Working paper on the EU Taxonomy and CSRD climate risks assessments

The EU Taxonomy and the Corporate Sustainability Reporting Directive (CSRD) Draft ESRS E1 both introduce the requirement for companies to assess their exposure to climate-related risks. The regulations are interrelated, yet the minimum requirements for compliant climate risk and vulnerability assessments differ slightly. Through this working paper, we aim to provide further clarity by sharing our view on the interpretations and practical implications of conducting climate risk assessments for EU Taxonomy and the CSRD’s Draft ESRS E1 purposes.

For the EU Taxonomy climate change adaptation objective, companies must consider the lifespan of their eligible activities, with future IPCC climate scenarios taken into account for activities with a lifespan of at least ten years. All relevant objects of the economic activity must be considered, and the climate-related hazards that are to be taken into account are those that present a material risk to the eligible activity. Materiality is defined as the potential adverse effect(s) on system elements significantly impairing the performance of the economic activity.

For the CSRD, companies must disclose a considerable amount of information around their effect on climate change as well as the effect of climate on their undertaking. A key requirement is to provide a description of processes to identify and assess material climate-related impacts, risks, and opportunities, including potential financial effects from material physical risks, material transition risks, and climate-related opportunities. Climate risk assessments must identify and assess the materiality of climate-related risks and opportunities, including physical and transition risks, as well as the company's resilience to such risks.

In summary, companies must conduct a robust climate risk and vulnerability assessment to comply with both regulations. The main differences lie in the specific requirements for the assessments, with the EU Taxonomy emphasizing the consideration of eligible activities' lifespan and location, and the CSRD focusing on identifying and assessing physical and transitional climate-related impacts, risks, and opportunities on company level.