ESRS E5: Impact, Risk, and Opportunity Management
ESRS E5: Resource use and circular economy impact, risk, and opportunity management
1. Introduction
While governance and strategy are not part of ESRS E5, Impact Risk, and Opportunity management is. Resource use and circular economy practices are important components of sustainable business operations. Companies are expected to be transparent about how they manage the impacts, risks, and opportunities related to these areas. This involves not only understanding their resource inflows and outflows but also taking action to minimize waste and promote sustainable practices. In this article, we'll break down these requirements and explain what companies need to disclose. 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 Impacts, Risks, and Opportunities
Companies are required to describe their processes for identifying and assessing significant impacts, risks, and opportunities related to resource use and circular economy practices. This includes:
Screening assets and activities: Companies must explain whether and how they evaluate their operations and supply chains to identify actual and potential impacts on resource use and waste generation. This involves detailing the methodologies, assumptions, and tools used during this screening process.
Consulting affected communities: Companies should also disclose whether and how they consult with communities that might be affected by their resource use practices. Engaging with these stakeholders ensures that all potential impacts are considered and addressed.
Policies Related to Resource Use and Circular Economy
Companies need to describe the policies they have adopted to manage their significant impacts, risks, and opportunities related to resource use and circular economy. Key elements of these policies should include:
Transitioning away from virgin resources: Policies should address the shift from using new, non-renewable resources to incorporating more recycled or secondary materials.
Sustainable sourcing and use of renewable resources: Companies should commit to sustainable practices in sourcing and using renewable resources to reduce their environmental footprint.
Lifecycle management: Policies should cover the entire lifecycle of products, from design and production to disposal, promoting practices such as reuse, repair, and recycling.
Actions and Resources
To achieve their resource use and circular economy-related targets, companies must also disclose the specific actions they take and the resources they allocate. This includes:
Improving resource efficiency: Implementing measures to use materials more efficiently, particularly in relation to critical raw materials and rare earths.
Increasing use of secondary raw materials: Actions to boost the use of recycled materials in products.
Adopting circular business practices: Implementing practices such as product refurbishment, remanufacturing, and closed-loop systems where waste is minimized and resources are continually reused.
Optimizing waste management: Ensuring waste is managed in line with the waste hierarchy, which prioritizes prevention, reuse, recycling, and recovery over disposal.
Companies need to identify and assess the significant impacts, risks, and opportunities related to their resource use and circular economy practices, including how they screen their operations and consult affected communities. They must also disclose the policies and actions they implement to manage these factors, focusing on sustainable sourcing, efficient resource use, and waste reduction.
3. Conclusion
Understanding and managing the impacts, risks, and opportunities related to resource use and circular economy are essential for sustainable business practices. By adhering to disclosure requirements, companies can demonstrate transparency in their efforts and contribute to a more sustainable future.
In an upcoming article, we will explore how companies can report on these disclosures. Subscribe to stay updated.
Relevant Standards
ESRS E5
Disclosure Requirement related to ESRS 2 IRO-1 – Description of the processes to identify and assess material resource use and circular economy-related impacts, risksand opportunities
11. The undertaking shall describe the process to identify material impacts, risks and opportunitiesrelated to resource use and circular economy, in particular regarding resource inflows, resource outflows and waste, and shall provide information on:
(a) whether the undertaking has screened its assets and activities inorder to identify its actual and potential impacts, risks and opportunities in its own operations and its upstream and downstream value chain, and if so, the methodologies, assumptions and tools used in the screening;
(b) whether and how the undertaking has conducted consultations, in particular, with affected communities.
Disclosure Requirement E5-1 – Policies related to resource use and circular economy
12. The undertaking shall describe its policies adopted to manage its material impacts, risks and opportunities related to resource use and circular economy.
13. 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 impacts, risks and opportunities related to resource use and circular economy.
14. The disclosure required by paragraph 12 shall contain the information on the policies the undertaking has in place to manage its material impacts, risks and opportunities related to resource use and circular economy in accordance with ESRS 2 MDR-P Policies adopted to manage material sustainability matters.
15. In the summary, the undertaking shall indicate whether and how its policies address the following matters where material:
(a) transitioning away from use of virgin resources, including relative increases in use of secondary (recycled) resources;
(b) sustainable sourcing and use of renewable resources.
16. Policies shall address material impacts, risks and opportunities in its own operations and along its upstream and downstream value chain.
Disclosure Requirement E5-2 – Actions and resources related to resource use andcircular economy
17. The undertaking shall disclose its resource use and circular economy actions and the resources allocated to their implementation.
18. The objective of this Disclosure Requirement is to enable an understanding of the key actions taken and planned to achieve the resource use and circular economy-related policy objectives and targets.
19. The description of the resource use and circular economy-related actions and resources allocated shall follow the principles defined in ESRS 2 MDR-A Actions and resources in relation to material sustainability matters.
20. In addition to ESRS 2 MDR-A, the undertaking may specify whether and how an action and resources cover:
(a) higher levels of resource efficiency in use of technical and biological materials and water, particularly in relation to critical raw materials and rare earths as listed in the Raw Materials Information System;
(b) higher rates of use of secondary raw materials (recyclates);
(c) application of circular design, leading to increased product durability and optimisation of use, and higher rates of: Reuse, Repair, Refurbishing, Remanufacture, Repurposing and Recycling.
(d) application of circular business practices such as (i) value retention actions (maintenance, repair, refurbishing, remanufacturing, component harvesting, upgrading and reverse logistics, closed loop systems, second-hand retailing), (ii) value maximisation actions (product-service systems, collaborative and sharing economy business models), (iii) end-of-life actions (recycling, upcycling, extended 148 producer responsibility), and (iv) systems efficiency actions (industrial symbiosis);
(e) actions taken to prevent waste generation in the undertaking’s upstream and downstream value chain; and
(f) optimistation of waste management in line with the waste hierarchy.
ESRS 2
Disclosure Requirement related to ESRS 2 IRO-1 – Description of the processes to identify and 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.