The introduction of the Corporate Sustainability Reporting Directive (CSRD) is a huge milestone toward improving transparency and accountability in corporate sustainability reporting across Europe. But its intricate reporting requirements also introduce new challenges for more than 71,000 companies under its scope.

If your business is one of them, understanding the European Sustainability Reporting Standards (ESRS)—including ESRS S3: Affected communities—is crucial. Beyond compliance, this standard provides a clear framework to prioritize the well-being of the communities your business impacts, ensuring sustainable and ethical business practices.

But what exactly is ESRS S3, and why does it matter? What are its key requirements? And how can your business work with ESRS S3 effectively? Read on for everything you need to know to approach this standard with confidence.

Quick recap: What are the ESRS?

Before we dive in, let’s quickly recap what the ESRS are all about. Developed by the European Financial Reporting Advisory Group (EFRAG), the ESRS are the detailed reporting requirements companies must follow to comply with the CSRD. 

They’re made up of two cross-cutting standards applicable to all companies and ten topical standards covering environmental, social, and governance (ESG) matters. 

What is ESRS S3: Affected communities?

As you can see above, ESRS S3: Affected communities is the third of four standards under the social pillar. It focuses on how businesses interact with, impact, and address the needs and concerns of affected communities across their operations and value chains.

Its main objective is to ensure organizations transparently report how their activities affect communities, including both negative impacts (such as environmental harm or social displacement) and positive contributions (such as local job creation or community development). 

It aims to promote accountability, human rights protection, and sustainable practices that consider the well-being of communities impacted by business activities.

Who are affected communities, exactly?

Affected communities are people or groups who live or work in areas that are, or could be, impacted by your organization’s operations or value chain.

These communities can include those living near your business’s operations (local communities) as well as those farther away. Affected communities include actually and potentially affected indigenous people.

What are the key focus areas of ESRS S3?

When reporting on ESRS S3, there are five key areas your business must consider:

1. Understanding material impacts

Companies must assess and disclose both the positive and negative impacts their operations have on communities, whether these impacts arise directly or indirectly by business operations.

2. Engaging with communities

Meaningful dialogue with affected communities is essential. Businesses need to explain how they involve community representatives in decision-making and ensure that their voices are heard and respected.

3. Providing remediation mechanisms

Establishing clear processes for addressing grievances or remediating harm caused by business operations is key. Companies should ensure accessible channels for communities to raise concerns and have those concerns addressed effectively.

4. Developing clear policies and targets

Organizations must outline their policies for managing impacts on communities and set measurable goals aligned with international standards.

5. Managing impacts, risks, and opportunities

Companies should implement systems to monitor and evaluate the effectiveness of their actions in mitigating risks, enhancing positive outcomes, and addressing dependencies within their value chain.

Why is ESRS S3 important?

Beyond helping businesses achieve CSRD compliance, ESRS S3 offers broader benefits for both businesses and society. It drives alignment with global standards for human rights and corporate responsibility, and drives businesses to consider the complete scope of their societal footprint.

Transparent reporting fosters trust with stakeholders, including investors, communities, and regulators. In fact, a global study by Deloitte and The Fletcher School revealed that over 80% of investors actively seek sustainability information during their due diligence processes.

Proactively identifying and addressing risks related to community impacts also helps businesses safeguard their reputation and avoid potential financial setbacks.

The 5 disclosure requirements for ESRS S3 (and how to implement them)

Now that we’ve got some background about ESRS S3, let’s take a look at its disclosure requirements in more detail.

General Disclosures – ESRS 2 SBM-2: Interests and views of stakeholders

Organizations must disclose how the interests, views, and rights of significantly affected communities influence their strategy and business model.

This includes addressing human rights concerns, indigenous peoples' rights where applicable, and how these considerations shape operational and strategic decisions. The disclosure should highlight whether these stakeholder views are integrated through direct engagement or credible proxies.

