Author: lily.russelljones

Report finds evidence linking inadequate engagement with Indigenous Peoples and local communities to operational disruption, legal action, financing risks and billions of dollars in losses across sectors.

Businesses can face significant financial losses if they fail to adequately engage with Indigenous Peoples and local communities on nature-related issues, according to a report by Shift.   

Shift, a non-profit working globally to embed respect for human rights into business, has published a new report on “Community Engagement, Nature and Financial Materiality: An evidence review of the financial effects of engagement with Indigenous Peoples and local communities on nature-related issues.” 

Shift analyzed a range of evidence, including more than 1200 cases where impacts companies had on nature through the use of land, water or other natural-resources affected Indigenous Peoples and local communities.

In 69% of cases, Shift found evidence that the quality of a company’s engagement with Indigenous Peoples and local communities had a positive or negative effect on its financial prospects.   

“This research shows that meaningful engagement with Indigenous Peoples and local communities is not only essential for respecting rights and managing impacts on people and nature, but is also increasingly financially material,” said Caroline Rees, President of Shift. “The quality of community engagement can help determine whether nature-related impacts become a source of trust and resilience, or of conflict, disruption and financial loss.”   

Shift found that poor or non-existent engagement often led to community opposition that resulted in significant financial losses for companies from operational delays, reputational damage and legal or regulatory challenges.   

By contrast, companies that engaged early, consistently and meaningfully with local communities often avoided opposition and associated financial risks. Some businesses that created partnerships with local communities experienced financial benefits such as more stable operations and resilient supply chains.  

The report has been published as the International Sustainability Standards Board (ISSB) considers how to introduce reporting on nature-related issues into its disclosure standards and guidance. Shift’s analysis shows that information about the quality of a company’s engagement with local communities can affect cash flows, project viability and valuation, making it decision-useful for investors.    

“The evidence is clear. We support calls for companies across sectors and geographies to report on steps they are taking to engage with local communities and Indigenous Peoples,” Rees said. “However, the relevant information is not just how companies pursue such engagement, but also how the insights or agreements that result shape company decisions and actions. That’s the information that shows whether risks are being managed.”   

“Businesses can have profound impacts on nature which many Indigenous Peoples and local communities depend on and take pride in stewarding on behalf of everyone on the planet,” said Lucy Mulenkei, co-chair of the International Indigenous Forum on Biodiversity. “I am delighted with this research which provides extensive evidence of the financial materiality of community engagement.” 

The report has been published alongside a companion document which includes 24 detailed case studies. These examples illustrate how the quality of a company‘s engagement with Indigenous Peoples and local communities can contribute to a range of positive and negative financial effects.   

The case study document includes contributions from the United Nations Environment Program World Conservation Monitoring Centre (UNEP-WCMC), Liquen Consulting, a group that mediates disputes between companies and communities and TMP, a global advisory group.    

Editor’s note:   

• The publication was written with financial support from the International Climate Initiative (IKI) of the German Federal Ministry for the Environment, Climate Action, Nature Conservation and Nuclear Safety (BMUKN) via the United Nations Development Programme (UNDP) and Global Canopy.   

Shift has published an open letter calling for the European Commission to drop a proposal that would exempt asset managers from key sustainability reporting requirements.

The letter, sent to European Commissioner Maria Luis Albuquerque, was jointly written by Shift, WWF, Frank Bold, The European Sustainable Investment Forum (Eurosif), The European Federation of Financial Analyst Societies (EFFAS) and the European Trade Union Conference (ETUC). It urges the commission to remove the proposal in the final version of the European Sustainability Reporting Standards, which is due to be published in the coming months. Read the letter in full below.

