Top-down (¶27)
A topic-level conclusion from strategy, business model, sectors, geographies and value chain.
AR 9: in general no assessment of individual IROs.Materiality · the units of assessment
Impacts, risks and opportunities: the units of the ESRS assessment
Impacts, risks and opportunities are what an ESRS materiality assessment tests: the undertaking’s effects on people and the environment, and the sustainability matters that could affect its finances.
The revised ESRS 1 assesses impacts on severity and likelihood, and risks and opportunities on likelihood and financial magnitude, and either can make a topic material.
UK SRS S1 asks only about risks and opportunities, with impacts counting as a source of them, so the impact half is EU work.
What the three words mean
Impacts, risks and opportunities, defined by the standard
The revised ESRS 1 decides what an undertaking reports in two steps: identify the topics related to material impacts, risks or opportunities, then decide the information to report on each (¶25).
An impact looks outward, from the undertaking to people and the environment; a risk or an opportunity looks inward, from a sustainability matter to the undertaking’s finances.
Read the definitions as the revised ESRS 1 frames them
¶39 covers impacts that are actual or potential, positive or negative, over the short, medium or long term, connected with own operations and the upstream and downstream value chain, including through products, services and business relationships.
It adds that business relationships “are not limited to direct contractual relationships”, so an impact several tiers down a supply chain can still be connected to the undertaking.
¶47 makes a topic financially material when the risks or opportunities related to it have, or could reasonably be expected to have, a material influence on the undertaking’s development, financial position, financial performance, cash flows, access to finance or cost of capital.
¶26 then says the undertaking reports material information for a topic or sub-topic when it relates to one or more material impacts, risks or opportunities.
The wider meaning of “material” across accounts, audit and each framework is on materiality explained.
Three kinds of matterExplore
Module 01 / 04
Impact
The undertaking’s actual or potential, positive or negative effect on people or the environment, in its own operations or value chain (¶39).
Module 02 / 04
Risk
A sustainability matter that could have a material negative influence on development, position, performance, cash flows, access to finance or cost of capital (¶47).
Module 03 / 04
Opportunity
The same test with a positive influence; opportunities sit beside risks in the financial lens (¶¶47, 50).
Module 04 / 04
Together
The ESRS call them impacts, risks and opportunities, and ESRS 2 names IRO-1 and IRO-2 after them.
How granular
Topic level or IRO level: the two routes
The revised ESRS 1 does not force an undertaking to list every impact, risk and opportunity one by one.
Under the top-down route of ¶27 it may conclude on a whole topic from an analysis of its strategy and business model, and assesses specifically only where the answer is not evident.
Read the rules on granularity
AR 9 says a top-down approach “in general” does not require the materiality assessment at the level of individual impacts, risks and opportunities, and that the conclusion can be reached at topic level for combined impacts, risks and opportunities.
A more granular look may still be necessary where it could reasonably lead to a different conclusion.
The bottom-up route of ¶28 relies on an assessment conducted only at the level of impacts, risks and opportunities, and AR 10 allows the two routes to be combined topic by topic.
¶32(b) adds that the undertaking is not required to assess every possible impact, risk or opportunity, but focuses where material ones are likely to arise.
The full method is on the double materiality assessment, and the framework-neutral version on the materiality assessment guide.
Each topic or sub-topic
Bottom-up (¶28)
An assessment conducted only at the level of individual impacts, risks and opportunities.
AR 10: the routes can be combined.Assessing impacts
Impacts: severity, and likelihood when potential
An impact is assessed on its own terms, whether or not it ever reaches the accounts.
Severity has three characteristics, and AR 22 says “any of the three characteristics (scale, scope and irremediable character) can make a negative impact severe”.
Read the impact rules, including policies and actions
Likelihood is a separate factor that applies to potential impacts only.
¶42 makes engagement with affected stakeholders in ongoing due diligence a key input, and AR 24 says no separate engagement process is needed for the materiality assessment.
¶43 assesses an actual negative impact as it manifested in the reporting year, without taking account of remediation in that year.
A potential negative impact takes account of prevention and mitigation only if they are implemented and can reasonably be assumed to work, and AR 27 excludes a policy that merely implies future actions.
The impact lens in depth is on impact materiality.
Four kinds of impactExplore
Module 01 / 04
Actual negative
Severity: scale, scope and irremediable character (¶40).
Module 02 / 04
Potential negative
Severity and likelihood; for human rights, severity takes precedence (¶40).
Module 04 / 04
Potential positive
Scale, scope and likelihood (¶41); never netted (¶44).
Assessing risks and opportunities
Risks and opportunities: likelihood and financial magnitude
Risks and opportunities are assessed “based on a combination of the likelihood of occurrence and the potential magnitude of the financial effects” (¶50).
¶46 calls the scope of financial materiality “an expansion” of the materiality used for the financial statements, extending to the value chain.
Read the financial rules
¶48 names three sources: material impacts, dependencies on natural, human and social resources, and other factors such as exposure to climate hazards or regulatory changes addressing systemic risks.
¶49 says dependencies may be sources of risks or opportunities “regardless of potential impacts on the natural, human and social resources relied on”.
AR 29 names the internal risk-management framework as a valuable input, and AR 31 asks for likely scenarios and anticipated financial effects not yet in the financial statements.