General Disclosures – ESRS 2 SBM-3: Material impacts, risks, and opportunities

Organizations are required to explain how actual and potential material impacts related to affected communities interact with their strategy and business model. This includes:

• Identifying the origins of these impacts in the value chain.
• Providing details about specific communities impacted (e.g., indigenous groups, local residents near operations, downstream communities).
• Describing whether impacts are systemic or linked to isolated incidents.
• Highlighting opportunities to support communities through positive contributions, such as capacity-building or other community-focused initiatives.

Disclosure requirement S3-1: Policies related to affected communities

To comply with S3-1, organizations must disclose policies addressing material impacts, risks, and opportunities concerning affected communities. This includes:

• Explaining how policies are designed to identify, assess, and manage impacts.
• Highlighting alignment with recognized international standards, like the UN Guiding Principles on Business and Human Rights.
• Reporting non-compliance cases within the organization’s operations or value chain.

Organizations should also detail how policies are communicated to employees, affected communities, or other stakeholders, using tools like websites or social media. Special attention should be given to policies that address indigenous communities or other vulnerable groups.

Disclosure requirement S3-2: Processes for engaging with affected communities

To meet S3-2, companies must disclose their processes for engaging with affected communities about material impacts. Disclosures should cover:

• Methods of engagement, such as direct interactions, consultations, or proxies.
• When and how these engagements occur, including frequency and decision-making stages.
• Efforts to engage marginalized or vulnerable groups, including indigenous peoples, respecting their right to free, prior, and informed consent.

Companies must also explain how they assess the effectiveness of these engagements. If no engagement process exists, organizations must disclose this and outline a plan to establish one.

Disclosure requirement S3-3: Processes to remediate negative impacts and channels for raising concerns

S3-3 requires organizations to disclose how they manage remediation of negative impacts and provide channels for affected communities to raise concerns. This includes:

• Describing grievance mechanisms or other channels available for communities to report issues.
• Steps to ensure the effectiveness of these mechanisms, including follow-up processes.
• Policies to protect individuals from retaliation for raising concerns.

Organizations should also report how they monitor and assess the effectiveness of remediation processes, ensuring transparency and accountability.

Disclosure requirement S3-4: Actions on material impacts and risk mitigation

Under S3-4, organizations must disclose their strategies for addressing significant community impacts. This includes actions taken to:

• Prevent, mitigate, and remediate negative impacts.
• Enhance positive contributions to affected communities.

Businesses should also explain how they evaluate the effectiveness of these actions and the processes they use to manage risks and opportunities related to community impacts. This requirement ensures accountability and encourages businesses to adopt meaningful measures that prioritize the well-being of affected communities.

Disclosure requirement S3-5: Targets for managing material impacts, risks, and opportunities

S3-5 requires organizations to set and disclose measurable, time-bound targets aimed at:

• Reducing negative impacts.
• Promoting positive contributions to affected communities.
• Managing risks and opportunities effectively.

Companies should explain how these targets are developed, whether affected communities were involved in the process, and how progress is tracked and monitored. Clear, actionable targets demonstrate a commitment to improving community well-being and help build trust with stakeholders.

How to implement the ESRS S3 Disclosure Requirements

Implementing ESRS S3 can feel complex, but breaking it down into actionable steps makes the process more manageable. Here's how your business can approach it:

1. Conduct a double materiality assessment

Not every ESRS topical standard is mandatory to report on—only those deemed material to your business. Conducting a double materiality assessment is a mandatory first step to determine whether the impacts, risks, and opportunities related to affected communities (and other ESRS topics) are significant for your business and stakeholders.

This involves assessing both impact materiality: How your company affects communities, directly or indirectly, as well as financial materiality: How community-related impacts affect your company’s financial performance.

Some key sub-topics to consider during the assessment for ESRS S3 include:

• Economic, social, and cultural rights: Evaluate how your operations affect livelihoods, education, healthcare, and cultural heritage.
• Civil and political rights: Identify potential risks to freedom of expression, peaceful assembly, and land rights.
• Rights of indigenous peoples: Pay special attention to their unique needs, such as ensuring free, prior, and informed consent for activities that may impact their lands or culture.

