How to Identify Impacts, Risks, and Opportunities (IROs) for CSRD Reporting

Implementing the Corporate Sustainability Reporting Directive (CSRD) calls for the introduction of a variety of new terms, including Double Materiality Assessment (DMA), Impacts, Risks, and Opportunities (IROs), European Sustainability Reporting Standards (ESRS) and Gap Analysis into sustainability reporting. In this article, we will focus on IROs and provide all the essential information to understand their significance and ensure their inclusion in your CSRD reporting process.

Impacts, Risks, and Opportunities are a crucial component of the Double Materiality Assessment mandated by the CSRD framework. They help us comprehend both the business's impact on the environment and society and how sustainability affects the business itself. Central to this requirement is the identification and evaluation of IROs concerning sustainability matters, which are categorised into environmental, social, and governance (ESG) topics. 

The importance of IROs does not end with the DMA. A company's material IROs shape its entire CSRD journey, as these dictate which ESRS, Disclosure Requirements, and even Datapoints are relevant to the company, and therefore need to be disclosed. In other words, IROs tailor the structure of the ESRS to the specific needs of any reporting company, reducing the reporting burden by discarding disclosure requirements that are not applicable. 

IROs and Double Materiality

The  CSRD reporting journey begins with the Double Materiality Assessment (DMA). One key step in the DMA is identifying material impacts, risks, and opportunities related to the sustainability matters defined in the earlier stages of the assessment.

Before delving into IROs, let’s get a quick refresher on the concept of Double Materiality. This new concept introduced by the CSRD encompasses two dimensions: 

• Impact Materiality: This perspective considers a sustainability matter material if it significantly affects people or the environment, either positively or negatively, over short, medium, or long-term horizons. It includes impacts from the company's operations, value chain, products, services, and business relationships.
• Financial Materiality: This dimension views a sustainability matter as material if it poses risks or opportunities that could affect the company’s financial performance, position, cash flows, access to finance, or cost of capital over various time horizons.

This dual approach is a novelty introduced by the CSRD, diverging from earlier ESG frameworks that often focused solely on financial materiality. It ensures a comprehensive view of sustainability, addressing the needs of a broader range of stakeholders interested in both the company's impacts and how external factors affect the company itself. For more information about the DMA, read our dedicated articles “Double Materiality and its Implications for CSRD Reporting” and "How to Conduct a Double Materiality Assessment in 6 Steps". 

Relationship between Impacts, Risks, and Opportunities and DMA

Environmental, Social and Governance topics are mapped into sustainability matters and as explored in the previous section, during the DMA exercise, a company identifies material impacts, risks and opportunities linked to these sustainability matters. But concretely, what does one mean when they speak of Impacts, Risks, and Opportunities:

• Impacts (impact materiality): the effect the undertaking has or could have on the environment and people, including effects on their human rights, connected with its own operations and value chain, including through its products and services, as well as through its business relationships. Example: investments in renewable energy leading to a reduced environmental impact.

• Risks (financial materiality): Sustainability-related financial risks arising from environmental, social, and governance matters that may negatively affect the undertaking’s financial position, financial performance, cash flows, access to finance or cost of capital in the short, medium, and long term. Example: increased costs resulting from fines and judgments. 

• Opportunities (financial materiality): Sustainability-related financial opportunities from environmental, social, or governance matters that may positively affect the undertaking’s financial position, financial performance, cash flows, access to finance or cost of capital over the short, medium, and long-term. Example: reduced operating costs through efficiency gains. 
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Identifying Impacts, Risks, and Opportunities

The process of identifying IROs starts with leveraging multiple sources. The ESRS provide a comprehensive list of sustainability matters that serve as a foundation for the sustainability matters that should be assessed to build the list of IROs. Additionally, companies should consider specific sustainability issues relevant to their industry and operations, referencing frameworks from other standards such as the IFRS and GRI for broader guidance, as the list of sustainability matters provided by the ESRS is not exhaustive.

The assessment must cover the entire value chain, from upstream suppliers to downstream customers, ensuring a holistic view of the company's impacts and financial risks. The output of this identification phase is an exhaustive list of IROs, which sets the stage for further evaluation.

Assessing Impact Materiality

To assess impact materiality, companies conduct due diligence processes to identify, prevent, mitigate, and account for actual or potential impacts on the environment and society. The severity of an impact is measured by its scale, scope, and irremediability, the latter only in the case of negative impacts. The scale pertains to the gravity of the impact, the scope of its geographical or demographic reach, and irremediability to the extent of its reversibility.

Assessing Financial Materiality

Financial materiality involves determining whether sustainability matters trigger significant financial effects on the company. This assessment evaluates the likelihood of occurrence and the potential magnitude of these effects over various time horizons.

Scoring: Applying Thresholds and Prioritising IROs

Once IROs are identified, defined, and assessed, companies must prioritise them by applying thresholds to determine which are material and should be reported. High scores in impact and financial assessments indicate materiality, while low scores suggest non-materiality. The challenge lies in evaluating IROs that fall in between, where setting thresholds becomes crucial.

Defining these thresholds requires a strategic approach, considering the company's environment and challenges. Stakeholders with a strategic outlook should be involved to ensure a comprehensive and justified classification of material and non-material matters. Clear communication of the company's strategic approach is essential, as it influences the final results of the double materiality assessment and undergoes scrutiny by auditors.

From Theory to Practice: Expert Insights on Identifying IROs

Now that we have covered the theory behind the process of defining and identifying IROs, let’s look at it more concretely. We have interviewed Laura Gabrielli, Sustainability Analyst in our Advisory team to share some common insights about the different corporates she and her team have helped with their IRO exercise. Please note that this information is based on certain criteria and is subject to change depending on the size of the corporation.

How Long Does the IRO Exercise Take?

“Conducting desk research, defining the IROs, and scoring them takes 1-2 months on average with an additional month for stakeholder engagement to validate the defined IROs”, states Laura Gabrielli. 

How Many IROs are Identified in General? 

“Based on my experience, approximately 100 potential material IROs are usually identified. The list is then narrowed down to 50 material IROs and about 20 borderline ones during the scoring phase.” 

Which Teams are Involved in Identifying IROs? 

Laura Gabrielli explains: “This effort involves a dedicated project management team or role, internal experts on ESG (Environmental, Social, and Governance) topics for defining and scoring the IROs, and stakeholders to double-check the outcomes.

Surprisingly, it seems that many corporate employees possess extensive ESG knowledge without realising it; for instance, HR departments have significant expertise in social topics. Despite the seemingly complex and theoretical nature of the process, it ultimately results in a robust and concrete outcome.”

Getting Set Up for a Successful CSRD Reporting Process

Understanding and reporting on impacts, risks, and opportunities (IROs) in CSRD is a critical process for companies aiming to align with sustainability standards. The double materiality assessment ensures that companies recognise their external impacts on society and the environment andaddress the internal financial implications of sustainability matters. By thoroughly identifying, assessing, and prioritising IROs, companies can enhance their sustainability reporting, foster transparency, and contribute to a more sustainable future.

Seeking assistance with your CSRD reporting? Collaborating with sustainability experts like Greenomy offers invaluable guidance and support, ensuring your organisation not only meets regulatory requirements but also utilises its sustainability reporting as a strategic asset. Discover Greenomy's innovative CSRD solution to streamline data capturing and reporting for long-term efficiency. Additionally, explore our Sustainability Advisory services, where our experts will help you initiate your CSRD reporting journey. Book a call for further details.