appendix C).

   • No: If the company has not established policies, taken actions, or set targets, it must disclose that it does not currently have these items in place. Additionally, the company may also provide a timeframe indicating when it plans to implement them.

4. Is the disclosure requirement material?:

   • Yes: If the specific disclosure requirement is material, the company proceeds to the next step.

   • No: If the specific disclosure requirement is not material, the company does not have to disclose the Disclosure Requirements (DRs) or the related Data Points (DPs).

   Is the individual data point material?:

   • Yes: If the individual data point is material, the company must disclose the information required by the Data Point (DP).

   • No: If the individual data point is not material, the company does not have to disclose the Data Point.

This flowchart guides companies through the decision-making process regarding what sustainability information needs to be disclosed.

3. Conclusion

Navigating the disclosure requirements under the ESRS can seem daunting, but understanding the materiality assessment process and the corresponding disclosure obligations is the first step. By following the guidelines outlined in this article, you know what and what not to disclose. Be aware, the goal is not just compliance but also to provide meaningful insights into how your company addresses sustainability issues, thereby enhancing transparency and accountability.

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Relevant Standards

ESRS 1

Appendix E: Flowchart for determining disclosures under ESRS

Materiality assessment is the starting point for sustainability reporting under ESRS. This appendix provides a non-binding illustration of the impact- and financial materiality assessment outlined in chapter 3. IRO-1 in section 4.1 of ESRS 2 includes general disclosure requirements (DR) about the undertaking’s process to identify impacts, risks and opportunities and assess their materiality. SBM-3 of ESRS 2 provides general disclosures requirements on the material impact, risks and opportunities resulting from the undertaking’s materiality assessment. The undertaking can omit all disclosure requirements in a topical standard if it assessed that the topic in question is not material. In that case it may disclose a brief explanation of the conclusions of the materiality assessment for that topic but shall disclose a detailed explanation in the case of ESRS E1 climate change (IRO-2 ESRS 2). ESRS set disclosure requirements, not behavioral requirements. Disclosure requirements in relation to action plans, targets, policies, scenario analysis and transition plans are proportionate because they are contingent on the undertaking having these, which may depend on the size, capacity, resources, and skills of the undertaking. Note: The flowchart below does not cover the situation in which the undertaking assesses a sustainability matter as material but it is not covered by a topical standard, in which case the undertaking shall make additional entity specific disclosures (ESRS 1 (30 (b)).

Companies must disclose environmental, social, and governance (ESG) impacts. However, not every ESG topic is relevant for each company. To identify relevant ESG topics a company can perform a materiality assessment. Materiality assessment is the process through which a company determines which sustainability topics are most significant to its operations and stakeholders. These significant topics, are the ones that the company needs to report on. This article aims to explain how a company can perform a materiality assessment .

The materiality assessment process is subdivided into four phases, which will be discussed:

2. Analyse

Before diving into analyzing potential material topics, it’s essential to understand what topics are likely to be important in your industry. You can get a sense of this by visiting these websites:

• MSCI materiality map

• SASB materiality finder

When conducting a materiality assessment, you must consider a list of topics found in Appendix A of ESRS 1. These include various environmental, social, and governance topics. The environmental topics are shown here:

The goal of the first phase is to get an initial understanding of potentially material topics by analyzing your competitors. Here’s how you can do that:

1. Identify competitors: Start by listing 10-20 major competitors in your industry. Include both direct competitors and those in similar markets. This list will help you focus your analysis.

2. Review competitor information: Look at your competitors’ sustainability reports, websites, and public disclosures. Identify the sustainability topics they focus on. Note that not all competitors may have public information available, so your list with competitors might narrow down based on available data.

3. Analyze and document: Go through the available documentation for each competitor. Identify the topics they mention. If they mention a topic you can assume that it is important for them. Record these topics and their sources:

By the end of this phase, you’ll have a preliminary list of potentially material topics based on your industry and competitors.

Example retail company

Imagine you are in the retail industry. You find that competitors like Walmart and Target frequently focus on topics such as energy use, waste reduction, and air pollution. These recurring themes indicate their importance in your industry.

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Creating a value chain should be the first step in understanding and reporting your company's environmental, social, and governance (ESG) impacts. In a previous article we explained what the value chain is (click here for the article). This guide will walk you through the process of making a comprehensive value chain covering:

1. your organization, upstream and downstream activities,

2. relevant environments,

3. stakeholders,

4. and important impacts, risks, and opportunities.

In this article we will create a value chain by using the example of a car manufacturing company.

2. Value Chain

The first step in creating a value chain focuses on own organization, upstream and downstream activities. This information will be used as a foundation for the following steps.

Own organization

While information about upstream and downstream activities can be collected in parallel, it is best first to map out the activities within your organization. This provides a clear picture that will inform the subsequent mapping of upstream and downstream activities.

