S3-4 – Taking action on material impacts on affected communities, and approaches to managing material risks

🗂️ ESRS S3 Affected communities, page 23

The undertaking shall disclose how it takes action to address material impacts on affected communities, and to manage material risks and pursue material opportunities related to affected communities and the effectiveness of those actions.
The objective of this Disclosure Requirement is twofold. Firstly, it is to provide an understanding of any actions and initiatives through which the undertaking seeks to:

(a) prevent, mitigate and remediate the negative material impacts on affected communities; and/or

(b) achieve positive material impacts for affected communities.

Secondly, it is to enable an understanding of the ways in which the undertaking is addressing the material risks and pursuing the material opportunities related to affected communities.

The undertaking shall provide a summarised description of the action plans and resources to manage its material impacts, risks, and opportunities related to affected communities as per ESRS 2 MDR-A Actions and resources in relation to material sustainability matters.

In relation to material impacts, the undertaking shall describe:

(a) actions taken, planned or underway to prevent or mitigate material negative impacts on affected communities;

(b) whether and how it has taken action to provide or enable remedy in relation to an actual material impact;

(c) any additional actions or initiatives it has in place with the primary purpose of delivering positive impacts for affected communities; and

(d) how it tracks and assesses the effectiveness of these actions and intiatives in delivering intended outcomes for affected communities.

In relation to paragraph 29, the undertaking shall describe:

(a) the processes through which it identifies what action is needed and appropriate in response to a particular actual or potential negative impact on affected communities;

(b) its approach to taking action in relation to specific material negative impacts on communities, including any action in relation to its own practices regarding land acquisition, planning and construction, operation or closure practices, as well as whether wider industry or collaborative action with other relevant parties will be required; and

(c) how it ensures that processes to provide or enable remedy in the event of material negative impacts are available and effective in their implementation and outcomes.

In relation to material risks and opportunities, the undertaking shall describe:

(a) what action is planned or underway to mitigate material risks for the undertaking arising from its impacts and dependencies on affected communities and how it tracks effectiveness in practice; and

(b) what action is planned or underway to pursue material opportunities for the undertaking in relation to affected communities.

The undertaking shall disclose whether and how it takes action to avoid causing or contributing to material negative impacts on affected communities through its own practices, including, where relevant, in relation to planning, land acquisition and exploitation, finance, extraction or production of raw materials, use of natural resources, and management of environmental impacts. This may include disclosing what approach is taken when tensions arise between the prevention or mitigation of material negative impacts and other business pressures.
The undertaking shall also disclose whether severe human rights issues and incidents connected to affected communities have been reported and, if applicable, disclose these.
When disclosing the information required under paragraph 31 (c), the undertaking shall consider ESRS 2 MDR-T Tracking effectiveness of policies and actions through targets if it evaluates the effectiveness of an action by setting a target.
The undertaking shall disclose what resources are allocated to the management of its material impacts, with information that enables users to gain an understanding of how the material impacts are managed.

Application Requirements

AR 25. It may take time to understand negative impacts and how the undertaking may be involved with them through its value chain, as well as to identify appropriate responses and put them into practice. Therefore, the undertaking shall consider:

(a) its general and specific approaches to addressing material negative impacts;

(b) its social investment or other development programmes aimed at contributing to additional material positive impacts;

(d) its aims for continued improvement.

AR 26. Appropriate action can vary according to whether the undertaking causes or contributes to a material impact, or whether the material impact is directly linked to its own operations, products or services through a business relationship.

AR 27. Given that material negative impacts affecting communities that have occurred during the reporting period may also be linked to entities or operations outside its direct control, the undertaking may disclose whether and how it seeks to use its leverage in its business relationships to manage those impacts. This may include using commercial leverage (for example, enforcing contractual requirements with business relationships or implementing incentives), other forms of leverage within the relationship (such as providing training or capacity-building on the rights of indigenous peoples to entities with which the undertaking has a business relationships) or collaborative leverage with peers or other actors (such as initiatives aimed at minimising security-related impacts on communities or participating in company-community partnerships).

AR 28. Impacts on communities may stem from environmental matters which are disclosed by the undertaking under the ESRS E1 to E5. Examples include:

(a) ESRS E1 Climate Change: The implementation of climate change mitigation plans may require the undertaking to invest in renewable energy projects that may affect the lands, territories and natural resources of indigenous peoples. If the undertaking does not consult with the affected indigenous peoples , it could negatively impact the affected communities’ right to free, prior and informed consent;

(b) ESRS E2 Pollution: The undertaking may negatively impact affected communities by failing to protect them from pollution from a particular production facility that causes them health-related issues;

(c) ESRS E3 Water and marine sources: The undertaking may negatively impact the access to clean drinking water of communities when withdrawing water in water stressed areas;

(d) ESRS E4 Biodiversity and ecosystems: The undertaking may negatively affect the livelihood of local farmers through operations that contaminate soil. Additional examples include the sealing of land through building new infrastructure, which can eradicate plant species that are critical for, for example, local biodiversity or to filter water for communities; or the introduction of invasive species (whether plants or animals) that can impact ecosystems and cause subsequent harm;

(e) ESRS E5 Resource use and circular economy: The undertaking may negatively impact the lives of communities by affecting their health through the mismanagement of hazardous waste.

