ESRS E4-6: Anticipated Financial Effects
ESRS E4-6: Anticipated Financial Effects from Material Biodiversity and Ecosystem-Related Risks and Opportunities
1. Introduction
In today’s world, businesses are increasingly required to consider their impact on the environment, particularly on biodiversity and ecosystems. Companies must not only identify these impacts but also anticipate how they might affect their financial health. This includes understanding the financial risks and opportunities that arise from their interactions with the natural world. In this article, we'll break down what anticipated financial effects related to biodiversity and ecosystems need to be disclosed.
How companies can effectively disclose this information will be covered in another article.
2. Anticipated Financial Effects from Material Biodiversity and Ecosystem-Related Risks and Opportunities
Companies are required to disclose how risks and opportunities related to biodiversity and ecosystems might impact their finances. This means they need to explain:
Financial risks: Companies must assess how risks, like the depletion of natural resources or changes in ecosystem services, could financially impact them. For instance, if a company relies on water from a river that is drying up, this could affect its production costs or operations.
Financial opportunities: Companies also need to identify opportunities that might arise from protecting or restoring biodiversity. For example, investing in sustainable practices might open up new markets or reduce long-term costs.
Quantifying effects: Where possible, companies should provide monetary estimates of these anticipated financial effects. If exact numbers aren’t available, they should offer qualitative descriptions instead.
Time horizons and uncertainties: It’s crucial for companies to indicate when these financial effects are likely to occur—whether in the short, medium, or long term. They should also explain the assumptions and uncertainties involved in their estimates.
Companies must estimate and disclose how risks and opportunities related to water and marine resources could impact their future financial performance. This includes providing financial projections, describing potential impacts, and outlining the assumptions and uncertainties involved.
3. Conclusion
Understanding and disclosing the anticipated financial impacts of biodiversity and ecosystem-related risks and opportunities is vital for businesses. It not only helps them prepare for future challenges but also demonstrates transparency and responsibility to their stakeholders. By being proactive in this area, companies can better manage risks and capitalize on opportunities that contribute to their long-term sustainability and financial success.
In an upcoming article, we will explore how companies can report on these disclosures. Subscribe to stay updated.
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Relevant Standards
ESRS E4
Disclosure Requirement E4-6 – Anticipated financial effects from material biodiversity and ecosystem-related risks and opportunities
42. The undertaking shall disclose its anticipated financial effects of material biodiversity-and ecosystem-related risks and opportunities.
43. The information required by paragraph 42 is in addition to the information on current financial effects on the entity’s financial position, financial performance and cash flows for the reporting period required under ESRS 2 SBM-3 para 48 (d).
44. The objective of this Disclosure Requirement is to provide an understanding of:
(a) anticipated financial effects due to material risks arising from biodiversity- and ecosystem-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; and
(b) anticipated financial effects due to material opportunities related to biodiversity- and ecosystem.
45. The disclosure shall include:
(a) a quantification of the anticipated financial effects in monetary terms before considering biodiversity and ecosystems-related actions or where not possible without undue cost or effort, qualitative information. For financial effects arising from material 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). The quantification of the anticipated financial effects in monetary terms may be a single amount or a range;
(b) a description of the effects considered, the impacts and dependencies to which they relate 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 the levelof uncertainty of those assumptions.