Whether through your supply chain, physical operations, employment practices, or resource use, almost every company will have some level of impact on communities. As a result, your assessment will most likely find that impacts on affected communities are material, requiring you to report on ESRS S3 under the CSRD.

{{custom-cta}}

2. Establish policies and governance

Next, it’s important to develop clear policies that outline how your organization will manage its impacts on affected communities. These policies should address the processes for identifying, assessing, and managing material impacts while aligning with international standards.

Effective communication here is key—share these policies with stakeholders, including employees and affected communities, to ensure they are well understood and implemented. Assign governance responsibilities to specific roles within your organization to help maintain accountability and provide effective oversight.

3. Engage with affected communities

Meaningful engagement processes are essential for involving affected communities in decisions that impact them. This involves conducting consultations directly or through credible representatives, ensuring that all voices are heard and respected. 

Inclusivity is key, particularly for marginalized groups such as indigenous peoples, women, or low-income populations. Regular communication channels should be established to keep communities informed, encourage their feedback, and foster trust between your organization and the affected groups.

Good to know: Companies that actively engage with their communities are more likely to build trust and loyalty among customers, leading to increased brand value and business success.

4. Implement remediation channels

Organizations must create mechanisms that allow affected communities to raise concerns and ensure those concerns are addressed effectively. Grievance mechanisms should be accessible, transparent, and trusted by the communities they serve, with safeguards in place to protect individuals from retaliation.

A 2023 study by the World Benchmarking Alliance (WBA) found that 91% of companies provide grievance mechanisms for workers and 76% extend them to external stakeholders. However, only 5% actually ensure these systems are trusted, and just 10% involve users in their design, performance, and improvement.

To ensure these mechanisms are effective, your business should regularly monitor and evaluate these mechanisms, focusing on resolving issues in a timely and fair manner.

5. Take action on impacts, risks, and opportunities

Taking action on material impacts, risks, and opportunities requires a proactive approach. Develop specific measures to prevent, mitigate, and remediate negative impacts on communities through targeted initiatives.

 Invest in programs that contribute positively, such as supporting local businesses, enhancing infrastructure, or improving access to education. Collaboration with local stakeholders can help align your efforts with community needs and amplify the positive outcomes of your actions.

6. Track and report on effectiveness

To ensure accountability, set measurable targets to assess the effectiveness of your actions. Progress toward these goals should be monitored using key performance indicators (KPIs), which provide insights into what is working and where improvements are needed. 

Regularly evaluate outcomes to identify opportunities for refinement, and share these findings transparently with stakeholders to build trust and demonstrate your commitment to continuous improvement.

7. Allocate resources

Ensure adequate resources—financial, human, and technical—are dedicated to implementing and maintaining your ESRS S3 compliance efforts. 

Clearly assign roles and responsibilities to specific teams or individuals within your organization, and invest in training to enhance internal capacity for managing community impacts. This commitment of resources is critical for long-term success.

8. Document and disclose

The final step is to prepare detailed disclosures that align with ESRS S3 requirements. This includes summarizing your policies, governance practices, and actions taken, as well as providing evidence of community engagement, grievance mechanisms, and progress toward your targets. 

Use standardized tools and frameworks to ensure your reporting is consistent and comparable, giving stakeholders a clear and accurate view of your efforts to address community impacts. To help you, we’ve developed a list of reporting best practices here.

Select the right software for your ESRS S3 reporting

To meet ESRS S3 requirements, organizations should focus on building strong processes for engaging with affected communities, tracking impacts, and ensuring transparency in their policies and actions. 

Implementing tools that streamline data collection and reporting can help businesses manage these requirements efficiently, while also creating meaningful relationships with the communities they impact. 

By adopting sustainability management and compliance software like Coolset to organize and analyze data, companies can proactively address community concerns, measure the effectiveness of their actions, and meet their sustainability goals with confidence.

If you’re looking for a solution to simplify compliance and enhance transparency, explore how Coolset can support your reporting needs. Try our interactive product tour below or book a free advisory call today.