Remarks on the drafts European Sustainability Reporting Standards (ESRS) by EFRAG - Aug. 2022

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Berlin, 5 August 2022


Remarks on the European Sustainability Reporting Standards Authors: Frank Schiemann | Ingmar Jürgens | Laura Kaspar | Lisa Hoch | Raphael Tietmeyer | Theresa Spandel |

Co-authors: Helen Bellfield | Global Canopy Mariana Lopez | ECOS Sarah Draper | Global Canopy


Remarks on the European Sustainability Reporting Standards Transparency about sustainability risks and impacts lies at the heart of this generation’s mission to shift the necessary trillions of finance toward urgently needed climate and sustainability transformations. One central instrument to achieve transparency about sustainability risks and impacts is the Corporate Sustainability Reporting Directive (CSRD). Its effectiveness however hinges entirely on the quality of the European Sustainability Reporting Standards (ESRS). This is where the Directive’s objectives of mandatory disclosure and its important double materiality concept will need to be translated into explicit, meaningful and effective disclosure requirements. We welcome the standards’ combination of cross-cutting, sector agnostic and sector specific standards. Together, these standards have the potential to reduce the economically costly and inefficient information asymmetries around sustainability performance through a combination of comprehensive and targeted disclosures. As all standards will be based on a double materiality concept1, they can add substantial value over and above existing capital market-oriented standards2, which exclude critical sustainability related risks, opportunities and impacts. The experience and corresponding scientific literature is crystal clear about the enhanced performance and effectiveness of sustainability reporting in reducing information asymmetries in financial markets.3 The CSRD will only deliver mandatory sustainability reporting effectively, if the mandatory nature of reporting is consistently implemented at the level of the ESRS and ultimately, the corresponding delegated acts, which the work of EFRAG aims to provide substantial input to. In recognition of the far-reaching implications and the great potential of the ESRS, we thoroughly analysed the standards to be able to support the work of EFRAG (and the Commission services) by providing science-based feedback and concrete suggestions for their further development. Our recommendations are based on (i) our team’s deep and long-term work with and expertise in sustainability reporting (and its regulation), from a policy, usability and academic perspective expanding well beyond policy and market practice in the EU, and on (ii) expert workshops and coworking sessions that we specifically designed to gather input from experts in the area of disclosure, relevant EU regulatory processes, climate, biodiversity, forestry, agriculture, supply chain data, circular economy and further critical sustainability issues (please refer to the Appendix I for a process description and further details on the expert consultations). Regarding our feedback on topical standards, we focus on ecosystem conversion, in particular deforestation, as a major threat for biodiversity and climate, and hence ultimately, human

As defined in the CSRD (Art. 19a (1)). Such as the Sustainability Accounting Standards Board (SASB) standards, which were used, for example, in the development of the drafts of the International Sustainability Standards Board (ISSB) standards 3 Cho, S. Y. et al. (2013), Corporate social responsibility performance and information asymmetry. Journal of Accounting and Public Policy, 32(1), 71-83; Fuhrmann, S. et al. (2017), The contents of assurance statements for sustainability reports and information asymmetry. Accounting and Business Research, 47(4), 369- 400; Krüger, P. (2015), Climate change and firm valuation: Evidence from a quasi-natural experiment. Swiss Finance Institute Research Paper; Schiemann, F., & Sakhel, A. (2019), Carbon disclosure, contextual factors, and information asymmetry: The case of physical risk reporting. European Accounting Review, 28(4), 791-818. 1 2


prosperity4. Worldwide, 1 million species face extinction5, and a significant portion of terrestrial biodiversity is harboured by forests (80 % is a widely reported number, however there is no precise estimate6). Since 1990, it is estimated that 420 million hectares of forest have been lost through conversion to other land uses; the area of primary forests has decreased by over 80 million hectares. Between 2015 and 2020, the rate of deforestation was estimated at 10 million hectares per year7. From 2001 to 2021, there was a total of 437 million hectares of tree cover loss globally, equivalent to a 11% decrease in tree cover since 2000 and 176Gt of CO₂ emissions8. The importance of biodiversity goes way beyond common perception. Biodiversity loss can lead to major financial risks; it threatens the availability of ecosystem services on which economic activities depend. “By financing companies that depend on ecosystem services, financial institutions are exposed to physical risks. The loss of ecosystem services can threaten companies’ production processes and this can translate into a deterioration in their financial position. […] Financing companies with a negative impact on biodiversity and ecosystem services also exposes financial institutions to transition and reputational risks” 9. Additionally, there is no solution to climate change without a solution to (tropical) deforestation. By protecting and restoring global forests, 18% of the emissions reductions needed by 2030 to prevent catastrophic climate change can be achieved. Forest, land and agriculture industries are critical to this. These sectors contributed 2019 for 22% to global emissions, half of which come from deforestation driven by commodities providing food, fibre, feed and fuel10. These numbers need to be considered against the backdrop of strong evidence that the land sector offers one of the largest solutions to climate change, due both to the potential of reducing emissions from land use practices, and the ability to sequester carbon in trees and soil11. We would like to stress that our overarching recommendations will contribute to the comparability, reliability and usability of the disclosed information, increasing the effectiveness of the standards overall. The highlighted aspects are essential for users of disclosure information, including financial institutions (e.g., institutional investors, asset managers, or banks), financial regulators and wider stakeholder groups (e.g., household investors, civil society, researchers) as a basis for meaningful decision-making. At the same time, our recommendations consider that the standards need to be feasible and consistent with other reporting standards. As such, our recommendations highlight and build on existing standards and reporting frameworks, particularly in the context of deforestation and conversion-free supply chains that have been widely adopted and supported by both companies and civil society12. We acknowledge and welcome that the ESRS already include references to existing standards and frameworks, as such our comments aim to strengthen the apparent objective of linking the ESRS to existing sustainability reporting standards and frameworks. We urge EFRAG to keep IPCC (2020). “Climate Change and Land, An IPCC Special Report on climate change, desertification, land degradation, sustainable land management, food security, and greenhouse gas fluxes in terrestrial ecosystems. Summary for Policymakers’. link. ; Gibbs, D. et al. (2018), “By the Numbers: The Value of Tropical Forests in the Climate Change Equation.” World Resources Institute. link. ; IUCN Issues Brief (2021), “Forests and Climate Change”. link. ; Pendrill, F. et al. (2019). “Agri-cultural and forestry trade drives large share of tropical deforestation emissions”. Global Environmental Change 56:1-10. link. 5 IPBES (2019), Global assessment report of the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services. 6 FAO 2020. State of the World’s Forests 2020 ( 7 Ibid. 8 Globalforestwatch (2022), Global Deforestation Rates & Statistics by Country | GFW ( 9 DNB & PBL (2020), Indebted to nature: Exploring biodiversity risks for the Dutch financial sector. link 10 IPCC Climate Change (2022), Mitigation of Climate Change. WORKING GROUP III CONTRIBUTION TO THE IPCC SIXTH ASSESSMENT REPORT (AR6) Summary for Policymakers. link 11 IPCC’s 2019 Special Report on Climate Change and Land. Girardin C.A.J., et al. (2021), Nature-based solutions can help cool the planet - if we act now, Nature; Griscom B.W. et al. (2017), Natural climate solutions. 12 e.g., Accountability Framework Initiative and CGF Forest Positive Coalition 4


ambition levels high, going beyond existing standards, and to aim for consistency with others through advocating for a rise of ambition of the others. We structure our feedback on cross-cutting and topical standards along two chapters and highlight our respective key recommendations as follows: 1

