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Why Physical Climate Risks and Value Chain Risk Matter for CSRD Reporting

Michael Gloor
June 7, 2024

The Corporate Sustainability Reporting Directive (CSRD) applies to approximately 50’000 companies within the European Union and also to certain companies abroad that are indirectly affected. While CSRD defines which companies are affected, the European Sustainability Reporting Standards (ESRS) provides the details on how companies must disclose sustainability-related matters.

ESRS provides requirements for different environmental areas, namely climate change, pollution, water and marine resources, biodiversity and ecosystems, resource use, and circular economy. In the following, we will focus on ESRS E1 (Climate Change).

To ensure international alignment, ESRS is structured similarly to ISSB Standards, which integrated TCFD recommendations. This is reflected by focusing on four main pillars of an organization or undertaking that is subject to CSRD disclosures: Governance, Strategy, Impact, risk and opportunity management, and Metrics and Targets.

One of the key requirements related to physical climate risks is that companies need to disclose the process of identifying and assessing material climate-related impacts, risks, and opportunities (IRO) related to climate-related physical risks (ESRS E1 – 20 b) in their own operations and along the upstream and downstream value chain:

In the identification of physical climate hazards,

at least one high-emission climate scenario needs to be used, and
the assessment needs to analyze how assets and business activities may be exposed to climate-related hazards.

In a first step, the analysis needs to assess the gross physical risk, i.e. before any mitigation or resilience measures.

The Application Requirement ESRS E1 AR 11 prescribes that when identifying climate-related hazards, companies need to explain whether and how they assessed the hazards from the list below and how business activities might be affected by these hazards:

EU – Taxonomy relevant hazard
Chronic	Temperature-related	Wind-related	Water-related	Solid mass-related

	Changing temperature (air, freshwater, marine water)	Changing wind patterns	Changing precipitation patterns and types (rain, hail, snow/ice)	Coastal erosion
	Heat stress		Precipitation or hydrological variability	Soil degradation
	Temperature variability		Ocean acidification	Soil erosion
	Permafrost thawing		Saline intrusion	Solifluction
			Sea level rise
			Water stress
Acute	Heat wave	Cyclones, hurricanes, typhoons	Drought	Avalanche
	Cold wave / front	Storms (including blizzards, dust, and sandstorms	Heavy precipitation (rain, hail, snow/ice)	Landslide
	Wildfire	Tornado	Flood (coastal, fluvial, pluvial, ground water)	Subsidence
			Glacial lake outburst

The European Financial Reporting Advisory Group (EFRAG) recently published a set of guidelines and a list of ESRS data points. In particular, the following reporting requirements are relevant for the assessment of physical climate risks:

Relevant requirements for the assessment of physical climate risk

	Climate Change ESRS E1
	Impact, risk and opportunity management	Metrics and targets
Disclosure Requirement	ESRS 2 IRO-1 Description of the processes to identify and assess material climate-related impacts, risks, and opportunities	E1-9 Anticipated financial effects from material physical and transition risks and potential climate-related opportunities
Disclosure Item	Description of process in relation to impacts on climate change Description of process in relation to climate-related physical risks in own operations and along value chain Undertaking has screened whether assets and business activities may be exposed to climate-related hazards Short-, medium- and long-term time horizons have been defined Extent to which assets and business activities may be exposed and are sensitive to identified climate-related hazards has been assessed Identification of climate-related hazards and assessment of exposure and sensitivity are informed by high emissions climate scenarios Explanation of how climate-related scenario analysis has been used to inform identification and assessment of physical risks over short, medium and long-term	Assets at material physical risk before considering climate change adaptation actions Assets at acute material physical risk before considering climate change adaptation actions Assets at chronic material physical risk before considering climate change adaptation actions Percentage of assets at material physical risk before considering climate change adaptation actions Disclosure of location of significant assets at material physical risk Disclosure of location of its significant assets at material physical risk (disaggregated by NUTS codes) Percentage of assets at material physical risk addressed by climate change adaptation actions Net revenue from business activities at material physical risk Percentage of net revenue from business activities at material physical risk Disclosure of whether and how anticipated financial effects for assets and business activities at material physical risk have been assessed Disclosure of whether and how assessment of assets and business activities considered to be at material physical risk relies on or is part of process to determine material physical risk and to determine climate scenarios Disclosure of risk factors for net revenue from business activities at material physical risk Disclosure of magnitude of anticipated financial effects in terms of margin erosion for business activities at material physical risk

How Correntics can support:

Correntics has developed a sophisticated software solution to efficiently assess physical climate risks under different future scenarios. The solution is used by corporations and consulting firms to speed up the process of assessing the materiality, impacts, risks, and opportunities, based on the latest scientific data. Do you want to learn more about how we can support you?