For the activities of your company, you can choose from a detailed mapping to a high-level overview. Each approach has its pros and cons. A detailed mapping offers deep insights into specific processes. But, making one is time-consuming and can result in a complex, less intuitive value chain that is harder to understand:

An overview that is high level is easier to understand and quicker to create. But, may overlook important details and nuances critical to identifying significant impacts, risks, and opportunities:

For an effective value chain, strike a balance between detail and simplicity to ensure it is both comprehensive and understandable. Keep in mind that you should be able to extract information about environments, stakeholders, and IRO from the value chain.

To map out the activities of your own organization effectively, engage with employees who have extensive knowledge of various operations, such as production managers. Then, try to make a value chain with 1-5 the activities with 3 - 8 steps.

Example car manufacturer

While a car company might have more activities, such as logistics and after-sales services. We will look into the following activities:

1. Research and Development (R&D):

   • Designing and developing new car models.

   • Innovating in automotive technology.

2. Manufacturing:

   • Assembling car components in plants.

   • Conducting quality control and testing.

Upstream

When talking about the upstream, or your suppliers, a common framework is to regard the supply chain from the perspective of tiers:

While you might have more than three tiers of suppliers, it is advisable to limit the supply chain to two or three tiers. More than three tiers can lead to loss of oversight and increased complexity. However, avoid excluding suppliers with important impacts, risks, or opportunities (IROs).

To map out the upstream, you should identify the 5-10 main materials that are supplied to your company (i.e. in terms of costs). Pay special attention to materials that might have significant IROs associated with them, such as substances of very high concern. Add these materials to the value chain, even if these materials do not belong to the 5-10 main materials.

If you work with a large variety of materials, you can categorize them. For instance, a car manufacturer dealing with numerous types of metals might categorize them as steel, aluminum, and other alloys, simplifying the mapping process and maintaining clarity.

Example car manufacturer

For a car manufacturer, mapping the upstream value chain might look as follows:

1. Tier 1 suppliers: Direct suppliers providing major components like engines and electronics.

2. Tier 2 suppliers: Suppliers who provide sub-components or raw materials to Tier 1 suppliers, such as metal castings, plastics, and specialized electronics.

3. Tier 3 suppliers: Suppliers of raw materials or basic components used by Tier 2 suppliers, such as steel, rubber, and chemicals.

Downstream

Once materials and components from the upstream value chain go through your company's activities, they are transformed into finished products (or services). These products will go to different customers and might end up into different markets.

To create the downstream part of the value chain, the next step is to identify the main uses of your product. Understanding the markets into which the product is sold will provide insights into the product's usage. Ask yourself:

• Who are our primary customers?

• Which regions or industries do we primarily serve?

• What are the main uses of our products in these markets?

After identifying the main uses, the next step is to determine the end-of-life treatment of your products. This involves understanding what happens to your products after their useful life. Consider:

• How are the products disposed of or recycled?

• Are there components that can be reused or repurposed?

For some products, determining the end-of-life phase is straightforward. For example, a beverage company might know that its bottles are typically recycled. However, for products with numerous components, like cars, this process can be more complex. Here are a few tips for handling complexity:

• Component analysis: Break down the product into its main components and trace each component’s end-of-life path.

• Industry standards: Refer to industry standards and practices for end-of-life management.

• Customer feedback: Gather information from customers about how they dispose of or recycle your products.

Example car manufacturer

For a car manufacturer, mapping the downstream value chain would involve:

• Identifying key markets such as North America, Europe, and Asia.

• Understanding the primary uses of cars in these markets (e.g., personal or commercial use).

• Investigating the end-of-life process for cars, which might include dismantling for parts, recycling of metals, and disposal of non-recyclable components.

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Identifying and engaging stakeholders is important in sustainability reporting, especially under the European Sustainability Reporting Standards (ESRS). Knowing who your stakeholders are and engaging with them is needed to create meaningful sustainability reports. Who stakeholders are and why to engage them, is covered in another article. This guide will walk you through the methodology to identify and engage stakeholders.

2. Identifying stakeholders

Before you start identifying the stakeholders, it is important to understand what stakeholders under the CSRD are. Stakeholders are individuals or groups either affected by or affecting the company's operations. They fall into two main categories:

1. Affected stakeholders: Employees, suppliers, customers, local communities, public authorities, and so on.

2. Users of sustainability statements: Investors, lenders, business partners, trade unions, NGOs, government bodies, and so on.

It’s important to note that stakeholders can belong to one or both of these categories.

To begin identifying stakeholders, start by reviewing existing sources within your organization:

• Internal documents: Review company reports, meeting minutes, and project documents.

• Employee input: Gather insights from employees across different departments.

• Previous engagements: Look at records from past stakeholder engagements or consultations.

• Industry benchmarks: Consider stakeholders identified by similar companies or industry reports.

These sources might yield an initial list of stakeholders.. To create a more comprehensive list you can use the following stakeholder groups:

You may need to add or remove several stakeholder groups based on the specific context of your organization. Once you have all stakeholder groups, it is time to identify stakeholders within these groups.