Open letter to Commissioner Maria Luis Alburquerque

To: Commissioner Maria Luis Albuquerque

cc:

President of the European Commission Ursula von der Leyen

Executive Vice-President Stéphane Séjourné

Executive Vice-President Teresa Ribera

Commissioner Valdis Dombrovskis

Brussels, 3 June 2026

Subject: Proposed asset management exemption in the revised ESRS contravenes explicit scope of reporting obligations established by the EU CSRD

Dear Commissioner Albuquerque,

As organisations involved with EFRAG, we would like to express our deep concern about the proposal by the European Commission to exempt certain investments from the scope of reporting under the Corporate Sustainability Reporting Directive. We consider that AR17 in ESRS 1 of the draft Commission Delegated Regulation, issued for public consultation on 6 May 2026, exceeds the exemptions for specific categories of investment products provided in the Accounting Directive, as amended by the CSRD. The proposed Level 2 provision concerning an extensive removal of asset management from the scope of sustainability reporting appears to be beyond the European Commission’s legal mandate.

The legal basis

The Accounting Directive determines the scope of corporate sustainability reporting. This firstly concerns the personal scope established in Article 19a, 29a and 40a. In addition, in Article 1(4) it contains an explicit exemption for two categories of investment funds, UCITS and AIFs, as it holds that: “The coordination measures prescribed by Articles 19a, 29a and 29d shall not apply to financial products listed in points (b) and (f) of point (12) of Article 2 of Regulation (EU) 2019/2088”.

Article 2 of Regulation (EU) 2019/2088 lists the following financial products:

• (a) a portfolio managed in accordance with point (6) of this Article;
• (b) an alternative investment fund (AIF);
• (c) an IBIP;
• (d) a pension product;
• (e) a pension scheme;
• (f) a UCITS; or
• (g) a PEPP;

This means that the intention of the co-legislators is that financial products in (a), (c), (d), (e) and (g) are in scope. Sub (a) references point (6) within the same article, which holds that: “‘portfolio management’ means portfolio management as defined in point (8) of Article 4(1) of Directive 2014/65/EU.” This article in Directive 2014/65/EU holds that: “‘portfolio management’ means managing portfolios in accordance with mandates given by clients on a discretionary client-by-client basis where such portfolios include one or more financial instruments.”

The scope of reporting obligations is thus clearly established in the CSRD. Level-2 instruments such as the European Sustainability Reporting Standards cannot and should not be used to further reduce the scope.

Rationale

In addition, the European Commission does not provide a sound rationale for the proposed Level-2 exemption. It merely states that: “The proposed text includes new provisions to avoid the risk that undertakings that carry out asset management activities are required to report information that is not relevant about the investments that they manage.”

Notably, the CSRD/ESRS framework is set up specifically to avoid reporting on irrelevant information. Where information on impacts, risks or opportunities is relevant (i.e. ‘material’), it must be disclosed. Where it is not relevant, it does not have to be disclosed. To presuppose that certain activities or parts of an undertaking’s value chain are by definition irrelevant sits at odds with the logic of the reporting framework. It also creates a problematic precedent for future revisions, as undertakings in different sectors will seek explicit exemptions where they see ‘irrelevance’.

The premise of ‘irrelevance’ is fundamentally misaligned with the established interpretation and application of the UN Guiding Principles and OECD Guidelines in the context of asset management. Both the OECD and the Office of the UN High Commissioner for Human Rights have clarified that institutional investors and asset managers can be directly linked to adverse impacts through their business relationships, irrespective of whether they hold legal ownership of the underlying assets or act pursuant to fiduciary duties. Investors and investor groups have routinely written about and acted on the understanding of this responsibility.

Even where investment mandates follow client instructions, asset managers retain significant discretion over portfolio construction, stewardship, engagement, voting and sustainability integration. Without reporting on managed assets, investors, beneficiaries, supervisors and other stakeholders will have limited ability to assess whether sustainability commitments are being effectively implemented. Actual portfolio holdings provide the most objective evidence of how policies translate into practice — rather than merely described in theory. Removing this transparency would undermine accountability, weaken public trust and increase greenwashing risk.

We therefore strongly urge the European Commission to refrain from including ESRS 1 – AR17 in the final Delegated Regulation.

Yours sincerely,

Shift’s response to the EU delegated act

The European Commission has published a near-final version of the European Sustainability Reporting Standards (ESRS). These standards set out the information that companies must disclose about their environmental and human rights impacts in order to comply with the Corporate Sustainability Reporting Directive (CSRD). On May 6, the European Commission opened a public consultation on the revised ESRS, which largely reflect the recommendations submitted by the advisory body EFRAG to the Commission in late 2025. Stakeholders have until 3 June to respond to the consultation.