Implement the double-materiality concept more effectively 1.1 1.2 1.3


Specify principles on robust materiality assessments in ESRS 1 Centralize the materiality assessment procedures in ESRS 2 Adjust the rebuttable presumption for the topical and sectoral standards

Assure disclosure on ecosystem conversion and deforestation 2.1 2.2 2.3 2.4

Strengthen the consideration of deforestation and ecosystem conversion in ESRS E4 Provide meaningful and comparable metrics to be reported Increase data availability whilst ensuring feasibility Value-chain reporting should be mandatory

1. Implement the double-materiality concept more effectively 1.1. Specify principles on robust materiality assessments in ESRS 1 We strongly support that the double materiality perspective is embedded as a key principle in ESRS 1. To ensure that double materiality is indeed considered sufficiently in terms of both the insideout and the outside-in perspective, we suggest adding further principles in ESRS 1, chapter 2.2, particularly to ensure the validity, robustness and transparency of the materiality assessments’ methodology to be disclosed under ESRS 2, chapter 4. Such principles should provide entities with further guidance on the expected rigour of their materiality assessments, and should provide references to examples on how to implement robust materiality assessments. We view it as essential to stress the importance of, and reference to, established materiality assessment procedures, which illustrate the envisioned depth and rigour of the materiality assessments that firms need to undertake and report on. In other words, ESRS 1 needs to set the tone in terms of principles and guidance beyond double materiality for the expected depth of the materiality assessment disclosed under ESRS 2. We caution that without reference to such additional principles and guidance, the materiality assessments may be conducted in a superficial or even opportunistic manner, leading to the loss of precious time to judge if and where real progress is being achieved (or not). The materiality assessment may also be treated as a check-box exercise after using the sectoral and topical standards as a starting point and main resource of the reporting procedure under the CSRD. This can lead to incomplete, inaccurate, and incomparable materiality classifications. To integrate the most critical principles for materiality assessments, we suggest that EFRAG coordinates closely with organizations such as Global Reporting Initiative (GRI), who have years of experience in helping firms to establish meaningful materiality assessments beyond financial considerations. Further, we propose to include guidance on how firms can use sector specific characteristics as a starting point for such procedures. While the SASB materiality map provides a useful reference in terms of structure and user friendliness for indicating financially material issues based on sector affiliations, the ESRS should provide materiality guidance based on double 4

materiality. Such guidance can be understood as a starting point and minimum requirement (see also section 1.3 on the rebuttable presumption). Further, we urge EFRAG to specify and clarify terms in ESRS 1, chapter 2.2, particularly regarding the definition and implementation of “double materiality”. §51, for instance, leaves much room for interpretation in stating that materiality of an actual impact is determined by the severity of the impact (scale, scope, and irremediable character), while the significance of a potential negative impact is determined by the severity and likelihood of the impact. Scale, scope and irremediable character are thus far neither included in Appendix A on “Defined terms” nor are thresholds or other methodologies provided for operationalization of these dimensions. Further guidance and specificity is necessary to ensure that these dimensions are considered in a meaningful manner.

1.2. Centralize the materiality assessment procedures in ESRS 2 We generally support and see value in all three elements of the materiality related disclosures as laid out in ESRS 2, chapter 4 (IRO 1, IRO 2, IRO 3). More specifically, we support the ESRS to mandate (i) entities to conduct and report on an entity specific materiality assessment (ESRS 2, IRO 1), (ii) the disclosure of the consideration of all sustainability issues included in topical standards and the applicable sector-specific standards in these assessment (ESRS 2, IRO 2), and (iii) the disclosure of additional, entity-specific material items not covered by sector agnostic or sector specific ESRS (ESRS 2, IRO 3). Despite this general support, we caution that the current architecture of the ESRS series complicates a comprehensive understanding of the requirements laid out in ESRS 2, and generates substantial confusion about the procedures and requirements that entities need to undertake in terms of their materiality assessments. A major point of concern is that guidance on topic-specific materiality assessment is currently provided in the respective Appendix B of each topical standard, most of the times in the Application Guidance right after the first disclosure requirement. Besides being difficult to spot, it is unclear why the topical standards include detailed descriptions on materiality assessments in their respective appendices and application guidance, when topical standards are otherwise presented as laying out the disclosure requirements that entities need to consider and disclose after the materiality assessment as part of ESRS 1 and particularly ESRS 2. We would thus like to provide specific suggestions on how to resolve these issues. We suggest to summarize all sustainability topics (including sub-topics and sub-sub-topics) of the topical and potentially also the sector specific standards13 in a comprehensive table. This table would serve as a useful orientation and would provide an intuitive initial link between the crosscutting standards and the topical and, potentially, sectoral standards. Furthermore, it would serve as an overview through links to the most important resources linked to each sustainability topic. The list should thus include a row for each topic, sub-topic, and where applicable also sub-sub-topics, and include at least the following columns to capture the most important links and resources attached to a topic: (i) (ii) (iii) (iv) 13

Topic name Topic description Link to topic-specific materiality guidance Link to topical or sector standard for disclosure requirements

If a comprehensive table would become too large, possibly an “add-on” table per sector could work


(v) (vi)

Indication of applicability (for all, for sector(s) XY) Specification of rebuttable presumption

As such, we recommend to move the application guidance on topic specific materiality assessments to the overview table in ESRS 2 (as a link), which would be more intuitive, and would reduce current difficulties to spot these important elements. Further, it would resolve confusion about the sequence of how to work with the ESRS elements, as it clarifies to first conduct the materiality assessments (under ESRS 2) and then move to the ESRS topical and sectoral standards for the disclosure requirements. Under this approach, the ESRS topical and sectoral standards would then focus on the disclosure requirements, and respective application guidance, which we understand as their main role. Following the same line of thought, we recommend to clarify and simplify the connection of ESRS 2, chapters 2 and 3, and their respective disclosure requirements and application guidance in the topical standards. As laid out usefully in ESRS 1 §7, the topic specific disclosure requirements regarding (a) strategy and business model and (b) governance and organisation relate to ESRS 2 (chapters 2 and 3, respectively) “since they address several or all topics”. As such, we recommend them, and their respective topic specific application guidance, to be integrated in the abovementioned overview table in ESRS 2, too. These should only be explicitly integrated in terms of disclosure requirements in the topical standards if there are indeed topic specific disclosure requirements, such as E 1-1 in ESRS E1. Adopting this proposition would, in our view, ensure the topical and sectoral standards’ focus on disclosure requirements corresponding to ESRS 1 §7 (d) (e). The recommendation is motivated mainly by the fact that there is substantial overlap between the different ESRS elements, which causes confusion due to circular references between them. We would be happy to provide further support in establishing a coherent architecture with intuitive interfaces between the ESRS elements, in line with ESRS 1 §7. We acknowledge that our recommendations require additional work in the revision of the standards. We do, however, strongly believe that these efforts would be offset by an immense increase in clarity and reduction of confusion, contributing not only to the ESRS’s effectiveness and efficiency but also their support from future users of the standards. We would be happy to provide further insights on our visions for the above-mentioned overview table and to support EFRAG in the re-configuration of the standards’ interfaces.

