Questions & Answers
Is the disclosure of monetary amount and proportion of assets at risk over the short-/medium-/long-term meant to be broken down by the time horizon (short-/medium-/long-term) or by a single aggregate number for assets at risk in any of those time horizons?
- Assets at risk
Background
ESRS E1 paragraph 66 states: ‘The disclosure of anticipated financial effects from material physical risks required by paragraph 64 (a) shall include:
(a) the monetary amount and proportion (percentage) of assets at material physical risk over the short-, medium- and long-term before considering climate change adaptation actions, with the monetary amounts of these assets disaggregated by acute and chronic physical risk …’
ESRS E1 paragraph 67 states: ‘The disclosure of anticipated financial effects from material transition risks required by paragraph 64 (b) shall include: …
(b) the monetary amount and proportion (percentage) of assets at material transition risk over the short-, medium- and long-term before considering climate mitigation actions.’
As stated in both articles, the undertaking shall disclose the monetary amount and proportion of assets at risk considering the different time horizons (short-, medium- and long-term). Guidance on how to calculate these figures can be found in ESRS E1 paragraph AR 70 to AR 76, which clarify that the proportion can be done as a single amount or range.
ESRS E1 paragraph AR 70 (a) states: ‘The estimate of monetary amounts and proportion of assets at physical risk may be presented as either a single amount or range.’
ESRS E1 paragraph AR 73 (a) states: ‘… an estimate of the amount of potentially stranded assets (in monetary amounts and as a proportion/percentage) from the reporting year until 2030 and from 2030 to 2050 … may be expressed as a range of asset values based on different climate and policy scenarios …’.
Answer
ESRS E1 paragraphs 66 and 67 do not require a breakdown of monetary amount figures by the three time horizons. It rather requires the disclosure of a monetary amount that is the result of cumulative financial effects assessed for each of the time horizons (short-, medium- and long-term).
For example, the undertaking shall evaluate the assets at material physical risk considering short-, medium- and long-term physical climate risks. As the time span increases, the likelihood of certain climate events impacting the assets is also expected to increase – either because the events become more frequent or because the period for which they can materialise has become larger. For this reason, when doing the analysis from the short- to long-term perspective, more assets are likely to be impacted. These are then accounted for with the carrying value in the financial statement at the reporting date (ESRS E1 paragraph AR 70), and their carrying value is added up to a single amount and reported for each of the time horizons (short-, medium- and long-term). To provide more contextual information, the undertaking may disclose the expected carrying value of the assets at the time when the climate effect will materialise, taking into account the amortisation schedule. When identifying the amount and share of current assets that may be at risk, the time horizons (short-, medium- and long-term) should be considered. If applying different scenarios or if there is higher uncertainty on assets at risk in the medium- or long-term, the disclosure can be provided as a range (ESRS E1 paragraphs AR 70 (a) and 73 (a)). A breakdown by time horizon is not required but may be reported.
When reporting this information, preparers can consider the proportionality principle. Information on climate-related risks over the long-term is useful for giving direction. However, while the likelihood of certain climate events can be expected to increase over time, long-term climate information remains uncertain in varying degrees. It is, therefore, difficult for an undertaking to anticipate and adapt financially beyond five to ten years both credibly and verifiably. Consequently, the quality and purpose differ between short-term and long-term information.