What is IRO for CSRD?
IRO in CSRD stands for Impact, Risk, and Opportunity management. It is a key concept for the double materiality assessment, requiring companies to evaluate and report not only on how sustainability issues affect their financial performance (risks and opportunities), but also on their impact on the environment and society.
Impacts
Impacts refers to the positive and negative effects a company has on the environment and society. Companies need to report on how their operations impact critical sustainability areas like climate, biodiversity, human rights, and labor practices.
Risks
Risks focuses on the potential negative consequences to the company itself due to sustainability issues. It includes financial risks stemming from climate change, resource scarcity, changing regulations, and societal shifts towards sustainability, which could affect the company’s profitability and sustainability in the long term.
Opportunities
This involves identifying and acting on chances to benefit from sustainability, such as developing new green products, entering sustainable markets, or improving efficiency and reducing costs through sustainable practices. Opportunities represent ways for a company to enhance its competitive advantage, innovation, and growth by aligning with sustainable development goals.
How to use IRO for CSRD double materiality assessment?
1. Start with a longlist
Begin with a CSRD longlist of potential sustainability topics that could affect your organization or that your organization could impact. This list should be expansive, covering a wide range of environmental, social, and governance (ESG) issues.
For each topic on your longlist, identify the potential impacts (positive and negative), risks (how sustainability issues could negatively affect your company’s finances or operations), and opportunities (chances for your company to benefit from sustainability trends or practices).
2. Materiality assessment
After creating the longlist, you can start with your double materiality assessment. Assess both the impact materiality and financial materiality of all these topics. For both topics you have to answer different questions.
Impact Materiality: Assess which impacts are significant based on their severity, scale, scope, likelihood and irreversibility (only when the impact is negative). This helps determine how your company’s actions affect sustainability matters.
Financial Materiality: Evaluate which risks and opportunities could have a material financial effect on your organization in the short, medium, and long term. Consider the potential for future costs or benefits, changes in the regulatory landscape, market shifts, and other factors.
You can also incorporate insights from stakeholder engagement to understand the concerns and information needs of your stakeholders. Their perspectives can help prioritize which issues are most material from an external viewpoint.
3. Prioritize the topics
Use the insights gained from assessing impacts, risks, and opportunities, along with stakeholder feedback, to prioritize the topics. This involves setting a threshold for what’s considered material, ensuring that both impact materiality and financial materiality are considered. Topics that are deemed material on either dimension should be included in your list of material topics.
Since this process can be quite daunting, using a CSRD software can help you to score the topics and determine the topics which are material for your company. Not only does it help in accurately scoring these topics, but it also ensures your administration is done well. This is a critical aspect for achieving limited assurance.
Why is IRO for CSRD important?
IRO management is crucial within the CSRD framework as it offers a holistic understanding of a company’s sustainability footprint—outlining not just how the company impacts the environment and society, but also how sustainability issues impact the company itself. This dual perspective is vital for several reasons.
Providing a comprehensive view
Firstly, it ensures companies provide a complete picture of their sustainability performance, highlighting both the good and the bad. This transparency is key for informed decision-making, allowing companies to balance economic goals with environmental and social responsibilities effectively.
Helps managing risks
Understanding and managing risks related to sustainability is essential for any business aiming to safeguard itself against financial losses, regulatory penalties, and damage to its reputation. At the same time, recognizing and seizing sustainability-related opportunities can drive innovation, open up new markets, and enhance operational efficiencies, contributing to growth and a stronger competitive edge.