Integrate additional sector specific issues in ESRS 2 Whilst still in development, we would already like to raise that the intuitive integration of the sectoral standards into the ESRS overall architecture will be critical. From participation in the sector workshops, we gained the impression that undertakings from a specific sector will most probably look at the sector standards first and will have difficulties to understand the selection of sector standards, as they most probably will not have a good overview on what topical disclosure requirements are material to them yet. This is triggered by the high number of cross-cutting and topical standards and disclosure requirements. It will probably be difficult to understand the extent to which specific topical disclosure requirements may be (slightly) different as part of their sectoral disclosure obligations. This may lead to lengthy, less meaningful reports, which are more difficult to compare. To increase user-friendliness as well as analysability and comparability, we recommend to closely compare sector and topical standards and to include the sectoral standards’ topics in the overview table mentioned above, for instance as included in our proposed comprehensive table under (v) “Indication of applicability (for all, for sectors(s) XY)”, to indicate their sector-specificity.


1.3. Adjust the rebuttable presumption Define sustainability issues which are not rebuttable We recommend to specify certain sustainability issues as non-rebuttable by (i) any undertaking, (ii) undertakings in a specific sector, and/or (iii) undertakings with certain characteristics. Currently, the rebuttable presumption allows that entities can define any sustainability issue in ESRS topical or sectoral standards as “not material for the undertaking”. At least for undertakings with certain characteristics, such as   

relevance for land –use / impact on natural ecosystems, or dependence of their supply chain on key commodities14/ the “covered products” of the proposal for EU regulation on deforestation-free products, specific sustainability topics (i.e., carbon emissions and biodiversity loss due to deforestation / land-use change)

will always be material from a double materiality perspective. These issues should thus be defined as such and these adjustments to the rebuttable presumptions should also be indicated in the comprehensive table suggested above, for example as described above under (vi) “Rebuttable presumption”. Indeed, these non-rebuttable issues would provide the absolute minimum reporting requirement beyond ESRS 2, and would be complemented by the material topics based on the mandatory and entity-specific materiality assessment.

Clarify necessary criteria for the rebuttable presumption to apply We recommend to define “reasonable and supportable evidence” (ESRS 1 §57) more precisely, and to include further details on the disclosure requirements related to such evidence. Otherwise, boilerplate arguments and statements for why an issue was determined to be non-material are likely to arise, and the underlying processes are likely to remain opaque, prohibiting judgement on their validity from an external perspective.

2. Assure disclosure on ecosystem conversion and deforestation 2.1.Strengthen the consideration of deforestation and ecosystem conversion in ESRS E4 We recognize that ecosystem conversion is addressed in ESRS 4, especially in DR 3-7 as well as Appendix B Application guidance on ESRS 2 related requirements AG7 – AG30. However, we fear two things: (1) Companies might not disclose (enough) information on their impacts on deforestation/ecosystem conversion by assessing their impacts as “non-material”. (2) The lack of visibility of these issues in the table of content leads to too little (immediate) visibility of this key threat for terrestrial biodiversity loss and climate change. 1. As stated above in 1.3, we would advocate for a mandatory non-rebuttable disclosure of ecosystem/deforestation in the operations or supply chains of every (or at least specific) undertakings. This is consistent with the proposal for a regulation on deforestation-free products that is currently being negotiated through the Council and Parliament.15 As suggested above in 1.2 we would move the biodiversity-specific see for example OECD-FAO 2022. Draft OECD-FAO Handbook on Deforestation, Forest Degradation and Due Diligence in Agricultural Supply Chains. link 15 14


application guidance on ESRS 2, currently part of Appendix B of ESRS E4, to an overview table in ESRS 2. 2. We would further like to motivate the EFRAG team to re-evaluate the option of introducing sub-topics to ESRS E4 (as done for S1), to give more explicit visibility to the most important threats for biodiversity loss, regarding terrestrial biodiversity above all ecosystem conversion/deforestation. If elaboration of (selected) sub-topics for ESRS E4 is considered, we would be happy to provide additional inputs and support. It is crucial that disclosure on ecosystem conversion includes comprehensive, quantitative and comparable data especially on  size of areas converted,  type of ecosystem conversion,  location of production sites (georeferenced), and  cut-off date or assessment period used to define ecosystem conversion linked to the undertaking or to its value chain by direct or indirect sourcing activities. We would like to highlight the importance of a clear definition of cut-off dates or assessment periods to be reported on in order to address the very destructive speculative practice of forest clearance followed by production several years later. In the Proposal for deforestation-free products, the cut-off date is proposed to be set on 31 December 2020. We strongly recommend that cut-off dates be set in line with existing sector conventions (e.g., Amazon Soy Moratorium), legal requirements (e.g., Brazilian Forest Code) and certification schemes (e.g., Round Table on Sustainable Palm Oil, Forest Stewardship Council) where earlier dates should be used accordingly.16 If no widely adopted cut-off in the sector or region exists, then the cut-off date should be no later than 2020. The inclusion of these clear definitions in the ESRS standards will support consistent data generation and allows for comparability of performance and progress across companies and value chains in ending ecosystem conversion. Furthermore, we recommend to review the current definitions of deforestation and ecosystem conversion provided in Appendix A of ESRS E4 regarding alignment with the proposal on regulation for deforestation-free products and to include a typology of ecosystem conversion activities that need to be disclosed in order to ensure clear data generation (and at the same time increase userfriendliness, such that it can be included in an existing (satellite) monitoring system of the undertakings). We recommend to seek further exchange with the team of the Accountability Framework initiative (AFi17) and the disclosure platform CDP Forests18 (both already referenced in ESRS E4) on these issues. CDP forests and GRI have recently added metrics on extent of conversion linked to operations and supply chains, in alignment with the Accountability Framework. Forthcoming guidance

For the Brazilian Soy Moratorium with cut-off dates 2006/8 see e.g. Heilmayr, R., Rausch, L.L., Munger, J. et al. Brazil’s Amazon Soy Moratorium reduced deforestation. Nat Food 1, 801–810 (2020). For certification schemes see e.g. Round Table on Sustainable Palm Oil (RTSP) (4 cut-off periods defined, see f.e. Annex 3 LUCA guidance document-English.pdf and Forest Stewardship Council (FSC). See also: Updates on the Finalization of FSC Policy on Conversion | Forest Stewardship Council. 17 The Accountability Framework Initiative (AFI) supports companies in achieving supply chains free from deforestation, conversion, and human rights violations. Companies and other stakeholders can use the Framework as a tool to assess company policies and systems against consensus-based principles and best practices, as well as a resource to support improvement processes. 18 CDP Forests defines high deforestation risk commodities and countries and provides a menu of key performance indicators that companies with tropical commodity supply chains, financiers with high deforestation risk investments, and forestry asset managers can use to generate standardized and comparable disclosures. Forests - CDP 16


by the AFi, Science Based Targets initiative, and Greenhouse Gas Protocol on holistic land use change accounting and reporting will provide further clarity on best practice. Apart from ESRS E4 also most of the other topical (environmental and social) standards (and also sector standards) contain disclosure requirements that relate to ecosystem conversion and deforestation dynamics, most directly (but not only) ESRS E 1 (e.g., scope 3 emissions) and ESRS S3 Affected Communities. To support efforts to ensure protection of vital ecosystems, indigenous peoples and local communities need to be put at the heart of solutions19. Workers in the value chain, consumers and end-users also play crucial roles in the success of these efforts. The introduction of a specific sub-topic on ecosystem conversion/deforestation in ESRS E4 would then allow referencing within these other topical standards to this sub-topic (instead of referring generally to E4). Please find specific remarks on the disclosure requirements of different topical standards in Appendix II.

