Questions & Answers
ESRS E1 paragraph 20 b(ii) and 20 c(ii) make reference to ‘Gross’ risk, yet ‘Gross Risk’ (or comparable terms) is not included in the ESRS Glossary (i.e., is not clearly defined). Is it correct to say that climate risk and scenario analysis/assessments processes should be done on an inherent/gross (i.e., pre-control/mitigation strategy) risk (not a residual/net risk post-control/mitigation) basis?
- Gross risk
- physical risk
- transition risk
Background
ESRS E1 paragraph 20 b(ii) states: ‘The undertaking shall describe the process to identify and assess climate-related impacts, risks and opportunities. This description shall include its process in relation to: …
(a) climate-related physical risks in own operations and along the upstream and downstream value chain, in particular: …
ii. the assessment of how its assets and business activities may be exposed and are sensitive to these climate-related hazards, creating gross physical risks for the undertaking; …
(c) climate-related transition risks and opportunities in own operations and along the upstream and downstream value chain, in particular: …
ii. the assessment of how its assets and business activities may be exposed to these climate-related transition events, creating gross transition risks or opportunities for the undertaking.’
ESRS 2 Disclosure Requirement IRO-1 details the processes to identify and assess climate-related impacts, risks and opportunities. It requires the assessment of gross material risks. This process allows to respond to ESRS 2 Disclosure Requirement SBM-3, which introduces the description of business resilience in relation to climate change. The actions and resources to mitigate material risks will lead to residual net risks. The climate risk and scenario analysis/assessments processes should be done on a gross basis.
Answer
As stated in ESRS E1 paragraph 20, the undertaking shall describe the process to identify and assess climate-related impacts, risks and opportunities. This assessment refers to gross physical and transition risks. Gross risks means that the undertaking should not consider the effects of the actions and resources to mitigate the material risk when assessing it.
When disclosing the information required under ESRS E1 paragraphs 20 (b) and 20 (c), the undertaking shall explain how it has used climate-related scenario analysis, including a range of climate scenarios, to inform the identification and assessment of physical risks and transition risks and opportunities over the short-, medium- and long-term.
The assessment of material climate-related impacts, risks and opportunities is performed looking at the gross risk, i.e., before any mitigating actions. The same applies to scenario analysis when it is used to support the identification and materiality assessment of impacts, risks and opportunities.
When disclosing according to ESRS E1 paragraphs 20 b(ii) and c(ii), consideration should be given to ESRS 1 paragraph 31 that relevant information is disclosed only on the material risks.
See also IG 1 Materiality Assessment – FAQ 23: Are remediation and mitigation actions considered in the materiality assessment of environmental impacts? for further explanation.
Relations
Paragraph | Content |
|---|---|
the assessment of how its assets and business activities may be exposed to these climate-related transition events, creating gross transition risks or opportunities for the undertaking. | |
the assessment of how its assets and business activities may be exposed and are sensitive to these climate-related hazards, creating gross physical risks for the undertaking. | |
the assessment of how its assets and business activities may be exposed to these climate-related transition events, creating gross transition risks or opportunities for the undertaking. | |
the assessment of how its assets and business activities may be exposed and are sensitive to these climate-related hazards, creating gross physical risks for the undertaking. | |
the assessment of how its assets and business activities may be exposed to these climate-related transition events, creating gross transition risks or opportunities for the undertaking. | |
the assessment of how its assets and business activities may be exposed and are sensitive to these climate-related hazards, creating gross physical risks for the undertaking. |