ESRS E4: Impact, Risk, and Opportunity Management
ESRS E4: Biodiversity and ecosystems impact, risk, and opportunity management
1. Introduction
As businesses face increasing pressure to address environmental concerns, transparency about how they manage biodiversity and ecosystem-related impacts, risks, and opportunities is becoming essential. Companies must now share detailed information on the processes, policies, actions, and resources they use to protect biodiversity and ecosystems. In this article, we'll break down these requirements.
How companies can effectively disclose this information will be covered in another article.
2. Impact, Risk, and Opportunity Management
Impact, Risk, and Opportunity (IRO) are important elements in the ESRS:
Impact: This refers to the effects that a company's actions have on the environment, society, and the economy. Impacts can be positive (beneficial) or negative (harmful).
Risk: Risks are potential events or conditions that could cause harm or loss to a company. These can stem from various sources, including financial, operational, environmental, or social factors.
Opportunity: Opportunities are potential favorable circumstances or conditions that a company can exploit to its advantage. They can lead to growth, innovation, and a competitive edge.
Identifying and Assessing Biodiversity-Related Impacts, Risks, and Opportunities
Companies must describe how they identify and assess biodiversity and ecosystem-related impacts, risks, dependencies, and opportunities. This involves:
Impacts on biodiversity and ecosystems: Identifying how a company’s operations, both on-site and across the supply chain, impact local and global biodiversity, including any potential harm to sensitive species and habitats.
Dependencies on ecosystem services: Assessing how the business relies on ecosystem services (e.g., water supply, pollination) and the risks posed by their disruption.
Physical and transition risks: Evaluating risks from environmental changes (e.g., habitat loss, regulatory shifts) and how these could impact the business.
Community involvement: Engaging with affected communities to assess the social impacts of business activities on shared resources, and incorporating their input into the company’s sustainability strategy.
Companies should also consider using biodiversity scenario analysis to inform their assessments over the short, medium, and long term, providing insights into potential future risks and opportunities.
Biodiversity and Ecosystem Policies
Companies need to describe their policies for managing biodiversity and ecosystem-related impacts, risks, and opportunities. This includes:
Protection policies: Implementing policies to protect biodiversity-sensitive areas near operational sites.
Sustainable practices: Adopting sustainable land, agriculture, and ocean management practices to minimize negative impacts on ecosystems.
Traceability and monitoring: Ensuring traceability of products and materials that affect biodiversity, along with regular monitoring and reporting on ecosystem health.
These policies should be aligned with the company’s broader sustainability objectives and be part of an integrated approach to environmental stewardship.
Actions and Resources for Biodiversity Policies
Companies must disclose the actions they are taking and the resources they are allocating to protect biodiversity and ecosystems. Key points include:
Key actions: Listing significant actions, such as restoration projects, conservation efforts, and the use of biodiversity offsets to mitigate unavoidable impacts.
Outcome of actions: Providing details on the effectiveness of these actions, including any measurable improvements in ecosystem health or biodiversity.
Financial commitment: Relating significant expenditures for biodiversity-related projects to financial statements and key performance indicators.
This disclosure helps stakeholders understand the company’s commitment to biodiversity conservation and the tangible steps it is taking to achieve these goals.
Companies must identify and assess how their operations impact biodiversity and ecosystems, including potential risks and dependencies. This process involves evaluating physical and transition risks, consulting with affected communities, and considering future scenarios to better manage these environmental challenges.
3. Conclusion
Clear and comprehensive disclosure of biodiversity-related processes, policies, actions, and resources is crucial for companies aiming to demonstrate their commitment to sustainability. By detailing their approach to managing biodiversity impacts, risks, and opportunities, companies can show that they are not only aware of environmental challenges but are actively working to address them.
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 related to ESRS 2 IRO-1 Description of processes to identify and assess material biodiversity and ecosystem-related impacts, risks, dependencies and opportunities
17. The undertaking shall describe its process to identify material impacts, risks, dependencies and opportunities. The description of the process shall include whether and how the undertaking:
(a) identified and assessed actual and potential impacts on biodiversity and ecosystems at own site locations and in the upstream and downstream value chain, including assessment criteria applied;
(b) identified and assessed dependencies on biodiversity and ecosystems and their services at own site locations and in the upstream and downstream value chain, including assessment criteria applied, and, if this assessment includes ecosystem services that are disrupted orlikely to be;
(c) identified and assessed transition and physical risks and opportunities related to biodiversity and ecosystems, including assessment criteria applied based on its impacts and dependencies;
(d) considered systemic risks;
(e) conducted consultations with affected communities on sustainability assessmentsof shared biological resources and ecosystems and, in particular: i. when a site, a raw material production or sourcing is likely to negatively impact biodiversity and ecosystems, the identification of the specific sites, raw materials production or sourcing with negative or potentially negative impacts on affected communities; ii. when affected communities are likely to be impacted, the undertaking, shall disclose how these communities were involved in the materiality assessment; and iii. with respect to impacts on ecosystem services of relevance to affected communities in its own operations, the undertaking shall indicate how negative impacts may be avoided. If these impacts are unavoidable, the undertaking may indicate its plans to minimise them and implement mitigation measures that aim to maintain the value and functionality of priority services.