2.2. Provide meaningful and comparable metrics to be reported Quantifiable and codifiable metrics with clear instructions for their measurement should be provided (especially for sector standards, but also) for the most important topical sustainability impacts, risks and opportunities (IRO). A high degree of specificity can establish the critical basis for effective benchmarking and analysability of the disclosed information. Particularly for the criteria that should be defined as non-rebuttable (see above) we suggest to include quantifiable and codifiable metrics in the topical standards. Research suggests that when there are no precise guidelines on reporting, it leads to cherry-picking approaches on indicators20, which inhibits comparability. We further suggest to provide details on metric measurement and calculative methods, where possible, which will contribute further to the reliability and comparability across firms. From our point of view, this approach for selected criteria/requirements would complement well the general approach taken by EFRAG providing disclosure principles and requiring a comprehensive materiality assessment (a highly valued approach that allows for innovations and advanced measurement systems). Providing measurement examples can also help firms in the process of reporting, specifically for items, which are currently more difficult to disclose and measure (e.g., biodiversity, human rights, corruption). Besides the reporting standards elaborated within the Task Force on Climate-Related Financial Disclosures (TCFD), the Taskforce on Nature-related Financial Disclosures (TNFD), the GRI and the International Sustainability Standards Board (ISSB), we recommend, as mentioned also in the previous section, engaging in further exchange with CDP Forests and AFi on metrics and KPIs. AFi provides a basis for standardization of reporting platforms on this topic, including recommendations for metrics. (see Appendix II for some specific examples) and this link for the overall methodology. Regarding ESRS E4 we recommend to review the voluntary nature (i.e., classification as “optional disclosure requirement”) of very important metrics on outcomes and company progress (e.g., optional disclosure requirement E4-8 – Biodiversity-friendly consumption and production metrics) and to classify more items as a disclosure requirement (e.g., % compliant, % traceable % certified etc).

Global Canopy, The Accountability Framework initiative, WWF and the Science Based Targets initiative (2022). WHY NET ZERO NEEDS ZERO DEFORESTATION NOW. Initial research paper from the UN Climate Change High-Level Climate Champions. Link ; Sze, J.S., et al. (2022), Reduced deforestation and degradation in Indigenous Lands pan-tropically. Nat Sustain 5, 123–130 (2022) ; FAO (n.d.), Deforestation and forest degradation in indigenous and tribal territories, link. 20 Korca, B. and Costa, E. (2021). "Directive 2014/95/EU: building a research agenda", Journal of Applied Accounting Research, Vol. 22 No. 3, pp. 401-422. link. 19


2.3. Increase data availability whilst ensuring feasibility Highlight even more data availabilities beyond current firm-level disclosure practices Costliness of reporting on new sustainability issues is a common argument against extensive disclosure requirements. However, as discussed previously, important progress is being made already within several companies, including the Consumer Goods Forum Forest Positive Coalition and the Soft Commodities Forum regarding their reporting against consistent KPIs towards deforestation-free supply chains. Furthermore, the proposal for a regulation on deforestation-free products will require companies placing forest-risk commodities on the EU market or exporting such commodities to collect and verify information that these commodities have been produced legally and on land that has not been deforested after 2020 including plot level geolocation. A large share of sustainability information is already available or accessible from third parties, and from the perspective of double materiality, it seems obvious that any reporting to a third party (e.g. environmental authorities) is evidence of the inside-out materiality of the respective information. We support EFRAG in its attempts to consider and provide information on sustainability related data availabilities and accessibilities beyond current firm-level disclosure practices to assess and balance data disclosure costs and benefits realistically. It is critical that all available data sources beyond firm-level disclosures are utilised, and we would thus be happy to support EFRAGs efforts in this regard with additional comprehensive, sector and topic specific assessment of crucial data sources that can usefully be integrated into the ESRS series. Do not hesitate to contact us on this issue to set up briefings with our data experts. In the following, we provide suggestions how to differentiate between three types of sustainability data, based on their availability, accessibility, or feasibility of collection. First, a considerable amount of data on land-use and land cover (LULC) change is publicly available21 and can be linked to the firm-level, even if both product traceability and quality of land-use and land cover (LULC) data still is subject to high variability. In the context of some smallholder production systems, remote sensing data may not provide sufficient accuracy or precision yet. However, the proposed EU deforestation-free products regulation will increase expectations and norms regarding both traceability and use of available data due to its requirements imports of forest risk commodities to have the geolocation of production plots and verified information that production complies with relevant laws and there has been no-deforestation after 2020. Furthermore, where companies do not yet have full traceability of products, and/or where appropriate LULC data is (yet) unavailable or of poor quality, this does not justify non-disclosure. Indeed, it is important to understand the nature of data gaps and constraints so that efforts can be targeted to support ongoing data improvements. Companies should disclose their production sites’ geo-locations21 and report the scales to which products are traceable, and land use change associated with those sourcing regions. In cases where geolocations are not known, step wise disclosure and the initial use of cruder risk measures of sourcing at country or regional level rather than production site could be used22. That means concretely, that disclosure should include the finest resolution possible, such as a sourcing area or source-shed or subnational jurisdiction, and if that is also not known then the country of origin should be reported. Information users can match these data points with accessible satellite imagery-derived

21 22

Such geolocations are currently unavailable to stakeholders, but can be provided by companies. This is aligned with developing recommendations from AFI on reporting outcome metrics.


land-use cover and change data and data products may then be used to calculate meaningful measures of LULC change at the following scales: 

What percentage of the commodity purchased or sourced by the company can be traced to the level of the production unit/sourcing area/jurisdiction/country (high-risk or low-risk jurisdiction/country) and what percentage of commodity volume has unknown provenance? What land area, in hectares, of forest and/or other natural ecosystem has been converted on production sites which are known to be in the company’s supply chain in the time since an appropriate cut-off or reference date? What land area, in hectares, of forest and/or other natural ecosystem have been converted in the sourcing area (such as source-shed of a processing facility or co-op, municipality, or landscape) in total or linked to the commodity (specify which) in the time since an appropriate cut-off or reference date? Companies should also be required to report what activities they are undertaking to improve their traceability and data on land use change year-on-year.

Third party datasets (e.g., Universal Mills List23, Trase24, UN Comtrade, FAO), which are already listed in AG 13-18 of ESRS E4, can be used as proxies in absence of other data. This provides a prime example how significant data gaps could and shall be filled through mandatory reporting in full respect of the principle of proportionality. Second, for certain sectors, critical sustainability related information is already part of firms’ internal management accounting systems or has to be reported to environmental authorities. This data is thus captured and reported already on the firm level. We suggest that these information points, especially information reported to environmental authorities, must be reported publicly, along with other disclosure requirements. There is little additional effort required for the disclosure of this type of information. Third, we suggest to conduct cost-benefit analyses on sustainability issues where data points are currently not collected and/or reported to prioritize disclosures most relevant for stakeholders and the sustainability transformation. In cases where the information is material, we suggest that the European Commission and EU governments should consider providing additional support to firms to collect the respective information and to thereby fulfil their disclosure requirements. In general, governments have an essential role to play in helping make key data sets available and in many ways disclosure and expectations around disclosure of governments is lagging behind that of companies. Some effort was made to address this recently, for example in the FACT (Forest, Agriculture and Commodity Trade) Dialogue and with the COP 26 process. But awarenessraising on the key role governments need to play is still a major task. Noting that differentiating between these different levels of information is rather complex and in need of collaboration of different actors. We would be pleased to provide further support and ideas on what the steps for increased data availability for specific KPIs in certain sectors could look like.

