The impacts, risks & opportunities are an important part of the CSRD reporting obligationwhich deserves special attention.
We will give you an overview and show you what you need to bear in mind with these terms, which are also referred to collectively as IROs.
The IROs stand for Impacts, Risks and Opportunities.
They play a major role in dual materiality and relate to the sustainability topics of the ESG areas of environment, social affairs and governance.
CSRD compliance requires companies not only to report on IROs, but also to manage the material risks arising from IROs.
The impacts, risks and opportunities (IROs), together with dependencies, are the most important building blocks for analyzing materiality and are therefore essential for CSRD risk management.
What is double materiality?
Dual materiality looks at ESG sustainability issues from two perspectives:
1. significant impacts of companies on people and the environment and
2. significant impacts of people and the environment on companies.
While the first perspective of material impacts is also called the inside-out perspective, the second perspective represents the financial aspects and is called the financial materiality or outside-in perspective.
A company must report on both perspectives as part of CSRD compliance with regard to sustainability issues.
The impacts are assigned to the first or inside-out perspective.
The risks and opportunities are assigned to the second or outside-in perspective.
What is the difference between dual materiality and materiality analysis?
The two perspectives of dual materiality are the conceptual basis of the materiality analysis.
For the materiality analysis, the two perspectives “inside-out” and “outside-in” are split separately, analyzed and determined in terms of their materiality or significance.
This breakdown is made into impacts, risks and opportunities (IROs).
What dependencies are there in the CSRD?
Dependencies describe the situation of a company that is dependent on natural, human and/or social resources for its business processes.
These dependencies can be diverse, are situationally related to the individual company and are not limited in number in the CSRD.
Examples of dependencies are
- Natural resources — bee pollination for fruit growers
- Human resources — access to a specific group of professionals, e.g. nursing staff in a rural area
- Social resources — Good relationships based on trust, e.g. with a supplier of important raw materials
What impact does the CSRD have?
The CSRD describes the impacts as negative and positive effects of the company on people or the environment in connection with its own value chain.
The impacts are part of the first or inside-out perspective.
The list of possible impacts is not limited, but they can be summarized well via the sustainability topics and in particular the ESRS AR 16 list.
Examples of effects are
- Negative effects: Contamination of groundwater through wastewater, incidents of child labor in upstream stages of the value chain, loss of biodiversity through soil sealing.
- Positive effects: Reduction of greenhouse gas emissions, projects to increase biodiversity, e.g. renaturation measures
What risks are there in CSRD?
According to the CSRD definition, risks are sustainability-related risks with a negative financial impact that affect cash flows, access to finance or the cost of capital.
The CSRD does not limit the list of possible risks.
The risks can also be easily determined using the sustainability topics, in particular the ESRS AR 16 list.
Risks are generally divided into physical risks and transition risks.
Physical risks are, for example, those caused by flooding, drought or heavy rainfall.
Transition risks can arise, for example, as a result of a shortage of raw materials, stricter regulation regarding the use of hazardous chemicals, loss of reputation due to unequal treatment of employees, etc.
What opportunities does the CSRD offer?
In the CSRD, opportunities are defined as sustainability-related opportunities with a positive financial impact that affect the company’s cash flows, access to finance or cost of capital.
The opportunities are divided into the following main categories:
- Resource efficiency, e.g. by avoiding waste
- Cost savings, e.g. through the use of fewer raw materials in the production process
- Diversification of the business model, e.g. through additional sustainable product or service offerings
- Reputation gain, e.g. through commitment to local biodiversity
How are the dependencies, impacts, risks and opportunities (DIROs) interrelated?
All elements of the DIROs are fundamentally interconnected.
They can even be interrelated and interdependent.
Conflicting objectives can arise in this context, e.g. if there are social impacts when switching to renewable energies.
While the climate gains in our example, many people in the coal mining area lose their jobs.
This makes it difficult to analyze.
In simple terms, however, it can be said that dependencies and impacts are sources of risks and opportunities.
These in turn are examined individually for their materiality and ranked in order of importance.
What is the difference between the impacts, risks and opportunities of CSRD and the impacts, risks and opportunities in CSRD?
The impacts, risks and opportunities in the CSRD are the most important components of the materiality analysis.
The effects, risks and opportunities of CSRD are manifold and initially mean a higher bureaucratic burden for companies and the risk of getting lost in regulation.
Over time, there is great hope that the opportunities arising from transparency, data availability and increased resilience, for example, will outweigh the risks.
Conclusion
The impacts, risks and opportunities, also known as IROs, are the core of ESG reporting and must be determined, analyzed, assessed and reported via the materiality analysis.
Dependencies, which are also part of the concept, do not have to be reported, but are an integral part of the materiality analysis and must be taken into account.
The terms of CSRD are not always clearly defined or assignable.
It is important to pay attention to this and to create clarity for your own company.
Find out more about CSRD reporting as well as the dependencies, impacts, risks and opportunities of CSRD in our guide
