IRO-1 — Processes to identify and assess material impacts, risks and opportunities
Cross-cutting disclosure requirement of ESRS 2 that documents the process to identify and assess material impacts, risks and opportunities under the CSRD double materiality principle.
Context
IRO-1 is the procedural backbone of the double materiality framework. It documents the how: methodology, assumptions, scope, consultation procedures, prioritisation criteria and thresholds applied by the company to identify and assess its material impacts, risks and opportunities.
Regulatory origin
Cross-cutting disclosure requirement of the cross-cutting standard ESRS 2 (Delegated Regulation (EU) 2023/2772, Annex I), published in the OJEU L 22.12.2023. The obligation is anchored in ESRS 2 §4.1 ¶51 and developed in ¶53 with eight letters (a)-(h) that structure the mandatory content.
«To provide an understanding of the process by which the company identifies impacts, risks and opportunities, and assesses their materiality, as the basis for determining the information to be included in its sustainability statement.»
View verbatim quote in English
“to provide an understanding of the process through which the undertaking identifies impacts, risks and opportunities and assesses their materiality, as the basis for determining the disclosures in its sustainability statement”
The eight letters of IRO-1 (¶53)
Methodologies and assumptions applied in the process described.
Overview of the process to identify, assess, prioritise and monitor potential and actual impacts on people and the environment, informed by the company's due diligence.
Focus on activities, relationships and geographies with elevated risk of adverse impacts.
Considers impacts linked to own operations and to business relationships (chain of activities).
Includes consultation with affected stakeholders and external experts.
Prioritises negative impacts by severity and likelihood and, where applicable, positive impacts by scale, scope and likelihood — with qualitative or quantitative criteria under ESRS 1 §3.4.
Process to identify and assess risks and opportunities with financial effects.
Connections between impacts and dependencies.
Assessment of likelihood and magnitude.
Prioritisation of sustainability risks relative to other types of risk.
Description of the decision-making process and related internal control procedures.
Integration with the company's overall risk management (ERM) process.
Integration with the overall opportunity management process.
Input parameters (data sources, scope of operations covered, level of detail in assumptions).
Changes compared with the prior period, date of last revision and future revisions of the process.
Key differences with SBM-3 and IRO-2
| Disclosure | Reports | ESRS 2 anchor |
|---|---|---|
| IRO-1 | The process (how the analysis was done) | ¶51-53 |
| SBM-3 | The outcome (which impacts, risks and opportunities turned out material) | ¶48 |
| IRO-2 | The inventory (which disclosure requirements are covered) | ¶54-59 |
Application timeline
ESRS publication
Delegated Regulation (EU) 2023/2772 published in the OJEU L 22.12.2023 with IRO-1 in ESRS 2 §51-53.
EFRAG IG 1
Implementation Guidance on Materiality Assessment published with the operational details of IRO-1.
CSRD wave 1
First mandatory application for large and listed companies (>500 employees).
Waves 2-3
Progressive application to large non-listed companies and listed SMEs after Omnibus.
Applied case
A textile brand required to report under CSRD drafts the IRO-1 of its first ESRS sustainability statement, reporting under each of the eight letters of ¶53. The following deployment shows how each letter materialises in its real operational context.
Applies the canonical four-step process of IG 1 ¶66 (understand context, identify, assess, report). Uses the list of sustainability matters in ESRS 1 AR 16 as support. Documents a qualitative threshold (severity prevails over likelihood in human rights, ESRS 1 ¶45 in fine) and a quantitative one (≥1 per cent of exposure on turnover).
Details the focus on cotton cultivation (Pakistan, India), spinning (Turkey) and garment-making (Morocco, Portugal). Consultation with textile unions, NGO Clean Clothes Campaign and peer review with a human rights consultancy. Prioritises by severity (scale + scope + irremediable character) with the rule of precedence over likelihood.
Links the water dependencies in Turkish spinning with regulatory risk (Regulation (EU) 2024/3015 Forced Labour) and commercial opportunities (access to textile transition funds).
Double materiality committee chaired by the CSO with representation from Procurement, Operations and Legal. Final approval by the Audit Committee.
Cross-referenced with the corporate risk management matrix to avoid duplication and integrate the assessment of sustainability risks and opportunities into overall management.
Changes compared with the prior period: integration of Regulation (EU) 2024/3015 on forced labour following its entry into force on 13 Dec 2024. Next revision planned for 2027 before the mandatory textile DPP.
Common mistakes
IRO-1 is not the outcome of the materiality analysis: it is the documented process.