Identifying and integrating established data tools and sources in the ESRS series We highly welcome the fact that several standard drafts include references to important data tools (e.g., ESRS E4 within the chapter on “Biodiversity and ecosystems-related specific application guidance on ESRS 2 Disclosure Requirements IRO 1 and IRO 2 on materiality assessment”, specifically AG11-AG18). In line with our proposition to summarize important topic specific information and references in a table in ESRS 2, we would also recommend to link such data tools, and their strengths and limitations, to the suggested overview table, which would be part of ESRS 2 (please refer to section 1.2). We consider it as important to make such references more visible in the cross11

cutting ESRS standards, as they support firms in their materiality assessments and contributes to raise demand for these important data sources provided by the assessment community. Existing data tools should provide the starting point for subsequent disclosures. The current location in appendices to the topical standards entails the risk of firms’ spotting such important guidance tools late in the disclosure process, increasing its costs unnecessarily. In line with the prior section, we recommend to further invest in the identification of all available established data sources and tools, as they assist firms in fulfilling their disclosure obligations, whilst ensuring comparability and validity. See also TNFD discussion on data availability.23

2.4. Value-chain reporting should be mandatory We would like to express our support for the strong consideration of reporting along the supplychains suggested in the ESRS series. Also the US Securities and Exchange Commission (SEC) has included this aspect in their proposal for a “Standardization of Climate-Related Disclosures for Investors”.24 On average, entities’ emissions from the supply chain are five times higher than from direct operations25, while large sectors such as retail and food industries are characterized by substantial upstream dependencies on ecosystem services. To date, availability of supply chain data is limited26, partly due to the absence of regulation in many countries outside the EU. Regulation and disclosure are the key drivers of increased data availability and thus allow investors to rely on comparable data to better assess the risks and impacts of their investments. As stressed in the chapters above, we would also like to argument for mandatory reporting of material impacts in the value chain as the most important impacts often occur upstream in the value chain.27 Especially the implementation of the proposed Corporate Sustainability Due Diligence Directive and the Regulation of Deforestation-free Products would be significantly facilitated by solid supply chain disclosure regulations. The mandatory disclosure of upstream and downstream sustainability risks and impacts, should include direct and indirect sourcing. For this, more guidance should be provided on how the assessment of sustainability matters should be undertaken (following the principle of double materiality) and what processes and mechanisms undertakings should use to disclose risks and impacts of their suppliers. We would like to refer again to the Accountability Framework28 , the Science Based Targets Network29 as well as to the Aligned Accountability project30 for further information and guidance on upstream/downstream impacts/dependencies. The disclosure content of each reporting entity should especially highlight sector-typical upstream and downstream connections, addressed in specific KPIs. Therefore, we will comment on these during our upcoming review of several sector standards.

TNFD (2022), A Landscape Assessment of Nature-related Data and Analytics Availability, link. SEC (2022), The Enhancement and Standardization of Climate-Related Disclosures for Investors, link. 25 CDP (2019), CDP SUPPLY CHAIN: CHANGING THE CHAIN Making environmental action in procurement the new normal, link. 26 Erdmann, K., Hessenius, M. and Yahisi, M. (2022), Supply Chains in the Spotlight: The role of supply chain (disclosure) regulations, link. 27 Korca, B., Costa, E., Farneti, F. (2021). From voluntary to mandatory non-financial disclosure following Directive 2014/95/EU: an Italian case study. Accounting in Europe, 18(3), 353-377. link 28 Accountability Framework 29 The Science Based Targets Network (SBTN) - Science Based Targets 30 Aligning data to increase accountability – Global Canopy 23 24


*** We hope you will find these comments useful, and we wish you the best of luck with your further work on these important Exposure Drafts. Should you have any questions or identify any further need for feedback or input, please do not hesitate to reach out to us. Sincerely,

Ingmar Juergens, CEO, Climate & Company, on behalf of all authors and signatories.


Signatories Antoine Cadi, head of research and innovation, on behalf of CDC Biodiversité

Environmental Coalition on Standards (ECOS)

Global Canopy Daniel Reimsbach, Associate Professor of Accounting, on behalf of Nijmegen School of Management, Radboud University Trase

Tropical Forest Alliance

Dr. Stephan Küster, research associate, on behalf of Otto-Friedrich-Universität Bamberg, Chair of Business Administration, esp. International Accounting and Auditing Co-authors   

Helen Bellfield, Global Canopy Mariana Lopez Davila, Environmental Coalition on Standards – ECOS Sarah Draper, Global Canopy

Authors       

Prof. Dr. Frank Schiemann, Professor of Management Accounting at the University of Bamberg Ingmar Juergens, Co-founder and CEO, Climate & Company Dr. Lisa Hoch, Senior Forest Expert (external) for Climate & Company Laura Kaspar, Analyst, Climate & Company Raphael Tietmeyer, Research Associate at the University of Hamburg and external advisor at Climate & Company Theresa Spandel, Research Associate at the University of Hamburg and external advisor at Climate & Company Dr. Oliver Herrmann, Partner, Climate & Company 14

Appendix I: Expert workshops and co-workings Aim of the workshops and co-workings

Our aim was to engage with experts to have a meaningful impact on the European Sustainability Reporting Standards. We focussed specifically on deforestation relevance and to what extent important factors that influence deforestation dynamics are reflected in the cross-cutting and topical standards. We wanted to contribute with suggestions for meaningful, quantifiable and codable indicators. In our opinion only then the data provided by companies can be coherent and comparable.

Process description

We started a mini-series of co-working among a team of five experts from Climate & Company, bringing in knowledge on sustainability reporting, European regulation processes, forestry, agriculture as well as on supply chain data. We began to revise and prepare the feedback for the cross-cutting and topical standards. In a next step we engaged with experts with complementary expertise and prepared the ground for what developed into a weekly co-working session with up to twelve participants per meeting. In the first co-working session we gave a short presentation on EFRAG and the architecture of the ESRS, introduced EFRAG’s approach on the materiality assessment and presented our initial feedback on cross-cutting issues. The experts received access to both the initial feedback and an Excel working book in which all disclosure requirements of the cross-cutting and topical standards were listed. We explained the questions that we wanted to focus on in our co-working sessions, which are:   

Is the disclosure requirement relevant for sustainable land use / biodiversity (with special focus on deforestation)? Does it provide a quantitative / codified indicator? Is the data to support this disclosure requirement available? If yes, where?

In the following co-working session, we continued discussions on materiality, rebuttable presumption, the structure of the standards and its usability. In the third co-working session, we put together the viewpoints that were raised during the discussions with experts and presented our outcome on the cross-cutting and topical standards. The remaining time was used for the experts to review our document.


