ESRS Standard
ESRS Standard
The term"Policy" is synonymous with the term"Policy", which is used within the German version of the ESRS Standard.
64 The entity shall disclose the following:
(a) its anticipated financial effects of Material risks
b) Anticipated financial effects of Transition risks; and c) The potential to benefit from Material Climate-related opportunities.
65 The information required by paragraph 64 complements the information on current financial effects required by ESRS 2 SBM-3 paragraph 48(d). Targets of this disclosure requirement are,
a) With regard to Anticipated financial effects due to material physical risks and transition risks, to provide an understanding of how these risks have a material effect on the entity's financial position, financial performance and cash flows in the short, medium and long term (or whether such an effect is probable). The results of the Scenario analysis used to perform the resilience analysis in accordance with sections AR 10 to AR 13 should be incorporated into the assessment of the Anticipated financial effects of Material risks and Transition risks,
b) with regard to the potential to take advantage of material Climate-related opportunities, provide an understanding of how the company can benefit financially from material Climate-related opportunities. This disclosure complements the key performance indicators to be disclosed in accordance with Commission Delegated Regulation (EU) 2021/2178.
66. the disclosure of Anticipated financial effects of material physical risks in accordance with paragraph 64(a) shall include the following:
(a) the monetary amount and share (percentage) of assets with material physical risk in the short, medium and long term before considering Climate change adaptation actions; the monetary amounts of these assets shall be broken down by acute and chronic physical risk,
b) the proportion of assets with material physical risk to which Climate change adaptation actions relate,
(c) the location of significant assets with material physical risk; and
d) the amount of money and the share (percentage) of net revenue from its operations with material physical risk in the short, medium and long term.
67. the disclosure of Anticipated financial effects due to material Transition risks in accordance with paragraph 64(b) shall include the following:
(a) the monetary amount and the proportion (percentage) of assets with short-, medium- and long-term material transition risk before considering climate change actions,
(b) the proportion of assets with material transition risk to which the mitigation actions relate,
c) a breakdown of the carrying amount of the entity's property by energy efficiency class,
d) liabilities that may need to be recognized in the financial statements in the short, medium and long term; and
e) the monetary amount and proportion (percentage) of net revenue from its operations with short, medium and long-term Materiality transition risk, including, where applicable, net revenue from the entity's customers operating in the coal, oil and gas sectors.
68. the entity discloses reconciliations of the following amounts to the corresponding line items or notes in the financial statements:
(a) significant amounts of assets and net revenue with material physical risk (in accordance with paragraph 66),
(b) significant amounts of assets, liabilities and net revenue with a material transition risk (in accordance with paragraph 67).
69. in disclosing the potential to exploit Climate-related opportunities in accordance with paragraph 64(c), the entity shall consider the following:
(52)
(a) its expected cost savings from Climate change mitigation and adaptation actions; and
(b) the potential market size or expected changes in net revenue from low-carbon products and services or adaptation solutions that the entity has or may have access to.
70 Quantification of the financial effects arising from Opportunities is not required if such disclosure does not meet the qualitative characteristics of useful information as set out in Installation B Qualitative characteristics of information of ESRS 1.
Application Requirements (AR)
Application Requirements (AR)
Anticipated financial effects of material physical risks and transition risks
AR 67 Climate-related physical risks and transition risks may affect the entity's financial position (e.g., owned assets, financially controlled leased assets and liabilities), performance (e.g., potential future increases/decreases in net revenue and costs due to business disruptions or higher supply prices, potentially causing margins to decline) and cash flows. Due to the low probability, high severity and long-term time horizon of some Climate-related physical risks (Physical risk from climate change) and the uncertainty arising from the transition to a sustainable economy, there will be material anticipated financial effects that do not fall under the requirements of the applicable accounting standards.
AR 68. there is currently no generally accepted method to assess or measure how material physical risks and transition risks may impact the entity's financial position, financial performance and cash flows in the future. Therefore, when disclosing the financial effects (in accordance with paragraphs 64, 66 and 67), the entity must use internal methods and, to a significant extent, make its own judgments about what data and assumptions are necessary to quantify Anticipated financial effects.
