If your business is one of the 50,000+ affected by the EU’s new Corporate Sustainability Reporting Directive (CSRD), understanding key concepts like the double materiality assessment and how to identify impacts, risks, and opportunities (IROs) is essential.

In this article, we’ll break down IROs and provide everything you need to know about their importance and how to include them in your CSRD reporting process.

Quick recap: the double materiality assessment and CSRD

The double materiality assessment is a central requirement of the CSRD. It helps your business identify which of the European Sustainability Reporting Standards (ESRS) topical standards are material and must be included in your CSRD reports.

Unlike traditional materiality assessments, which focus on how environmental, social, and governance (ESG) factors affect your company’s financial performance (the outside-in approach, known as financial materiality), double materiality takes it a step further. 

It also looks at how your business impacts the environment and society (the inside-out perspective, known as impact materiality). This dual approach encourages transparency, accountability, and more holistic decision-making by considering the broader implications of your business activities.

What are IROs in materiality – impacts, risks and opportunities

IROs, or Impacts, Risks, and Opportunities are the key factors that your company must identify and evaluate in your double materiality assessment. By evaluating IROs, you can figure out which topics are material to both your business and its stakeholders, warranting further in-depth examination. 

Impacts (impact materiality)

Impacts refer to the direct effects your company’s actions have or could have on the environment or society, such as pollution or labor practices. These impacts focus on the inside-out perspective, considering how your company’s operations affect people and the planet.

For example: A manufacturing company's greenhouse gas emissions contributing to global warming would be a negative impact under impact materiality.

Risks (financial materiality)

Risks focus on how external factors, such as climate change or new regulations, might negatively influence your company’s operations or financial performance. This addresses the outside-in perspective, highlighting potential threats to business success.

For example: For an agricultural company, the increasingly warm heatwaves in Europe are leading to significant losses in terms of crop yield and thus profits. 

Opportunities (financial materiality)

Opportunities assess how external factors, such as climate change or new regulations, could positively impact your company’s operations or financial performance. These are strategic opportunities that can enhance business value.

For example: Investing in energy-efficient technologies reduces operational costs and improves financial sustainability over time.

How to identify IROs

There are two primary ways to identify IROs in your double materiality assessment: the top-down approach and the bottom-up approach. Let’s break down each.

Top-down approach

In this method, you start with the relevant sustainability topics outlined in the ESRS, then drill down into sub-topics and potential IROs.

For example, let’s take the topic S1: Own workforce. Within this, there’s a sub-topic on working conditions. A potential negative impact for a chemical company might be exposure to hazardous chemicals for workers, which could lead to health risks and legal liabilities. 

This approach ensures you systematically cover all relevant sustainability issues and how they relate to your business.

Bottom-up approach

The bottom-up approach starts by identifying all potential IROs across your operations, then connects them back to one of the 37 ESRS sub-topics. This involves making a long list of all the impacts, risks and opportunities (e.g., health risks, environmental impact, labor practices) and linking them to the appropriate ESRS (sub-)topics. 

This flexible approach is particularly useful for companies with diverse or complex operations.

Examples of IROs

Let’s explore three general examples of IROs a company might need to consider:

1. ESRS E1 - Climate change 

Impact - Actual negative 

• Value chain: Own operations 
• Time horizon: Medium-term 
• Sub-topic: Climate change mitigation 
• Title: GHG emissions from business operations contribute to climate change
• Example: Most businesses emit greenhouse gases through their operations and supply chain, including energy use in offices, heating, cooling, and transportation. These emissions have a negative impact by contributing to global warming. 

Risk 

• Value chain: Supply chain (upstream, downstream) 
• Time horizon: Short-term 
• Sub-topic: Climate change adaptation 
• Title: Supply chain disruptions due to extreme weather events 
• Example: Extreme weather caused by climate change, such as floods or droughts, can disrupt supply chains. These disruptions may lead to production delays, impacting delivery times and financial performance. 

