1. Introduction
In today’s rapidly changing world, businesses are increasingly held accountable for their impact on the environment. Awareness of the importance of biodiversity and ecosystems is growing. Requirements are introduced that require companies to consider their environmental impact, also in relation to biodiversity and ecosystems. Let’s break down these requirements.
How you can disclose this information will be covered in another article.
2. Strategy
Simply said, strategy is a plan of action designed to achieve long-term or overall goals. It's about making decisions and allocating resources to reach desired outcomes, often considering various internal and external factors that might affect success. In the context of the ESRS, strategy involves how companies integrate sustainability into their business models and operations.
Transition Plan for Biodiversity
Companies must disclose their transition plans concerning biodiversity and ecosystem protection. This means they need to explain their past, present, and future efforts to mitigate their impacts on biodiversity and ecosystems, aligning with global and regional environmental goals like the Kunming-Montreal Global Biodiversity Framework and the EU Biodiversity Strategy for 2030. Key elements of this disclosure include:
Biodiversity impact targets: Companies must explain how their biodiversity protection goals align with broader environmental targets, such as maintaining biosphere integrity and preventing land-system change.
Actions for ecosystem protection: They should detail the key actions they plan to take to reduce their impact on ecosystems, including changes in their operations, product and service offerings, and the adoption of nature-positive practices.
Investment and funding: Companies need to provide information on their investments and funding that support their biodiversity and ecosystem protection plans, including key performance indicators related to sustainable practices.
Impact on sensitive areas: A qualitative assessment of potential impacts on biodiversity-sensitive areas, including the location of key sites, activities affecting these areas, and the ecological status of these locations.
Alignment with environmental regulations: For activities covered by local, national, or global biodiversity and ecosystem regulations, companies must explain their plans to align with these criteria.
Capital expenditures: Disclosure of significant investments in activities that could negatively affect biodiversity, such as land use changes or resource extraction.
Overall business strategy: How the transition plan fits within the company's broader business strategy and financial planning.
Approval and progress: Whether the transition plan is approved by the company’s top management and the progress made in implementing it.
If a company does not have a transition plan for biodiversity and ecosystems, it must indicate if and when it plans to adopt one.
Material Impacts, Risks, and Opportunities
Companies must also explain how biodiversity and ecosystem-related risks and opportunities affect their strategy and business model. This involves:
Biodiversity-related risks: Identifying whether risks are physical (like habitat destruction), transitional (like new environmental regulations), or systemic (like the loss of ecosystem services).
Resilience of strategy: Describing how the company's strategy and business model can withstand changes related to biodiversity and ecosystems, including the use of scenario analyses.
Material impacts: Disclosing the significant effects of biodiversity and ecosystem-related risks and opportunities on their business model, value chain, and decision-making processes. This includes financial effects and the time horizons for these impacts.
Response plans: Outlining the company's plans to manage these risks and opportunities, including any strategic changes necessary to mitigate negative impacts or capitalize on opportunities.
Resilience analysis: Providing a qualitative and, where applicable, quantitative analysis of the company's resilience to biodiversity and ecosystem impacts.
Companies should keep stakeholders informed about changes to their material impacts, risks, and opportunities compared to the previous reporting period.
Companies must disclose their plans and actions to protect biodiversity and ecosystems, aligning with global environmental goals and assessing the impact on their business strategies. They should also outline how biodiversity-related risks and opportunities affect their operations, including resilience and financial implications.
3. Conclusion
By requiring businesses to disclose how they adapt their strategies to environmental risks and opportunities, the standards aim to create a more sustainable future. Companies that successfully integrate these considerations into their business models not only contribute to environmental protection but also enhance their own resilience and long-term success.
Relevant Standards
ESRS E4
Disclosure Requirement E4-1 – Transition plan and consideration of biodiversity and ecosystems in strategy and business model
11. The undertaking shall disclose how its biodiversity and ecosystem impacts, dependencies, risks and opportunities originate from and trigger adaptation of its strategy and business model.
12. The objective of this Disclosure Requirement is to enable an understanding of the resilience of the undertaking’s strategy and business model in relation to biodiversity and ecosystems, and of the compatibility of the undertaking’s strategy and business model with regard to relevant local, national and global public policy targets related to biodiversity and ecosystems.
13. The undertaking shall describe the resilience of its strategy and business model in relation to biodiversity and ecosystems. The description shall include:
(a) an assessment of the resilience of the current business model and strategy to biodiversity and ecosystems-related physical, transition and systemic risks;
(b) the scope of the resilience analysis in relation to the undertaking’s own operations and its upstream and downstream value chain and in relation to the risks considered in that analysis;
(c) the key assumptions made;
(d) the time horizons used;
(e) the results of the resilience analysis; and (f) the involvement of stakeholders, including, where appropriate, holders of indigenous and local knowledge.
