ESRS-Professional Questions and Answers

Under ESRS, organizations are required to disclose material impacts, risks, and opportunities (IRO) in accordance withdouble materiality principles. The ESRS framework emphasizes transparency and structured reporting of sustainability matters that arematerial from both impact and financial perspectives.

Key Disclosure Requirements for Material IROsAccording to ESRS 2, organizations must disclose:

(A) The outcomes of their double materiality assessment: Organizations need to explain how they determined material sustainability matters, covering both impact and financial materiality​.

(B) Information outlined in the topical ESRS and sector-specific standards: The disclosure of IROs must align withspecific ESRS topical standards(e.g., ESRS E1 for climate change, ESRS S1 for own workforce) andsector-specific standards, ensuring comprehensive reporting​.

(C) Minimum Disclosure Requirements on policies, actions, and targets: Organizations must disclosepolicies, strategies, action plans, and progress tracking mechanismsrelated to managing material sustainability risks and opportunities. ESRS mandates these disclosures to provide transparency on an entity’s approach torisk mitigation and opportunity realization​.

(D) A general overview of their sustainability policies, even if unrelated to specific material matters:

ESRS doesnotrequire companies to provide general sustainability policy overviewsunlessthey relate to material sustainability matters. The focus is on material disclosures that affect business operations or external stakeholders​.

Commission Delegated Regulation (EU) 2023/2772, ESRS 2, Section 4.1 & IRO-1– Covers disclosure requirements for identifying and assessing material impacts, risks, and opportunities​.

EFRAG Compilation Explanations (January – November 2024)– Details about ESRS 1 and ESRS 2 disclosure requirements on materiality​.

Incorrect OptionOfficial References:

Organizations should report on sustainability for several reasons, includingtransparency, stakeholder expectations, and competitive advantage. Below is the evaluation of each option:

A. True– Reporting on sustainabilitydemonstrates transparency and accountability, allowing companies to disclose theirenvironmental, social, and governance (ESG) impacts​.

B. True–Stakeholders, including investors, customers, and regulators,increasingly demand sustainability reportingto assess the long-term viability of a company​.

C. False– While sustainability reporting may contribute tolong-term financial gains, it doesnot guarantee immediate financial benefits​.

D. True– Companies withstrong sustainability performanceoften enjoyenhanced brand value and competitive advantage, attracting investors and customers who prefer sustainable businesses​.

Why Sustainability Reporting MattersBenefit

Impact on Organization

Transparency & Accountability

Builds trust with investors, regulators, and the public

Stakeholder Expectations

Meets regulatory and customer expectations for ESG disclosures

Brand & Competitive Advantage

Companies with strong ESG performance are more attractive to investors

Regulatory Compliance

Helps meet CSRD and ESRS disclosure obligations

CSRD & ESRS Guidance (2024)– Key Sustainability Reporting Benefits​.

EU Platform on Sustainable Finance Report (2025)– Stakeholder Expectations & Competitive Advantage​.

Official References:

Incorporation by reference in sustainability statements under ESRS must adhere to specific principles to ensure transparency, accessibility, and alignment with financial and regulatory reporting. The key principles are:

(A) The referenced information must be clearly identified in the original document.

ESRS mandates that referenced disclosures must beexplicitly identifiedin the original document to prevent ambiguity and ensure clear linkage to the sustainability statement​.

(C) It must comply with digitalization requirements.

The referenced data must meetthe same technical digitalization standardsas the sustainability statement to ensure consistency and usability across digital platforms​.

(D) It must meet the same level of assurance as the sustainability statement.

Any information incorporated by reference must be subject to at least thesame level of assuranceas the sustainability statement itself, ensuring reliability and accuracy​.

(B) It can be published later than the management report.

ESRSdoes not allowreferenced information to be published after the management report. It must be available at the same time or earlier to maintain the coherence of disclosures​.

Commission Delegated Regulation (EU) 2023/2772, ESRS 1, Section 9.1– Defines the principles of incorporation by reference​.

EFRAG Compilation Explanations (January - July 2024)– Provides guidance on referenced information's role in digital and assurance compliance​.

Incorrect Option:Official References:Thus, the correct answers areA, C, and D.

Under the European Sustainability Reporting Standards (ESRS), organizationscan leverage their ongoing dialogue with stakeholders for the materiality assessment.The ESRS explicitly acknowledges that stakeholder engagement plays a fundamental role in assessing material impacts, risks, and opportunities.

Stakeholder Engagement is Central to Materiality Assessment

ESRS 1 and ESRS 2 emphasize that organizations should integrate stakeholder perspectives into their materiality assessments.Engagement with affected stakeholders is central to the undertaking’s ongoing due diligence process and sustainability materiality assessment.This includes processes to identify and assess actual and potential negative impacts, which inform the identification of material sustainability topics​.

ESRS Does Not Mandate a Specific Stakeholder Engagement Approach

While stakeholder input is considered valuable, the ESRS doesnot prescribe a mandatory format or behavior for engagement. Companies have flexibility in determining how they engage with stakeholders.

IG 1 Materiality Assessment FAQ 15states:"The ESRS require disclosure on the materiality assessment and its outcomes but do not mandate specific behavior on stakeholder engagement or the due diligence process."​.

Stakeholders Can Provide Objective Evidence

The materiality assessment should be based as much as possible onobjective data and evidence, butstakeholder perspectives can be a source of supporting evidencefor impact materiality.

The relevance of stakeholder input depends onhow much they are affectedby an organization’s activities (severity and likelihood of impacts)​.

