Short answer
The answer, before the reasoning
Start with strategy, business model, sectors, geographies, activities and upstream/downstream relationships. Identify actual and potential positive and negative impacts on people and the environment, then identify dependencies and derive financial risks and opportunities from impacts, dependencies, hazards, regulation and other sustainability factors.
Use a top-down approach where a topic-level conclusion is evident and a bottom-up assessment where granularity could change it. Assess negative impacts through severity and likelihood as applicable, and financial risks/opportunities through magnitude and likelihood across time horizons. Record locations, evidence, thresholds, judgement, aggregation and management response in the IRO register.
2026 REVISED ESRS · DEEP GUIDE
How to Identify Impacts, Risks and Opportunities Under ESRS
Own operations and value chain, impact connections, dependencies, financial pathways, time horizons and aggregation
ANSWER · EXPLAIN · APPLY · EVIDENCE · CONNECT · PUBLISH
© 2026 London Reporting Academy. Educational technical guidance.
In practice
| Article / package ID | LRA-ESRS1-004 |
|---|---|
| Version | 1.0 |
| Technical review date | 2 August 2026 |
| Source basis | Commission-adopted 2026 Revised ESRS |
Technical status
TECHNICAL STATUS
Commission-adopted 2026 Revised ESRS (C(2026) 5010 final, 3 July 2026). As at 2 August 2026, the delegated act has not yet entered into force. It becomes legally effective only after completion of the scrutiny period and publication in the Official Journal of the European Union. The revised standards apply to financial years beginning on or after 1 January 2027. Early application for financial year 2026 is permitted once the delegated act enters into force. Until early adoption is validly made, the 2023 ESRS as amended remain the legally applicable standards for current reporting. Preparers should state clearly which version they use. EFRAG had not issued revised Implementation Guidance or an updated revised-ESRS datapoint list by 28 July 2026.
Quick orientation
Quick orientation
- Applies to
- Double materiality assessments and IRO-register design under the 2026 Revised ESRS.
- Primary decision
- How to move from business context to specific, evidence-based IROs and material topics.
- Key source
- Revised ESRS 1, Chapter 3 and related ARs; Revised ESRS 2 IRO-1/IRO-2.
- Common confusion
- Treating the IRO register as a topic list or using one undifferentiated score for impact and financial materiality.
1. Start with the business context, not an ESG topic list
REQUIREMENT Revised ESRS uses a two-step process: first identify topics related to material impacts, risks or opportunities; then determine the material information to report for those topics. The assessment can use a top-down approach, a bottom-up approach or a combination. A top-down analysis starts from strategy, business model, sectors, geographies and value-chain features and can reach a topic-level conclusion where materiality is evident. More granular analysis is required where it could reasonably change the conclusion.
Source anchor: Revised ESRS 1, paragraphs 25-31 and AR 9-11.
REQUIREMENT The undertaking uses reasonable and supportable information available at the reporting date without undue cost or effort. It is not required to search exhaustively for every possible IRO, but it focuses on areas where material IROs are likely based on strategy, business model, geography, sector, relationships, activities and other relevant factors. Qualitative analysis can be sufficient.
Source anchor: Revised ESRS 1, paragraphs 32-33 and AR 13-16.
Figure 1. A proportionate top-down and bottom-up workflow for identifying IROs.
Rule
Proportionality does not mean superficiality
A proportionate process concentrates resources where the context indicates heightened impact or financial exposure. It still needs enough evidence, granularity and challenge to support the conclusion.
2. Definitions that control the register
Use separate register fields for the IRO and the related topic. This avoids treating “climate change”, “own workforce” or “business conduct” as the impact or risk itself. A useful IRO statement names the source, affected resource or stakeholder, pathway, direction, time horizon and location.
In practice
| Term | Working meaning under the Revised ESRS | Do not confuse with |
|---|---|---|
| Impact | An actual or potential, positive or negative effect on people or the environment, connected with own operations or the upstream/downstream value chain over the short, medium or long term. | An effect on the undertaking itself. |
| Risk | A sustainability-related uncertain event or condition that has or could have a negative effect on financial performance, position, cash flows, access to finance or cost of capital. | The likelihood of an external impact alone. |
| Opportunity | A sustainability-related uncertain event or condition with a potential positive financial effect or strategic benefit. | Any positive impact on people or the environment. |
| Dependency | A natural, human or social resource or relationship on which business processes rely and which can create financial effects. | A negative impact, although the two can interact. |
| Topic/sub-topic | The reporting category connected to one or more material IROs. | The IRO itself; several IROs may sit under one topic. |
3. Identify impacts across own operations and the value chain
REQUIREMENT Impact materiality covers actual and potential, positive and negative impacts on people or the environment connected with the undertaking’s own operations and upstream and downstream value chain, including through products, services and business relationships. Business relationships are not limited to direct contractual relationships.
Source anchor: Revised ESRS 1, paragraphs 38-39.
