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Introduction.
In 2022, the European Commission adopted the Corporate Sustainability Reporting Directive (CSRD), requiring companies based in the European Union (EU) to disclose relevant economic, social, and governance (ESG) information to standardize and improve the quality of ESG disclosure. This reporting is based on standards defined in the European Sustainability Reporting Standard (ESRS), which came into effect in January 2024, and companies operating in the EU are expected to progressively comply according to the categories of companies defined by the CSRD For more information on the CSRD, please seethis way (direction close to the speaker or towards the speaker)For more information on the meaning of CSRD for Japanese companies, please see the followingthis way (direction close to the speaker or towards the speaker)Please see.
The ESRS consists of two cross-cutting standards - ESRS General Requirements, and ESRS2 General Disclosures - that are mandatory for all companies that comply with the CSRD. ESRS1 and ESRS2 establish the general principles of disclosure, including a description of terminology, assessment criteria, data collection, and analytical methods, and What are the specific roles of ESRS1 and ESRS2?this way (direction close to the speaker or towards the speaker)article. Apart from the general ESRS 1 and ESRS 2, the ESRS consists of 10 topical standards covering environmental, social and governance topics.
Figure 1: ESRS disclosure structure
According to the procedures outlined in ESRS1 and ESRS2, companies are encouraged to prioritize reporting on ESG topics identified as material through a dual materiality assessment, rather than covering all possible issues, or environment, a topic is considered material if it has a significant impact on the business model, key stakeholders, or the environment. This article will focus on social and governance disclosures.
Social Disclosure
ESRS social disclosures cover policies, actions, metrics, and targets related to a company's impact on four affected stakeholder groups: its own workers (S1), workers in the value chain (S2), affected communities (S3), and consumers (S4). This section describes S1-S4 disclosures in more detail and provides examples of how companies can use S1-S4 disclosures in their sustainability reporting.
S1 defines the information that companies must report on their internal workforce: for the scope of the ESRS, "internal workforce" refers to employees and non-employees (contract workers, freelancers, temporary workers, etc.) and covers 17 subtopics, including working conditions, equal treatment, occupational safety and employee engagement. Coverage. Companies are required to focus only on those disclosures that are determined to be necessary in a dual materiality assessment.
Table 1: Summary of S1 Disclosures
| Disclosure Requirements | title | Contents |
| S1-1 | policy | Disclosures regarding the company's policies for managing significant impacts on its workforce, including human trafficking, forced and compulsory labor, child labor, and accident prevention. Covers the company's commitment to human rights and compliance with international frameworks. |
| S1-2 | engagement | Disclosure regarding engagement with employees, including vulnerable groups, in discussions of significant positive or negative impacts. |
| S1-3 | Improvement of adverse effects | Disclosures regarding the company's mechanisms available to employees to raise concerns about negative impacts and how the company addresses such concerns. |
| S1-4 | Specific actions for impact management | Disclosures regarding the process the firm uses to identify significant impacts on employees and to take initiatives to create positive impacts and mitigate or correct negative impacts. In addition, the firm must disclose how it assesses the effectiveness of such actions. |
| S1-5 | Indicators and Targets | Objectives related to managing significant negative impacts, promoting positive impacts, and managing significant risks and opportunities. |
Let's look at a hypothetical example of how a company might structure S1-related disclosures in the context of workplace safety.
| Company C complies with the CSRD and has published a sustainability statement in accordance with the ESRS. After conducting a dual materiality assessment, Company C found that workplace safety was a key issue, and to address this, Company C disclosed its existing practices in accordance with ESRS S1 standards: S1-1 & S1-3: Policies and remedies Disclosed information on human rights policies addressing forced labor and accident prevention, and described avenues for employees to report grievances. S1-4 Response to Impact: Company C publicly announced that it had implemented safety improvements based on a risk assessment of the work environment and introduced health initiatives targeting socially vulnerable groups. S1-5 & S1-14 Indicators & Objectives: Company C set a goal of reducing occupational accidents by 30% over the next two years and disclosed health and safety data, including accident rates and improvement measures. S1-13 Training and Skills: Company C initiated a mandatory safety training program for its employees, broken down by gender and job function. These measures not only address existing workplace risks, but also set future goals, strengthen employee confidence and morale, and demonstrate the company's commitment to ethical and sustainable practices. |
- S2 expands the scope of S1 to include impacts on workers throughout a company's value chain. The definition of "value chain workers" here is as follows. :
- Workers for outsourced services (e.g., third-party catering, security).
