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What are IROs and how do I define them?

The concept of double materiality asks you to think about each topic from an impact perspective and a financial perspective. This means that you should think about the impacts of each topic on the environment and society (negative and positive impacts) as well as the financial effects (risks and opportunities) that each topic has or could have on the business.

Impacts (positive and negative)

Impacts can be positive or negative, depending on whether they lead to positive or negative externalities on the environment and society. Impacts can be actual, if they have already occurred or potential, if they could occur in the future. If the impact is related to human rights, it is important to mark it as such. To define impacts, consider the following:

  • Are there any positive or negative impacts that your organization has or may have on people, such as your employees, your value chain workers, your customers or the community?
  • What about positive or negative impacts on the environment, such as through your emissions, or use of water or resources?
  • Do you have any sources you can derive these impacts from, such as internal documents, impact assessments, or external reports?

Risks and opportunities

Risks are effects that have a negative impact on your company's financial situation (such as costs or losses due to legal, reputational, operational or market risks)

Opportunities are effects that have a positive impact on your company's financial situation (such as cost reductions or increases in sales).

Once you have defined your impacts, you can start thinking about your risks and opportunities:

  • Will any of the impacts identified lead to potential risks or opportunities such as regulatory risks, credit risks, operational risks or market opportunities? For example, the negative impact of “Personal data breach” could lead to a financial risk in terms of litigation risk for the organization.
  • Do you have any dependencies, for example on resources, that could lead to risks for your business?
  • Do you see any new opportunities from innovation or new product development due to ESG topics?
  • Have you conducted any climate, biodiversity or human rights risk assessments that can inform your risks? Climate risk assessments and scenario analysis are particularly important for identifying physical and transition risks.

Value chain

In the IRO identification, remember to consider not only your own operations, but the entire value chain (suppliers, third-parties, distributors etc.). For example, there may be an impact that occurs in your own operations, but also in your upstream or downstream value chain. If the extent of the IRO differs according to the value chain stage, the IROs would have to be added individually and classified according to the value chain stage (upstream, own operations, downstream).