REQUIREMENT For actual negative impacts, materiality is based on severity. For potential negative impacts, it is based on severity and likelihood. Severity is assessed through scale, scope and irremediable character; any one of those characteristics can make a negative impact severe. For potential negative human-rights impacts, severity takes precedence over likelihood.
Source anchor: Revised ESRS 1, paragraphs 40 and AR 22.
REQUIREMENT Actual positive impacts are assessed through scale and scope; potential positive impacts also include likelihood. Positive and negative impacts are assessed separately and are not netted. Compliance with law or the result of mitigating a negative impact to which the undertaking is connected is not automatically a positive impact.
Source anchor: Revised ESRS 1, paragraphs 41 and 44.
Causing, contributing and directly linked impacts
INTERPRETATION ESRS 1 frames impact scope in terms of impacts connected with own operations, products, services and business relationships. It does not require the IRO register to use a formal three-bucket “cause, contribute, directly linked” classification as the materiality criterion. However, revised social-standard ARs recognise that the appropriate action differs according to the undertaking’s connection to an impact.
Source anchor: Revised ESRS 1, paragraphs 38-44; Revised ESRS S1-S4 action ARs.
IMPLEMENTATION PRACTICE As implementation practice, the register can include an involvement field using the international due-diligence terminology: caused, contributed to, or directly linked through a business relationship. This helps determine prevention, leverage and remedy responsibilities. The field should not be used to exclude a connected impact from the ESRS materiality assessment or to imply that “directly linked” means a first-tier contract.
Source anchor: UN Guiding Principles on Business and Human Rights; OECD Due Diligence Guidance for Responsible Business Conduct.
Figure 2. IRO pathways and the optional due-diligence connection field.
4. Identify dependencies and derive risks and opportunities
REQUIREMENT The financial materiality assessment covers information about risks and opportunities that have or could reasonably be expected to have material financial effects over the short, medium or long term. It extends beyond controlled entities to material risks and opportunities attributable to business relationships in the value chain.
Source anchor: Revised ESRS 1, paragraphs 45-47.
REQUIREMENT Risks and opportunities can arise from material impacts, dependencies on natural, human and social resources, and other factors such as physical hazards or regulatory change. Dependencies can affect the ability to obtain resources, their quality and price, or the terms of relationships needed for business processes. Materiality is assessed through the likelihood of occurrence and potential magnitude of financial effects.
Source anchor: Revised ESRS 1, paragraphs 48-50 and AR 29-31.
In practice
| Pathway | Illustrative chain | Evidence |
|---|---|---|
| Impact to risk | Severe worker-safety impact -> stoppage, claims, labour loss, financing or reputation effects. | Incident data; legal analysis; operational and financial scenarios. |
| Dependency to risk | Water dependency in a stressed basin -> restricted availability and higher operating costs. | Site and basin data; production sensitivity; procurement and cost forecasts. |
| Dependency to opportunity | Access to skilled labour -> capacity to expand lower-carbon products. | Workforce plan; skills gap; market and capex plan. |
| Other factor to risk | New regulation or climate hazard -> asset impairment, capex or revenue effects. | Regulatory horizon scan; hazard analysis; finance model. |
| Positive impact to opportunity | Product delivers verified environmental benefit -> demand, pricing or access-to-finance opportunity. | Impact evidence; market analysis; customer contracts; financial forecast. |
5. Apply time horizons and thresholds
REQUIREMENT The default short-term horizon is the period used for the financial statements. Medium term runs from the end of the short-term period up to five years, and long term is beyond five years. The undertaking may use different horizons where justified, but the choices and their effect on disclosures should be transparent.
Source anchor: Revised ESRS 1, time-horizon provisions.
Thresholds can be quantitative, qualitative or combined. In a top-down approach, qualitative considerations may be enough to reach a topic-level conclusion. In a bottom-up approach, the undertaking may use qualitative considerations or quantitative thresholds depending on the nature of the IRO, data and circumstances. Thresholds should not override a severe potential human-rights impact simply because likelihood is uncertain.
Rule
Threshold control
Document the threshold owner, definition, evidence, calibration, exceptions and approval. Retain the original score and the final judgement when governance overrides or refines a mechanical result.
6. Aggregate and disaggregate without obscuring material differences
REQUIREMENT The undertaking chooses a level of aggregation or disaggregation that enables users to understand significant variations by topic, sector, subsidiary, geography, asset or other relevant dimension. The level used for the materiality assessment does not automatically dictate the level of published disaggregation.
Source anchor: Revised ESRS 1, aggregation and disaggregation provisions.
A group-level IRO can be appropriate when the pathway and response are genuinely common. Separate IROs or disclosures may be needed when one location, workforce group, product, ecosystem or value-chain segment has a materially different severity, likelihood or financial effect. Aggregation must not hide a severe local impact behind an immaterial group average.