- Contract supplier workers.
- Workers in downstream organizations who purchase goods and services from the firm.
- An employee of an equipment supplier who performs maintenance on the supplier's equipment.
- Workers who work deeper in the supply chain, extracting and processing raw materials that are later used to manufacture products.
The structure of S2 mirrors S1 and covers five subthemes: policy (S2-1); engagement process (S2-2); remediation of negative impacts (S2-3); management of material impacts, risks, and opportunities (S2-4); and metrics and targets (S2-5).
Table 2: Summary of S2 Disclosures
| Disclosure Requirements | title | Contents |
| S2-1 | policy | Disclosure requirements on how company policies address value chain workers. This section emphasizes the importance of strong policies that protect human rights and effectively engage with value chain workers. |
| S2-2 | engagement | A disclosure requirement to clarify the engagement process with workers in the value chain and their representatives. This is intended to ensure that workers' perspectives are considered in decision-making. Companies must describe their general engagement process, including whether they interact directly with workers or through their representatives, the stage and frequency of engagement, and who is responsible for these efforts at the senior level. In addition, companies must share the steps they have taken to engage marginalized workers and, if a process is not currently established, provide a timeframe for its establishment. |
| S2-3 | Improvement of adverse effects | Urging companies to clarify their processes for correcting negative impacts on workers in the value chain. Emphasizing the importance of establishing channels through which workers can share their concerns and needs directly with companies. Companies must explain their existing cooperative processes, including remedies for harm that has occurred, specific channels available for communication, and how these channels are supported and monitored. |
| S2-4 | Specific actions for impact management | Focus on managing significant impacts, risks, and opportunities related to people working in the value chain. Firms must describe the actions they have taken to address impacts, manage risks and opportunities, and determine appropriate responses to identified negative impacts. It must also outline planned actions to mitigate negative impacts and detail efforts aimed at creating positive impacts. In addition, the entity must explain how it monitors the effectiveness of these actions and disclose the resources allocated to manage impacts. |
| S2-5 | Indicators and Targets | Information on time-bound, results-oriented objectives set by the company to reduce negative impacts, promote positive impacts, and manage significant risks and opportunities related to chain employees. |
Let's look at a hypothetical example of how a company might structure S2-related disclosures in the context of fair wages and long hours in the supply chain .
| Through a dual materiality assessment, Company B, a global electronics manufacturer, identified fair wages and overtime as significant issues in its supply chain, particularly among workers assembling components in South Asia. In response, the company has disclosed the following information in accordance with its S2 disclosure S2-1 Value Chain Worker Related Policies: Company B has a fair wage and overtime policy that requires all suppliers to ensure that workers are paid a living wage and compensated for overtime. The policy also prohibits excessive working hours in line with international labor standards. S2-2 Collaborative process with people working in the value chain: Company B discloses engagement practices at supplier factories. The company held workshops where both workers and their representatives had the opportunity to discuss concerns about wages and overtime. In India, Company B has also successfully launched a digital platform that allows workers to provide feedback anonymously. S2-3 Adverse Impact Correction Process: Company B discloses its existing processes for remediating negative impacts. For example, Company B could provide information on how it worked with local authorities and labor rights organizations to ensure that workers affected by wage withholding and unpaid overtime are reimbursed. S2-4 Management of Significant Impacts, Risks, and Opportunities: The risk analysis conducted by Company B highlighted that temporary workers are particularly vulnerable to low wages. In response, Company B describes the actions it has taken to manage this risk and details its plans to launch an opportunity-focused initiative to assist in the transition from temporary workers to permanent employees. S2-5 Indicators and Objectives: Company B revealed that it aims to pay a living wage to 100% of its value chain workers by 2027 (current standard: 85%), reduce wage-related grievances by 50% over the next two years, and increase the percentage of temporary workers who transition to permanent employment by 20% by 2025. Through these measures, Company B is demonstrating its commitment to addressing wage and overtime issues, promoting fair treatment, and improving conditions for value chain workers. |
ESRS S3 focuses its attention on communities affected by corporate operations, including economic, social, cultural, civil and political rights. It also places particular emphasis on the rights of indigenous peoples. esrs S3 aims to understand the impacts on communities, implement measures to mitigate adverse impacts, and manage associated risks and opportunities.
