ESRS standards – S in ESG

In addition to environmental impacts, which you can read about in the previous article “ESRS Standards – E in ESG”, which can be found at the link here another area that ESG addresses is social factors or social responsibility. Although environmental factors receive the most attention across business, government and the general public, it is the social aspects that have the greatest impact on individuals and communities.

“S” as a social factor
At the outset, it is worth noting that social factors are and will be inevitable for most of the companies concerned – indeed, even after the materiality analysis (which will be addressed in the following articles), non-financial reporting on the areas covered by social factors will not be avoided in most cases.

Whether it’s the OHS of their own employees or compliance with more than just labour laws within the supply chain, businesses will need to start tracking, reporting and rigorously monitoring compliance in all relevant areas.

Social factor “S” represents social factors such as employee rights, health and safety standards, gender equality and pay equity – issues that can have a negative impact on society. It also examines internal policies such as inclusion, the company’s relationship with employees, customers and other stakeholders. Product safety and quality and consumer protection are other of the many social indicators taken into account.

ESRS-S subgroups
The ESRS divides social factors into four sub-areas, which are presented below.

ESRS S1 – own workforce
The first group is information about the company’s own staff (and employees). This standard applies to the enterprise’s own workforce, which includes both persons who are in an employment relationship with the enterprise (under Czech law, employees) and persons who are not employees and who have a contract with the enterprise for the provision of labour (under Czech law, self-employed persons), or persons who are provided by another enterprise to perform work, i.e. employees assigned by, for example, an employment agency.

Enterprises must describe in the ESRS S1:

1. how the company affects its own employees in terms of significant positive and negative actual or potential impacts;
2. any measures taken to prevent, mitigate or remedy actual or potential negative impacts and to address risks and opportunities and their results;
3. the nature, type and extent of the company’s significant risks and opportunities associated with its impacts and dependence on its own workforce, and how the enterprise manages the impacts; and
4. the financial impact of significant risks and opportunities arising from the impacts and dependencies of the enterprise on its own workforce in the short, medium and long term.

To comply with ESRS S1, the company must also explain how it identifies and manages the actual and potential impacts on its own employees in relation to the following social, including human rights:

1. working conditions, which include access to employment in the undertaking, working hours, adequate wages, social dialogue, freedom of association, the existence of works councils and workers’ rights to information, consultation and participation, collective bargaining, including the proportion of the undertaking’s employees covered by collective agreements, work-life balance and the undertaking’s OSH;
2. Equal treatment and opportunities for all, covering gender equality and equal pay, training and professional development, employment and inclusion of people with disabilities, measures against violence and harassment in the workplace and diversity;
3. other labour-related rights, including those relating to child labour, forced labour, adequate housing and privacy.

ESRS S2 – Workers in the value chain
Another area is the impact of the company on workers in its value chain in terms of significant positive and negative impacts, any measures taken and the results of these measures to prevent, mitigate or remedy actual or potential impacts. In particular, this includes significant impacts on workers in the value chain related to the undertaking’s own activities and value chain, including through its products or services and its business relationships.

As is the case for ESRS S1 – own workforce, the enterprise must describe in the non-financial report:

1. how the enterprise affects its workers along the value chain in terms of significant positive and negative actual or potential impacts;
2. any measures taken to prevent, mitigate or remedy actual or potential negative impacts and to address risks and opportunities and their results;
3. the nature, type and extent of the enterprise’s significant risks and opportunities associated with its impacts and dependence on workers in the value chain and how the enterprise manages the impacts; and
4. the financial impact of significant risks and opportunities arising from the impacts and dependencies of the enterprise on workers in the value chain in the short, medium and long term.

It must also indicate how it identifies and manages actual and potential impacts on workers in the value chain, in relation to working conditions, equal treatment and opportunities for all and other related rights (see requirements for ESRS S1).

ESRS S3 –  affected communities
The third area is information on the interests and position of stakeholders (e.g. shareholders) and their influence on the business model and strategy of the company, the involvement of affected communities in the impact discussions, and the measures and targets for significant impacts on affected communities.

To meet these standards, the company must provide an explanation of its approach to identifying and managing all significant actual and potential impacts on affected communities in relation to (i) the economic, social and cultural rights of communities (e.g. sufficient food, water and sanitation, impacts related to land and security); (ii) civil and political rights (e.g. freedom of expression, freedom of assembly, impacts on human rights defenders); and (iii) specific indigenous rights (e.g. free, prior and informed consent, right to self-determination, etc.).

ESRS S4 – consumers and end users
The final group is consumer and end-user data, consumer and end-user involvement in impact discussions, processes for remedying negative impacts and opportunities for consumers and end-users to raise objections and concerns, and more.

In particular, these include (i) information-related impacts on consumers and/or end-users (e.g. privacy, freedom of expression and access to (quality) information), (ii) personal safety of consumers and/or end-users (e.g. health and safety, child safety and protection), and (iv) social inclusion of consumers and/or end-users (e.g. non-discrimination, access to products and services and responsible marketing practices).

More information can be found on the EFRAG (European Financial Reporting Advisory Group) website here.

Conclusion
How a company can manage its relationships with its employees, the society in which it operates and the cultural and political environment is the main question behind the “S” in ESG. This social aspect of sustainable investing is crucial both for companies as businesses and for workers and employees themselves, who are directly affected by remuneration, health and safety measures, etc.

Given the importance of the social factors agenda, which companies must also address in the context of national compliance, particularly with regard to labour law, the companies concerned should pay close attention to the ESRS-S standards and bring their internal procedures, as well as all documentation, into line with all relevant legislation at both national and EU-wide level in a timely manner.

In conclusion, satisfied employees and customers are always the best calling card, which plays an important role in investors’ decision-making. Focusing on these topics can ultimately increase profits and, at the same time, corporate social responsibility. In our next article, we will focus on the last concept in ESG, namely G – corporate governance.

If you have any questions about non-financial reporting or the context of ESRS-S and employment law in general, please do not hesitate to contact us, our PEYTON legal team is at your disposal.

 

Rachel Kouklíková, legal assistant – kouklikova@plegal.cz

Tereza Hrudková, legal assistant – hrudkova@plegal.cz

Mgr. Jakub Málek, managing partner – malek@plegal.cz

 

www.peytonlegal.en

 

28. 2. 2024