ESRS E2: Anticipated Financial Effects
ESRS E2: Anticipated Financial Effects from Material Pollution-Related Risks and Opportunities
1. Introduction
Understanding the financial implications of pollution is important for businesses aiming to be transparent and responsible. In this article we outline what companies should report regarding the anticipated financial effects of pollution-related risks and opportunities. Making sure that stakeholders are informed about potential financial impacts on a company's performance, cash flow, and overall financial health.
How companies can effectively disclose this information will be covered in another article.
2. Anticipated Financial Effects from Material Pollution-Related Risks and Opportunities
Companies must reveal the expected financial impacts of pollution-related risks and opportunities, including:
Quantification and description: The financial effects should be quantified in monetary terms, where feasible, or described qualitatively if quantification is too costly or complex.
Effects considered: Details about the types of financial effects, the related pollution impacts, and the time frames in which these effects are expected to occur.
Assumptions and uncertainty: The key assumptions used in calculating these effects, along with the level of uncertainty and sources of these assumptions.
The disclosure should also include additional financial information:
Revenue shares: The portion of net revenue from products containing substances of concern and very high concern.
Expenditures and provisions: Costs incurred due to pollution-related incidents and provisions for environmental protection and remediation.
Material incidents: Contextual information on significant pollution events that have or may impact the company’s financials in the short, medium, and long term.
Companies must disclose the anticipated financial impacts of pollution-related risks and opportunities, detailing how these may affect their financial position, performance, and cash flows. This includes quantifying financial effects, describing related impacts and time frames, and providing key assumptions and uncertainties.
3. Conclusion
By disclosing the anticipated financial effects of pollution-related risks and opportunities, companies can better manage their environmental impact while maintaining transparency with stakeholders. This information helps in understanding both the potential costs and benefits associated with pollution.
In an upcoming article, we will explore how companies can report on these disclosures. Subscribe to stay updated.
Relevant Standards
ESRS E2
Disclosure Requirement E2-6 – Anticipated financial effects from material pollution-related risks and opportunities
36. The undertaking shall disclose the anticipated financial effects of material pollution-related risks and opportunities.
37. The information required by paragraph 36 is in addition to the information on current financial effects on the undertaking’s, financial position, financial performance and cash flows for the reporting period required under ESRS 2 SBM-3 para 48 (d).
38. The objective of this Disclosure Requirement is to provide an understanding of:
(a) anticipated financial effects due to material risks arising from pollution-related impacts and dependencies and how these risks have (or could reasonably be expected to have) a material influence on the undertaking’s , financial position financial performance and cash flows, over the short-, medium- and long-term.
(b) anticipated financial effects due to material opportunities related to pollution prevention and control.
39. The disclosure shall include:
(a) a quantification of the anticipated financial effects in monetary terms before considering pollution-related actions, or where not possible without undue cost or effort, qualitative information. For financial effects arising from opportunities, a quantification is not required if it would result in disclosure that does not meet the qualitative characteristics of information (see ESRS 1 Appendix B Qualitative characteristics of information);
(b) a description of the effects considered, the related impacts and the time horizons in which they are likely to materialise; and
(c) the critical assumptions used to quantify the anticipated financial effects, as well as the sources and level of uncertainty of those assumptions.
40. The information provided under paragraph 38(a) shall include:
(a) the share of net revenue made with products and services that are or that contain substances of concern, and the share of net revenue made with products and services that are or that contain substances of very high concern;
(b) the operating and capital expenditures incurred in the reporting period in conjunction with major incidents and deposits;
(c) the provisions for environmental protection and remediation costs, e.g., for rehabilitating contaminated sites, recultivating landfills, removal of environmental contamination at existing production or storage sites and similar measures.
41. The undertaking shall disclose any relevant contextual information including a description of material incidents and deposits whereby pollution had negative impacts on the environment and/or is expected to have negative effects on the undertaking’s financial cash flows, financial position and financial performance with short-, medium- and long-term time horizons