14. If information specified in this disclosure requirement is disclosed by the undertaking as part of the information required under ESRS 2 SBM-3, the undertaking may refer to the information it has disclosed under ESRS 2 SBM-3.
15. The undertaking may disclose its transition plan to improve and, ultimately, achieve alignment of its business model and strategy with the vision of the Kunming-Montreal Global Biodiversity Framework and its relevant goals and targets, the EU Biodiversity Strategy for 2030, and with respecting planetary boundaries related to biosphere integrity and land-system change.
Disclosure Requirement SBM 3 – Material impacts, risks and opportunities and their interaction with strategy and business model
16. The undertaking shall disclose:
(a) a list of material sites in its own operations, including sites under its operational control, based on the results of paragraph 17(a). The undertaking shall disclose these locations by: i. specifying the activities negatively affecting biodiversity sensitive areas; ii. providing a breakdown of sites according to the impacts and dependencies identified, and to the ecological status of the areas (with reference to the specific ecosystem baseline level) where they are located; and iii. specifying the biodiversity-sensitive areas impacted, for users to be able to determine the location and the responsible competent authority with regards to the activities specified in paragraph 16(a) i.
(b) whether it has identified material negative impacts with regards to land degradation, desertification or soil sealing; and
(c) whether it has operations that affect threatened species.
ESRS 2
Disclosure Requirement SBM-3 - Material impacts, risks and opportunities and their interaction with strategy and business model
46. The undertaking shall disclose its material impacts, risks and opportunities and how they interact with its strategy and business model.
47. The objective of this Disclosure Requirement is to provide an understanding of the material impacts, risks and opportunities as they result from the undertaking’s materiality assessment and how they originate from and trigger adaptation of the undertaking’s strategy and business model including its resources allocation. The information to be disclosed about the management of the undertaking’s material impacts, risks and opportunities is prescribed in topical ESRS and in sector-specific standards, which shall be applied in conjunction with the Minimum Disclosure Requirements on policies, actions and targets established in this Standard.
48. The undertaking shall disclose:
(a) a brief description of its material impacts, risks and opportunities resulting from its materiality assessment (see Disclosure Requirement IRO-1 of this standard), including a description of where in its business model, its own operations and its upstream and downstream value chain these material impacts, risks and opportunities are concentrated;
(b) the current and anticipated effects of its material impacts, risks and opportunities on its business model, value chain, strategy and decision-making, and how it has responded or plans to respond to these effects, including any changes it has made or plans to make to its strategy or business model as part of its actions to address particular material impacts or risks, or to pursue particular material opportunities;
(c) with reference to the undertaking’s material impacts: i. how the undertaking’s material negative and positive impacts affect (or, in the case of potential impacts, are likely to affect) people or the environment; ii. whether and how the impacts originate from or are connected to the undertaking's strategy and business model; iii. the reasonably expected time horizons of the impacts; and iv. whether the undertaking is involved with the material impacts through its activities or because of its business relationships, describing the nature of the activities or business relationships concerned;
(d) the current financial effects of the undertaking’s material risks and opportunities on its financial position, financial performance and cash flows and the material risks and opportunities for which there is a significant risk of a material adjustment within the next annual reporting period to the carrying amounts of assets and liabilities reported in the related financial statements;
(e) the anticipated financial effects of the undertaking’s material risks and opportunities on its financial position, financial performance and cash flows over the short-, medium- and long-term, including the reasonably expected time horizons for those effects. This shall include how the undertaking expects its financial position, financial performance and cash flows to change over the short, medium- and long-term, given its strategy to manage risks and opportunities, taking into consideration: i. its investment and disposal plans (for example, capital expenditure, major 47 acquisitions and divestments, joint ventures, business transformation, innovation, new business areas and asset retirements), including plans the undertaking is not contractually committed to; and ii. its planned sources of funding to implement its strategy.
(f) information about the resilience of the undertaking's strategy and business model regarding its capacity to address its material impacts and risks and to take advantage of its material opportunities. The undertaking shall disclose a qualitative and, when applicable, a quantitative analysis of the resilience, including how the analysis was conducted and the time horizons that were applied as defined in ESRS 1 (see ESRS 1 chapter 6 Time horizons). When providing quantitative information, the undertaking may disclose single amounts or ranges;
(g) changes to the material impacts, risks and opportunities compared to the previous reporting period; and
(h) a specification of those impacts, risks and opportunities that are covered by ESRS Disclosure Requirements as opposed to those covered by the undertaking using additional entity-specific disclosures.
49. The undertaking may disclose the descriptive information required in paragraph alongside the disclosures provided under the corresponding topical ESRS, in which case it shall still present a statement of its material impacts, risks and opportunities alongside its disclosures prepared under this chapter of ESRS 2.