Questions & Answers
Please provide more clarity around the requirement to report the anticipated financial effects from chronic and acute physical risks in relation to climate change. The CSRD and ESRS language is not very clear on whether the requirement is to report the financial effects of the expected damage and loss from chronic and acute physical risk or to simply report the monetary amount of the values of the assets themselves that are exposed to chronic and acute physical risk.
- Financial materiality
- climate risk
- financial effects
Background
The question that was originally submitted, which was edited for clarity, is the following: ‘I would like to ask to provide more clarity around the requirement to report monetary impact from chronic and acute climate risks. The CSRD and ESRS language is not very clear if the requirement is to report the monetary impact of the expected damage&loss from chronic and acute aspects, or if it is simply amount reporting the monetary amount of the values of the assets themselves that see chronic or acute exposure.’
ESRS E1 paragraph 66 states: ‘The disclosure of anticipated financial effects from material physical risks required by paragraph 64 (a) shall include … 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.’
The related ESRS E1 paragraph AR 70 states: ‘When preparing the information on assets at material physical risk that is required to be disclosed under paragraph 66 (a), the undertaking shall:
(a) calculate the assets at material physical risk in terms of monetary amount and as a proportion (percentage) of total assets at the reporting date (i.e. the proportion is an estimate of the carrying value of assets at material physical risk divided by total carrying value as stated in the statement of financial position or balance sheet). The estimate of assets at material physical risk shall be derived starting from the assets recognised in the financial statements ... To contextualise this information, the undertaking shall:
i. disclose the location of its significant assets at material physical risk. Significant assets located in the EU territory shall be aggregated by NUTS codes 3 level digits (Nomenclature of Territorial Units for Statistics). For significant assets located outside the EU territory, the breakdown by NUTS code will only be provided where applicable …
(c) to contextualise this information, the undertaking shall: …
ii. disaggregate the monetary amounts of assets at risk by acute and chronic physical risk.’
The ESRS E1 AR 70 (c) (i) (ii) is consistent with the requirements included in Commission Implementing Regulation (EU) 2022/2453 Template 5: Banking book – Climate change physical risk: Exposures subject to physical risk, which states that ‘Institutions shall disclose the gross carrying amount of exposures sensitive to impact from chronic climate-change events only, including hazards relating to gradual changes in weather and climate and having a possible impact on economic output and productivity [as well as] the gross carrying amount of exposures sensitive to impact from acute climate change events only, including hazards that may cause sudden damage to properties, disruption of supply chains, and depreciation of assets [and] the gross carrying amount subject to impact from both chronic and acute climate change events …’.
Answer
The undertaking is required to report the monetary amount of the assets that are exposed to impact from chronic and/or acute climate change events. This provides a measure of exposure to climate risks. The intention is not to report the monetary amount of the expected damage and loss from the chronic and acute aspects, which would be more complex and uncertain to estimate.
The requirement to disaggregate the monetary amounts of assets by acute and chronic physical risk (see ESRS E1 paragraph 66 (a)) stems from the requirements detailed by the Commission Implementing Regulation (EU) 2022/2453 Template 5: Banking book – Climate change physical risk: Exposures subject to physical risk (note that this regulation uses the term ‘financial impact’). This regulation states that the undertaking is required to disclose:
(a) the gross carrying amount of exposures sensitive to impact from chronic climate-change events;
(b) the gross carrying amount of exposures sensitive to impact from acute climate change events; and
(c) the gross carrying amount subject to impact from both chronic and acute climate change events.