Disclosure Requirement ESRS 2 SBM-2 requires the undertaking to provide an understanding of if and how it considers the role that its strategy and business model may play in creating, exacerbating or mitigating significant material impacts on affected communities , and whether and how the business model and strategy are adapted to address such material impacts.

While affected communities may not be engaging with the undertaking at the level of its strategy or business model , their views can inform the undertaking’s assessment of its strategy and business model. The undertaking may disclose the views of affected communities and affected communities’ representatives.

Impacts on affected communities can originate in the undertaking’s strategy or business model in a number of different ways. For example, impacts may relate to the undertaking’s value proposition (such as, construction or commencement of projects with timelines that do not allow sufficient time for consultation with groups affected by the projects), its value chain (for example, land-use in countries in which ownership is often contested or records are unreliable or in which land-users such as indigenous peoples are unrecognised), or its cost structure and the revenue model (such as, aggressive strategies to minimise taxation, particularly with respect to operations in developing countries).

Impacts on affected communities that originate in the strategy or business model can also bring material risks to the undertaking. For example, where the undertaking’s strategy involves moving into higher risk geographies in pursuit of certain commodities, and if affected communities resist its presence or object to its local practices, this may create extensive and costly delays, and affect the undertaking’s ability to secure future land concessions or permits. Similarly, if the undertaking’s business model relies on intensive water extraction at its plants, to the extent that it affects access to water for communities’ consumption, hygiene and livelihoods, this may result in reputationally-damaging boycotts, complaints and lawsuits.

Examples of particular characteristics of affected communities that may be considered by the undertaking when responding to paragraph 10 may be an affected community that is physically or economically isolated and is particularly susceptible to introduced diseases or has limited access to social services and therefore relies on infrastructure set up by the undertaking. It may be because where land worked by women is purchased by the undertaking and payments go to male heads of households, women become further disenfranchised in the community. It may also be because the community is indigenous, and its members seek to exercise cultural or economic rights to the land owned or used by the undertaking – or by one of the entities with which it has a business relationship – in a context where their rights are not protected by the state. In addition, the undertaking shall consider whether different characteristics overlap. For example, characteristics such as ethnicity, socioeconomic status, migrant status and gender may create overlapping risks of harm for certain affected communities, or for distinct parts of those affected communities, since affected communities are often heterogeneous in nature.

With regard to paragraph 11, material risks could also arise because of the undertaking’s dependency on affected communities where low likelihood but high impact events may trigger financial effects; for example, where a natural disaster leads to a catastrophic industrial accident involving the undertaking’s operations, resulting in severe harm to affected communities.

The description shall include the key information necessary to ensure a faithful representation of the policies in relation to affected communities and, therefore, the undertaking shall consider explanations of significant changes to the policies adopted during the reporting year (for example, new or additional approaches to engagement, due diligence and remedy).

When disclosing the alignment of its policies with the UN Guiding Principles on Business and Human Rights, the undertaking shall consider that the Guiding Principles refer to the International Bill of Rights, which consists of the Universal Declaration of Human Rights and the two Covenants that implement it, as well as the UN Declaration on the Rights of Indigenous Peoples, the International Labour Organisation’s Convention concerning Indigenous and Tribal Peoples (ILO No. 169) and the core conventions that underpin it, and may disclose its alignment with these instruments.

The undertaking may provide an illustration of the types of communication of its policies to those individuals, group of individuals or entities for whom they are relevant, either because they are expected to implement them (for example, the undertaking’s employees , contractors and suppliers ), or because they have a direct interest in their implementation (for example, own workers, investors). It may disclose communication tools and channels (for example, flyers, newsletters, dedicated websites, social media, face to face interactions, workers’ representatives), aimed at ensuring that the policy is accessible and that different audiences understand its implications. The undertaking may also explain how it identifies and removes potential barriers for dissemination, such as through translation into relevant languages or the use of graphic depictions.

When disclosing severe human rights issues and incidents connected to affected communities, the undertaking shall consider any legal disputes related to land rights and to the free, prior and informed consent of indigenous peoples.

Explanations of how the undertaking takes into account and ensures respect of the right of indigenous peoples to free, prior and informed consent may include information about processes to consult with indigenous peoples to obtain such consent. The undertaking shall consider how the consultation includes a good faith negotiation with affected indigenous peoples to obtain their free, prior and informed consent where the undertaking affects the lands, territories or resources that indigenous peoples customarily own, occupy or otherwise use; or relocates them from land or territories subject to traditional ownership or under customary use or occupation; or affects or exploits their cultural, intellectual, religious and spiritual property.

When describing which function or role has operational responsibility for such engagement and/or ultimate accountability, the undertaking may disclose whether this is a dedicated role or function or part of a broader role or function, and whether any capacity building activities have been offered to support the staff to undertake engagement. If it cannot identify such a position or function, it may state that this is the case. This disclosure could also be fulfilled by making reference to information disclosed according to ESRS 2 GOV-1 The role of the administrative, management and supervisory bodies.