Guidelines for the calculation - Anticipated financial effects of material physical risks
AR 69 When disclosing the information required by paragraph 64(a) and paragraph 66, the entity shall explain whether and how:
(a) it has assessed the Anticipated financial effects on assets and operations where there is material physical risk, including the scope, time horizons, method of calculation, critical assumptions and parameters, and boundaries of the assessment; and
(b) the valuation of assets and business activities considered to have material physical risk is based on or forms part of the process for determining material physical risk in accordance with paragraph 20(b) and Section AR 11 and for determining climate scenarios in accordance with paragraph 19 and Sections AR 13 and AR 14. In particular, the entity shall explain how it has defined short, medium and long-term time horizons and how these definitions relate to the expected life of its assets, its strategic planning horizons and capital allocation plans.
AR 70 In compiling the information required by paragraph 66(a) about Material risks for assets, the entity does the following:
(a) It calculates the assets exposed to material physical risk as a monetary amount and as a proportion (percentage) of total assets at the reporting date (i.e., the proportion is an estimate of the carrying amount of assets exposed to material physical risk divided by the total carrying amount as disclosed in the statement of financial position). The estimate of assets exposed to Materiality physical risk is determined based on the assets recognized in the financial statements. The estimate of the monetary amounts and the proportion of assets with physical risk can be presented in the form of a single amount or a range.
b) In determining the assets with Materiality physical risk, it takes into account all types of assets, including those related to finance leases and right-of-use assets.
c) To classify this information:
i. the entity discloses the location of significant assets with material physical risk. Significant assets located in the territory of the EU (59) are classified according to NUTS 3 codes (common classification of territorial units for statistics). For significant assets located outside the EU, the breakdown by NUTS codes is only applied where possible,
ii. the entity breaks down the monetary amounts of risk-weighted assets by acute and chronic physical risk.(60)
(d) it calculates the proportion of assets with material physical risk arising from paragraph 66(a) that is covered by Climate change adaptation actions based on the information disclosed under disclosure requirement E1-3. This is intended to approximate the net risks.
AR 71. in compiling the information required by paragraphs 64(a) and 66(d), the entity may assess and disclose the proportion of net revenue from operations subject to physical risk. This disclosure:
(a) is based on net revenue in accordance with the requirements of the accounting standards applicable to the financial statements, i.e. IFRS 15 or local accounting requirements,
b) may include a breakdown of the entity's business activities with relevant details of the percentage of total net revenue, risk factors (hazards, exposure and vulnerability) and, where possible, the extent of Anticipated financial effects relating to the erosion of profit margins over short, medium and long-term time horizons. The types of business activities may also be disaggregated by operating segment if the entity has disclosed the contribution of margins by operating segment in its segment report within the financial statements.
Guidelines for the calculation - Anticipated financial effects of material transition risks
AR 72 When disclosing the information required by paragraph 64(b) and paragraph 67(a), the entity shall explain whether and how
(a) it has assessed the potential impacts on the future results of operations and financial position for assets and operations that are subject to significant transition risk, including the scope, method of calculation, critical assumptions and parameters, and boundaries of the assessment; and
(b) the valuation of assets and operations deemed to have material transition risks is based on, or forms part of, the process for identifying material transition risks in accordance with paragraph 20(c) and Section AR 12 and for determining Scenarios in accordance with Sections AR 12 to AR 15. In particular, the entity explains how it has defined short, medium and long-term time horizons and has explained how these definitions relate to the expected life of its assets, its strategic planning horizons and capital allocation plans.