Table 3: Summary of S3 Disclosures
| Disclosure Requirements | title | Contents |
| S3-1 | policy | This section requires detailed disclosure in corporate policies on how they address risks and opportunities, particularly with respect to indigenous peoples, and requires consistency with internationally recognized human rights principles. |
| S3-2 | engagement | Companies must disclose their engagement process, including communication methods, frequency of interactions, and how community perspectives are reflected in decision-making at the company level. The perspectives of marginalized groups and indigenous peoples must also be mentioned. If an engagement process is not in place, a timeline for establishing it must be provided. |
| S3-3 | Improvement of adverse effects | Require the company to detail its processes for addressing negative impacts and evaluate their effectiveness. The firm must describe specific means for community feedback and explain how it monitors the issues raised. It must also assess whether the community is aware of and trusts these measures. |
| S3-4 | Specific actions for impact management | The firm's approach to addressing significant impacts on affected communities by detailing actions taken to prevent, reduce, or ameliorate negative impacts and initiatives to achieve positive outcomes. Disclosures should include the firm's methods for monitoring and evaluating these actions. In addition, the disclosure should include disclosure of serious human rights issues relevant to affected communities. |
| S3-5 | Indicators and Targets | Clear, time-based goals set by the company to track progress in reducing negative impacts, promoting positive impacts, and managing associated risks and opportunities for affected communities. |
| Company D complies with the CSRD and publishes its sustainability statement in accordance with ESRS standards. A dual materiality assessment revealed that the company's operations have had a significant negative impact on local communities, as deforestation caused by Company D's supply chain activities has forced local indigenous people to displace and restricted their hunting and gathering opportunities. The company's operations have had a significant negative impact on local communities. How did Company D deal with these impacts? S3-1 Policy: Company D details a human rights policy that addresses migration risks and respect for indigenous peoples' land rights, and is also committed to mitigating biodiversity loss. S3-2 Engagement: Company D shared its experience of conducting quarterly dialogues with affected communities using culturally appropriate formats (e.g., meetings in local languages and led by trusted community intermediaries). Indigenous groups provided feedback that led to changes in operational plans, such as rerouting the expansion project to avoid sacred sites. S3-3 Remediation of adverse effects: Company D worked with a local NGO to describe a grievance mechanism specifically designed for the socially vulnerable, including an anonymous reporting channel. interpoint (interword separation)S3-4 Specific actions: It disclosed actions it has taken to address the impacts on affected communities, including establishing reforestation programs to rebuild biodiversity, providing financial compensation to displaced families, and supporting resettlement initiatives. S3-5 Goals and Indicators: The company has set goals, including a 40% reduction in migration complaints by 2027. It also committed to monitoring progress through regular community surveys and third-party audits, and to publishing an annual update on these efforts. By addressing these impacts, Company D seeks to mitigate future damage, restore community resources, and build trust and foster cooperation with affected groups. In doing so, we also aim to clearly demonstrate our commitment to sustainable and ethical business practices. |
ESRS S4 outlines disclosure requirements regarding a company's impact on consumers and end-users. It encompasses the alignment of corporate policies with international frameworks, consumer and end-user engagement practices, and processes for identifying, addressing, and remediating adverse impacts. It also highlights the company's commitment to positive outcomes and establishes time-bound, results-oriented goals that will guide future improvements.