Identifying every single stakeholder can be overwhelming and unnecessary. Instead, it would help if you focused on the most important stakeholders in each group. To determine the most important stakeholders, consider the following aspects:

1. Impact: The degree to which the stakeholder is affected by or can affect the company's activities.

2. Dependency: The extent to which the stakeholder depends on the company for their wellbeing or operations.

3. Responsibility: The level of responsibility the company has towards the stakeholder.

4. Tension: The potential for conflict or disagreement with the stakeholder.

5. Influence: The power or influence the stakeholder has over the company’s operations or decision-making.

Read more

In the landscape of corporate sustainability, stakeholders play a crucial role. The European Sustainability Reporting Standards (ESRS) highlight the importance of engaging with stakeholders. Let’s dive into what the ESRS says about stakeholders and why they are so important.

2. Who are stakeholders?

Stakeholders are individuals or groups affected by or affecting a company's operations. According to the ESRS, stakeholders can be categorized into two groups:

1. Affected stakeholders: These are people or entities directly or indirectly impacted by a company’s activities. They include employees, suppliers, customers, local communities, public authorities, and so on.

2. Users of sustainability statements: These stakeholders are interested in the company’s sustainability performance for various reasons, including financial decisions. They include investors, lenders, trade unions, NGO’s and so on.

A stakeholder can belong to one or both of these groups. Interestingly, the ESRS recognizes nature as a "silent stakeholder." This means companies may consider ecological data and species conservation information in their materiality assessments.

3. Engaging with stakeholders

The ESRS emphasizes that stakeholder engagement is not just a box-ticking exercise but a critical component of the materiality assessment process. Here's why:

1. Identifying material issues: Engaging with stakeholders helps companies understand the key ESG (Environmental, Social, and Governance) issues that are important to those affected by or interested in the company's operations.

2. Informing strategy: Stakeholder feedback can provide valuable insights that shape the company’s sustainability strategy and business model. By considering stakeholder perspectives, companies can make informed decisions that align with stakeholder expectations.

3. Building trust: Transparent and continuous engagement with stakeholders builds trust and strengthens the company’s reputation. It shows that the company values the input of those it affects and is committed to addressing their concerns.

4. Requirements

The ESRS does not require specific behavior on stakeholder engagement or the due diligence process, but it requires companies to disclose how they incorporate stakeholder views into their strategy and business model. Here’s what companies need to do:

• Describe the engagement process: Companies must explain how they engage with stakeholders, including the methods used (e.g., surveys, interviews, workshops) and the frequency of engagement.

• Identify key stakeholders: Companies should list the key stakeholders involved in the engagement process and explain why they are relevant.

• Summarize feedback and actions: Companies must summarize the main feedback received from stakeholders and how it has influenced their sustainability strategy and operations. This includes any changes made to address stakeholder concerns.

5. Conclusion

Stakeholders are an essential component of the ESRS approach to sustainability reporting. Engaging with stakeholders not only helps in meeting regulatory requirements but also builds trust and credibility with stakeholders. By listening to and addressing the concerns of stakeholders, companies can drive positive change and achieve long-term success in the sustainability journey.

In an upcoming article, we will explore how companies can identify stakeholders. Subscribe to stay updated.

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Relevant Standards

EFRAG IG 1: Materiality Assessment Implementation Guidance

3.5 Role and approach to stakeholders in the materiality assessment process

101. Stakeholders are classified into the following two groups: affected stakeholders and users of the sustainability statement6 (ESRS 1 paragraph 22). Some, but not all, stakeholders may belong to both groups (ESRS 1 paragraph 23).

102. ESRS 2 requires transparency on the undertaking’s consultation with affected stakeholders (IRO-1 paragraph 53 (b)(iii)). Even though the ESRS do not mandate behaviour, the undertaking is required to disclose whether and how the materiality assessment process identifies and assesses its impacts, including consultation with affected stakeholders, to understand how they may be impacted.

103. The outcome of the undertaking’s ongoing due diligence processes that are in place is generally useful to inform the materiality assessment. However, the ESRS do not impose due diligence processes for the purposes of reporting only.

104. In particular, the ESRS clarify that the materiality assessment process is informed by the due diligence process, per the international due diligence instruments. These are the OECD Guidelines for Multinational Enterprises (MNE Guidelines) and the UN Guiding Principles on Business and Human Rights (UNGPs). The engagement with affected stakeholders is central to the undertaking’s due diligence and impact assessment (ESRS 1 paragraph 24). The undertaking may engage with affected stakeholders or experts to provide input or feedback on the conclusions of the materiality assessment (ESRS 1 AR 8). Such engagement may provide evidence or insights into actual or potential impacts on people and the environment connected to the undertaking. Social dialogue with workers’ representatives at the undertaking level is regulated at both European Union and national levels. Under the Accounting Directive 2013/34/EU (as amended by the CSRD), Member States have to require undertakings to inform the workers’ representatives about sustainability reporting and to discuss with them the relevant information and the means of obtaining and verifying it.