AR 73 When disclosing the information required by paragraph 67(a) and (b) about material transition risks for assets, the entity shall do the following:
(a) it shall include, at a minimum, an estimate of the quantity of potentially stranded assets (in monetary terms and as a proportion/percentage) from the reporting year to 2030 and from 2030 to 2050. Lost assets are the company's most important active or firmly earmarked assets that have significant amounts of Locked-in GHG emissions during their period of use. Fixed assets are the most important assets that the company is most likely to use in the next five years. The amount may be expressed as a range of assets based on different climate and policy scenarios, including a scenario that is aligned with the target of limiting global warming to 1.5°C.
b) The entity discloses a breakdown of the carrying amount of its real estate, including right-of-use assets, by energy efficiency class. The energy efficiency is presented in relation to the ranges of energy consumption in kWh/m² or the labeling class of the energy performance certificate. If the entity is unable to obtain this information after best efforts, it discloses the total carrying amount of the real estate assets for which the energy consumption is based on internal estimates.
AR 74. when disclosing the information required by paragraph 67(d) on potential liabilities arising from Materiality Transition risks, entities operating installations covered by an emissions trading scheme may include a range of potential future liabilities arising from those schemes.
(a) entities operating installations covered by an emissions trading scheme may include a range of potential future liabilities arising from those schemes.
(b) entities subject to the EU ETS may report the potential future liabilities associated with their allocation plans for the period before and up to 2030. The estimate of potential liabilities may be based on the following:
i. the number of allowances held by the company at the beginning of the reporting period,
ii. the number of allowances to be purchased on the market each year, i.e. before and up to 2030
iii. the gap between the estimated future emissions in different transition scenarios and the free allocation of allowances known for the period up to 2030, and
iv. the estimated annual cost per tonne of CO2 for which an allowance must be purchased.
c) the entity may consider and disclose the number of Scope 1 greenhouse gas allowances within regulated emissions trading schemes and the cumulative number of emission allowances held at the beginning of the reporting period (from previous allowances) when assessing its potential future liabilities.
d) entities that disclose the quantities of Carbon credits to be retired in the near future (disclosure requirement E1-7) may disclose the potential future liabilities associated with liabilities based on existing contractual arrangements.
e) the company may also include its monetized Scope 1 and Scope 2 GHG emissions and its total GHG emissions (in currency units) calculated as follows:
i. monetized Scope 1 and Scope 2 GHG emissions in the reporting year using the following formula:
ii. monetized total GHG emissions in the reporting year using the following formula:
iii. using a lower, middle and upper cost rate (63) for GHG emissions (e.g. CO2 market price and different estimates for the social cost of carbon), justifying the choice.
AR 75 Other approaches and methodologies may be used to assess how transition risks may impact the entity's future financial position. In each case, the disclosures on Anticipated financial effects must include a description of the methods and definitions used by the entity.
AR 76 In compiling the information required by paragraph 67(e), the entity may assess and disclose the proportion of net revenue from operations subject to transition risks. This disclosure
a) is based on net revenue in accordance with the accounting standards applicable to the financial statements, i.e. IFRS 15 or local accounting requirements,
b) may include a breakdown of the company's business activities with corresponding details of the respective percentage of current net revenue, risk factors (events and exposure) and, where possible, Anticipated financial effects in the short, medium and long term in relation to the collapse of profit margins. The nature of operations may also be disaggregated by operating segment if the entity has disclosed the contribution of profit margins by operating segment in its segment report within the financial statements.
Connectivity with financial reporting information
AR 77 The reconciliation between the material amount of assets, liabilities and net revenue (that are susceptible to material physical risks or Transition risks ) and the corresponding line item or disclosure (e.g. in segment reporting) in the financial statements (in accordance with paragraph 68) may be presented by the entity as follows:
(a) by a cross-reference to the related line item or disclosure in the financial statements, if those amounts can be found in the financial statements; or
(b) if a direct cross-reference cannot be made, by a quantitative reconciliation to each line item or disclosure in the financial statements using a tabular format for the following items:
Carrying amount of assets or liabilities or net sales susceptible to Material risks or Transition risks
Adjustment items
Assets or liabilities or net sales in the financial statements
AR 78 The entity ensures the consistency of the data and assumptions used to measure and communicate the expected financial effects of material physical risks and transition risks in the sustainability statement with the corresponding data and assumptions used for the financial statements (e.g. CO2 prices for the measurement of asset impairment, useful lives of assets, estimates and provisions). The company explains the reasons for any deviations (e.g. if the total financial effects of climate-related risks have yet to be assessed or were not considered material in the financial statements).
