CSRD's ESRS 2: General Disclosures, Part 1

ESRS 2 General Disclosures is the set of sustainability disclosures required for all companies starting from the first year of disclosure. Thus, it is the most generally applicable section of ESRS and it is considered “sector-agnostic” and “cross-cutting” across Sustainability Topics. Except a few specific phase-in requirements outlined in ESRS 1 General Requirements, all disclosures in ESRS 2 General Disclosures are required for all entities starting from the first year of mandatory reporting.

Structure of ESRS 2 General Disclosures

The disclosure requirements of ESRS 2 General Disclosures is structured into three main sections: Governance (GOV), Strategy and business model (SBM), and Impacts, risks and opportunities (IRO). In addition, the Basis for preparation (BP) and a set of Minimum disclosure requirements (MDP) on policies, actions, metrics, and tracking for identified impacts, risks and opportunities complete this section.

The application requirements supplement the disclosure requirements, following the same structure.

In this article, we look at the Basis for Preparation (BP) and Governance (GOV).

Basis for Preparation (BP)

Two Basis for Preparation (BP) disclosure requirements are included in ESRS 2 General Disclosures. BP-1 applies in all cases and is the General Basis, while BP-2 applies for specific cases and is Disclosures in Relation to Specific Circumstances.

BP-1 requires a statement on the level of consolidation of the sustainability statement, and declarations on the topics of value chain disclosures, sensitive and intellectual property omissions, and exemptions for disclosures of impending developments and matters in the course of negotiation.

The reporting entity is required to disclose whether the sustainability statement is prepared on a consolidated or individual basis. For consolidated sustainability statements, a confirmation that the level of consolidation is the same as the financial statement is requested. Otherwise, exemptions should be clearly indicated pursuant to relevant EU regulations.

Other declarations required in the BP-1 disclosure are:

• declaration of the value chain information included in the disclosure (e.g., covering the upstream and downstream value chain relevant to the material impacts, risks and opportunities),
• declaration of whether information is omitted corresponding to intellectual property, know-how, or the results of innovation, and
• declaration of whether the exemption of disclosure due to impending negotiation is applied to the Sustainability Statement.

Several specific circumstances requires disclosure under BP-2 and this information could be reported alongside the disclosures to which they refer.

• If the time horizon of reporting is different from the initial definitions (e.g., less than 5 years as medium-term, and greater than five years as long-term), an explanation of the reasons for applying different definitions is required.
• If the metrics for value chain information are estimated using indirect sources (e.g., sector-average data or other proxies), the basis of preparation of each such metric and the resulting level of accuracy should be disclosed, along with plans to improve accuracy.
• For any quantitative metrics and monetary amounts that is subject to a high level of measurement uncertainty, information about the sources of measurement uncertainty and the assumptions, approximations and judgments made in the measurement should be disclosed.
• Any changes in the preparation or presentation of sustainability information compared to previous periods should be explained, including why the replaced metric provides more useful information. The differences between the figure disclosed in the preceding period and the revised figure should be reported.
• Material errors in prior periods should be reported. It should include the nature of the material error and corrections for each of the prior periods to the extent possible.
• Information related to the disclosure and assurance of sustainability information in other regulations or frameworks (e.g., any European standards approved by the European Standardisation System (ISO/IEC or CEN/CENELEC standards), and the list of incorporations by reference should be disclosed

If an SME (with less than 750 employees during the reporting year) decides to omit disclosures in accordance with the phase-in provisions (ESRS 1 Appendix C), it must still disclose the following

• whether the topics covered under the omitted Topical Standards have been assessed to be material
• briefly describe the outcome of the materiality assessment in relation to topics presented in ESRS 1 AR 16. Explain how the business model and strategy take account of the impacts.
• briefly describe any targets that have been set, and the supporting information for its biodiversity and ecosystem targets
• disclose the policies, actions and metrics relevant to the identified material topics and matters.

Governance (GOV)

The GOV disclosures comprise of five disclosure requirements.

GOV-1 is concerned with the disclosure of information on composition, roles and responsibilities, and expertise of the administrative, management and supervisory bodies. To fulfil this disclosure requirement, detailed and quantitative information on the number of executive and non-executive members, representation of employees and other workers, gender diversity ratio and other diversity metrics, and the percentage of independent board members is required. The supervisory process on sustainability, such as committees and policies should be disclosed. The expertise of the administrative, management and supervisory bodies in sustainability knowledge is also required.  This could include the member on whom the bodies rely for expertise on sustainability matters, and how that expertise is leveraged. The disclosure should also include how the expertise and skills are relevant to the material impacts, risks and opportunities and whether the bodies have access to other sources of expertise to update and continue to develop sustainability-related expertise.

GOV-2 concerns the process of informing the administrative, management and supervisory bodies on sustainability matters and how such matters are addressed. This disclosure includes information on the frequency and extent of sustainability information presented to the administrative, management and supervisory bodies. It also includes disclosures on the implementation of due diligence and the results and effectiveness of policies, actions, metrics and targets adopted to address impacts, risks and opportunities.

GOV-3 concerns the integration of sustainability-related performance in incentive schemes. This includes a description of the key characteristics of the incentive schemes, specific sustainability-related targets for performance evaluation, renumeration associated with sustainability-related performance targets, the proportion of variable renumeration tied to sustainability-related targets, and the governance process of such incentive schemes. For listed entities, this disclosure should be consistent with the renumeration report required in Directive 2007/36/EC on the exercise of certain rights of shareholders in listed companies.

GOV-4  requests a mapping of the due diligence for sustainability disclosures. The mapping explains how and where its due diligence of various aspects (e.g., as required in other GOV, SBM, IRO, and MDR disclosures) are reflected in its sustainability disclosure. The five key elements of due diligence are

1. Embedding due diligence in governance, strategy and business model
2. Engaging with affected stakeholders in all key steps of the due diligence
3. Identifying and assessing adverse impacts
4. Taking actions to address those adverse impacts
5. Tracking the effectiveness of these efforts and communicating

A table that maps each of these elements to sections of the sustainability statement could be used as the format of the disclosure.

GOV-5 concerns the disclosure of the entity’s risk management and internal control system in relation to the sustainability reporting process. This involves the disclosure of the scope, features and components of the internal control systems in relation to sustainability reporting. Main risks and their risk mitigation strategies should be disclosed, along with risk assessment and prioritisation methodologies. Some potential risks may include the completeness and integrity of the data, the accuracy of estimation results, the availability of upstream and/or downstream value chain data, and the timing of the availability of the information.

Other articles in this series

• CSRD's ESRS 1: General Requirements
• CSRD's ESRS 2: General Disclosures, Part 2
• CSRD's ESRS E1: Climate Change
• GHG emissions reporting: interoperability between CSRD/ESRS, GRI and ISSB

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