The revised standards mark a final step in the wider revision process for EU sustainability legislation. In February the European Union adopted an Omnibus Directive which amended the CSRD and the Corporate Sustainability Due Diligence Directive (CSDDD), including by reducing the number of companies covered by CSRD. As Shift remarked at the time, this reduction in the scope of transparency requirements for companies headquartered or operating in the EU is a step backwards. Many of those now excluded are likely to find themselves facing varying information demands from investors and others, given the lack of an ESRS-based report. We hope that the reduced scope of coverage will be reversed in future years as the value of companies producing single, sufficient and coherent sustainability reports is demonstrated.

For now, Shift welcomes the fact that the revised ESRS issued by the Commission remain closely aligned with the UN Guiding Principles on Business and Human Rights (UNGPs) and the CSDDD. The standards reflect a risk-based approach to determining which material impacts should be reported and require disclosures across all stages of due diligence. They also retain the strengthened reporting expectations recommended by EFRAG on the payment of adequate wages for companies’ employees. However, some of the Commission’s revisions introduce additional elements that risk creating more confusion and less transparency.

Alignment with the CSDDD and international due diligence standards

With the exception of one point highlighted below, the revised ESRS demonstrate a high level of alignment with the CSDDD as well as the international due diligence standards that the CSDDD is based on: the UNGPs and the OECD Guidelines for Multinational Enterprises. This is important, as it allows companies to meet expectations under due diligence and reporting standards, as well as wider investor and lender expectations, through a single, coherent methodology. With the draft ESRS, the European Commission reaffirms that:

• The criteria to determine when negative impacts are material for reporting purposes are identical to the requirements that companies should use if they need to prioritize impacts for action as part of their due diligence efforts;
• For companies that have already conducted due diligence, including engagement with affected stakeholders, this will provide the key input when they determine their material negative impacts for the purpose of reporting;
• A company’s material impacts and dependencies are the basis for determining the company’s material sustainability-related risks and opportunities.
• Companies need to disclose meaningful information related to all steps of due diligence: how they identify, assess and prioritize impacts, the actions they take to address them, and how they track the effectiveness of those measures, in addition to their processes for engaging with affected stakeholders and the use and results of grievance mechanisms.

Importantly for the quality of social disclosures, the Commission also follows the EFRAG advice to create alignment between the ESRS and the CSDDD with regard to adequate wages. Whereas the current ESRS allow companies to disclose payment of minimum wages as ‘adequate’, the new ESRS require benchmarking against living wage estimates that comply with the criteria for such estimates set by the International Labour Organization.

A small but problematic revision that would change companies’ responsibilities

Despite these positive elements, one small but critical Commission revision to the draft ESRS is problematic in ways it may not have intended. Since their adoption in 2011, the UNGPs and the OECD Guidelines clarify that companies can be involved with adverse human rights impacts in three ways: they may cause or contribute to impacts through their own activities, or impacts may be directly linked to their operations, products and services through their business relationships. These three ‘levels of involvement’ also determine companies’ obligations under the CSDDD.

In the revised ESRS, however, the European Commission replaces ‘direct linkage’ with the term ‘other connection’. This introduces a novel, undefined and open-ended category that may significantly stretch the scope of companies’ responsibilities in unhelpful and unfounded ways.

Take the example of a supplier with two factories – one where there is child labor and a second where there is none. If a company’s products are made in the factory where there is no child labor, it has no ‘direct link’ to abuse. The fact that it has a connection to the supplier is not sufficient to create a responsibility for the child labor in the second factory. The European Commission’s introduction of ‘other connection’, however, would be grounds for it to have a responsibility regarding how things are made in both factories, based simply on its connection to the supplier. While that may be attractive to some in principle, in practice it creates an unworkably expansive form of responsibility that would divert from the core expectation of companies: that they be accountable for how their products and services are sourced, made, delivered and (within limits) used.  

