Key Points
- The IRO assessment is the gating step for every ESRS topical disclosure: only matters identified as material require reporting.
- Impact materiality uses severity (scale, scope, irremediable character) and, for potential impacts, likelihood.
- Financial materiality uses likelihood and magnitude of expected financial effects on performance, position, cash flows, and cost of capital.
- EFRAG's September 2025 Implementation Guidance IG 1 confirms that qualitative thresholds are acceptable where quantitative scoring is not practicable.
What is an IRO assessment?
Double materiality under ESRS 1.38 requires every in-scope entity to assess sustainability matters from two directions. Impact materiality asks whether the entity's activities cause actual or potential effects on people or the environment. Financial materiality asks whether a sustainability matter creates risks or opportunities that could affect the entity's financial position, performance, cash flows, or cost of capital over the short, medium, or long term.
ESRS 1.43-48 sets the criteria. For actual negative impacts, the entity evaluates severity alone (scale, scope, irremediable character). For potential negative impacts, it adds likelihood. Financial risks and opportunities require both likelihood and potential magnitude of financial effects. Human rights impacts receive special treatment under ESRS 1.45: severity overrides likelihood, so a low-probability but high-severity human rights impact can still be material.
In practice, most teams start by mapping activities, business relationships, and the value chain against the sustainability matters listed in ESRS 1 AR 16. They then apply quantitative or qualitative thresholds (ESRS 1.42) to each identified IRO. ESRS 2 IRO-1 (paragraphs 53-55) requires the entity to disclose how it ran the process, which stakeholders it consulted, and which methodologies it applied. Only material IROs trigger topical disclosure requirements.
Worked example: Bergstrom Skog AB
Client: Swedish forestry and paper company, FY2025, revenue EUR 75M, IFRS reporter. Bergstrom Skog is in scope for CSRD reporting as a large undertaking and must prepare its first sustainability statement for FY2025.
Step 1: Map activities and value chain
Bergstrom's operations span forestry harvesting, pulp production, and paper finishing. Upstream, the company depends on fuel, chemicals, transport, and packaging suppliers. Downstream, it sells to packaging manufacturers and printing houses. Four geographies concentrate environmental exposure: northern Sweden (biodiversity), the Baltic coast (water discharge), Poland (supplier labour conditions), and Germany (customer logistics emissions).
Step 2: Identify potential IROs
Using the ESRS 1 AR 16 list as a starting point, the engagement team screens 93 sub-topics across E1 through S4 and G1. Screening produces 31 potentially relevant IROs. Two sector-specific matters not on the AR 16 list (deforestation-linked supply risk and FSC certification dependency) are added based on sector knowledge.
Step 3: Assess impact materiality
For each of the 33 candidate IROs, the team scores severity. Water discharge from the pulp mill scores high on scale (biochemical oxygen demand exceeds local limits by 40%) and scope (affects a 12 km river stretch used by two downstream municipalities). Irremediable character is moderate because water quality recovers within two seasons if discharge reduces. On this basis, the water-discharge IRO is material for impact purposes.
Step 4: Assess financial materiality
That same water-discharge IRO also creates a financial risk. Sweden's Environmental Protection Agency proposed tighter effluent limits effective 2027, which would require EUR 4.2M in treatment plant upgrades. Non-compliance could trigger fines of up to EUR 600,000 per year and loss of the operating permit for the Sundsvall mill (representing 35% of group revenue). Likelihood is high and magnitude is significant.
Step 5: Consolidate and determine material matters
After scoring all 33 IROs on both dimensions, 14 are material from an impact perspective, 9 from a financial perspective, and 6 on both dimensions. That consolidated list of material sustainability matters drives which topical ESRS disclosures Bergstrom must include in its FY2025 sustainability statement.
Why it matters in practice
We've seen this on about half the engagements we review: the IRO assessment is treated as a one-time exercise completed during the first reporting year, then carried forward SALY without a second look. ESRS 1.42 requires the entity to apply appropriate thresholds at each reporting date. A static list of material matters from the prior year does not satisfy that requirement when business activities, regulations, or stakeholder expectations have changed.
Financial materiality is often underdeveloped relative to the impact dimension. Entities score impacts using structured severity criteria but assess financial risks with vague labels ("low / medium / high") that lack traceable monetary estimates. ESRS 1.49 requires the entity to consider effects on financial performance, financial position, cash flows, access to finance, and cost of capital. An assessment that omits quantified financial exposure for risks already flagged as material on the impact side leaves an evidence gap that assurance providers will challenge.
Getting the financial side right is genuinely difficult. Impact materiality at least has a defined framework (severity criteria in ESRS 1), but financial materiality asks you to estimate forward-looking monetary effects for matters where market data barely exists yet. At firms like ours, we push teams to attach at least a rough order-of-magnitude figure to each financial IRO, even if it comes with a wide confidence interval. A PIOOMA number beats a traffic-light rating every time because it forces the conversation about what "significant" actually means for this entity.
IRO assessment vs. enterprise risk management
| Dimension | IRO assessment (ESRS) | Enterprise risk management (ERM) |
|---|---|---|
| Scope | Covers impacts on people and environment (inside-out) plus financial risks and opportunities from sustainability matters (outside-in) | Covers financial, operational, strategic, and compliance risks to the entity |
| Governing framework | ESRS 1 paragraphs 38-48, ESRS 2 IRO-1, EFRAG IG 1 | COSO ERM 2017 or ISO 31000 (voluntary) |
| Materiality lens | Double materiality: impact materiality and financial materiality assessed independently | Single materiality: effect on entity value and objectives |
| Output | List of material sustainability matters driving ESRS topical disclosures | Risk register with ratings, owners, and mitigation plans |
| Assurance | Subject to limited assurance under CSRD (reasonable assurance expected from 2028 onward) | Not subject to mandatory external assurance in most jurisdictions |
Both processes overlap on financial risks from sustainability matters but diverge on impact materiality. An entity that relies solely on its ERM register to populate the IRO assessment will miss impacts that do not yet create a financial risk. ESRS 1.38 requires the entity to consider how impacts may translate into financial effects over time, so the IRO assessment must also capture matters that are material on the impact dimension alone, even when the ERM register does not flag them.
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Frequently asked questions
Do I have to use a scoring matrix for the IRO assessment?
No. ESRS 1.42 requires "appropriate quantitative and/or qualitative thresholds" but does not prescribe a specific format. EFRAG's Implementation Guidance IG 1 (September 2025) confirms that qualitative assessments are sufficient where quantitative data is unavailable, provided the entity documents the rationale for each determination. Many mid-sized entities use a structured workshop format with documented judgments rather than numerical scoring.
Does the IRO assessment cover the full value chain?
Yes, in principle. ESRS 1.43 states that impact materiality covers the entity's own operations and its upstream and downstream value chain. However, the CSRD value-chain phase-in (Article 29c(4) of the Accounting Directive, as amended) allows entities to limit value-chain data collection during the first three reporting years where information is not available, provided they describe the efforts made to obtain it. The phase-in does not exempt the entity from identifying value-chain IROs; it relaxes the data requirement for quantifying them.
When do I reassess the IRO assessment?
At every reporting date. ESRS 1.42 requires the entity to apply materiality thresholds to its sustainability matters on an ongoing basis. If new legislation, a supply-chain incident, or a shift in business model changes the severity or financial magnitude of a previously screened-out IRO, the entity must reclassify it and add the corresponding disclosures. The reassessment itself must be documented and disclosed under ESRS 2 IRO-1.