Due Diligence and Materiality Assessment

Thedue diligence process includes stakeholder engagement, which informs the materiality assessment. Organizations must report how they integrate stakeholder feedback into identifying and assessing material issues​.

Nature as a Silent Stakeholder

The ESRS even recognizes thatecological data and conservation indicatorsshould be considered as proxy indicators for stakeholder engagement where human stakeholders are absent (e.g., in cases of biodiversity impact assessments)​.

Thus, the statement in the question isfalse. Organizationsare encouragedto utilize their existing stakeholder engagement mechanisms to inform their materiality assessments under ESRS.

Official References:

Commission Delegated Regulation (EU) 2023/2772​.

Compilation Explanations January - November 2024​.

ESRS 1 & 2 Guidelines on Double Materiality​.

TheEnvironmental Sectionof the topical ESRS includes disclosure requirements covering environmental sustainability matters. This section specifically relates toenvironmental objectives as defined in the EU Taxonomy, ensuring alignment with broader European sustainability goals.

Thetopical ESRS environmental standards (ESRS E1 - E5)cover:

ESRS E1– Climate Change (Mitigation & Adaptation)

ESRS E2– Pollution

ESRS E3– Water and Marine Resources

ESRS E4– Biodiversity and Ecosystems

ESRS E5– Resource Use and Circular Economy

These standardsalign with the environmental objectives of the EU Taxonomy Regulation(Regulation (EU) 2020/852) andrequire organizations to report on their material environmental impacts, risks, and opportunities (IROs)​.

A. Social impact and labor rights:→Incorrect, as this belongs to theSocial (S) section(ESRS S1 - S4).

B. Financial performance information:→Incorrect, as this is part offinancial reporting, not ESRS environmental disclosures.

D. Corporate governance and board diversity:→Incorrect, as governance matters are covered underESRS G1 Business Conduct​.

Commission Delegated Regulation (EU) 2023/2772​

Compilation Explanations January - November 2024​

Why Other Options Are Incorrect:Official References:

ESRS 2 IRO-1 requires organizations to disclose their process for identifyingimpacts, risks, and opportunitiesand assess theirmateriality. This includes detailing whether and howaffected stakeholderswere consulted during the process. Sincerisks and opportunitiestypically stem fromimpacts, the process ofimpact materiality assessmentserves as a natural starting point before evaluating theirfinancial materiality.

Identification of Impacts, Risks, and Opportunities (IROs):

Organizations must disclose their methodology for identifying materialimpacts, risks, and opportunities.

These include bothactual and potential impactson people and the environment, considering short-, medium-, and long-term horizons​.

Consultation with Affected Stakeholders:

ESRS 2 IRO-1 requires disclosure of whether and how theconsultation with affected stakeholdersinfluenced the identification of material sustainability matters​.

Stakeholder engagement is crucial in determining the scope and severity of sustainability impacts.

Role of Impact Materiality:

Impact materiality assessmentprecedes the evaluation of risks and opportunities.

Since mostrisks and opportunitiesoriginate fromimpacts, impact materiality serves as thestarting pointfor assessing theirfinancial materiality​.

Financial Materiality Evaluation:

Financial materiality pertains to the extent that a sustainability matteraffects the undertaking’s financial position, performance, cash flows, or cost of capital.

It evaluates whether an impact or risk could reasonably be expected to have amaterial financial effecton the organization​.

"Impacts, risks, and opportunities"correctly defines the scope of ESRS 2 IRO-1.

"Affected stakeholders"are explicitly referenced as a crucial element in the disclosure process.

"Risks and opportunities"emerge from sustainability impacts, making impact materiality the logical starting point.

"Financial materiality"is the final step, determining the financial significance of sustainability risks and opportunities.

Why is B the Correct Answer?Thus, the correct sequence isB: impacts, risks, and opportunities; affected stakeholders; risks and opportunities; financial materiality.

Official Commission Delegated Regulation (EU) 2023/2772, various EFRAG guidance documents, and CSRD-related references:

Commission Delegated Regulation (EU) 2023/2772, Annex I: ESRS 2 IRO-1 materiality assessment requirements​.

EFRAG Compilation of Explanations (January - November 2024): Explanation of ESRS 2 IRO-1 and its link to impact materiality​.

Nature is indeed recognized as a "silent stakeholder" in the European Sustainability Reporting Standards (ESRS). This term implies that, although nature cannot actively voice its concerns, it remains a critical component of sustainability reporting due to its fundamental role in sustaining life and economic activity. ESRS emphasizes that organizations must consider their impacts on nature, ecosystems, and biodiversity as part of their sustainability disclosures.

This recognition aligns with the concept ofdouble materialityembedded in the ESRS framework, which considers both the financial impact on an organization and the organization's impact on environmental and social matters. The ESRS explicitly integratesbiodiversity and ecosystems (ESRS E4)as a key topic, reflecting the need to account for the effects of business activities on nature, even if nature itself cannot actively advocate for protection.

Thesilent stakeholderconcept reinforces theduty of carethat organizations hold in assessing and mitigating their impacts on biodiversity, land use, pollution, and natural resources. This aligns with theUnited Nations Sustainable Development Goals (SDGs)and theEU Biodiversity Strategy for 2030, both of which emphasize the protection and restoration of natural ecosystems​.

Commission Delegated Regulation (EU) 2023/2772 of 31 July 2023(ESRS E4 - Biodiversity and Ecosystems)​.

EFRAG Guidance on Stakeholder Engagement– Highlights nature as an affected stakeholder in sustainability matters​.

EU Biodiversity Strategy for 2030– Emphasizes that economic activities must integrate ecosystem preservation and restoration​.

Official References:This confirms that the statement istrueunder ESRS standards.