105. Engagement – for example, consulting with affected stakeholders and incorporating their views into the materiality assessment – helps to substantiate their perspectives when determining the relevance of sustainability matters to them. For example, this includes engaging with the undertaking’s employees and/or their representatives on health and safety matters. Such engagement also includes feedback received from affected stakeholders from ongoing processes of engagement as part of the undertaking’s business practices.

106. When performing the materiality assessment, an undertaking may leverage on its regular dialogue with affected stakeholders or may reach out to stakeholders specifically in the context of its reporting process.

107. Dialogue with affected stakeholders may assist during various steps of the materiality assessment. However, separate engagement with affected stakeholders in each step of the materiality assessment is not necessary, as undertakings may already have ongoing engagement with them to use. As mentioned in paragraph 69 of step A, the mapping of affected stakeholders and, where possible, prioritising them could be the first step. As part of step B, the undertaking may engage with them or build on past or ongoing engagement to map the impacts that they experience. Finally, in step C the undertaking may involve affected stakeholders in the assessment of the severity and likelihood of negative impacts that are relevant for them as well as, for example, in the case of particularly severe impacts in validating or providing feedback on impacts that have been assessed by the undertaking as material (refer to ESRS 1 paragraph AR 8).

108. In situations where engagement with affected stakeholders is not possible (for instance, because such engagement would put them at risk), the undertaking may consider appropriate alternatives. This may include consulting credible independent experts (ESRS S3 Affected communities), a Non-Governmental Organisation (NGO) representing this affected community, or for environmental matters, scientific articles and reports. 109. A source for impact materiality is scientific research, particularly for environmental matters, where credible scientific reports and other sources may be key to objectively assess the severity and/or likelihood of impacts.

110. Chapter 5.4 FAQ on stakeholder engagement provides further guidance on this matter.

5.4 FAQs on stakeholder engagement - Impact materiality

FAQ 15: Do the ESRS mandate to actively engage in dialogue with affected stakeholders for the materiality assessment process?

197. The ESRS require disclosure on the materiality assessment and its outcomes but do not mandate specific behaviour on stakeholder engagement or the due diligence process.

198. However, ESRS 1 paragraph 45 states that the impact materiality assessment is informed by the undertaking’s due diligence process. In addition, ESRS 1 paragraph 24 points to affected stakeholders’ engagement as central to the materiality assessment. Engagement with affected stakeholders is a tool that supports the undertaking’s business processes (for example, due diligence) as well as the management of sustainability matters. The undertaking, when preparing its sustainability statement, can leverage its engagement with affected stakeholders per its due diligence process, if applicable.

199. Stakeholder engagement informs the identification and assessment of material impacts. This can help the assessment of severity, likelihood and time horizons and also ensure the completeness of the material impacts identified. Refer to Chapter 3.5 Role and approach to stakeholders in the materiality assessment.

FAQ 16: Can the undertaking prioritise some categories of stakeholders for the materiality assessment process? How?

200. Engagement with affected stakeholders helps the undertaking to understand which sustainability matters are sources of concern for the respective stakeholders and how they are affected. This information may be useful input for the assessment. For further information, see Chapter 3.5 Role and approach to stakeholders in the materiality assessment.

201. ESRS 1 paragraph 22(a) states: ‘affected stakeholders: the individuals or groups whose interests are affected or could be affected – positively or negatively – by the undertaking’s activities and its direct and indirect business relationships across its value chain’. The concept of ‘key stakeholders’ (or ‘relevant stakeholders’, per international instruments) rests on the idea that not all stakeholders will be equally affected by the undertaking’s activities. Furthermore, the undertaking is to identify which stakeholders’ views are to be taken into account in connection with a specific activity. It also builds upon the idea that the degree of impact on stakeholders may inform the degree of engagement specifically for prioritisation.

202. The undertaking may consider engaging stakeholders or their representatives to determine whether they are affected or not if not obvious.

203. The undertaking may not engage with all the stakeholders for all sustainability matters. Engagement with stakeholders who are not affected by the specific sustainability matter is not meaningful. Therefore, the undertaking may engage with different groups of affected stakeholders for different matters.

FAQ 17: What is the role of silent stakeholders and how should they be considered?

204. There may be stakeholders who cannot voice their concerns, and in the ESRS nature has been identified as a silent stakeholder (ESRS 1 paragraph AR 7). Nature is an essential part of the sustainability context of the undertaking and the value chain it operates in. Nature, unlike other stakeholders, cannot voice its concerns on its own, neither verbally nor in writing. Data from scientific sources (e.g., scientific studies on the planetary boundaries or scientifically validated data) may give nature a voice as it may explain the state of nature, such as the health of bird populations, the state of water bodies or the condition of a forest.

205. Channels monitoring the concerns of silent stakeholders can provide valuable input to the materiality assessment for impacts, dependencies and, where applicable, the subsequent risks and opportunities for the undertaking.

