CSRD : everything you need to know about impacts, risks and opportunities (IROs)

Impacts, risks and opportunities, called IROs, are at the heart of the construction of the sustainability report for companies.

‍

In fact, ESRS, European reporting standards, specify what businesses should publish about significant impacts, risks, and opportunities.

‍

In other words, it is on the basis of the materiality assessment of IROs that the company can decide on the materiality of its main sustainability matters and therefore on the information that it will have to include in its extra-financial report.

‍

What do the impacts, risks and opportunities cover? How to draw up the list of IROs to be analyzed? How to carry out the IROs quotation? How does Sami support you on the IROs? We explain everything to you in this article.

‍

1. What are IROs?

‍

ESRS break down impacts, risks and opportunities into two parts:

‍

• The impacts

‍

These are the positive and negative impacts, real or potential, on sustainability that are linked to the company's activities. This corresponds to impact materiality.

‍

• Risks and opportunities

‍

This time it is a question of the company's financial risks and opportunities generated by the economic, social and natural environment. We are talking about financial materiality.

‍

IROs are inseparable from a crucial step in the sustainability report: the double materiality assessment.

‍

During this double materiality assessment, the first phase is to draw up a list of the company's potential material matters. To do this, the company can first rely on the list of matters provided by EFRAG itself and found in the ESRS 1, AR 16 (page 26 of this document), with the themes, sub-themes and sub-sub-themes that should be considered by the company.

‍

This list must be supplemented by a documentary analysis to identify issues specific to the company through internal documents, an analysis of its sector of activity or a benchmark of the issues selected by the company's competitors. Analysis of voluntary sectoral frameworks published by the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), or the Morgan Stanley Capital International (MSCI) is also recommended.

‍

It is from these potential material matters that IROs appear. In other words, we go down a notch in the detail of the analysis.

‍

For example, in the “Climate Change” theme, sub-theme “Climate Change Mitigation”, several IROs can be listed:

‍

• impact of company greenhouse gas emissions on the climate
• impact of scope 3 emissions on businesses
• market risk linked to company emissions: reputational risk with customers, on other stakeholders, financial risk with respect to investors
• regulatory risk
• risk if the company does not have goals compatible with limiting global warming to 2 degrees

‍

How to succeed your double materiality assessment? Discover our complete article on this subject.  

‍

2. How to determine the materiality of IROs?

‍

Once the IROs have been identified, their materiality must be determined.

‍

For this, the ESRS have defined evaluation criteria. They are different between impacts on the one hand and risks and opportunities on the other hand.

‍

2.1 For impacts

‍

Impacts can be positive or negative, real or potential. The criteria differ somewhat depending on the nature of the impact.

‍

For negative impacts, it is the severity of the impact that is evaluated as well as its probability of occurrence for potential impacts.

‍

The criterion for the severity of the impact itself depends on 3 criteria:

• its magnitude: what is the importance or severity of the impact? On human rights or on the environment for example.
• its extent: what is the scope of the impact? For example, the extent of environmental damage.
• and its irremediable nature: to what extent can the impact be repaired? Can environmental damage be restored and to what extent can the environment return to a situation at least equivalent to that observed before the negative impact?

‍

For positive impacts, only the magnitude and extent of the impact are evaluated, as well as its probability of occurrence for potential impacts.

‍

2.2 For risks and opportunities

‍

To assess financial materiality, two criteria must be taken into account:

‍

• the potential magnitude of financial effects based on appropriate thresholds
• The probability of occurrence

‍

This analysis must be done in the short, medium and long term.

‍

The company must then build a rating scale. This will make it possible to quantify, for each criterion and on each IRO, the importance or not of this IRO.

‍

EFRAG does not impose a single rating scale. It is up to the company to choose its scale: from 0 to 3 for example, from 1 to 4 or even from 1 to 5.

‍

And then you have to rate all the IROs. In concrete terms, this means that a score must be applied for each evaluation criterion.

‍

For example, for a potential negative impact, is the expected magnitude very low (0) or major (3)? Is the expected range very low (0) or major (3)? Etc. And repeat this exercise for each criterion. This gives a final score.

‍

Finally, the company determines thresholds beyond which IROs are considered material. Again, EFRAG does not impose a methodology but the company must be in a position to be able to explain how these thresholds were defined and applied.

‍

When listing IROs, the ESRS do not require consultation with stakeholders. However, paragraph 24 of ESRS 1 makes it clear that stakeholder engagement is an important element in the quality of materiality assessment since stakeholders will help you determine the severity and probability of IROs. Internal and external stakeholders can be consulted during and at the end of the scoring exercise in order to confirm or readjust the materiality scores.