Opportunity 

• Value chain: Own operations 
• Time horizon: Medium-term 
• Sub-topic: Energy 
• Title: Adoption of energy-efficient technologies to reduce GHG emissions 
• Example: By implementing energy-efficient solutions like LED lighting, optimizing heating/cooling, and using electric vehicles, companies can reduce greenhouse gas emissions and lower operational costs in the medium term.

2. ESRS S1 - Own Workforce

Impact - Actual positive

• Value chain: Own operations
• Time horizon: Medium-term
• Sub-topic: Working conditions
• Title: Enhanced employee well-being through health and wellness programs
• Example: Comprehensive health and wellness programs, such as mental health support, fitness initiatives, and flexible work options, can improve employee well-being. These programs lead to higher satisfaction, lower absenteeism, and increased productivity, benefiting the company's overall performance.

Risk

• Value chain: Own operations
• Time horizon: Short-term
• Sub-topic: Working conditions
• Title: Increased turnover due to poor working conditions
• Example: Inadequate working conditions, like poor safety measures or lack of career growth, can cause high employee turnover. This increases recruitment and training costs, disrupts operations, and lowers team morale, negatively affecting business performance.

Opportunity

• Value chain: Own operations
• Time horizon: Long-term
• Sub-topic: Equal treatment and opportunities
• Title: Boosting business resilience through diversity and inclusion
• Example: Diversity and inclusion initiatives help attract a wider talent pool, foster innovation, and enhance decision-making. Diverse teams bring unique perspectives, leading to creative solutions and stronger business outcomes. This commitment also improves the company’s reputation and appeal to socially responsible customers and investors.

3. ESRS G1 - Business Conduct 

Impact - Actual positive 

• Value chain: Own operations 
• Time horizon: Long-term 
• Sub-topic: Corporate culture 
• Title: Enhanced board diversity and effectiveness 
• Example: Increasing board diversity by incorporating different genders, ethnicities, and expertise improves governance. Diverse boards bring fresh perspectives, drive innovation, and improve decision-making. This leads to better oversight, reduces groupthink, and equips the board to handle complex challenges, ultimately fostering sustainable growth and building stakeholder trust. 

Impact - Potential positive 

• Value chain: Own operations 
• Time horizon: Long-term 
• Sub-topic: Political engagement 
• Title: Constructive political engagement through lobbying 
• Example: Companies can use lobbying to influence legislation positively, contributing to societal and environmental improvements. 

Risk 

• Value chain: Own operations 
• Time horizon: Short-term 
• Sub-topic: Corporate culture 
• Title: Legal and regulatory compliance challenges 
• Example: Compliance with changing regulations, such as corporate governance codes or reporting standards, may require adjustments in areas like board composition and decision-making transparency. Failure to comply can result in penalties, legal issues, and reputational harm. Investing in governance frameworks and training can help mitigate these risks. 

Opportunity 

• Value chain: Supply chain (downstream) 
• Time horizon: Long-term 
• Sub-topic: Management of supplier relationships, including payment practices 
• Title: Promoting ethical supply chain practices 
• Example: Strengthening governance to ensure ethical supply chain practices promotes transparency and accountability, reducing risks like child labor or environmental harm. This enhances brand reputation, attracts socially conscious consumers, and supports long-term sustainable growth, aligning the company with global sustainability goals.

For more general IRO examples, check out our help center article.

How to evaluate IROs

When evaluating IROs in the context of a double materiality assessment, companies must assess both impact and financial materiality. These assessments are guided by a 4 and 2 characteristics, for impact and financial materiality, respectively.

Impact materiality

1. Scale 

How severe is the impact? This considers how basic needs or freedoms—like access to education or livelihoods—are affected.

2. Scope

How widespread is the impact? This measures the number of people or the extent of environmental damage caused.

