Questions & Answers
What is the relationship between:
(a) impacts, risks and opportunities related to climate change that are to be identified and assessed in your materiality analysis (ESRS E1 paragraph 20); and
(b) detailed analyses (using scenario analysis) for climate-related impacts, physical risks and transition risks and opportunities (ESRS E1 paragraph 21)
according to ESRS E1 Disclosure Requirements related to ESRS 2 IRO-1?
- Climate-risk analysis
Background
The original question received was the following: ’What is the difference between: …?’
The ESRS distinguish between impacts, risks and opportunities (‘IROs’) of the undertaking, which are defined in Annex II of the Delegated Act. The undertaking is required to disclose the processes to identify the IROs and to assess which ones are material (ESRS 2 Disclosure Requirement IRO-1). Consequently, the ESRS E1 Disclosure Requirement related to ESRS 2 IRO-1 seeks transparency on the approach taken to assess its material climate-related IROs.
ESRS E1 Disclosure Requirement related to ESRS 2 IRO-1 is conceptually divided into paragraphs that require describing the processes to assess:
(a) impacts on climate change (ESRS E1 paragraphs 20 (a), AR 9 and AR 10);
(b) climate-related physical risks (ESRS E1 paragraphs 20 (b) and AR 11); and
(c) climate-related transition risks and opportunities (ESRS E1 paragraphs 20 (c) and AR 12).
The ESRS E1 paragraphs 20 (b)(i) and 20 (c)(i) as well as the corresponding AR 11 and AR 12 refer directly to specific climate scenarios. At the same time, ESRS E1 paragraph 21 requires information on how climate-scenario analysis was used to inform the identification and assessment of physical risks and transition risks and opportunities. Additionally, ESRS E1 paragraph AR 13 seeks transparency on how the scenario analysis was used in relation to disclosures in ESRS E1 paragraphs 19 (ESRS 2 Disclosure Requirement SBM-3) as well as ESRS E1 paragraphs 20, 21, AR 10 and AR 11 (ESRS 2 IRO-1). ESRS E1 paragraph AR 15 requires explanation of how the climate scenarios are compatible with critical assumptions made in the financial statements. Finally, ESRS E1 paragraph AR 14 provides a reference to existing guidance, frameworks and standards on scenario analysis.
Annex II to the Delegated Act introduces definitions of impacts, sustainability-related impacts, risks, sustainability-related risks, material risks, physical risks, climate-related physical risks, climate-related transition risks, opportunities, material opportunities and climate-related opportunities.
Answer
Impacts, risks and opportunities related to sustainability matters are assessed for materiality and reported when material. The identification of material impacts, risks and opportunities is the outcome of the materiality assessment process.
Paragraphs 20 and 21 of ESRS E1 set the Disclosure Requirements related to the process followed in order to identify material impacts, risks and opportunities related to climate change that are to be reported.
Preparing a scenario analysis is not a direct requirement in ESRS E1 per se, but several ESRS E1 disclosures refer to it as a foundation for the information to be disclosed. For instance, when the undertaking develops climate scenario analysis, its outcome informs the materiality assessment, particularly for the identification of risks and opportunities (ESRS E1 paragraph 21). It is generally used to develop the resilience analysis (ESRS E1 paragraph 19).
Scenario analysis involves identifying and evaluating a range of future events and outcomes under conditions of uncertainty. It deals with the underlying uncertainty in the quantification of the future value of decision variables for one single scenario as well as with the uncertainty of different future scenarios. Scenario analysis helps ensure the quality of the information provided.
In ESRS this is reflected in the Disclosure Requirement on processes to identify and assess climate risks, which requires explanation of whether the assessment of climate-related physical risks considered at least a high emission climate scenario and whether the assessment of transition risks considered at least a climate scenario in line with limiting global warming to 1.5°C with no or limited overshooting. These requirements provide transparency on how the assessment of physical and transition risks of climate change has been done and help to better understand how they may impact the undertaking’s business, strategies and financial performance over time.