18. The undertaking may disclose whether and how it has used biodiversity and ecosystems scenario analysis to inform the identification and assessment of material risks and opportunities over short-, medium- and long-term time horizons. If the undertaking has used such scenario analysis, it may disclose the following information:
(a) why the considered scenarios were selected;
(b) how the considered scenarios are updated according to evolving conditions and emerging trends; and
(c) whether the scenarios are informed by expectations published by authoritative intergovernmental bodies, such as the Convention for Biological Diversity and, where relevant, by scientific consensus, such as that expressed by the Intergovernmental Science-policy Platform on Biodiversity and Ecosystem Services (IPBES).
19. The undertaking shall specifically disclose:
(a) whether or not it has sites located in or near biodiversity-sensitive areas and whether activities related to these sites negatively affect these areas by leading to the deterioration of natural habitats and the habitats of species and to the disturbance of the species for which a protected area has been designated; and
(b) whether it has been concluded that it is necessary to implement biodiversity mitigation measures, such as those identified in: Directive 2009/147/EC of the European Parliament and of the Council on the conservation of wild birds; Council Directive 92/43/EEC on the conservation of natural habitats and of wild fauna and flora; an Environmental Impact Assessment (EIA) as defined in Article 1(2), point (g), of Directive 2011/92/EU of the European Parliament and of the Council83 on the assessment of the effects of certain public and private projects on the environment; and for activities located in third countries, in accordance with equivalent national provisions or international standards, such as the International Finance Corporation (IFC) Performance Standard 6: Biodiversity Conservation and Sustainable Management of Living Natural Resources.
Disclosure Requirement E4-2 – Policies related to biodiversity and ecosystems
20. The undertaking shall describe its adopted policies to manage its material impacts, risks, dependencies, and opportunities related to biodiversity and ecosystems.
21. The objective of this Disclosure Requirement is to enable an understanding of the extent to which the undertaking has policies that address the identification, assessment, management and/or remediation of its material biodiversity and ecosystem- related impacts, dependencies, risks and opportunities.
22. The disclosure required by paragraph 20 shall contain the information on the policies the undertaking has in place to manage its material impacts, risks, dependencies and opportunities related to biodiversity and ecosystems in accordance with ESRS 2 MDR-P Policies adopted to manage material sustainability matters).
23. In addition to the provisions of ESRS 2 MDR-P the undertaking shall describe whether and how its biodiversity and ecosystems-related policies:
(a) relate to the matters specified in ESRS E4 AR 4;
(b) relate to its material biodiversity and ecosystems-related impacts;
(c) relate to material dependencies and material physical and transition risks and opportunities;
(d) support traceability of products, components and raw materials with material actual or potential impacts on biodiversity and ecosystems along the value chain;
(e) address production, sourcing or consumption from ecosystems that are managed to maintain or enhance conditions for biodiversity, as demonstrated by regular monitoring and reporting of biodiversity status and gains or losses; and
(f) address social consequences of biodiversity and ecosystems-related impacts.
24. The undertaking shall specifically disclose whether it has adopted:
(a) biodiversity and ecosystem protection policy covering operational sites owned, leased, or managed in or near a biodiversity sensitive area;
(b) sustainable land / agriculture practices or policies;
(c) sustainable oceans / seas practices or policies; and
(d) policies to address deforestation.
Disclosure Requirement E4-3 – Actions and resources related to biodiversity and ecosystems
25. The undertaking shall disclose its biodiversity and ecosystems-related actions andthe resources allocated to their implementation.
26. The objective of this Disclosure Requirement is to enable an understanding of the key actions taken and planned that significantly contribute to the achievement of biodiversity and ecosystems-related policy objectives and targets.
27. The description of key actions and resources shall follow the mandatory content defined in ESRS 2 MDR-A Actions and resources in relation to material sustainability matters.
28. In addition, the undertaking :
(a) may disclose how it has applied the mitigation hierarchy with regard to its actions (avoidance, minimisation, restoration/rehabilitation, and compensation or offsets);
(b) shall disclose whether it used biodiversity offsets in its action plans. If the actions contain biodiversity offsets, the undertaking shall include the following information: i. the aim of the offset and key performance indicators used; ii. the financing effects (direct and indirect costs) of biodiversity offsets in monetary terms; and; iii. a description of offsets including area, type, the quality criteria applied and the standards that the biodiversity offsets comply with;
(c) shall describe whether and how it has incorporated local and indigenous knowledge and nature-based solutions into biodiversity and ecosystems-related actions.
ESRS 2
Disclosure Requirement related to ESRS 2 IRO-1 – Description of the processes to identifyand assess material impacts, risks and opportunities
6. When describing the process to identify material impacts, risks and opportunities in relation to business conduct matters, the undertaking shall disclose all relevant criteria used in the process, including location,activity, sector and the structure of the transaction.