For each material climate-related risk, is it considered a physical risk or a transition risk?
CSRD
1. Material Climate-Related Risks
Definition of Material Climate-Related Risks:
Material climate-related risks are those risks that could significantly affect the company’s operations, financial performance, or long-term viability as a result of climate change. These risks are generally categorized into physical risks and transition risks.
Identification of Material Risks:
The company should identify the key climate-related risks that have been assessed as material, meaning they are likely to impact the business, its assets, or its stakeholders in a significant way. This could include risks linked to physical climate change impacts (e.g., extreme weather events) or risks from the transition to a low-carbon economy (e.g., changes in regulations or consumer preferences).
2. Explanation of Whether the Risk is Physical or Transition Risk
Climate-Related Physical Risks:
Physical risks refer to the direct and indirect impacts of climate change on the company’s operations or assets. These can be further divided into:
Acute Physical Risks: Risks arising from extreme weather events, such as hurricanes, floods, wildfires, or heatwaves, which may disrupt operations or cause damage to infrastructure.
Chronic Physical Risks: Long-term changes in climate patterns, such as rising temperatures, water scarcity, or sea-level rise, which can affect operations, supply chains, and the company’s ability to function in certain regions.
For each physical risk identified, explain:
How the acute or chronic impacts of climate change could affect the business in terms of operational disruption, asset damage, or supply chain vulnerabilities.
Climate-Related Transition Risks:
Transition risks refer to risks associated with the shift toward a low-carbon economy and the transition to sustainable business practices. These risks include:
Regulatory risks: Risks related to new climate regulations, such as carbon pricing, emissions targets, or restrictions on fossil fuel use.
Market risks: Shifts in consumer demand towards sustainable products and services or changes in market value related to carbon-intensive industries.
Technology risks: The need to invest in low-carbon technologies or face obsolescence due to advances in sustainable innovation.
Reputation risks: Risk of damage to the company’s reputation from not adopting climate-friendly practices or from being associated with high-carbon industries.
For each transition risk identified, explain:
The potential regulatory, market, or technology shifts that could influence the company’s operations, pricing, or competitive positioning.
3. Reporting Format
For each material climate-related risk identified, provide:
A description of the risk (e.g., "Impact of increased flooding due to rising sea levels on production facilities").
A classification of the risk as either physical or transition risk.
The potential impact of the risk on the business (e.g., operational disruptions, regulatory costs, loss of market share).
An assessment of the likelihood and time horizon over which the risk might manifest (e.g., short-term, medium-term, long-term).
https://xbrl.efrag.org/e-esrs/esrs-set1-2023.html#890
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ESRS 2 SBM-3 - Material impacts, risks and opportunities and their interaction with strategy and business model
- How resilient is the company’s strategy and business model to climate change, including the scope, methodology, timing, and results of resilience and scenario analysis?
- How resilient is the company’s strategy and business model to climate change, including the scope, methodology, timing, and results of resilience and scenario analysis?
- Has the company disclosed its material sites, including those under its operational control, and the activities negatively affecting biodiversity-sensitive areas? Please include: (a) a list of these sites, broken down by the identified impacts and dependencies, and by the ecological status of the areas (with reference to specific ecosystem baseline levels); (b) the biodiversity-sensitive areas impacted, along with the location and the responsible competent authority for the activities specified; (c) whether the company has identified material negative impacts related to land degradation, desertification, or soil sealing; and (d) whether the company has operations that affect threatened species?
- How does your organization evaluate whether—and how—actual and potential impacts on your workforce (as identified through your ESRS 2 IRO-1 processes) stem from or relate to your strategy and business model, and how do these insights drive adaptations in your strategic framework? Additionally, what is the relationship between the material risks and opportunities arising from these workforce impacts and your overall strategy?
- How does your organization ensure that your ESRS disclosure fully covers all individuals in your workforce—whether employees, self-employed, or third-party workers—who may be materially impacted by your operations, value chain, or business relationships? In your response, please detail: (a) the types of workers affected; (b) whether material negative impacts (such as forced, compulsory, or child labour) are widespread/systemic or incident-specific, and describe any material positive impacts along with the activities driving them; (c) the material risks and opportunities arising from these impacts, including those related to transition plans for environmental sustainability (e.g., carbon reduction measures that may lead to restructuring, job losses, or opportunities for reskilling/upskilling); and (d) any operations or geographic areas identified as being at significant risk of forced, compulsory, or child labour incidents.
- How has your organization, using insights from your ESRS 2 IRO 1 materiality assessment, identified which segments of your workforce—based on specific characteristics, work contexts, or activities—are at greater risk of harm, and how is this understanding integrated into your risk management processes?
- Which material risks and opportunities stemming from workforce impacts and dependencies are specific to certain groups (for example, defined by age, location, or operational role) rather than affecting your entire workforce uniformly, and what targeted strategies does your organization employ to manage these group-specific issues?
- How do actual and potential impacts on value chain workers—identified through your ESRS 2 IRO-1 processes—originate from or connect to your strategy and business model, and how do they inform adaptations to it? Additionally, please describe the relationship between material risks and opportunities arising from impacts and dependencies on value chain workers and your overall strategy and business model.