Sustainability reporting by financial institutions

Another problematic change compared to the version submitted by EFRAG is the novel provision allowing financial institutions to disregard impacts, risks and opportunities related to investments they manage on behalf of clients where the institution does not retain the risks or rewards of ownership. This exemption is fundamentally misaligned with the established interpretation and application of the UN Guiding Principles and OECD Guidelines in the context of asset management. Both the OECD and the Office of the UN High Commissioner for Human Rights have clarified that institutional investors and asset managers can be directly linked to adverse impacts through their business relationships, irrespective of whether they hold legal ownership of the underlying assets or act pursuant to fiduciary duties. Investors and investor groups have routinely written about and acted on the understanding of this responsibility.[1]

The ability to influence investee companies through stewardship, engagement, voting rights, and investment decisions is central to responsible investment practice and reflects due diligence expectations under international standards. Exempting managed assets from consideration therefore risks creating a significant blind spot in sustainability reporting and undermines the coherence between the ESRS and internationally recognized standards on responsible business conduct and responsible investment.

Phase-ins for social reporting

Under the existing timeline, large non-listed companies within the scope of the CSRD would be required to report on impacts, risks and opportunities related to workers in the value chain, affected communities, and consumers and end-users (S2, S3 and S4) from fiscal year 2027 onwards. Indeed, a considerable number of companies are already preparing CSRD-aligned reports for 2026 on a voluntary basis. However, the Commission’s revisions to the ESRS would allow them to postpone reporting on these topics for an additional two years. This further reduces transparency of human rights impacts in companies’ value chains.

Allowing less-prepared companies to omit disclosures on these material topics until 2029 undermines comparability and creates an uneven playing field. Importantly, it also reduces the availability of decision-useful information on material social impacts. For most companies, the most material human rights impacts – the source of many material risks – will sit outside of their own workforce. Any review of social-related lawsuits, complaints, operational disruptions and reputational harm will quickly show that they are particularly prevalent in relation to companies’ value chain workers and affected communities. Delaying for another two years any requirement to report specific information about such impacts, risks and opportunities would create a significant gap for investors and other users of sustainability information. It also undermines interoperability with other reporting requirements.

Summary of Shift recommendations for the consultation on the draft ESRS:

• Maintain the high-level of alignment with the CSDDD and international due diligence standards.
• Apply the established terminology of ‘cause, contribute, directly linked’ instead of introducing the novel and open-ended concept of ‘other connection.’
• Remove the exemption for reporting on investments that are managed on behalf of clients where the institution does not retain the risks or rewards of ownership.
• Remove the additional two-year phase-in for reporting on workers in the value chain, affected communities and consumers and end-users.

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Footnotes

[1] PRI: An introduction to responsible investment: Human rights (2024). Available at: https://public.unpri.org/an-introduction-to-responsible-investment-human-rights/12026.article#downloads; OHCHR: Taking stock of investor implementation of the UN Guiding Principles on Business and Human Rights (2021). Available at: https://www.ohchr.org/sites/default/files/Documents/Issues/Business/UNGPs10/Stocktaking-investor-implementation.pdf;  IAHR: Investor Toolkit on Human Rights (2020). Available at: https://investorsforhumanrights.org/sites/default/files/attachments/2022-03/Full%20Report-%20Investor%20Toolkit%20on%20Human%20Rights%20May%202020_updated_0.pdf; OECD: Responsible business conduct for institutional investors (2017). Available at: https://www.oecd.org/content/dam/oecd/en/publications/reports/2017/01/responsible-business-conduct-for-institutional-investors_3f5732a1/8b9e240a-en.pdf; OHCHR: The issue of the applicability of the Guiding Principles on Business and Human Rights to minority shareholdings (2013). Available at: https://www.ohchr.org/sites/default/files/Documents/Issues/Business/LetterSOMO.pdf

March 20, 2026

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Rules that place greater responsibilities on firms to identify and address human rights abuses have been finalised.

After almost a year of negotiations changes to the Corporate Sustainability Due Diligence Directive (CSDDD) and Corporate Social Reporting Directive (CSRD) have become EU law.

While not without limitations, the directives represent a significant step forward.  They have the potential to drive meaningful action by companies to prevent the most severe human rights harms from occurring across value chains.