AR 79 For potential future impacts on liabilities (in accordance with paragraph 67(d)), the entity includes a cross-reference to the description of emissions trading schemes in the financial statements, where appropriate.
Climate-related opportunities
AR 80 When disclosing the information required by paragraph 69(a), the entity shall explain the nature of the cost savings (e.g. due to reduced energy consumption), the time horizons and methodology used, including the scope of the assessment, critical assumptions and limitations, and whether and how Scenario analysis has been applied.
AR 81. in providing the information required by paragraph 69(b), the entity shall explain how it has assessed the market size or the expected changes in net revenues from low-carbon products and services or adaptation solutions, including the scope of the assessment, the time horizon, critical assumptions and limitations, and the extent to which the market is accessible to the entity. The information on market size can be considered in the context of current taxonomy-compliant revenues reported in accordance with the provisions of Regulation (EU) 2020/852. The company can also explain how it intends to address its Climate-related opportunities; this should be linked, where possible, to the information on Policies, Targets and Actions under disclosure requirements E1-2, E1-3 and E1-4.
Examples from previous practice
Examples from previous practice
Examples serve only as an indication of how a disclosure requirement has been reported by other companies to date. Audited ESRS reports are not yet available. There is no guarantee of accuracy and completeness.
E1-9 - Anticipated financial effects of material physical risks and transition risks and potential Climate-related opportunities
PwC's Sustainability Reporting Guide presents a fictitious example that can be used to support the fulfillment of the data point.
Example
Violet Company Ltd (Violet Co), a company with a calendar year end, operates in a high flood risk area and is exposed to the risk of flooding. Over a three-year period, Violet Co addresses the Impacts of flood risk as follows:
In 20X1, Violet Co has not yet found a suitable solution to mitigate the risk. No major flooding occurs.
In 20X2, Violet Co invests in a flood protection wall and makes an upfront payment of €1 million. Violet Co does not expect any major financial impacts from flooding in the first three months of 20X3 before the flood protection wall is completed.
In 20X3, construction begins and Violet Co makes a final payment of €2 million. Completion of the wall is expected in March 20X3.
By building the flood protection wall, Violet Co expects to fully mitigate the potential flooding costs in the short, medium and long term. Without the wall, Violet Co has estimated that the expected financial loss would be approximately €4 million in the short term, €5 million in the medium term and €10 million in the long term.
Question:
How should Violet Co consider the flood risk, actions taken and planned in disclosing its current and expected financial impact in 20X1, 20X2 and 20X3 (for this example, assume all amounts are material)?
Analysis:
In 20X1, prior to any planned risk mitigation, Violet Co would consider and disclose the expected short, medium and long-term financial impacts from flooding.
In 20X2, there is a plan in place and Violet Co has incurred expenditure related to the construction of the wall. Violet Co would disclose:
Current financial impacts of actions taken during the period (i.e. the €1 million upfront payment).
Expected financial impacts, including the cost of future actions to address the flood risk (i.e. the expected final payment of €2 million). As the final payment is due in 20X3, Violet Co would recognize the €2 million as a current expected financial impact.
In addition, Violet Co would disclose the risk of future flooding and the mitigating effects of the actions taken to reduce the risk (i.e. the future risk of damage of €4 million in the short term, €5 million in the medium term and €10 million in the long term, as well as the damage prevented by the protective wall).
In 20X3, when the wall is fully constructed, Violet Co would disclose the current financial impacts of the final payment of €2 million. However, it may determine that there is no longer a Materiality risk of flood damage and therefore may no longer be required to identify that risk in the disclosures. In making this determination, Violet Co would likely need to consider the risk that the wall may not fully protect against flood damage.
Source: Sustainability reporting guide, PWC, August 2024, p. 6-23 ff.
This article has been machine translated. In case of errors, please contact [email protected].