The feedback and comments we received during the discussions in our co-working sessions as well as individually by experts outside of these sessions were transformed into this document. Certain remarks that go more into detail and did not fit into our main observations can be found in Appendix II. In addition, we included our collected feedback into the EFRAG consultation questionnaire.


List of contributors* Name


Davide Cerrato

Ellen MacArthur Foundation

Non-financial disclosure, finance policy, circular economy

Charlotte Streck

Climate Focus

Value chain

Christoph Frischer

Environment Agency Austria

Interface with biodiversity and green finance

Christoph Töpfer

German Environment Agency

Corporate social responsibility, environmental management practices and corporate sustainability reporting

Chris West

TRASE/Stockholm Environment Institute York

Deforestation/Land conversion, data, cross-references to other initiatives (TRASE, AFI, industry-led activities)

Felipe Carazo

Tropical Forest Alliance

EU legislation on deforestation free products

Filip Gregor

Frank Bold

Frank Schiemann

University of Bamberg

Sustainability disclosures, materiality, sustainability accounting standards & regulations

Haseeb Bakhtary

Climate Focus

Value chain

Global Canopy

Deforestation/Land conversion, data, cross-references to other initiatives (Global Canopy, TRASE, AFI, industryled activities)

Ingmar Jürgens

Climate & Company

EU legislation and regulation, sustainable finance, biodiversity, climate change, data availability

Laura Kaspar

Climate & Company

Sustainability reporting, biodiversity, climate change

Leah Samberg

Accountability Framework Initiative/Rainforest Alliance

Deforestation/ecosystem conversion, definitions, standards and indicators

Freelancer with Climate & Company

Deforestation/ecosystem conversion and links with other topical standards; general structure/userfriendliness

Helen Bellfield

Lisa Hoch

Inputs on


Mariana Lopez

Environmental Coalition on Standards (ECOS)

Double materiality and circular economy

Mathilde Crepy


Circular economy

Niamh McCarthy

Climate Advisers

Climate change

Nicole Salcher

Environment Agency Austria


Raphael Tietmeyer

University of Hamburg, Climate & Company

Sustainability disclosures, materiality, sustainability accounting standards & regulations

Sarah Draper

Global Canopy

Deforestation/Land conversion, data, cross-references to other initiatives (Global Canopy, TRASE, AFI, industryled activities)

Simon König

Climate Focus

Value chain

Suzana Ostojic

University RWTH Aachen

EU Taxonomy

Toby Gardner

Stockholm Environment Institute and Trase

Deforestation/Land conversion, data and transparency, use of third-party and independent data

Theresa Spandel

University of Hamburg, Climate & Company

Sustainability disclosures, materiality, sustainability accounting standards & regulations

*The views and recommendations expressed in this document do not necessarily reflect the views of the experts / contributors

Appendix II: Collected single remarks on several disclosure requirements All single remarks on several disclosure requirements of different topical standards collected in the expert workshops and co-working (with a main focus on ecosystem conversion and deforestation) are listed here in Appendix II as a basis for our main messages presented in the text above.

ESRS E1 Climate Change Disclosure Requirement E1-1 – Transition plan for climate change mitigation


Comment AG 17 (d) - Add deforestation and ecosystem conversion as a climaterelated hazard, as it is interactive with climate-change.31 Report on aboveground/below-ground carbon emissions (consideration would need to be given to amortization periods) linked to deforestation and land use conversion. Deforestation itself (i.e. hectares of conversion) is best to be considered under E4-BE (possibly in specific sub-topic as outlined above in

Lenton, T. et al (2019), Climate tipping points – too risky to bet against, Nature, link.


point 2.1) (including indicators on area owned, leased or managed by entity). Should use forthcoming GHG Protocol Land Sector Guidance to account for land use change emissions. Should also set targets using SBTi FLAG. Linked to above could add in here more explicitly that should cover Scope 1, 2 and 3 emissions (as set out in E1-3) E1-3 – Measurable targets for climate change mitigation and adaptation

“The undertaking shall disclose GHG emission reduction targets on Scope 1, Scope 2 and Scope 3, either separately or combined” – I would suggest separately as in many cases at least in agriculture scope 3 will be by far the highest

E1-4 – Climate change mitigation and adaptation action plans and resources

For climate change adaptation forest management and timber production can provide risks and opportunities presented by climate change. The entity shall discuss the risks and/or opportunities that are presented by climate change scenarios to its owned, leased, and/or managed forestlands (referenced to their different areas/categories of (forest)land (certified/non certified, with protected conservation status, area overlapping with endangered species habitat).

E1-9 – Scope 3 GHG emissions

It is not clear why Scope 3 emissions are limited to specific upstream and downstream activities under 46 and not all activities happening upstream and downstream. Are these specific scope 3 categories really covering the hotspots along the value chain? Could possibly request land use change as specific reporting category here (if possible for agriculture and food and beverage sectors). Not sure if this is possible!

E1-10 – Total GHG emissions

Include standards that should be followed to determine the total GHG emissions. Suggestion: The life-cycle GHG emissions are calculated using Recommendation 2013/179/EU or, alternatively, using ISO 14067:2018(162), ISO 14064-1:2018(163) or the G-res tool(164). Quantified life-cycle GHG emissions are verified by an independent third party.

E1-13 – GHG mitigation projects financed through carbon credits

Stronger guidance on the quality of carbon credits would be needed (including on forest carbon credits) Missing (but probably best to address in E4 and there, if possible, in a specific sub-topic): Amount and origin of key forest risk commodities purchased (firm-level data).

ESRS E2 Pollution Disclosure Requirement General remark

Comment As it is stated in ESRS E2: "The possible impact from pollution on Biodiversity is addressed in ESRS E4 Biodiversity and ecosystems", we have no remarks on E2. In our analysis of the sector standards (upcoming) we 18

will revise the parts on especially harmful substances for biodiversity within specific sector standards (mining, agriculture, etc.)

ESRS E3 Water and marine sources Disclosure Requirement General remark

Comment If ESRS 4 would contain a specific sub-topic on ecosystem conversion/deforestation, the important impacts of trees/forests/deforestation and regulation and quality of water resources should be included there as well.

ESRS E4 Biodiversity and Ecosystems Disclosure Requirement E4-1 – Transition plan in line with the targets of no net loss by 2030, net gain from 2030 and full recovery by 2050

Comment The DR should also consider the life cycle phases (production, use, end of use) of undertakings' offerings. Might need to reference the direct and indirect scope of action along the value chain. What guidance is being provided on the allocation period to be considered between the land use change and resource utilisation? Will any cut-off dates be applied (e.g. as per EU Due diligence proposals)? Clearly defined definitions of 'deforestation' will also be needed. 2025 is a recommended target date for elimination of commodity driven deforestation and ecosystem conversion, by AFI, SBTi-FLAG32, and others. A no-deforestation commitment w/ a target date of 2025 or earlier is a requirement for a validated SBTi-FLAG target. The use of net is quite concerning, clear consensus in forest space (see Accountability Framework Initiative) but also proposed EC regulation on deforestation free products that is flagged above that cut-off date of 2020 or 2021 from which not able to source commodities produced on land with deforestation after this date. So need to be clear that advocate for no deforestation (and only net zero in context of tree plantations rather than natural forests)33. Indicators: -

32 33

Zero/Ambitious time-bound no-deforestation plan as part of climate transition plan To what level of traceability does the company commit? (e.g. to farm level, should include direct and indirect suppliers) If use certification standards, which and justify?

