1. Introduction
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:
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.
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:
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.
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.
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.
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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).