Table 4: Summary of S4 Disclosures
| Disclosure Requirements | title | Contents |
| S4-1 | policy | This disclosure outlines the company's policies regarding consumers and end users, focusing on how significant impacts on consumers and end users are identified, evaluated, managed, and addressed. This disclosure should include a description of policies covering the impact of products and services on consumers. It should also explain the company's commitment to human rights with respect to consumers and end-users, its alignment with international frameworks, and its reporting of violations of these frameworks. |
| S4-2 | engagement | S4-2 outlines the process for engagement with consumers and end users S4-2 requires companies to describe the general engagement process, including how they gather insights from consumers. Companies must explain how they incorporate consumer perspectives into their decision-making and their efforts to understand the views of vulnerable populations. If such a process does not exist, it must be clearly stated and indicate when it is expected to be established. |
| S4-3 | Improvement of adverse effects | Companies are required to disclose how they address adverse effects on consumers and end-users and explain the mechanisms by which consumers can raise concerns. The requirements emphasize the importance of tracking and monitoring issues raised and evaluating the effectiveness of remedies provided. In addition, companies must assess whether consumers are aware of and trust these processes. |
| S4-4 | Specific actions for impact management | S4-4 outlines the company's efforts to prevent negative impacts and create positive outcomes for consumers and end users while managing associated risks and pursuing opportunities S4-4 includes aspects such as product design, marketing, sales practices, and data use, It requires companies to explain how they identify actions needed to address negative impacts. Firms must provide an overview of their action plans and resources for managing these impacts and how they will be assessed. In addition, they are required to disclose serious human rights issues related to consumers and explain how conflicts between the prevention of negative impacts and other business pressures are handled. |
| S4-5 | Indicators and Targets | S4-5 outlines how organizations should use clear time-bound goals to track progress in reducing negative impacts, promoting positive impacts, and managing associated risks and opportunities for consumers and end users. It further states that companies should provide information on how they set goals, including whether and how they engage with consumers and end-users. |
Let's look at a case study.
| Company X is fully compliant with the CSRD and publishes consumer impact disclosures in accordance with ESRS S4. The dual materiality assessment reveals areas where the company's business adversely affects consumers, particularly in relation to data privacy violations and misleading product claims. How did Company X deal with these impacts? interpoint (interword separation)S4-1 Policy: Company X outlined a robust consumer protection policy that focuses on protecting consumer rights and ensuring transparency in marketing and product information. The policy is in line with international frameworks such as the OECD Guidelines for Multinational Enterprises. It also includes a commitment to data privacy under the GDPR and the development of a secure platform to prevent future data breaches. S4-2 Engagement -The company described its consumer engagement strategy, which includes regular surveys, focus groups, and interactive forums to gather consumer insights. Vulnerable consumer groups, such as the elderly and non-native speakers of foreign languages, were engaged through unique communication channels to ensure inclusiveness. Findings from these efforts were incorporated into revised product labeling and marketing materials. S4-3 Improvement of adverse impacts - Company X elaborated on its consumer complaint handling mechanism, accessible through an online portal. The system allows consumers to report problems anonymously and provides transparent updates on the progress of resolution. S4-4 Specific Actions -To address the identified impacts, Company X initiated a comprehensive review of its marketing and data handling practices. It revised product claims to ensure that they were scientifically supported and strengthened cybersecurity measures to prevent data breaches, including investing in advanced encryption technology. S4-5 Goals and Indicators Company X has committed to reducing consumer complaints about product claims by 30% and to zero data breaches by 2026. Progress will be monitored through quarterly reviews and independent audits, the results of which will be published in an annual sustainability report. By addressing these issues, Company X seeks to restore consumer confidence, enhance its reputation, and demonstrate its commitment to ethical and responsible business practices. These efforts underscore Company X's dedication to long-term sustainability and consumer welfare. |
Governance Disclosure
The ESRS has only one disclosure requirement on governance (G1); G1 is intended to address a company's business ethics, corporate culture, governance structure, supplier relationship management, anti-corruption measures, and payment practices.