Now the real work begins. At Shift our advisors have been helping businesses get to grips with what the legislation means for them.

The good news is that both directives are grounded in the UN Guiding Principles on Business and Human Rights (UNGPs) which have been around for over 15 years. That means companies do not have to reinvent the wheel when preparing for compliance – they can benefit from a wealth of existing guidance that can help them begin identifying and addressing risks to people and planet.

This month Shift ran multiple webinars attended by hundreds of businesses from all over the world where we offered an in-depth look at the CSRD and CSDDD legislation. We will also be running an in-depth program from April-June to help businesses get to grips with CSRD. Alongside this we do extensive advisory work with companies on all aspects of human rights due diligence and reporting.

So what are the main developments businesses need to know about?

The Corporate Sustainability Due Diligence Directive

• The directive requires businesses to identify actual and potential human rights and environmental harms caused by their operations, the operations of subsidiaries and by partners within their chain of activities.
• Where harms to people and planet are identified companies must take steps to address these. For example, by agreeing action plans with suppliers to make sure the human rights of workers are being protected. 
• EU companies with a net annual turnover greater than €1.5 billion and more than 5,000 employees are covered by the directive. Companies based abroad will also be covered if they have a turnover greater than €1.5 billion from their operations in the EU.
• Over 1000 companies are expected to be in scope.  
• Smaller companies cannot simply ignore the directive. This is because many of the business partners of the companies that are in scope will be impacted. This doesn’t mean larger companies will simply push due diligence requirements onto their suppliers. But they will need to collaborate with partners to help identify and address social and environmental impacts. 
• EU member states have until July 2028 to translate the directive into national law and set up supervisory authorities to make sure firms are following the rules.  Firms have until July 2029 to comply. Those that don’t could be fined up to 3% of their net annual turnover.
• The steps companies must take to identify and address risks under CSDDD mirror the expectations set out in the UN Guiding Principles on Business and Human Rights (UNGPs). This means companies already conducting due diligence in line with the UNGPs have a head start.

The Corporate Sustainability Reporting Directive

• The directive requires companies to report on material sustainability impacts, risks and opportunities in their own operations and value chains. The detail on what companies must report is set out in the European Sustainability Reporting Standard (ESRS)
• EU companies with a turnover of €450m or more and over 1,000 employees are covered by the legislation. These companies must publish a report that complies with CSRD in 2028 at the latest, covering the 2027 financial year.  
• Companies based abroad will also be covered if they have a turnover greater than €450m from their operations in the EU or if they have an EU subsidiary or branch with more than €200m in annual turnover. These companies must publish a compliant sustainability report in 2029 at the latest, covering the 2028 financial year. 
• In total about 5000 companies are expected to be covered by the directive.
• The CSRD requires companies to report on their entire due diligence process – from how they identify impacts, to the steps they take to address them. And from details of how a company engages with affected stakeholders to how it ensures its grievance mechanisms are effective.
• The CSRD goes beyond the CSDDD when it comes to the human rights impacts that companies must report on. This means that even if CSDDD does not require firms to take action on certain issues, CSRD may still require them to provide transparency.

What’s next?

EU Member States have until July 2028 to translate CSDDD into national law and set up supervisory authorities to check whether companies are following the rules. In the coming months the EU will also publish the final version of the ESRS, which will provide greater clarity on what information companies need to report under CSRD.   

Shift will be closely involved in this process. We work with policy makers and regulators to shape standards, and publish free resources to support businesses with implementation. We also sit on the board of EFRAG, an independent group which wrote the ESRS.

Companies have a lot to do to prepare for compliance, but it’s well worth putting the work in. Legislation influenced by the CSDDD is being considered in countries all around the world, including Switzerland, Australia, the UK, Canada, the USA, Thailand, South Korea and Indonesia.

Businesses have an obligation to step up to better protect people and planet. Drawing on more than 15 years of experience in embedding respect for human rights into business, Shift will continue to support effective implementation of these requirements – both through its public resources and its direct work with companies and other stakeholders. If you are looking to strengthen your approach, we welcome you to get in touch.