ESRS E5-6: Anticipated Financial Effects
ESRS E5: Anticipated Financial Effects from Material Resource Use and Circular-Related Risks and Opportunities
1. Introduction
As businesses navigate the shift toward sustainability, understanding the financial implications of their resource use and circular economy practices becomes crucial. Companies are now required to disclose not only their current financial impacts but also the anticipated financial effects of risks and opportunities related to resource use. This helps stakeholders grasp how these factors might influence the company's financial health in the future. In this article, we'll break down what companies need to disclose regarding these anticipated financial effects.
How companies can effectively disclose this information will be covered in another article.
2. Anticipated Financial Effects from Material Resource Use and Circular-Related Risks and Opportunities
Companies must disclose the potential financial impacts of risks and opportunities related to their use of resources and their circular economy practices. These anticipated effects can influence the company’s financial position, performance, and cash flows over the short, medium, and long term.
Key disclosure requirements:
Quantifying financial effects: Where possible, companies should quantify these anticipated effects in monetary terms. If exact numbers aren't feasible due to cost or effort, they can provide qualitative descriptions instead. For opportunities, if quantification might lead to misleading information, it's not required.
Describing the impact: Companies must describe the specific risks and opportunities they are considering, including how these relate to their operations and the expected time frame for these effects to materialize.
Assumptions and uncertainty: It’s important for companies to outline the critical assumptions they used to estimate these financial effects, along with the level of uncertainty and sources of these assumptions.
Companies must disclose the potential financial impacts of risks and opportunities related to their resource use and circular economy practices. This includes quantifying these effects where possible and explaining the assumptions and uncertainties involved.
3. Conclusion
Understanding and disclosing the anticipated financial effects of resource use and circular economy-related risks and opportunities is vital for transparent business operations. By providing this information, companies can better inform stakeholders of potential future financial impacts and demonstrate their preparedness for the evolving economic landscape shaped by sustainability practices.
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 E5
Disclosure Requirement E5-6 – Anticipated financial effects from material resource use and circular economy-related risks and opportunities
41. The undertaking shall disclose the anticipated financial effects of material risks and opportunities arising from resource use and circular economy-related impacts.
42. The information required by paragraph 41 is in addition 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). The objective of this Disclosure Requirement is to provide an understanding of:
(a) anticipated financial effects due to material risks arising from material resource use and circular economy-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 performance, and cash flows over the short-, medium- and long-term; and
(b) anticipated financial effects due to material opportunities related to resource use and circular economy.
43. The disclosure shall include:
(a) a quantification of the anticipated financial effects in monetary terms before considering resource use and circular economy-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 notmeet the qualitative characteristics of information (see ESRS 1 Appendix B Qualitative characteristics of information);
(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;
(c) the critical assumptions used to quantify the anticipated financial effects, as well as the sources and level of uncertainty of those assumptions