Impacts, risks and opportunities (IROs)

What are impacts, risks and opportunities?

• Impacts: the effects a company has or could have on the environment and people, including on human rights, connected with its own operations and its upstream and downstream value chain. A company can cause an impact, contribute to it, or be directly linked to it through a business relationship, such as a supplier.
• Risks: sustainability-related matters that could have negative financial effects on the company, such as higher costs, lost revenue, impaired assets or a higher cost of capital.
• Opportunities: sustainability-related matters that could have positive financial effects, such as new markets, price premiums or lower costs.

Impacts are judged from the outside in and risks and opportunities from the inside out; that is the double in double materiality. See double materiality explained.

How do impacts, risks and opportunities connect?

An impact often becomes a risk. Pollution a company causes may lead to fines, clean-up costs or lost customers. Dependencies create risks too: a company that depends on water, pollinators or skilled workers is exposed if those resources decline, even if it does not cause the decline. An opportunity can come from reducing a negative impact, for example by selling products that use less energy. Mapping these links helps a company explain the same matter consistently on both sides and in its financial statements. See climate risk in the financial statements.

Impacts, risks and opportunities: a coffee roaster

A European coffee roaster buys green coffee from smallholder farms through traders, roasts it, and sells beans and capsules to supermarkets. Its assessment identifies these IROs.

Deforestation and low farmer incomes are impacts in the upstream value chain, which the roaster is linked to through its suppliers; the incomes issue is an actual human rights impact today. Heat and drought cutting yields is a physical risk arising from the roaster's dependence on growing conditions, and it shows up in coffee prices and inventory costs. Rules requiring deforestation-free supply chains create a transition risk, through the cost of tracing every lot, but also the opportunity, because traceable, certified coffee can earn a premium with retailers. Capsule waste is an actual negative impact downstream. Each material IRO is mapped to the topical standard that covers it: biodiversity and ecosystems, value chain workers, climate change, and resource use and the circular economy. See running a double materiality assessment.

How are IROs reported?

For its material IROs, a company describes each one, where in its business model and value chain it arises, the time horizons, and how it interacts with its strategy and business model, including the current and anticipated financial effects of material risks and opportunities. It also explains the process used to identify and assess them; in the 2023 ESRS these were the disclosure requirements SBM-3 and IRO-1 in ESRS 2. The topical standards then require the policies, actions, metrics and targets that address each material IRO. See the revised ESRS. See ESRS 2 general disclosures.

Are impacts assessed before or after mitigation?

The revised ESRS clarify this. Actual impacts are assessed as they occurred in the year, reflecting earlier measures. For potential negative impacts, prevention and mitigation measures can be taken into account only where their effectiveness can be shown. A company should explain its approach, because it can change which IROs are material.

How do IROs compare with the ISSB approach?

IFRS S1 asks only about sustainability-related risks and opportunities that could reasonably be expected to affect a company's cash flows, access to finance or cost of capital. Impacts matter under the ISSB standards only to the extent they lead to such risks or opportunities, although IFRS S1 recognises that they arise from the company's dependencies and impacts on resources and relationships. A company reporting under both can use one inventory of IROs, with impacts reported under the ESRS and the financially material subset under the ISSB standards. See IFRS S1.

What mistakes are common?

Listing topics, such as water, instead of specific IROs, such as wastewater discharge at a named plant; not distinguishing actual from potential impacts; ignoring the value chain, where most impacts often sit; describing risks without saying how they affect the business; and reporting IROs that do not match the company's risk register or financial statements. Each makes the report harder to use and to assure.

This guide is general information. It is not tax or legal advice for your situation.