Forests, Land and Agriculture - Science Based Targets Accountability Framework – Definitions.



E4-2 – Policies implemented to manage biodiversity and ecosystems

Does policy specify specific ecosystems that protecting and define these? Does it define approach to identifying High Conservation Value Areas

Bullet 21 (and others) - take out the "material", when full disclosure on impacts on biodiversity loss is aimed for (see general remarks on specific mandatory disclosure/not rebuttable) Bullet 21 (d) needs clarifying as should include volume of sourcing of materials that are 'biodiversity-risk' and of this volume - the volume that are verified as biodiversity risk free, volume from high risk regions and volumes from unknown regions in line with expectations on deforestation free reporting (see impact metrics below). Bullet 23 (a) - potential 'loophole' if to rely on certification schemes that are based on 'legality' parameters. It needs to also justify how certification scheme demonstrates compliance with net zero (or ideally zero loss). E4-2 should also include supplier management policies designed to: 1) support suppliers in meeting forest, ecosystem, and biodiversity targets, 2) communicate and implement actions taken against suppliers as a consequence of non-compliance with these policies, 3) incentivize suppliers to set their own company-wide commitments on these topics. In most cases there is nowhere near enough supply of identity-preserved or segregated produces that are certified using a scheme with robust criteria on land use change, etc. So may be counterproductive to incentivize companies to report higher levels of certification. Bullet 23 (b) on traceability should specify traceability to plot of production (by geolocation of shape of plot) as per EU deforestation-free regulation. Bullet 24: consider including Digital Sequence Information (DCI). Appendix B E4-2 bullet AG 31 (b) traceability systems (consider if all internal and third-party systems shall be allowed). In all cases I think useful to determine how information is to be seen as adequately verifiable - rather than just based on self disclosure by company. Bullet AG 31 (c) and (d): take out the word "significant/significantly".

E4-3 – Measurable targets for biodiversity and ecosystems

Bullet 33 (e) is covering the increasing non-certified biodiversity-friendly production and/or procurement in addition to the (d) increasing certified biodiversity friendly-production; we welcome that the standard covers both, however would not like to see this reporting "taking over" the reporting of certified activities. Suggestion: Eliminate the "increasing" in (e). Indicators: Maybe need to clarify for targets the need in this context for cut-off date, so target for implementation but also cut off-date after which deforestation or conversion on a production area makes it non compliant with policy


E4-4 – Biodiversity and ecosystems action plans

Bullet 43: here the "may" should be switched out for a "shall", as it should be a central responsibility for companies.

E4-5 – Pressure metrics and E4-6 Impact metrics

Bullet 47 – regarding the “if the undertaking classifies this as material based on habitat loss and ecosystem services lost”. We advocate for industry or commodity-based thresholds that would trigger a mandatory disclosure (relevant to other bullets regarding E4 too). Refer specifically to new CDP and GRI metrics, as well as forthcoming AFI/SBTi/GHG Protocol guidance for best practice on indicators of deforestation/ecosystem conversion in operations and supply chains. Note that as far as deforestation is concerned, these are impact metrics. however, as far as biodiversity is concerned, they are pressure metrics (i.e., deforestation is a driver of biodiversity loss). Indicators (from a common methodology see Accountability Framework34 ) What is the land area, in hectares, of forest and/or other natural ecosystem converted on land owned, managed, or controlled by the company, by country and jurisdiction, in the time since an appropriate cut-off or reference date? What land area, in hectares, of forest and/or other natural ecosystem has been converted on production sites which are known to be in the company’s supply chain in the time since an appropriate cut-off or reference date? AND/OR What land area, in hectares, of forest and/or other natural ecosystem have been converted in the sourcing area (such as source-shed of a processing facility or co-op, municipality, or landscape) in total or linked to the commodity (specify which) in the time since an appropriate cut-off or reference date? For what proportion of the commodity sourced, purchased, or used by the company is deforestation or conversion not assessed? What proportion of total volume of the commodity produced, purchased, sourced, or used by the company in the past year has assessed or verified deforestation- and/or conversion-free (DCF)?

(optional DR) E4-8 Biodiversity-friendly consumption and production metrics

Bullet 60 - these are some of the most helpful objective measures for understanding links to deforestation and biodiversity loss, so they shouldn't be optional for companies with high risk of impact.

Taxonomy Regulation for biodiversity and ecosystems

Undertakings should disclose - if, where and how through their activities they are “significantly harming” biodiversity and ecosystems (terrestrial, water, and marine) as laid out in Art. 3 (b) and Art. 17 in conjunction with Articles 9, 12 and 15 of the Taxonomy Regulation. - failures to meet with the applicable DNSH criteria are present in its value chain. This disclosure should receive further explanation in the “Application Guidance”.


Accountability Framework – Common Methodology for Assessment of Progress Towards Deforestation-free supply chains, link.


Metrics could include: MSA.m²/kEUR on the proportion of the turnover, capital expenditure (‘CapEx’) and operating expenditure (‘OpEx’) associated with economic activities that qualify as significantly harming biodiversity and ecosystems (optional DR) E4-9 – Biodiversity offsets

We would encourage inclusion of information on the monitoring and evaluation of the success of any offsetting schemes (whether for biodiversity or carbon), i.e. to help ensure offsetting is 'robust'.

E4-10 – Potential financial effects from biodiversityrelated impacts, risks and opportunities

Quantitative metrics like "revenue dependent on natural resources" would help investors to understand the scale of these risks.

Concept of dependencies on biodiversity and ecosystems is not well connected to the risk-related disclosures. AG 10-30 in Appendix B (relate to the disclosure of the process to identify and assess material impacts) are very hard to follow. A clear and systematic concept is missing. See our recommendation above in point 1 2. to centralize guidance on materiality assessments. Better refine the technical definition of deforestation to ensure that it can be inputted into a company's satellite monitoring processes, for example.

General remarks

We suggest subtopics for the most important biodiversity issues in this standard (minimum list, not exclusive) or that – through selected subtopics, at least some biodiversity issues are highlighted such as deforestation/ecosystem conversion. Currently ecosystem conversion is addressed by several questions in E4-3 to 7 as well as in Appendix B Application guidance on ESRS 2 related requirements AG7 - AG30). This subtopic should furthermore be mandatory for at least all undertakings linked to the most important commodities causing deforestation (soy, cattle, palm oil, coffee, cocoa, timber) or to other important deforestation drivers (mining, hydropower, infrastructure in forest areas) etc. Disclosure needs to be given to area and georeferentiation of land subject to conversion as well as category of ecosystem conversion. This needs to be accompanied by clear definitions and guidance on what 'allocation' periods to use between land-use change and productive use of land linked to the company. This is important due to lags and potential indirect drivers of land use change (e.g. initial speculative clearance followed by production several years later). A lot of this is covered by either Accountability Framework or GHG Protocol Land Sector guidance already. Forthcoming joint guidance should provide some synthesis. Regarding certification schemes, justification should be needed that the certification scheme criteria align with key objectives (such as for example zero deforestation) and that it is adequately verifiable independently. Some norms and expectations on deforestation and conversion free policies, monitoring, reporting and verification are already well established across industry (e.g. Consumer Goods Forum Forest Positive Coalition, Soft


Commodities Forum and the Accountability Framework Initiative). Seek further integration.