The outcome (which impacts, risks and opportunities turned out material and how they interact with strategy) is reported under SBM-3 (ESRS 2 ¶48 in faithful paraphrase requires including a brief description of the material impacts, risks and opportunities resulting from the materiality assessment — see disclosure requirement IRO-1 of this standard). IRO-1 reports the how of the analysis: methodology, criteria, consultations, thresholds, internal governance. Confusing the two leads to sustainability statements that do not allow the user to assess the robustness of the analysis nor replicate the process.
IRO-1 is mandatory to report even if no topical turns out material — even for non-material ones.
ESRS 1 ¶29 in faithful paraphrase: irrespective of the outcome of its materiality assessment, the company must always disclose the disclosure requirements (including their datapoints) of the topical ESRS related to the IRO-1 requirement. This means that the topical-specific IRO-1 (e.g. E1 Climate change IRO-1, S1 Own workforce IRO-1, etc.) is reported always — even for topicals the company concludes to be non-material. The company cannot omit a topical's IRO-1 on the grounds of non-materiality. Only the other requirements of the topical (beyond IRO-1) are subject to the materiality filter.
IRO-1 is not merely descriptive: it requires explicit transparency on thresholds and criteria.
EFRAG IG 1 ¶29 in faithful paraphrase: ESRS 2 IRO-1 and IRO-2 also require transparency on the judgement exercised, that is, the quantitative or qualitative thresholds and other criteria used. ESRS 2 ¶53(b)(iv) in faithful paraphrase requires the process to prioritise negative impacts on the basis of their relative severity and likelihood and determine which sustainability matters are material for reporting purposes, including the qualitative or quantitative thresholds and other criteria used in accordance with ESRS 1 §3.4 on Impact Materiality. A generic drafting of the process without specific thresholds breaches IRO-1.
IRO-1 is not the same as IRO-2 — they are two distinct disclosure requirements in ESRS 2 §4.1.
IRO-1 (¶51-53) describes the process. IRO-2 (¶54-59) in faithful paraphrase: the company shall report on the disclosure requirements complied with in its sustainability statements — it is the inventory of which disclosure requirements of the ESRS framework are covered by the sustainability statement and, via the ESRS 2 Appendix B table, where the datapoints derived from other EU legislation (SFDR, Pillar 3, Benchmark Regulation, European Climate Law) are located. IRO-1 = process. IRO-2 = coverage inventory.
IRO-1 is not satisfied by a flowchart alone: it requires documented consultation with affected stakeholders.
ESRS 2 ¶53(b)(iii) in faithful paraphrase requires the process to include consultation with affected stakeholders to understand how they may be affected and with external experts. EFRAG IG 1 ¶102 reinforces it. The company must document which stakeholders it consulted, how and with what result — it is not enough to state that it "did consult". ESRS 1 ¶24 places dialogue with affected stakeholders as a central element of the due diligence and materiality process.
Frequently asked questions
What is IRO-1 in ESRS?
Description of the process to identify and assess material impacts, risks and opportunities. Cross-cutting disclosure requirement of ESRS 2 §53-58. It documents the methodological process the company used to identify and assess the material IROs (impacts, risks and opportunities) for its double materiality.
Who must document IRO-1?
Any company subject to CSRD. IRO-1 is a prerequisite for validating the rest of the sustainability statement: if the IRO identification process is not robust and documented, the datapoints reported may be challenged by the external auditor or stakeholders.
What must IRO-1 contain?
In accordance with ESRS 2 §53-58 + EFRAG IG 1: (i) description of the process for identifying the stakeholders consulted, (ii) methodology for assessing severity and likelihood, (iii) time horizon considered (short/medium/long term), (iv) value chain coverage (own operations + upstream + downstream), (v) integration with existing due diligence.
What is the difference between IRO-1 and SBM-3?
IRO-1 documents the PROCESS of identification and assessment (methodology). SBM-3 documents the resulting MATERIAL IROs and their connection with strategy. IRO-1 answers "how we did double materiality"; SBM-3 answers "which matters are material and how they affect the business".
Fuentes oficiales
- European Commission · Delegated Regulation (EU) 2023/2772 · Annex II · OJEU L of 22.12.202331 jul 2023Delegated act in force
- European Commission · Delegated Regulation (EU) 2023/2772 · Annex I · OJEU L of 22.12.202331 jul 2023Delegated act in force
- European Financial Reporting Advisory Groupmayo 2024Non-binding technical guidance
- European Financial Reporting Advisory Groupmayo 2024Non-binding technical guidance