206. Examples on considering silent stakeholders could include:
(a) identifying the silent stakeholders likely to be impacted by the undertaking’s activities and the actual and associated potential impacts of the undertaking;
(b) research to understand the potential or actual impacts on these stakeholders, such as reviews of scientific studies, articles and environmental impact assessments. Such research can be at a global level (e.g., planetary boundaries for biodiversity) or at a local level (e.g., via its impact on stressed water bodies or by identifying the type of species impacted);
(c) using proxies such as organisations that are legitimate representatives of, or that are considered by the undertaking to appropriately represent, the silent stakeholder. For considerations about nature, the undertaking may consider organisations that assess the current and future state of the ecosystem, water resources or climate; and (d) testing the results of the estimated potential impacts based on experts’ consultation, collaborative partnership with NGOs and other stakeholders.

ESRS 1

3. Double materiality as the basis for sustainability disclosures

21. The undertaking shall report on sustainability matters based on the double materiality principle as defined and explained in this chapter.

3.1 Stakeholders and their relevance to the materiality assessment process

22. Stakeholders are those who can affect or be affected by the undertaking. There are two main groups of stakeholders:
(a) affected stakeholders: individuals or groups whose interests are affected or could be affected – positively or negatively – by the undertaking’s activities and its direct and indirect business relationships across its value chain; and
(b) users of sustainability statements: primary users of general-purpose financial reporting (existing and potential investors, lenders and other creditors, including asset managers, credit institutions, insurance undertakings), and other users of sustainability statements, including the undertaking’s business partners, trade unions and social partners, civil society and non-governmental organisations, governments, analysts and academics.

23. Some, but not all, stakeholders may belong to both groups referred to in paragraph 22.

24. Engagement with affected stakeholders is central to the undertaking’s on-going due diligence process (see chapter 4 Due diligence) and sustainability materiality assessment. This includes its processes to identify and assess actual and potential negative impacts, which then inform the assessment process to identify the material impacts for the purposes of sustainability reporting (see section 3.4 of this Standard).

Companies must disclose environmental, social, and governance (ESG) impacts. However, not every ESG topic is relevant for each company. To identify relevant ESG topics a company can perform a materiality assessment. Materiality assessment is the process through which a company determines which sustainability topics are most significant to its operations and stakeholders. These significant topics, are the ones that the company needs to report on.

This article aims to explain what a materiality assessment is. How a company can perform a materiality assessment will be covered in another article.

2. Materiality Assessment

The ESRS approach to materiality is rooted in the concept of double materiality. Double materiality requires companies to report not only on how external factors impact their business, but also how their business activities impact the environment and society:

Impact materiality

This looks at how a company's operations affect people and the environment. When assessing the materiality of an impact, one should consider its severity and likelihood. The severity of the impact is based on the scale, scope, and remediability:

• Scale: This indicates how serious the impact is, considering how it affects fundamental needs and rights such as access to education, livelihood, or basic life necessities. For example, the pollution caused by a multinational corporation contributing to global pollution is much more severe compared to the pollution from a small local company affecting only its immediate surroundings.

• Scope: This indicates the extent of the impact, particularly the number of individuals affected or the extent of environmental damage. For instance, assessing how a company’s waste management practices affect local communities, wildlife, and the broader ecosystem gives a clear picture of the scope of the impact.

• Remediability: This assesses whether the impact can be undone or mitigated. Irremediable impacts are those that cause lasting or irreversible harm. For example: Permanent loss of biodiversity due to deforestation versus temporary air pollution that can be reduced through cleaner technologies.

To decide what should be considered, a distinction is made between actual and potential impacts and between positive and negative impacts.

Actual positive impact: scale and scope.
Potential positive impact: scale, scope, and likelihood.
Actual negative impact: scale, scope, remediability.
Potential negative impact: scale, scope, remediability, and likelhood.

Financial materiality

This perspective focuses on how ESG issues affect the company's financial health, including performance, cash flow, and access to capital. It’s of particular interest to investors, lenders, and suppliers. It includes both risks and opportunities. Risks affect the company negatively, while opportunities affect the company positively.

Key aspects of financial materiality include:

1. Financial performance: This looks at how sustainability matters impact the company’s revenues, expenses, and profitability. For example: A company’s reputation for sustainable practices could boost sales and customer loyalty, while failure to comply with environmental regulations could result in fines and increased operational costs.

2. Financial position: This involves the company’s assets, liabilities, and equity. Sustainability factors can affect the valuation of these elements. For example: Environmental liabilities due to contamination requiring cleanup could decrease the value of a company's assets.

3. Cash flows: This perspective examines how sustainability issues affect the company's inflow and outflow of cash, which is critical for maintaining operations. For example: Investments in energy-efficient technologies may initially increase capital expenditures but lead to long-term savings and positive cash flows.

4. Access to finance: This looks at the company’s ability to secure funding and the cost of capital. Companies with robust sustainability practices may find it easier to attract investors and secure loans at favorable rates. For example: Banks and investors increasingly favor companies with strong ESG credentials, potentially reducing the cost of capital for such firms.