Where the connection between environmental impacts and local communities is addressed in the disclosures within the Disclosure Requirements ESRS E1-E5, the undertaking may crossreference to those and clearly identify such disclosures.

AR 29. When the undertaking discloses its participation in an industry or multi-stakeholder initiative as part of its actions to address material negative impacts, the undertaking may disclose how the initiative, and its own involvement, is aiming to address the material impact concerned. It may disclose under ESRS S3-5 the relevant targets set by the initiative and progress towards them.

AR 30. When disclosing whether and how the undertaking considers actual and potential impacts on affected communities in decisions to terminate business relationships and whether and how it seeks to address any negative impacts that may result from termination, the undertaking may include examples.

AR 31. In disclosing how it tracks the effectiveness of actions to manage material impacts during the reporting period, the undertaking may disclose any lessons learned from the previous and current reporting periods.

AR 32. Processes used to track the effectiveness of actions can include internal or external auditing or verification, court proceedings and/or related court decisions, impact assessments, measurement systems, stakeholder feedback, grievance mechanisms, external performance ratings, and benchmarking.

AR 33. Reporting on effectiveness is aimed at enabling the understanding of the links between actions taken by an undertaking and the effective management of impacts.

AR 34. With regard to initiatives or processes whose primary aim is to deliver positive impacts for affected communities that are based on affected communities’ needs, and with regard to progress in the implementation of such initiatives or processes, the undertaking may disclose:

(a) information about whether and how affected communities and legitimate representatives or their credible proxies play a role in decisions regarding the design and implementation of these investments or programmes; and

(b) information about the intended or achieved positive outcomes for affected communities of these investments or programmes.

(c) an explanation of the approximate scope of affected communities covered by the described social investment or development programmes, and, where applicable, the rationale for why selected communities were chosen for a given social investment or development programme’s implementation.

AR 35. The undertaking may disclose whether any initiatives or processes whose primary aim is to deliver positive impacts for affected communities are designed also to support the achievement of one or more of the UN Sustainable Development Goals (SDGs). For example, through a commitment to advance UN SDG 5 to “achieve gender equality and empower all women and girls” the undertaking may be taking thoughtful measures to include women in the consultation process with an affected community to meet standards of effective stakeholder engagement, which can help empower the women in the process itself, but potentially also in their daily lives.

AR 36. When disclosing the intended or achieved positive outcomes of its actions for affected communities a distinction is to be made between evidence of certain activities having occurred (for example, that x number of women community members have been provided with training on how to become local suppliers to the undertaking) from evidence of actual outcomes for affected communities (for example, that x women community members have set up small businesses and have had their contracts with the undertaking renewed year-onyear).

AR 37. When disclosing whether initiatives or processes also play a role in mitigating material negative impacts, the undertaking may for example consider programmes that aim to improve local infrastructure surrounding an undertaking’s operations, such as improvements in roads leading to a reduction in the number of severe traffic accidents involving community members.

AR 38. When disclosing the material risks and opportunities related to the undertaking’s impacts or dependencies on affected communities, the undertaking may consider the following:

(a) risks related to the undertaking’s impacts on affected communities may include the reputational or legal exposure, as well as operational risks, where affected communities protest against resettlements or the loss of access to lands, leading to costly delays, boycotts, or lawsuits;

(b) risks related to the undertaking’s dependencies on affected communities may include disruption of business operations where indigenous peoples decide to withdraw their consent to a project on their lands, forcing the undertaking to significantly modify or abandon the project;

(c) business opportunities related to the undertaking’s impacts on affected communities may include more easily financing projects and being a partner of choice for communities, governments and other businesses; and

(d) opportunities related to the undertaking’s dependencies on affected communities may include the development of positive relationships between the undertaking and indigenous peoples that enable existing projects to expand with strong support.

AR 39. In disclosing the information in AR 41, the undertaking may consider explanations of risks and opportunities stemming from environmental impacts or dependencies (please refer to AR 31 for further details), including related human rights (or social) impacts. Examples include reputational risks stemming from the impact on the health of communities of unmanaged polluting discharges; or the financial effects of protests that may disrupt or interrupt an undertaking’s activities, for example, in response to operations in water stressed areas that may impact the lives of affected communities.

AR 40. When disclosing whether dependencies turn into risks, the undertaking shall consider external developments.

AR 41. When disclosing policies, action and resources and targets related to the management of material risks and opportunities, in cases where risks and opportunities arise from a material impact, the undertaking may cross-reference its disclosures on policies, actions and resources and targets in relation to that impact.

AR 42. The undertaking shall consider whether and how its processes to manage material risks related to affected communities are integrated into its existing risk management processes.

AR 43. When disclosing the resources allocated to the management of material impacts, the undertaking may disclose which internal functions are involved in managing the impacts and what types of action they take to address negative and advance positive impacts.