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🔎 Key takeaways
IROs, for Impacts, Risks and Opportunities, are at the heart of the methodology set out by the CSRD, the European non-financial reporting standard and one of the pillars of the European Climate Law.
IROs have strategic importance for companies, influencing the resilience of their business model in the short, medium or long term. They determine the ESG information the company will need to disclose in its sustainability report.
In its ESRS (European Sustainability Reporting Standards), EFRAG has set out a process to facilitate the identification and processing of IROs, which underpin the double materiality analysis carried out ahead of the data collection process used to compile your CSRD report.
What are IROs?
Under the CSRD, IROs guide the company on the disclosure requirements it must meet based on its environmental, social and governance (ESG) impacts identified as material. They require companies to report on the effects of their activities on society and the environment, and on how they may be affected by societal and environmental changes, following a double materiality approach.
The underlying objective is to promote transparency and improve sustainable decision-making by companies and their stakeholders. As such, IROs are essential for measuring companies' resilience, for example through their ability to adapt to the effects of climate change.
The ESRS classify IROs into two broad categories: impacts on one side, and risks and opportunities on the other.
Impacts
Impacts correspond to all the effects the company's activities may have on the environment and/or society. In other words, they correspond to the company's “impact materiality”.
They must be classified into several categories depending on whether they are positive or negative, actual or potential, and whether they occur in the short, medium or long term.
The severity of each effect will be measured according to 4 main criteria:
- the scale of the impact
- the scope of the impact
- whether the impact is irremediable
- the likelihood of potential impacts occurring
Risks and opportunities
Risks and opportunities correspond to the consequences of environmental, social or governance changes on the company's financial results, whether directly on its operational activities, its reputation, its cash flows, or its access to funding. As part of the materiality analysis, they correspond to financial materiality. This covers risks and opportunities with potential financial effects in the short, medium or long term.
As with impacts, the severity of risks and opportunities will be assessed according to 2 main criteria:
- the potential scale of the financial effects
- the likelihood of occurrence
To find out more, discover our breakdown of the Omnibus law
What are the disclosure requirements for IROs under the CSRD?
The methodology used to identify and assess IROs must be set out as part of the response to ESRS 2, one of the directive's 2 cross-cutting standards, which details the general principles for producing your non-financial report. These are the DRs (Data Requirements or Disclosure Requirements IRO-1 and IRO-2.
IRO-1: Description of the processes to identify and assess material impacts, risks and opportunities
In this disclosure requirement, the company must detail the process it used to identify and then measure the materiality of impacts, risks and opportunities.
It must state:
- the methods and assumptions used in the process
- the process used to identify, assess, prioritise and, finally, monitor actual or potential impacts on the environment and people
- the process used to identify, assess, prioritise and, finally, monitor risks and opportunities that may have a financial impact on their activities
- the decision-making process as well as internal control processes
- how all of this is integrated into the company's overall risk management process and overall strategy
- the resources used, for example, data sources and scope covered
- any changes made to the procedure compared with the exercise carried out in the previous period
IRO-2: Disclosure requirements in relation to the ESRS covered by the company's sustainability statement
Standard IRO-2 must detail the list of impacts, risks and opportunities taken into account following the double materiality analysis carried out by the company ahead of publishing its CSRD report.
This also involves being able to justify why certain topics were not considered material by the organisation.
Under ESRS-E1, dedicated to climate change, if the topic is not considered material, a detailed explanation must be provided by the organisation, along with an analysis of the conditions that could change this decision.
The method used to define “material” information must be detailed, along with the thresholds applied according to the scoring grid adopted by the company.
What is the IRO assessment methodology?
Assessing your Impacts, Risks and Opportunities is the step that precedes compiling your sustainability report. Under the CSRD, the methodology to be adopted is set out in cross-cutting standard ESRS 1.
Step 1: Identifying IROs
IROs must be identified within the company's own activities as well as across its value chain, both upstream and downstream, including with stakeholders who have no direct, contractual or commercial relationship with the company. The impact of activities on indigenous peoples is often a telling example of this, and must be taken into account under ESRS S3.
The first step is therefore to precisely and comprehensively map out the value chain. This makes it easier to go through each stage and identify impacts, risks and opportunities, as well as the company's dependencies that could be a source of IROs. The second step is to identify the various IROs that apply to your activities or your value chain, whether general, specific to your sector, or specific to your company.
ESRS 1 provides a list of 115 issues categorised into topics, sub-topics and sub-sub-topics for each thematic ESRS (AR 16). These issues can serve as a starting point for the company, which can then supplement them by drawing on a competitive benchmark and analyses of sector-based or thematic studies.
At this stage, since the sector-specific ESRS have not yet been published by EFRAG, we recommend drawing inspiration from the sector-based standards produced by other non-financial reporting standards, such as those of the ISSB, the GRI, or the CDP, etc.
Step 2: Scoring IROs
Once the IROs have been identified, the company will need to establish a scoring scale in order to assess their importance. This scale will be key to then carrying out its materiality analysis.
EFRAG has not imposed a scoring system, so it is up to the company to develop its own index. It is essential that this be transparent, so that every decision can be justified as part of the CSRD audit that will take place ahead of publishing the sustainability report.
The company will therefore need to build a scoring grid to assign a value to the various criteria considered, according to a predefined scale (a score from 1 to 5, from 0 to 3, etc.), for the severity and likelihood of occurrence of each IRO.