‍

2.3 From IROs to materiality matters

‍

Remember that the objective of rating IROs is to determine whether these IROs are material or not.

‍

The company may have several dozen, 50, or 60, material IROs. It can then aggregate several of them and group them together within the same challenge. For example, all the IROs related to the theme of climate change will be grouped together in the materiality issue “climate change”.

‍

This then makes it possible to have a much more readable double materiality matrix with for example a dozen challenges and not several dozen IROs.

‍

3. What are the disclosure requirements for IROs?

‍

3.1 The process of identifying and evaluating IROs

‍

This is what the ESRS call the disclosure requirement IRO-1.

‍

Companies must publish in their sustainability report information on the procedure that allowed them to identify impacts, risks and opportunities and to decide on their materiality.

‍

In concrete terms, here are the main information expected:

‍

• a description of the methodology and assumptions used in the procedure
• an overview of the procedure used to identify, assess, and prioritize IROs
• how this procedure is integrated into the overall business risk management process
• the sources of the data used, the range of action covered and the data used in the hypotheses
• and if and how the procedure has changed compared to the previous reference period, when it was last amended and the next dates for the revision of the significance assessment

‍

3.2 The publication of the list of material issues

‍

This is what the ESRS call the disclosure requirement IRO-2.

‍

The aim is for companies to publish the list of requirements themselves published in the sustainability report following the double materiality assessment.

‍

This list may take the form of a table of contents that will specify the numbers of pages or paragraphs where the information is found in the report and which will indicate “non-material” for issues considered to be non-material after the materiality assessment.

‍

A table of all data points arising from other EU legislative acts is also expected.

‍

Finally, if the company has decided that climate change is not a material matter and therefore omits to publish the information expected in the ESRS E1 Climate Change, it must publish a detailed explanation of the results of its materiality assessment on this matter, including a prospective analysis of the conditions that could lead it to conclude later that climate change is a material matter.

‍

For the details of the IRO-1 and IRO-2 requirements, you can consult pages 51, 52 and 53 of this document.

‍

4. What does Sami offer on the identification and analysis of IROs

‍

Our CSRD module integrated into our platform and the expertise of our partner consulting firms specializing in sustainability and ESG reporting allow us to offer you tailor-made support on CSRD, and in particular on the stage of identifying and evaluating IROs.

‍

4.1 On the identification of matters

‍

In this first step, our software makes it possible to map all of your stakeholders (employees, customers, suppliers, etc.) and to adapt the ESRS framework to your situation. The list of sustainability matters, detailed in themes, sub-themes and sub-sub-themes, provided by EFRAG is integrated into our platform. All you have to do is configure the tool to adapt it to your matter and then create IROs each time.

‍

‍

‍

4.2 On the IROs listing

‍

In particular, our software allows:

‍

• To easily assess your IROs

‍

You determine the rating of your IROs according to the criteria expected by EFRAG and the software automatically calculates the materiality score for each of the IROs and the matriality matters associated with the IROs. The evaluation grid is based on EFRAG standards.

‍

The exercise starts with an on-site meeting with our consultants and the people in charge of the company's CSRD project in order to give you the keys to rating the various impacts, risks and opportunities.

‍

‍

Our consultants follow this step with you, first review the scoring results (before making adjustments if necessary) and prepare the summary table of material IROs, the deliverable required by ESRS 2.

‍

• To solicit your stakeholders

‍

As mentioned earlier, the ESRS do not require companies to set up a dialogue with stakeholders for the double materiality assessment, but it is highly recommended in order to ensure the comprehensiveness and quality of your assessment.

‍ ‍

This is why our software makes it possible to simply and effectively interview the stakeholders you have identified. Ready-to-use questionnaire templates designed for CSRD are integrated. But you can also define your custom questionnaires with a multitude of fields available. Finally, the software automatically aggregates and analyzes the responses of your stakeholders in order to enrich the rating of your IROs.

‍

‍

‍

Based on the evaluation of the materiality of the IROs, our software then automatically provides a double materiality matrix in order to be able to visualize your material challenges.

‍

Our consultants also prepare the materiality report in order to detail the methodology followed during this double materiality assessment and the results obtained (deliverable required in ESRS 2) and prepare a summary table of material matters, disclosure requirements and datapoints that will be included in the report.

‍

{{newsletter-blog-3}}

‍

Our other content on the CSRD:

‍

- Understanding everything at CSRD

- CSRD: how to succeed in your double materiality analysis?

- All CSRD datapoints: Sami: CSRD - ESRS Data Points.

- CSRD: understand everything about the ESRS E1 climate change standard

- Building a transition plan aligned with CSRD

- ESRS standards: understanding European reporting criteria

- The 25 questions that all businesses ask themselves about CSRD

‍