- How do you ensure that all value chain workers likely to be materially impacted by your operations, products/services, or business relationships are included in your disclosure? Please describe: The types of value chain workers potentially impacted (for example, on-site non-employees, upstream workers, downstream workers, joint venture workers, and those particularly vulnerable such as trade unionists, migrant workers, home workers, women, or young workers); Any specific geographies, country levels, or commodities where there is a significant risk of child labour or forced/compulsory labour; Whether material negative impacts on these workers are widespread/systemic or linked to individual incidents (including impacts arising from the transition to greener, climate-neutral operations); Any material positive impacts, including the activities that generate these benefits and the types of workers positively affected; and The material risks and opportunities arising from impacts and dependencies on value chain workers.
- How has your organization developed an understanding of the increased risks facing specific groups of value chain workers—based on their characteristics, work contexts, or activities—and how does this inform your risk management strategies? How have you developed an understanding—based on your ESRS 2 IRO-1 materiality assessment—of how value chain workers with specific characteristics, working in particular contexts, or engaged in certain activities may be at greater risk of harm?
- What material risks and opportunities arising from impacts and dependencies on your value chain workers are specific to particular groups (e.g., by age, location, or operational role), and how are these group-specific issues managed? for 8 seconds Which material risks and opportunities arising from impacts and dependencies on your value chain workers apply specifically to certain groups (e.g., based on age, location, or operational context) rather than to the entire value chain workforce?
- How do the actual and potential impacts on affected communities—identified via your ESRS 2 IRO-1 processes—originate from or connect to your strategy and business model, and how do they inform adaptations to it? Additionally, please describe the relationship between material risks and opportunities arising from impacts and dependencies on affected communities and your overall strategy and business model.
- Are all affected communities that are likely to be materially impacted by your organization—including through your operations, value chain, products/services, or business relationships—included in your disclosure under ESRS 2? If so, please provide: A brief description of the types of affected communities impacted by your operations or value chain, specifying whether they are: Communities near your operating sites, factories, or facilities, or more remote communities affected by these activities (e.g., downstream water pollution); Communities along your value chain (e.g., those affected by suppliers’ operations or logistics/distribution activities); Communities at one or both endpoints of the value chain (e.g., extraction sites, waste/recycling areas); Indigenous communities. For material negative impacts, indicate whether they are widespread/systemic (e.g., marginalized populations facing health/environmental risks) or related to individual incidents (e.g., toxic waste spills, community protests met with violence). Include any impacts linked to the transition to greener, climate-neutral operations (e.g., mine closures, increased mineral extraction, solar panel production). For material positive impacts, describe the activities driving these benefits (e.g., capacity-building for alternative livelihoods) and the communities affected, including any regional specifics if applicable. Any material risks and opportunities for your business arising from these impacts and dependencies on affected communities.
- How has your organization developed an understanding of how affected communities with specific characteristics, living in particular contexts, or engaged in certain activities may be at greater risk of harm, as identified in your ESRS 2 IRO-1 materiality assessment?
- Which of your material risks and opportunities, arising from impacts and dependencies on affected communities, apply specifically to particular groups rather than to all affected communities?
- How do actual and potential impacts on consumers and/or end‑users—as identified through your ESRS 2 IRO-1 processes—originate from or connect to your strategy and business model, and how do they contribute to its adaptation? Additionally, please explain the relationship between material risks and opportunities arising from impacts and dependencies on consumers and/or end‑users and your overall strategy and business model.
- Are all consumers and/or end-users who are likely to be materially impacted by your organization—including through your operations, value chain, products/services, or business relationships—included in your disclosure under ESRS 2? If so, please provide: A brief description of the types of consumers and/or end-users affected by your operations or value chain, specifying whether they are: Users of products that are inherently harmful or increase chronic disease risks; Users of services that might negatively affect their privacy, data protection, freedom of expression, or non-discrimination rights; Users who rely on accurate and accessible product/service information (e.g., manuals, labels) to avoid harm; Consumers who are particularly vulnerable to health, privacy, or marketing impacts (e.g., children, financially vulnerable individuals). For material negative impacts, indicate whether they are widespread/systemic (e.g., state surveillance affecting user privacy) or linked to individual incidents (e.g., a defective product) or specific business relationships (e.g., a partner using unethical marketing strategies targeting young consumers). For material positive impacts, describe the activities generating these benefits (e.g., product design improvements for accessibility) and the types of consumers/end-users affected, including any regional specifics if applicable. Any material risks and opportunities for your business arising from these impacts and dependencies on consumers and/or end-users.
- How has your organization, based on its ESRS 2 IRO-1 materiality assessment, developed an understanding of how consumers and/or end‑users with specific characteristics or those using particular products or services may be at greater risk of harm?
- Which material risks and opportunities arising from impacts and dependencies on consumers and/or end‑users apply specifically to certain groups (e.g., particular age groups) rather than to the entire consumer base?