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IROs, for Impacts, Risks and Opportunities, are at the heart of the CSRD methodology, the European standard for extra-financial reporting and one of the pillars of the European climate law.
IROs are of strategic importance to companies, having a short-, medium- or long-term influence on the resilience of their business model. They determine the ESG information that a company must disclose in its sustainability report.
In its ESRS (European Sustainability Reporting Standards), EFRAG has detailed a process to facilitate the identification and treatment of IROs, which form the basis of the double-materiality analysis carried out upstream of the data collection process used to compile your CSRD report.
What are IROs?
In the context of the CSRD, the IROs provide guidance on the disclosure requirements for companies, based on their material environmental, social and governance (ESG) impacts. 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. double materiality.
The underlying aim is to promote transparency and improve sustainable decision-making by companies and their stakeholders. In this respect, IROs are essential for measuring the resilience of companies, for example through their ability to adapt to the effects of climate change.
ESRS classifies IROs into two main categories: impacts on the one hand, and risks and opportunities on the other.
Impacts
Impacts correspond to all the effects that a company's activities may have on the environment and/or on society as a whole. In other words, they correspond to the company's "materiality of impact".
They should be classified according to whether they are positive or negative, real or potential, and whether they occur in the short, medium or long term.
The severity of each incidence will be measured according to 4 main criteria:
- the scale of the impact
- extent of impact
- the irremediable nature of the impact
- the probability of occurrence of potential impacts
Risks and opportunities
Risks and opportunities correspond to the consequences of environmental, social or governance changes on the company's financial results, whether directly affecting its operating activities, reputation, cash flow or access to financing. For the purposes of materiality analysis, they correspond to financial materiality. Risks and opportunities with potential financial effects in the short, medium or long term are taken into account.
As with impacts, the severity of risks and opportunities will be assessed according to 2 main criteria:
- the potential scale of the financial impact
- probability of occurrence
What are the requirements for publishing IROs in the CSRD?
The methodology used to identify and evaluate IROs must be indicated as part of the response to ESRS 2, one of the directive's 2 transversal standards which detail the general principles for producing your extra-financial report. These are the DRs(Data Requirement ) IRO-1 and IRO-2.
IRO-1: Description of procedures for identifying and assessing material impacts, risks and opportunities
In this publication requirement, the company must detail the process it used to identify and measure the materiality of impacts, risks and opportunities.
It must indicate :
- the methods and assumptions used in the process
- the process of identifying, assessing, prioritizing and finally monitoring actual or potential impacts on the environment and populations
- the process of identifying, assessing, prioritizing and monitoring the risks and opportunities that could have a financial impact on their activities
- decision-making and internal control processes
- how this is integrated into the company's overall risk management process and strategy
- resources used, e.g. data sources and scope of action covered
- any changes made to the procedure in relation to the exercise carried out in the previous period
IRO-2: ESRS publication requirements covered by the company's sustainability status
The IRO-2 standard must detail the list of impacts, risks and opportunities taken into account as a result of the dual materiality analysis carried out by the company prior to publication of its CSRD report.
It is also important to be able to justify why certain topics have not been considered as material by the organization.
In the case of theESRS-E1 dedicated to climate change, if the subject is not considered material, a detailed explanation must be provided by the organization, together with an analysis of the conditions that could change this decision.
The method used to define "material" information must be detailed, together with the thresholds applied according to the rating grid adopted by the company.
What is the IRO evaluation methodology?
Assessing the company's Impacts, Risks and Opportunities is the prerequisite for compiling your sustainability report. In the context of CSRD, the methodology to be adopted is detailed in the transverse standard ESRS 1.
Step 1: Identifying IROs
IROs must be identified within the company's own activities, as well as up and down the value chain, including stakeholders who have no direct, contractual or commercial relationship with the company. The impact of our activities on indigenous peoples is often an eloquent example of this, and must be taken into account within the framework of the ESRS S3 standard.
The first step is therefore to formalize your value chain precisely and exhaustively. It will then be easier to review each stage and identify the impacts, risks and opportunities, as well as the company's dependencies that could be a source of IRO. The second step is to identify the various IROs that apply to your activities or value chain, whether they are general, specific to your sector or to your company.
ESRS 1 provides a list of 115 issues categorized into themes, sub-themes and sub-sub-themes for each thematic ESRS (AR 16). These issues can be used as a basis for reflection by the company, which can then supplement them with competitive benchmarking and analyses of sectoral or thematic studies.
At this stage, as the sectoral ESRS have not yet been published by EFRAG, we invite you to draw inspiration from the sectoral standards produced by other non-financial reporting standards, such as those ofISSB, GRI or CDP, etc.
Step 2: IRO rating
Once the IROs have been identified, the company will need to set up a rating scale to assess their importance. This scale will be decisive in the subsequent materiality analysis.
EFRAG has not imposed a rating system, so it is up to the company to set up its own index. This must be transparent, so that each decision can be justified during theCSRD audit, which will take place prior to publication of the sustainability report.