3. Irremediability

Can the impact be reversed or compensated for? This assesses whether affected individuals can return to their original state or regain lost rights.

4. Likelihood

What is the probability of the impact occurring? This can be measured using qualitative or quantitative data depending on available information.

Financial materiality

1. Magnitude

How much does the risk, or opportunity affect the company’s ability to operate? Magnitude is assessed in terms of financial or operational consequences and can be measured both qualitatively and quantitatively.

2. Likelihood

What is the probability of the financial risk or opportunity occurring? This can be measured using qualitative or quantitative data depending on available information.

Assessing impact materiality

Impact materiality always goes first, as the assessment of financial aspects relies on the results of the impact analysis.

To conduct the impact materiality assessment, companies should take into account both positive and negative impacts, along with actual and potential impacts. Within these categories, four main characteristics are considered: scale, scope, irremediability and likelihood. 

Below you can see the key characteristics to include for actual and potential positive impacts, as well as actual and potential negative impacts. 

Calculating thresholds for impact materiality

In line with the EFRAG guidelines, setting thresholds for various impact dimensions is adaptable and should be informed by quantitative data whenever possible. Examples include metrics like gender ratios in the workplace or scope 1-3 emissions.

If quantitative data is unavailable, a qualitative approach can be used, based on stakeholder interviews and research. A common evaluation scale, such as a 1 to 5 range (from negligible to significant), can be applied to characteristics like scale, scope, and irremediability. For likelihood, the scale moves from highly unlikely to highly likely.

It’s crucial that companies clearly document the rationale for their chosen thresholds in their final reports. This includes explaining how the scales were applied and why impacts were classified as negligible, moderate, or significant. 

Proper analysis of likelihood also plays a key role in managing risks and opportunities, feeding into the assessment of financial materiality.

Assessing financial materiality

Financial materiality is all about the external sustainability impacts that could affect a company’s future profitability. This includes factors like global warming, supply chain challenges, and future regulations, all of which may influence cash flow and operational capacity over time.

To assess financial materiality, companies need to evaluate both the risks and opportunities presented by the ESRS topics. These are analyzed in terms of magnitude and likelihood of occurrence, with a focus on the short-term (<1 year), medium-term (1-5 years), and long-term (>5 years).

This assessment requires a detailed analysis of sustainability impacts, considering current and future scenarios. Companies must evaluate the likelihood of sustainability risks and opportunities and assess their potential financial impact. 

This involves both qualitative and quantitative analysis, supported by internal data, stakeholder feedback, and expert insights.

Calculating thresholds for financial materiality

While there’s no hard requirements for how to threshold financial materiality topics, good practice includes using likert scales (1-5), with magnitude assessed on an insignificant-significant scale and likelihood measured from very low to very high. 

According to EFRAG, information is considered material if its omission or misstatement could influence decisions made by users of financial reports.

Below is an example of how companies can map financial materiality in a matrix. While thresholds can be set independently, we recommend that all matters falling within the yellow, orange, or red zones on a financial materiality matrix be treated as financially material to maintain consistency and rigor in reporting.

Using the double materiality matrix

After scoring, the double materiality matrix is an optional tool that helps visualize the results by plotting the IROs. The matrix allows companies to see where each IRO falls in terms of impact and financial materiality. Issues that score highly in both dimensions are considered the most material and should be included in sustainability reports.

Getting started with IROs for CSRD compliance

To comply with CSRD regulations, businesses need to integrate a thorough assessment of IROs into their sustainability reporting. This process not only ensures compliance but also helps identify key sustainability challenges and opportunities, positioning your company for long-term success.

By using a structured approach to evaluate IROs and applying the double materiality lens, your company can make more informed, sustainable decisions that benefit both the business and its stakeholders.

Looking to get started? Coolset helps mid-market companies get audit-ready with streamlined double materiality assessments and integrated ESRS reporting. See coolset in action below or request a free, personalized walkthrough with one of our product experts today.

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