ESRS E5 Resource and circular economy Disclosure Requirement


E5-1 - Policies

Circular economy is about minimizing the extraction of virgin nonrenewable and virgin renewable resources. Not specifying this gives license to exploit virgin renewable resources. Disclosure requirement 1 should call for the undertaking to disclose policies to decouple economic activity from the extraction of renewable and non-renewable resources.

E5-4 – Inflows

Inflows should account for all material use and clearly differentiate between non-virgin and virgin (regenerative vs non-regenerative). Failure to account for the entirety of the materials is a missed opportunity to understand the full scope of resource use, which is key to transitioning to a CE.

E5-5 Outflows

Outflow must address two issues: design and actual circulation or recovery. Design should get at the undertaking's capacity to design products following circular economy principles. Recovery will show the undertaking's capacity to keep materials in the system.

E5-6 Waste

The DR related to waste should be integrated into the outflows DR. This will reflect the weight and proportion of outflows that are not designed to be recovered and those that are not recovered. Giving waste its own section places undue attention to the end-of-life stage of a product, misleading undertakings into thinking the circular economy is about waste management when it is not. Any reporting on waste disposal methods should be integrated into the pollution standard.

Appendix A - Circular Economy definition

The proposed definition in the draft standard focuses on creating a “circular flow of resources” which can give the wrong impression that a CE is mostly about recycling. Besides, the definition is taken from an ISO working draft, breaching ISO protocol as this definition has not been agreed upon and should not be public. The definition of the circular economy should be in line with current knowledge and academic, policy and industry consensus. The CE definition should mention the commonly agreed principles of the circular economy: 1) overall reduction of resource and material use (both renewable and non-renewable), 2) elimination of waste and toxic materials, 3) prioritization of materials for uses that keep them in use at the highest level of utility for as long as possible, and 4) regeneration of natural ecosystems.

General remark

The way the standard is designed, it seems clearly complimentary (and not repetitive) to ESRS E 4. The standard does not provide sustainability criteria for the sourcing of renewable materials. There are references to regeneration, but the term is both not defined and is misused. Please clarify that regeneration is about


ecosystems and not resources, define regeneration and regenerative production, and add quality criteria for proper regenerative management

ESRS S1 Own Work Force Disclosure Requirement General remark

Comment See comments on ESRS S2. The same observations apply for own workforce if undertaking is directly acting in primary land-use sectors.

ESRS S2 Workers in the value chain Disclosure Requirement


General remark

Workers upstream are often at the same time small land holders in or close to areas of undertaking or their suppliers (so affected communities, which are addressed in S3). Land-use decisions of small land holders impact on biodiversity. Establish this logical connection between S2, S3 and E4 (potentially the subtopic on ecosystem conversion/deforestation).

S2-2 – Processes for engaging with value chain workers about impacts

Workers of undertakings or their value chains impact directly on biodiversity loss or gain (depending on the land and resource use techniques they apply). Biodiversity loss (or gain) then becomes material to the region/the direct environment the workers live in. This aspect could be highlighted and a reference being made to ESRS E4 (maybe even to a newly introduced sub-topic on deforestation/ecosystem conversion in E4). It should be reported on if biodiversity protecting land-use techniques are part of capacity-building measures for workers of undertaking or valuechain.

ESRS S3 Affected communities Disclosure Requirement


General remark

All DR of S3 are relevant for deforestation/ecosystem conversion. So a specific subtopic in E4 could also include several aspects/links to the DR of S3.

General remark 2 related to land tenure/usage rights

Especially in tropical forest areas, land and forest tenure issues are material for affected communities (as well as for their capacities to protect forest biodiversity, link to ESRS 4). Tenure claims might overlap, not be resolved yet or even subject to heavy conflicts. It is important that undertakings need to disclose on unclear/unresolved tenure issues. The standards could include some additional terms and references: the "Voluntary Guidelines on the Responsible Governance of Tenure of Land, Fisheries and Forests in the Context of National Food Security"; the term "tenure" (regarding land and forest tenure and resource use rights). Regarding traditional usage rights: include "traditional people/groups" in the standard (additional to indigenous groups). 24

S3-1 – Policies related to affected communities

Regarding sourcing policies: consider to specify that a sourcing policy that aims on no-exclusion of small producers due to higher difficulty of information gathering for sustainability reporting is desired.

ESRS S4 Consumers and end users Disclosure Requirement General remarks

Comment Consumers’ and end users’ decisions have important impacts on supply chain related deforestation dynamics. The current 6 disclosure requirements of S4 address the interactions of the undertaking with consumers/end-users regarding what might be (directly) harmful to consumers. We suggest to raise awareness on the impact consumer decisions have on climate change and biodiversity degradation (especially deforestation) - dynamics, which are harmful to everybody on the planet (thus including consumers). Furthermore, we suggest to include disclosure on actions of the undertaking to provide consumers and end-users with direct information on the related environmental impact (deforestation) of produced/sold products. If a subtopic on deforestation / ecosystem conversion will be included in ESRS E4, these aspects could then be connected/interlinked between S4 and the subtopic in E4.

ESRS G1 Governance, risk management and internal control Disclosure Requirement General remarks

Comment It states that G1 is to be applied in conjunction with E1-E4 (probably a mistake and it should say E5) and S1-S4 where disclosures on the governance structure of the undertaking and its internal control and risk management systems, with respect to specific environmental or social features is described. We also like to highlight the importance of governance, risk management and internal control of the undertakings for transformational change. Our specific comments are included in the environmental and social standards.

ESRS G2 Business conduct Disclosure Requirement General remarks

Comment On page 4 it states: ...shall be applied in conjunction with the Standards on environmental and social topics where they prescribe disclosures on the topics listed in paragraph 3 above with respect to specific environmental or social features. Those disclosures shall be considered as complementary .." and "Topics that cover similar areas may be covered in other ESRS 25

Standards, such as human rights or worker conditions. Nothing in this Standard override those requirements and undertakings should refer to the relevant Standard such as [draft] ESRS S1 Own workforce to [draft] ESRS S4 Affected communities". Suggestion to slightly adapt to: ...shall be applied in conjunction with E1-E5 and S1-S4 where they prescribe disclosures on the topics listed in paragraph 3 above with respect to specific environmental or social features. Those disclosures shall be considered as complementary .." and "Topics that cover similar areas may be covered in other ESRS Standards, such as environmental impacts, human rights or worker conditions. Nothing in this Standard override those requirements and undertakings should refer to the relevant Standard such as ESRS E 1-5 or ESRS S1 to S4. We also like to highlight the importance of business conduct of the undertakings for transformational change. Our specific comments are included in the environmental and social standards.

General remark on all cross-cutting and topical standards

Undertakings need to read, understand and work with all cross-cutting and topical standards. The amount of information given is very high, which is partly but not always necessary. We recommend to review all standards regarding repetitions of information between the different standards, between disclosure requirements and between disclosure requirements and Appendix B application guidance. It might result useful to eliminate Appendix B and to integrate guidance directly in each disclosure requirement. That would probably reduce the total number of pages due to less repetitions. The expected impact of this exercise would be increased user-friendliness resulting in more meaningful reports.


For any inquiries, please refer to: Climate & Company – The Berlin Institute for Climate Training and Research gGmbH Ahornallee 2 D-12623 Berlin Represented by: Ingmar Jürgens | David Rusnok | Website |


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