Scale of financial materiality

The scale of financial materiality can be assessed by looking at the magnitude and likelihood:

Magnitude refers to how big the financial effects of an ESG issue could be on a company. This can be measured in terms of money and considered over different time frames:

• Short-term: What impact will this issue have on the company's finances in the near future (e.g., the next year)?

• Medium-term: What financial effects will it have in the somewhat distant future (e.g., the next 2-5 years)?

• Long-term: How will this issue affect the company's financial situation far into the future (e.g., beyond 5 years)?

Likelihood is about the chances that an ESG issue will actually lead to financial effects. It's the probability that a risk or an opportunity will happen within a certain time frame.

• If the likelihood is high, it means there’s a strong chance that the financial effect will occur.

• If the likelihood is low, it means there’s a smaller chance that the financial effect will happen.

For example, if a company operates in a flood-prone area, the likelihood would assess how probable it is that flooding will cause financial damage to the company within the next few years.

3. Requirements

Performing a materiality assessment involves among others these important requirements:

1. Inclusion of entire value chain: Companies must consider their entire value chain, including both upstream (suppliers) and downstream (customers) impacts.

2. Stakeholder engagement: Engaging with affected stakeholders is important to understand the significance of various sustainability matters. This engagement helps discover the materiality of impacts from the perspective of those affected.

3. Structured process: While the ESRS does not mandate a specific process, companies are expected to follow a structured approach that reflects their unique circumstances.

4. Documentation: Companies must disclose the processes used to identify and assess material topics.

5. Topics: Companies must at least consider all the topics presented in ESRS 1, which are more than 90 (including the sub-sub-topics as they are called in ESRS 1). For example, there are 5 environmental topics, these topics include sub-topics (i.e. climate change adaptation, climate change mitigation, and energy). Meanwhile, sub-topics can have their own sub-topics, the so-called sub-sub-topics.

   

4. Conclusion

Making a value chain is followed by performing a materiality assessment. A materiality assessment is essential to ensure that companies provide meaningful sustainability information. By understanding what is required and following a structured approach, companies can effectively identify and report on the ESG topics that are relevant to them.

In an upcoming article, we will explore how companies can perform a materiality assessment. Subscribe to stay updated.

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Relevant Standards

EFRAG IG 1: Materiality Assessment Implementation Guidance

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ESRS 1

3. Double materiality as the basis for sustainability disclosures

21. The undertaking shall report on sustainability matters based on the double materiality principle as defined and explained in this chapter.

3.1 Stakeholders and their relevance to the materiality assessment process

22. Stakeholders are those who can affect or be affected by the undertaking. There are two main groups of stakeholders:
(a) affected stakeholders: individuals or groups whose interests are affected or could be affected – positively or negatively – by the undertaking’s activities and its direct and indirect business relationships across its value chain; and
(b) users of sustainability statements: primary users of general-purpose financial reporting (existing and potential investors, lenders and other creditors, including asset managers, credit institutions, insurance undertakings), and other users of sustainability statements, including the undertaking’s business partners, trade unions and social partners, civil society and non-governmental organisations, governments, analysts and academics.

23. Some, but not all, stakeholders may belong to both groups referred to in paragraph 22.

24. Engagement with affected stakeholders is central to the undertaking’s on-going due diligence process (see chapter 4 Due diligence) and sustainability materiality assessment. This includes its processes to identify and assess actual and potential negative impacts, which then inform the assessment process to identify the material impacts for the purposes of sustainability reporting (see section 3.4 of this Standard).

3.2 Material matters and materiality of information

25. Performing a materiality assessment (see sections 3.4 Impact materiality and 3.5 Financial materiality) is necessary for the undertaking to identify the material impacts, risks and opportunities to be reported.

26. Materiality assessment is the starting point for sustainability reporting under ESRS. IRO-1 in section 4.1 of ESRS 2, includes general disclosure requirements about the undertaking’s process to identify impacts, risks and opportunities and assess their materiality. SBM-3 of ESRS 2 provides general disclosure requirements on the material impacts, risks and opportunities resulting from the undertaking’s materiality assessment.

27. The Application Requirements in Appendix A of this Standard include a list of sustainability matters covered in topical ESRS, categorised by topics, sub-topics and sub-sub-topics, to support the materiality assessment. Appendix E Flowchart for determining disclosures to be included of this Standard provides an illustration of the materiality assessment described in this section.

28. A sustainability matter is “material” when it meets the criteria defined for impact materiality (see section 3.4 of this Standard) or financial materiality (see section 3.5 of this Standard), or both.

29. Irrespective of the outcome of its materiality assessment, the undertaking shall always disclose the information required by: ESRS 2 General Disclosures (i.e. all the Disclosure Requirements and data points specified in ESRS 2) and the Disclosure Requirements 6 (including their datapoints) in topical ESRS related to the Disclosure Requirement IRO-1 Description of the process to identify and assess material impacts, risks and opportunities, as listed in ESRS 2 Appendix C Disclosure/Application Requirements in topical ESRS that are applicable jointly with ESRS 2 General Disclosures.