Table 5: Summary of G1 Disclosures
| Disclosure Requirements | title | Contents |
| G1-1 | Corporate Culture Policy | G1-1 describes disclosure requirements for corporate conduct policies and how they promote corporate culture. This includes how corporate culture is fostered and evaluated, mechanisms for reporting and investigating misconduct, protection for whistleblowers, and procedures for dealing with corporate conduct incidents such as corruption and bribery. |
| G1-2 | Supplier relationship management | G1-2 outlines how the organization manages the purchasing process to ensure fair treatment of suppliers G1-2 outlines its approach to building supplier relationships, identifying supply chain risks, assessing sustainability impacts, and policies to prevent late payments, requires organizations to explain how social and environmental criteria are considered in the selection of suppliers. |
| G1-3 | Prevention and detection of corruption and bribery | G1-3 focuses on ensuring transparency of the organization's procedures for preventing, detecting, and addressing corruption and bribery. In addition, it discloses any training provided to employees regarding bribery and corruption. If no procedures are in place, the organization must disclose this and its implementation plan. |
| G1-4 | Transparency requirements on bribery and corruption | G1-4 outlines transparency requirements regarding instances of bribery and corruption during the reporting period. Organizations must disclose the number of convictions, fines, and violations of anti-corruption laws and the actions taken to address those violations. In addition, they are encouraged to voluntarily report the total number of confirmed cases, including disciplinary actions against employees, termination of contracts with business partners, details of public legal cases against the company or its employees, and the outcomes of those cases. |
| G1-5 | Political Influence and Lobbying | The firm must disclose its positions related to political contributions and lobbying, major lobbying topics, material impacts, risks, and opportunities. It should also detail its management oversight role, membership on the transparency register, and recent transfers from management. |
| G1-6 | Payment Method | G1-6 focuses specifically on the impact of late payments on SMEs and requires firms to provide information on contractual payment terms and their compliance. Firms are required to share details of their payment practices, payment terms to suppliers, percentage of payments made on time, and information on late payments. |
Let's look at a case study.
| Company Q complies with the requirements of the CSRD and discloses its governance practices in accordance with ESRS G1. The governance review identified areas for improvement, particularly with regard to transparency of supplier relationships and responses to corruption and bribery risks. How did Company Q deal with these impacts? interpoint (interword separation)G1-1 Policy: Company Q detailed a code of conduct that emphasizes the promotion of an ethical corporate culture. The policy includes mechanisms for reporting misconduct, protection for whistleblowers, and procedures for investigating and handling incidents of corruption and bribery. G1-2 Supplier Relationships: The company disclosed a supplier engagement framework that incorporates social and environmental criteria into procurement decisions. G1-3 Corruption and Bribery: Q shared information on mandatory anti-corruption training for employees and strengthening procedures to identify and address corruption risks. Since there was no whistleblower system, Q shared plans to establish a hotline by 2026 to report concerns safely and anonymously. G1-4 Transparency: During the reporting period, the company disclosed zero incidents of bribery or corruption. The company also voluntarily reported two internal investigations related to the value chain and details of corrective actions taken, including contract terminations. G1-5 Lobbying: Q publicized its lobbying activities, covering key topics such as climate policy and renewable energy incentives. It also disclosed 1.5 million euros in political contributions by region and by type of donor. G1-6 Payment Practices: The company shared comprehensive data on payment terms and practices and achieved 90% compliance with agreed payment terms. The company also implemented a monitoring system to address late payments and prioritized timely payments to smaller suppliers, significantly improving supplier relations. By disclosing and addressing these governance challenges, Q Corp. strengthens its commitment to ethical practices, transparency, and sustainable operations, fosters trust with its stakeholders, and aligns with international best practices. |
At the end.
Within the framework of the European Sustainability Reporting Standard (ESRS), companies must conduct a dual materiality assessment to identify the most pressing environmental, social, and governance (ESG) concerns relevant to their business model, identify the most pressing environmental, social, and governance (ESG) concerns relevant to their business model. They are also required to disclose their policies, actions, and how they manage risks and opportunities related to these concerns.