Step 3: Carrying out the materiality analysis
Your double materiality analysis will identify the material IROs, which will then determine the ESRS you must report on in your CSRD report.
As a reminder, double materiality takes into account:
- impact materiality: this is the impact your organisation's activities have on the environment or society
- financial materiality: this is the potential impact of various ESG factors on your company's financial performance, whether positively (opportunity) or negatively (risk)
To identify the topics considered material for your organisation, you must rely on your analysis and scoring of the various IROs. You will set a threshold in your scoring grid above which an IRO will be considered material. You will then group together, for each ESRS, the IROs assessed as material, and report according to the disclosure requirements on the information you consider material.
Step 4: Integrating IROs into the company's strategy
Assessing IROs is not just about identifying the topics to cover in your sustainability report. These elements must be proactively integrated into the company's overall strategy and managed at the highest level of the organisation.
- Setting strategic objectives: IRO analysis helps define short, medium and long-term objectives, in particular to reduce identified risks and maximise sustainable growth opportunities.
- Concrete action plan: A roadmap containing specific initiatives can be rolled out to improve ESG performance, such as decarbonising operations, improving social conditions across the supply chain, or strengthening ethical governance.
- Communication and stakeholder involvement: Integrating IROs demonstrates to stakeholders (clients, investors, employees, etc.) the company's command of ESG issues. This strengthens their trust and lends credibility to the company as a responsible, innovative player.
- Investment strategy and innovation: The opportunities identified during the IRO analysis can guide and justify investments in new technologies, services or markets linked to sustainable solutions.
Step 5: Establishing KPIs and monitoring IROs
To ensure dynamic, effective management of IROs, it will be essential to define key performance indicators as well as a regular monitoring mechanism.
The CSRD includes 1,200 data points to be completed according to the materiality issues specific to each company. This allows the organisation to prioritise the most relevant indicators for achieving its objectives, ensure rigorous monitoring, and communicate transparently, both internally and externally, in order to demonstrate the implementation of its commitments.
KPIs must be aligned with the objectives defined in the previous step. They must be specific, measurable, achievable, realistic and time-bound (SMART).
For example:
- Reducing CO2 emissions
- Percentage of suppliers engaged in responsible social practices
- Internal stakeholder satisfaction rate on ESG issues
- Frequency of ESG compliance audits
This will be followed by a regular monitoring mechanism including:
- Periodic collection of KPI data
- An annual assessment of progress made
- Strategic adjustments based on results and changes in risks and opportunities
Finally, monitoring KPIs and action plans will enable the implementation of a continuous improvement process that can easily be modelled in CSRD software. The company will reassess and adjust its objectives based on the results obtained and changes in the economic, environmental and regulatory context, drawing on interim targets that will serve as strategic checkpoints. These steps will help identify gaps, optimise resources, and adapt the actions implemented to ensure consistent, effective progress towards the targets set.
The results obtained will need to be included in sustainability reports and communicated to stakeholders to strengthen transparency.
IROs, a factor of long-term viability and competitiveness for companies
Proactively integrating Impacts, Risks and Opportunities into corporate strategy goes far beyond a simple regulatory obligation linked to the CSRD. This approach is a genuine lever for long-term resilience and competitiveness.
1. Risk management
Anticipating environmental, social and governance risks helps reduce incidents that could harm the organisation's reputation, regulatory compliance, or continuity of operations. A company able to effectively manage these risks is better prepared to face crises and unforeseen events.
While the cost of taking action may seem immediate, it remains far lower than the cost of inaction, whose financial, regulatory and strategic consequences can be much heavier in the long run.
2. Adapting to market expectations
Investors, consumers and partners are increasingly sensitive to ESG issues. Robust consideration of IROs positions the company as a credible, reliable and innovative player among its stakeholders, thereby attracting new responsible investors and customers.
3. Innovation and opportunities
Analysing opportunities helps stimulate innovative initiatives, such as developing new products and services, accessing funding, or entering new markets.
4. Competitive advantage
Companies that get ahead on ESG practices through rigorous IRO analysis stand out from their competitors. This approach can strengthen their differentiation, particularly in sectors under strong pressure to be sustainable, or compared with companies that have not properly anticipated the risks facing the market.
5. Engaging internal stakeholders
Integrating IROs and sustainability objectives fosters employee engagement, as employees are increasingly sensitive to organisations' ethical and responsible values. This can also improve retention and attractiveness to new talent.
Under the CSRD, it can further mobilise employees to contribute to data collection and the implementation of the company's action plans.
6. Improving governance
Good IRO management involves more robust decision-making processes, greater involvement of senior management in ESG strategy, and increased transparency towards stakeholders.
Conclusion
Integrating IROs (Impacts, Risks and Opportunities) under the CSRD goes far beyond a simple regulatory constraint. It represents a strategic opportunity for companies wanting to position themselves as responsible, competitive market players while facilitating their sustainable transition.
By structuring the identification, assessment and management of ESG issues, IROs not only help meet transparency requirements, but also help companies better anticipate risks, explore innovation opportunities, improve their governance, and factually identify the impacts (positive and negative) the company generates on people across its value chain and on the environment.
Through a proactive approach, companies can strengthen their resilience, differentiate themselves from competitors, attract investors, and engage both internal and external stakeholders, while actively contributing to more sustainable development. Organisations that manage to integrate IROs into their strategy will have a key advantage in navigating an ever-changing economic environment.