When preparing the disclosures described in paragraph 20 b) and c), the following illustrations may be considered:

1. examples of stages at which engagement occurs are i) determining the approach to mitigation and ii) evaluating the effectiveness of mitigation;
2. for type of engagement, these could be participation, consultation and/or information; 
3. for the frequency of the engagement, information may be provided on whether engagement occurs on a regular basis, at certain points in a project or business process; and 
4. for the role with operational responsibility, whether the undertaking requires relevant staff to have certain skills, or whether it provides training or capacity building to relevant staff to undertake engagement. In the case of material impacts, risks and opportunities related to indigenous peoples , this includes training on indigenous people’s rights, including on free, prior and informed consent.

To illustrate how the perspectives of communities have informed specific decisions or activities of the undertaking, the undertaking may provide examples from the current reporting period.

In fulfilling the requirements set out by Disclosure Requirement ESRS S3-3, the undertaking may be guided by the content of the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises focused on remediation and grievance mechanisms.

Channels for raising concerns or needs, include grievance mechanisms, hotlines, dialogue processes or other means through which affected communities or their legitimate representatives can raise concerns about impacts or explain needs that they would like the undertaking to address. This could include channels provided by the undertaking directly, in addition to any other mechanisms the undertaking may use to gain insight into the management of impacts on communities, such as compliance audits. Where the undertaking is relying solely on information about the existence of such channels provided by its business relationships to answer this requirement, it may state that.

To provide greater insight into the information covered in ESRS S3-3, the undertaking may explain whether and how communities that may be affected are able to access channels at the level of the undertaking they are affected by, in relation to each material impact. Relevant insights include information on whether affected communities can access channels in a language they understand, and whether they have been consulted in the design of such channels.

Third party mechanisms could include those operated by the government, NGOs, industry associations and other collaborative initiatives. The undertaking may disclose whether these are accessible to all affected communities who may be potentially or actually materially impacted by the undertaking, or individuals or organisations acting on their behalf or who are otherwise in a position to be aware of negative impacts.

In relation to the protection of individuals that use the mechanisms against retaliation, the undertaking may describe whether it treats grievances confidentially and with respect to the rights of privacy and data protection; and whether to the mechanisms can be used anonymously (for example, through representation by a third party).

When disclosing processes related to providing and enabling remedy for indigenous peoples , relevant information includes whether and how the undertaking has considered their customs, traditions, rules and legal systems.

In disclosing whether and how the undertaking knows that affected communities are aware of and trust any of these channels, the undertaking may provide relevant and reliable data about the effectiveness of these channels from the perspective of affected communities themselves. Examples of sources of information are surveys of community members that have used such channels and their levels of satisfaction with the process and outcomes.

In describing the effectiveness of channels for affected communities to raise concerns, the undertaking may be guided by the following questions, based on the “effectiveness criteria for non- judicial grievance mechanisms” , as laid out in the UN Guiding Principles on Business and Human Rights, in particular Principle 31. The below considerations may be applied on an individual channel basis or for the collective system of channels:

1. do the channels hold legitimacy by providing appropriate accountability for their fair conduct and building stakeholder trust?
2. are the channels known and accessible to stakeholders?
3. do the channels have clear and known procedures, set timeframes and clarity on the processes? 
4. do the channels ensure reasonable access to sources of information, advice and expertise?
5. do the channels offer transparency by providing sufficient information both to complainants and, where applicable, to meet any public interest at stake?
6. do the outcomes achieved through the channels accord with internationally recognised human rights?
7. does the undertaking identify insights from the channels that support continuous learning in both improving the channels and preventing future impacts? 
8. does the undertaking focus on dialogue with complainants as the means to reach agreed solutions, rather than seeking to unilaterally determine the outcome?

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: 

1. 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
2. nformation about the intended or achieved positive outcomes for affected communities of these investments or programmes.
3. 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.

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.

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.

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.

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

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.

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

1. 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;
2. 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;
3. 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
4. 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.

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.

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-on-year).

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.

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: 

1. its general and specific approaches to addressing material negative impacts;
2. its social investment or other development programmes aimed at contributing to additional material positive impacts;
3. how far it has progressed in its efforts during the reporting period; and 
4. its aims for continued improvement.

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

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.

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.

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.

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.

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

1. 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 ; 
2. 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;
3. 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; 
4. 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;
5. 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 cross-reference to those and clearly identify such disclosures.

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).

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.

When disclosing information about targets in accordance with paragraph 38, the undertaking may disclose: 

1. the intended outcomes to be achieved in the lives of affected communities, being as specific as possible;
2. the stability of the targets over time in terms of definitions and methodologies to enable comparability over time;
3. the standards or commitments which the targets are based on (for instance codes of conduct, sourcing policies, global frameworks or industry codes).

Targets related to material risks and opportunities may be the same as or distinct from targets related to material impacts. For example, a target to fully restore livelihoods of affected communities following resettlement could both reduce impacts on those communities and reduce associated risks such as community protests.

The undertaking may also distinguish between short-, medium- and long-term targets covering the same policy commitment. For example, the undertaking may have as a main objective to employ community members at a local mining site , with the long-term goal of staffing 100% locally by 2025, and with the short-term objective of adding x percent of local employees every year up and until 2025.

When modifying or replacing a target in the reporting period, the undertaking may explain the change by linking it to significant changes in the business model or to broader changes in the accepted standard or legislation from which the target is derived to provide contextual information as per ESRS 2 BP-2 Disclosures in relation to specific circumstances.