In this article we focused on social disclosure (S1-S4) and governance (G1). The scope of social disclosure includes workers (S1), workers in the value chain (S2), affected communities (S3), and consumers (S4). Each social disclosure covers policies, engagement practices, remediation of adverse impacts, and specific actions taken to manage risks and opportunities relevant to the target group. In addition, companies are expected to provide metrics and set results-oriented goals for the future. Governance disclosures, on the other hand, cover six topics, including corporate culture policies, supplier relations, corruption, payment practices, and lobbying.
The ESRS requires companies to address identified key issues throughout their operations and value chains. However,By EFRAGand the majority of companies that participated in the initial implementation of the ESRS reported difficulty in mapping risks in their supply chains. the ESRS allows companies to estimate information using reliable sources of information, such as sector average data and other indicators. aiESG provides The services provided by aiESG help companies identify key hotspots within the upstream supply chain based on industry averages and provide in-depth analysis. By identifying these critical areas, companies can more effectively allocate resources and ensure targeted stakeholder engagement, precise action plans, comprehensive research, and other relevant initiatives. This strategic focus improves both compliance efforts and overall operational efficiency.
(Report prepared by Nina Ždanovič, PhD ESG Research Department)
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Table 6: S1 Disclosure Requirements: Own Employees
| Disclosure Requirements | title | Contents |
| S1-1 | policy | Disclosures regarding the company's policies for managing significant impacts on its workforce, including human trafficking, forced and compulsory labor, child labor, and accident prevention. Covers the company's commitment to human rights and compliance with international frameworks. |
| S1-2 | engagement | Disclosure regarding engagement with employees, including vulnerable groups, in discussions of significant positive or negative impacts. |
| S1-3 | Improvement of adverse effects | Disclosures regarding the company's mechanisms available to employees to raise concerns about negative impacts and how the company addresses such concerns. |
| S1-4 | Specific actions for impact management | Disclosures regarding the process the firm uses to identify significant impacts on employees and to take initiatives to create positive impacts and mitigate or correct negative impacts. In addition, the firm must disclose how it assesses the effectiveness of such actions. |
| S1-5 | Indicators and Targets | Goals related to managing significant negative impacts, promoting positive impacts, and managing significant risks and opportunities |
| S1-6 | Employee Characteristics | Disclosure requirements related to the company's employment practices and workforce characteristics that provide the context for other reported information and the basis for indicators and targets. |
| S1-7 | Characteristics of Non-Employees | Disclosures about the company's employment practices affecting non-employees (e.g., self-employed, contract workers, temporary workers, etc.) |
| S1-8 | Scope of collective bargaining and social dialogue | Disclosures regarding collective bargaining agreements, including the percentage of employees covered by such agreements in the EU and worldwide. |
| S1-9 | Diversity Metrics | Disclosure regarding the gender diversity of top management and the age distribution of employees. |
| S1-10 | Adequate wages | A duty to disclose whether employees are receiving proper wages. |
| S1-11 | social protection | Disclosure obligations that require companies to disclose whether employees receive social protection during major life events such as illness, unemployment, injury, acquired disability, parental leave, or retirement. |
| S1-12 | disabled person | Require companies to disclose the percentage of employees with disabilities. |
| S1-13 | Training and Capacity Building | Disclosure requirements regarding employee training and development indicators, by gender. |
| S1-14 | health and safety index | Disclosure requirements regarding the scope, quality, and effectiveness of health and safety management systems, including the number of work-related injuries and fatalities. |
| S1-15 | work-life balance | Disclose information on employees' family-related leave entitlements and their use, separately for men and women. |
| S1-16 | Reward Metrics | Requirements for disclosing information on gender pay gaps and pay inequalities within the organization, along with any necessary background information. |
| S1-17 | Incidents, complaints, and human rights impacts | Disclosure requirements regarding work-related incidents affecting employees and their serious human rights impacts, including the number of discrimination incidents, grievances, and serious human rights violations. |
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