30. When the undertaking concludes that a sustainability matter is material as a result of its materiality assessment, on which ESRS 2 IRO-1, IRO-2 and SBM-3 set disclosure requirements, it shall:
(a) disclose information according to the Disclosure Requirements (including Application Requirements) related to that specific sustainability matter in the corresponding topical and sector-specific ESRS; and
(b) disclose additional entity-specific disclosures (see paragraph 11 and AR 1 to AR 5 of this Standard) when the material sustainability matter is not covered by an ESRS or is covered with insufficient granularity.

31. The applicable information prescribed within a Disclosure Requirement, including its datapoints, or an entity-specific disclosure, shall be disclosed when the undertaking assesses, as part of its assessment of material information, that the information is relevant from one or more of the following perspectives:
(a) the significance of the information in relation to the matter it purports to depict or explain; or
(b) the capacity of such information to meet the users’ decision-making needs, including the needs of primary users of general-purpose financial reporting described in paragraph 48 and/or the needs of users whose principal interest is in information about the undertaking’s impacts.

32. If the undertaking concludes that climate change is not material and therefore omits all disclosure requirements in ESRS E1 Climate change, it shall disclose a detailed explanation of the conclusions of its materiality assessment with regard to climate change (see ESRS 2 IRO-2 Disclosure Requirements in ESRS covered by the undertaking’s sustainability statement), including a forward-looking analysis of the conditions that could lead the undertaking to conclude that climate change is material in the future. If the undertaking concludes that a topic other than climate change is not material and therefore it omits all the Disclosure Requirements in the corresponding topical ESRS, it may briefly explain the conclusions of its materiality assessment for that topic.

33. When disclosing information on policies, actions and targets in relation to a sustainability matter that has been assessed to be material, the undertaking shall include the information prescribed by all the Disclosure Requirements and datapoints in the topical and sector-specific ESRS related to that matter and in the corresponding Minimum Disclosure Requirement on policies, actions, and targets required under ESRS 2. If the undertaking cannot disclose the information prescribed by either the Disclosure Requirements and datapoints in the topical or sector-specific ESRS, or the Minimum Disclosure Requirements in ESRS 2 on policies, actions and targets, because it has not adopted the respective policies, implemented the respective actions or set the respective targets, it shall disclose this to be the case and it may report a timeframe in which it aims to have these in place.

34. When disclosing information on metrics for a material sustainability matter according to the Metrics and Targets section of the relevant topical ESRS, the undertaking:
(a) shall include the information prescribed by a Disclosure Requirement if it assesses such information to be material; and
(b) may omit the information prescribed by a datapoint of a Disclosure Requirement if it assesses such information to be not material and concludes that such information is not needed to meet the objective of the Disclosure Requirement.

35. If the undertaking omits the information prescribed by a datapoint that derives from other EU legislation listed in Appendix B of ESRS 2, it shall explicitly state that the information in question is “not material”.

36. The undertaking shall establish how it applies criteria, including appropriate thresholds, to determine:
(a) the information it discloses on metrics for a material sustainability matter according to the Metrics and Targets section of the relevant topical ESRS, in accordance with paragraph 34; and
(b) the information to be disclosed as entity-specific disclosures.

3.3 Double materiality

37. Double materiality has two dimensions, namely: impact materiality and financial materiality. Unless specified otherwise, the terms “material” and “materiality” are used throughout ESRS to refer to double materiality.

38. Impact materiality and financial materiality assessments are inter-related and the interdependencies between these two dimensions shall be considered. In general, the starting point is the assessment of impacts, although there may also be material risks and opportunities that are not related to the undertaking’s impacts. A sustainability impact may be financially material from inception or become financially material, when it could reasonably be expected to affect the undertaking’s financial position, financial performance, cash flows, its access to finance or cost of capital over the short-, medium- or long-term. Impacts are captured by the impact materiality perspective irrespective of whether or not they are financially material.

39. In identifying and assessing the impacts, risks and opportunities in the undertaking’s value chain to determine their materiality, the undertaking shall focus on areas where impacts, risks and opportunities are deemed likely to arise, based on the nature of the activities, business relationships, geographies or other factors concerned.

40. The undertaking shall consider how it is affected by its dependencies on the availability of natural, human and social resources at appropriate prices and quality, irrespective of its potential impacts on those resources.

41. An undertaking’s principal impacts, risks and opportunities are understood to be the same as the material impacts, risks and opportunities identified under the double materiality principle and therefore reported on in its sustainability statement.

42. The undertaking shall apply the criteria set under sections 3.4 and 3.5 in this Standard, using appropriate quantitative and/or qualitative thresholds. Appropriate thresholds are necessary to determine which impacts, risks and opportunities are identified and addressed by the undertaking as material and to determine which sustainability matters are material for reporting purposes. Some existing standards and frameworks use the term "most significant impacts” when referring to the threshold used to identify the impacts that are described in ESRS as "material impacts."

