With the introduction of the Corporate Sustainability Reporting Directive (CSRD) companies are faced with the challenge of disclosing not only their financial, but also their environmental, social and governance (ESG) impacts in detail. A key element of this reporting is the double materiality analysis. This requires so-called IROs – Impacts, Risks & Opportunities – to be identified and evaluated.
IRO Abbreviation
The abbreviation IRO stands for “Impacts, Risks & Opportunities”. It was introduced by the European Sustainability Reporting Standards (ESRS)
These terms describe the key aspects that a company must take into account with regard to sustainability. It is not only about the potential negative effects that a company has on people and the environment, but also about the opportunities and risks that arise for the company.
What are IROs in the CSRD context?
IROs, are central concepts in the context of sustainability reporting. These three elements form the basis for the materiality analysis in accordance with the European Sustainability Reporting Standards (ESRS) and help companies to identify and systematically assess their material sustainability issues.
1. Impacts
The impacts of a company refer to the positive or negative effects that it exerts on people and the environment through its business activities, products or services. These effects can be immediate, long-term, direct or indirect. As part of the CSRD, companies must record, evaluate and report both the negative and positive impacts.
In addition to the company’s own activities, the activities of the upstream and downstream value chain must also be taken into account.
An example of a negative impact would be pollution from industrial waste, while a positive impact could be the creation of high-quality jobs in disadvantaged regions.
2. Risks
Risks include the potential negative financial, legal, environmental or social consequences that a company could suffer as a result of sustainability issues. These risks can arise from the company’s own business practices or the practices of the upstream and downstream value chain, from changes in legislation or from market conditions.
Risks for the company can often be derived from the negative effects. In addition, an interface between risk management and the CSRD or materiality analysis makes sense, as risks from the risk management system should also flow into the materiality analysis and, conversely, the material risks from the analysis should also be fed back into risk management.
A classic example of a financial risk is the transition risk arising from stricter environmental regulations, which can result in higher costs for compliance with new regulations.
3. Opportunities
Opportunities describe the positive potential that a company can realize through proactive measures in the area of sustainability or through environmental changes These opportunities can include both financial benefits and reputational gains. Opportunities for the company can also often be derived from the positive effects.
For example, a company that invests in renewable energies at an early stage could not only reduce its operating costs, but also strengthen its market position and gain new customers who value sustainable products and services.
Double materiality analysis & IROs
The identification and evaluation of IROs takes into account the principle of dual materiality. This principle distinguishes between financial materiality (outside-in perspective) and impact materiality (inside-out perspective).
- Impact materiality: This perspective looks at how the company impacts the environment and society through its business activities. This includes both negative and positive effects, such as the reduction of CO2 emissions through more efficient production processes.
- Financial materiality: This concerns the question of how sustainability issues can affect a company’s financial performance. For example, climate change could have a negative impact on business results through higher insurance premiums or disruptions in the supply chain.
By carefully analyzing their own impacts, risks and opportunities, companies can not only improve their reporting, but also develop targeted strategies and take measures to drive forward their sustainable development and achieve long-term success.
The difference between IROs and topics or sub(sub)topics
The ESRS require companies to systematically assign their IROs to the various sustainability topics defined in the standards. These topics include climate change, biodiversity, the company’s workforce and corporate governance. The full list of topics and sub-topics can be found in the ESRS AR 16.
Each sub-(sub-)topic can contain several impacts, opportunities and risks (IROs). Each IRO must be considered and evaluated separately.
IRO Assessment
IRO categorization
An IRO can be categorized according to the following topics:
- Materiality: Is the IRO an impact materiality or a financial materiality?
- Impact: Does it have a positive or negative impact or does it represent a financial opportunity or risk?
- Status (only for impact materiality): Does the IRO have an actual or potential impact?
- Value chain: Assignment of whether it concerns the company’s own activity or activities in the upstream or downstream value chain
- Time horizon: differentiation between short (<1 year), medium (1-5 years) and long term (>5 years)
IRO Rating
The following aspects must be assessed for the IROs:
- Scale
- Scope
- Reversibility
- Probability
The reason for the respective valuation should be documented so that it is comprehensible internally and for the auditor during the CSRD audit.
IRO examples
Impacts, opportunities and risks should be clear, differentiated, comprehensible and assessable. The following IRO examples are taken from theDNK‘s “IROs – Impacts, Risks and Opportunities” guidelines:
- Financial risk | E1 Climate change – climate protectionFinancial risk, as working hours have to be changed or shortened due to extreme weather conditions (heat, heavy rain, etc.), thus jeopardizing the smooth running of work processes
- Financial risk | E1 Climate change – adaptation to climate change: Political decisions due to climate change are tightening regulatory requirements for companies. This is accompanied by rising costs that have to be incurred in order to meet the new requirements (transition risk).
- Potential negative impact | E4 Biodiversity and ecosystems – Impacts on the extent and condition of ecosystems: Raw material extraction and land consumption/sealing can weaken or destroy ecosystems.
- Actual positive impact | E3 Water and marine resources – Water – Water consumption: The use of service water and rainwater contributes to the conservation of water resources.
Practical assistance for the identification and evaluation of IROs
The following tools and tips are helpful in identifying and evaluating IROs:
- Materiality Master: This software solution specializes in dual materiality analysis and guides its users step-by-step through the process of identifying and assessing IROs, supported by AI.
- Materiality Analysis Excel Template: Our popular template makes it easy to categorize and evaluate IROs.
- AI prompts: In this blog post you will find helpful prompts for the materiality analysis to identify impacts, risks and opportunities.
- AI prompt to determine the IRO longlist: This prompt instruction lets the AI ask you questions so that it has all the relevant information to create a comprehensive IRO longlist for your company.
- IRO document of the DNK: The German Sustainability Code provides guidance on the description, identification and formulation of IROs.