In practice
7. Recommended IRO register fields
| Field | Purpose |
|---|---|
| IRO ID and version | Stable identity and change control. |
| Topic/sub-topic | Connection to the ESRS architecture. |
| IRO type and direction | Impact, risk or opportunity; actual/potential; positive/negative. |
| Description and pathway | Source, affected stakeholder/resource, event or condition, and consequence. |
| Own operations/value-chain location | Entity, asset, product, relationship, tier, geography and time horizon. |
| Connection/involvement | Caused, contributed to or otherwise connected/directly linked, where used for due-diligence response. |
| Impact criteria | Scale, scope, irremediable character and likelihood, as applicable. |
| Financial criteria | Magnitude, likelihood, time horizon and affected financial-effect pathway. |
| Dependencies and related IROs | Natural, human or social dependency and linked risks/opportunities. |
| Evidence and stakeholder input | Sources, consultation, experts, science, risk systems and limitations. |
| Threshold and judgement | Mechanical result, qualitative conclusion, exception and approver. |
| Management response | Policies, actions, metrics, targets and remediation connection. |
| Status and review trigger | Material/non-material, last update, significant changes and next review. |
Hypothetical scenario
Illustrative example 1 - upstream cobalt and child labour
A manufacturer uses cobalt-containing components. Sector and geographic evidence indicates a potential severe child-labour impact in deeper upstream tiers. Direct supplier data is incomplete. The impact remains connected to the undertaking’s products through business relationships; the absence of a first-tier contract with the mine does not remove it from scope. The impact assessment prioritises severity, with likelihood informed by regional, sector and supplier evidence. The due-diligence connection field records that the undertaking is not presently shown to have caused or contributed to the impact but may be directly linked through the supply chain. This informs the use of leverage and remediation approach. Separately, the undertaking assesses financial risks such as supply interruption, regulatory action and customer loss.
Illustrative only. It shows how the decision is made, not wording that can be copied or relied on.
Hypothetical scenario
Illustrative example 2 - water dependency
A food producer depends on water in a basin projected to become more stressed. Its current abstraction has not been identified as a material negative impact after context-specific analysis, but the dependency creates a material production and cost risk over the medium term. This is a financially material IRO even without an impact-material conclusion of the same direction. The IRO register links basin data, production sensitivity, cost scenarios and planned capacity decisions. The report should not force the dependency risk into an impact-only narrative.
Illustrative only. It shows how the decision is made, not wording that can be copied or relied on.
In practice
9. Common mistakes
| Mistake | Correction |
|---|---|
| Starting with the ESRS topic list and writing one risk per topic | Begin with activities, relationships, stakeholders, dependencies and pathways; then connect IROs to topics. |
| Assessing only own operations | Include products, services and direct and indirect value-chain relationships. |
| Using one score for impacts and financial effects | Apply the distinct impact and financial materiality criteria and record interactions. |
| Treating directly linked as direct supplier | Use the due-diligence meaning: linkage can arise through deeper business relationships. |
| Reducing human-rights impacts because likelihood is low | For potential negative human-rights impacts, severity takes precedence. |
| Netting positive and negative impacts | Assess each impact on its own and report the management response transparently. |
| Counting future policy intentions as current mitigation | Consider only implemented prevention or mitigation that can reasonably be effective. |
| Using group averages that hide local severity | Disaggregate where context could change the materiality conclusion. |
| Ignoring dependencies that have no current external impact | Assess dependencies as independent sources of risks or opportunities. |
| Freezing the DMA for three years without trigger review | At each reporting date, consider significant changes and update when needed. |
Rule
Myth vs reality
Myth: An IRO register is a list of ESG topics with red, amber and green scores. Reality: it records specific impact and financial pathways, locations, evidence, thresholds, judgements, relationships and review triggers.
Readiness
10. IRO identification checklist
- The process starts from strategy, business model, sectors, geographies, activities and value-chain relationships.
- Top-down and bottom-up approaches are used deliberately and the reason for granularity is documented.
- Actual and potential, positive and negative impacts are identified across own operations and the value chain.
- Impact pathways identify affected people or environmental resources, location and time horizon.
- Scale, scope, irremediable character and likelihood are applied as required.
- Potential negative human-rights impacts are not screened out solely because likelihood is uncertain or low.
- Positive and negative impacts are not netted.
- Dependencies are identified and used to derive risks and opportunities.
- Financial risks and opportunities are assessed through magnitude, likelihood and time horizons.
- Stakeholder, due-diligence, risk-management, scientific and expert evidence is retained with limitations.
- Aggregation does not obscure a severe local, product or stakeholder-group variation.
- The IRO register links to PATM, topical disclosures, financial effects and governance approval.
- Significant changes are assessed at each reporting date and the change log is current.
Related Knowledge Hub articles
ESRS 2 General Disclosures
ESRS Policies, Actions, Metrics and Targets
Stakeholder Engagement in ESRS
ESRS Disclosure Matrix and Content Index
In practice
Related standards and mappings
| Relationship | Standard / disclosure |
|---|---|
| Direct or supporting | ESRS 1 paras 22-52 |
| Direct or supporting | ESRS 2 IRO-1 |
| Direct or supporting | ESRS 2 IRO-2 |
| Direct or supporting | UNGPs/OECD due-diligence involvement terminology |
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