3.4 Impact materiality

43. A sustainability matter is material from an impact perspective when it pertains to the undertaking’s material actual or potential, positive or negative impacts on people or the environment over the short-, medium- or long-term. Impacts include those connected with the undertaking’s own operations and upstream and downstream value chain, including through its products and services, as well as through its business relationships. Business relationships include those in the undertaking’s upstream and downstream value chain and are not limited to direct contractual relationships.

44. In this context, impacts on people or the environment include impacts in relation to environmental, social and governance matters.

45. The materiality assessment of a negative impact is informed by the due diligence process defined in the international instruments of the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises. For actual negative impacts, materiality is based on the severity of the impact, while for potential negative impacts it is based on the severity and likelihood of the impact. Severity is based on the following factors:
(a) the scale;
(b) scope; and
(c) irremediable character of the impact.
In the case of a potential negative human rights impact, the severity of the impact takes precedence over its likelihood.

46. For positive impacts, materiality is based on:
(a) the scale and scope of the impact for actual impacts; and
(b) the scale, scope and likelihood of the impact for potential impacts.

3.5 Financial materiality

47. The scope of financial materiality for sustainability reporting is an expansion of the scope of materiality used in the process of determining which information should be included in the undertaking’s financial statements.

48. The financial materiality assessment corresponds to the identification of information that is considered material for primary users of general-purpose financial reports in making decisions relating to providing resources to the entity. In particular, information is considered material for primary users of general-purpose financial reports if omitting, misstating or obscuring that information could reasonably be expected to influence decisions that they make on the basis of the undertaking’s sustainability statement.

49. A sustainability matter is material from a financial perspective if it triggers or could reasonably be expected to trigger material financial effects on the undertaking. This is the case when a sustainability matter generates risks or opportunities that have a material influence, or could reasonably be expected to have a material influence, on the undertaking’s development, financial position, financial performance, cash flows, access to finance or cost of capital over the short-, medium- or long-term. Risks and opportunities may derive from past events or future events. The financial materiality of a sustainability matter is not constrained to matters that are within the control of the undertaking but includes information on material risks and opportunities attributable to business relationships beyond the scope of consolidation used in the preparation of financial statements.

50. Dependencies on natural, human and social resources can be sources of financial risks or opportunities. Dependencies may trigger effects in two possible ways:
(a) they may influence the undertaking’s ability to continue to use or obtain the resources needed in its business processes, as well as the quality and pricing of those resources; and
(b) they may affect the undertaking’s ability to rely on relationships needed in its business processes on acceptable terms.

51. The materiality of risks and opportunities is assessed based on a combination of the likelihood of occurrence and the potential magnitude of the financial effects.

3.6 Material impacts or risks arising from actions to address sustainability matters

52. The undertaking’s materiality assessment may lead to the identification of situations in which its actions to address certain impacts or risks, or to benefit from certain opportunities in relation to a sustainability matter, might have material negative impacts or cause material risks in relation to one or more other sustainability matters. For example:
(a) an action plan to decarbonise production that involves abandoning certain products might have material negative impacts on the undertaking’s own workforce and result in material risks due to redundancy payments; or
(b) an action plan of an automotive supplier to focus on the supply of e-vehicles might lead to stranded assets for the production of supply parts for conventional vehicles.

53. In such situations, the undertaking shall:
(a) disclose the existence of material negative impacts or material risks together with the actions that generate them, with a cross-reference to the topic to which the impacts or risks relate; and
(b) provide a description of how the material negative impacts or material risks are addressed under the topic to which they relate.

3.7 Level of disaggregation

54. When needed for a proper understanding of its material impacts, risks and opportunities, the undertaking shall disaggregate the reported information:
(a) by country, when there are significant variations of material impacts, risks and opportunities across countries and when presenting the information at a higher level of aggregation would obscure material information about impacts, risks or opportunities; or
(b) by significant site or by significant asset, when material impacts, risks and opportunities are highly dependent on a specific location or asset.

55. When defining the appropriate level of disaggregation for reporting, the undertaking shall consider the disaggregation adopted in its materiality assessment. Depending on the undertaking’s specific facts and circumstances, a disaggregation by subsidiary may be necessary.

56. Where data from different levels, or multiple locations within a level, is aggregated, the undertaking shall ensure that this aggregation does not obscure the specificity and context necessary to interpret the information. The undertaking shall not aggregate material items that differ in nature.

57. When the undertaking presents information disaggregated by sectors, it shall adopt the ESRS sector classification to be specified in a delegated act adopted by the Commission pursuant to article 29b(1) third subparagraph, point (ii), of Directive 2013/34/EU. When a topical or sector-specific ESRS requires that a specific level of disaggregation is adopted in preparing a specific item of information, the requirement in the topical or sector-specific ESRS shall prevail.