The company will therefore have to construct a rating grid to assign a value to the various criteria taken into account, according to a predefined scale (rating from 1 to 5, from 0 to 3...), for the severity and probability of occurrence of each IRO.
Step 3: Perform a materiality analysis
Your dual materiality analysis will identify the material IROs which will then define the ESRSs you'll need to report on in your CSRD report.
As a reminder, double materiality takes into account :
- materiality of impact: the impact of your organization's activities on the environment or on society as a whole
- Financial materiality: the potential impact of various ESG factors on your company's financial performance, whether positive (opportunity) or negative (risk).
To identify which themes are considered to be material for your organization, you need to draw on your analysis and rating of the various IROs. You will set a threshold in your rating grid at which an IRO will be considered material. Then, for each ESRS, you will group together the IROs evaluated as material, and communicate the information you consider material in accordance with your publication requirements.
Step 4: Integrating IROs into corporate strategy
IRO assessment is not just about identifying themes to cover in your sustainability report. These elements need to be proactively integrated into the company's overall strategy, and driven at the highest level of the organization.
- Setting strategic objectives: IRO analysis helps define short, medium and long-term objectives, in particular to reduce identified risks and maximize opportunities for sustainable growth.
- Concrete action plan: A roadmap containing specific initiatives can be deployed to improve ESG performance, such as decarbonizing operations, improving social conditions in the supply chain, or strengthening ethical governance.
- Communication and stakeholder involvement: The integration of IROs demonstrates to stakeholders (customers, investors, employees, etc.) that ESG issues are under control. This strengthens their trust and lends credibility to the company as a responsible and innovative player.
- Investment strategy and innovation: Opportunities identified in the IRO analysis can guide and justify investments in new technologies, services or markets related to sustainable solutions.
Step 5: Establish KPIs and monitor IROs
To ensure dynamic, high-performance IRO management, it will be essential to define key performance indicators and a regular monitoring mechanism.
The CSRD includes 1,200 data points to be filled in according to the materiality issues specific to each company. This enables the organization to prioritize the indicators most relevant to achieving its objectives, to monitor them rigorously and to 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 committed to responsible social practices
- Satisfaction rate of internal stakeholders 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
- Strategic adjustments based on results and evolving risks and opportunities
Finally, the monitoring of KPIs and action plans will enable the implementation of a continuous improvement process. The company will re-evaluate and adjust its objectives according to the results obtained and changes in the economic, environmental and regulatory context, using intermediate targets as strategic checkpoints. These steps will enable gaps to be identified, resources to be optimized, and actions to be adapted to ensure consistent and effective progress towards set objectives.
The results obtained should be integrated into sustainability reports and communicated to stakeholders to enhance transparency.
IROs, a factor in the sustainability and competitiveness of companies
The proactive integration of Impacts, Risks and Opportunities into corporate strategy goes far beyond a simple regulatory obligation linked to CSRD. It is a real lever for resilience and long-term competitiveness.
Risk management
Anticipating environmental, social and governance risks helps reduce incidents that could damage an organization's reputation, regulatory compliance or business continuity. A company that can effectively manage these risks is better prepared to deal with crises and unforeseen events.
While the cost of action may seem immediate, it is far less than the cost of inaction, whose financial, regulatory and strategic consequences can be far greater in the long term.
Adapting to market expectations
Investors, consumers and partners are increasingly sensitive to ESG issues. Sound consideration of IROs positions the company as a credible, reliable and innovative player in the eyes of its stakeholders, attracting new investors and responsible customers.
Innovation and opportunities
Opportunity analysis helps stimulate innovative initiatives, such as the development of new products and services, access to financing, or the conquest of new markets.
Competitive advantage
Companies that take the lead in ESG practices through rigorous IRO analysis stand out from their competitors. This can reinforce their differentiation, particularly in sectors where the pressure for sustainability is strong, or in the face of companies that have not correctly anticipated the risks facing the market.
Internal stakeholder engagement
The integration of IROs and sustainability objectives fosters the commitment of employees, who are increasingly sensitive to an organization's values of ethics and responsibility. It can alsoimprove the retention and attractiveness of new talent.
In the context of CSRD, it can better mobilize employees to contribute to data collection and the implementation of action plans led by the company.
Improving governance
Good IRO management implies more robust decision-making processes, greater management involvement in ESG strategy and greater transparency towards stakeholders.
Conclusion
The integration of IROs (Impacts, Risks and Opportunities) into the CSRD framework goes far beyond a simple regulatory constraint. It represents a strategic opportunity for companies wishing to position themselves as responsible and competitive players on the market, while facilitating their sustainable transition.
By structuring the identification, evaluation and management of ESG issues, IROs not only enable companies to meet transparency requirements, but also to better anticipate risks, explore opportunities for innovation and improve their governance, and factually identify the impacts (positive and negative) that the company generates on the individuals in its value chain and on the environment.
With a proactive approach, companies can build resilience, differentiate themselves from competitors, attract investors and engage internal and external stakeholders, while actively contributing to more sustainable development. Organizations that are able to integrate IROs into their strategy will have a key advantage in effectively navigating an ever-changing business environment.