The joint ESRS–ISSB interoperability guidance says this definition of financial materiality is aligned with IFRS S1, and the lens in depth is on financial materiality.
Where risks come fromExplore
Module 01 / 04
Material impacts
An impact the undertaking causes can return as a financial risk (¶48(a)).
Module 02 / 04
Dependencies
On natural, human and social resources, regardless of impacts on them (¶49).
Module 03 / 04
Other factors
Exposure to climate hazards or regulatory changes addressing systemic risks (¶48(c)).
Module 04 / 04
The test
Likelihood of occurrence combined with potential magnitude of financial effects (¶50).
How they connect
One matter can be an impact, a risk and an opportunity
¶35 says double materiality has two dimensions and “the undertaking shall consider how they interact”.
An impact can be financially material from the start or become so, and impacts can also be material “exclusively from an impact perspective”.
Read how the standard handles connections
¶36 says that in general the starting point is the assessment of impacts, and that risks and opportunities unrelated to impacts, such as physical risks, are added.
¶51 deals with actions taken on one topic that create material negative impacts or risks on another, and asks for disclosure that makes the connection understood.
AR 32 gives the example: a climate-mitigation transition plan that creates material negative impacts or risks for the own workforce is disclosed under own workforce, with a cross-reference, and the climate disclosure explains how they are addressed.
The movement from impact to financial effect is sometimes called dynamic materiality, but that is a description of ¶35 and ¶34, not a separate test.
- 1
An impact is assessed
Severity, and likelihood if potential (¶40).
- 2
It may become financial
From the start, or later, when it is reasonably expected to affect the undertaking (¶35).
- 3
A risk is added
Material impacts are a named source of risks and opportunities (¶48(a)).
- 4
Actions ripple
Addressing one topic can create impacts or risks on another (¶51).
Keeping track
An IRO register: one row per matter
The ESRS prescribe no register format, so this is an illustrative working structure, not an official template.
Each field points to the paragraph of the revised ESRS 1 it serves.
| Field | What it records | Where the rule is |
|---|---|---|
| Matter | A short description of the impact, risk or opportunity | Revised ESRS 1 ¶25(a) |
| Topic and sub-topic | The ESRS topical standard and sub-topic it relates to, or entity-specific | ¶¶26, 30, 11 |
| Type | Impact (actual or potential, negative or positive), risk or opportunity | ¶¶39–41, 45–48 |
| Where it arises | Own operations or value chain, and the business relationship involved | ¶39, ¶46 |
| Impact assessment | Scale, scope, irremediable character; likelihood if potential | ¶40, AR 22 |
| Financial assessment | Likelihood and potential magnitude of financial effects; source (impact, dependency, other) | ¶¶48–50 |
| Policies and actions | Implemented, and reasonably assumed effective? Planned actions are excluded | ¶43, AR 27 |
| Threshold and conclusion | The recorded threshold applied and whether the matter is material | ¶37, AR 13 |
| Connections | Other topics affected by actions on this one | ¶51, AR 32 |
| Evidence and owner | The information relied on and the date of the last review | ¶32(a), ¶34 |
A register built this way answers ESRS 2 IRO-1 line by line, because IRO-1 asks for the process, the inputs, the thresholds and when the assessment was last updated.
It also gives an assurance provider something to test, since the limited assurance opinion covers “the process carried out by the undertaking to identify the information reported” (Accounting Directive Art 34(1)).
A template version for the whole assessment is on the double materiality assessment template, and the optional picture of the results on the materiality matrix.
Worked example
Three IROs from one illustrative food manufacturer
The company and its figures are invented; nothing here describes a real undertaking.
It scores each factor 1 to 5 and treats 3 or more as material, a convention it records under ¶37.
| Matter | Type | Assessment | Conclusion |
|---|---|---|---|
| Water withdrawal at a plant in a water-stressed basin | Impact (actual, negative) | Scale 3, scope 2, irremediable 4; severity reads at 4 because any one factor can make it severe (AR 22) | Material: ESRS E3 |
| Crop yields from the same basin falling in drought years | Risk (from a dependency) | Likelihood 3, magnitude 4 (¶¶49–50) | Material: ESRS E3, financial |
| Demand for a lower-water product line | Opportunity | Likelihood 2, magnitude 3 (¶50) | Not material on these scores; revisited at the next reporting date (¶34) |
The water impact and the yield risk sit in the same topic, and ¶35 asks the company to consider how they interact.
The yield risk would be material even without the impact, because a dependency can be a source of risk regardless of impacts (¶49).
Run through UK SRS S1, only the yield risk and the product opportunity are assessed as such, because single (financial) materiality asks about effects on cash flows, access to finance or cost of capital.
This is a provisional illustration of the method, not a finding about any company.
Where they are disclosed
IRO-1, IRO-2 and SBM-3: process, results, strategy
The assessment does not produce a separate report; it surfaces in ESRS 2 and then decides which topical disclosures apply.
IRO-1 asks for the process, including any “qualitative considerations or quantitative thresholds”, and when the undertaking last updated its materiality assessment.
Read the disclosure detail, and one cross-reference to avoid
IRO-1’s application requirements tell the undertaking to avoid “standardised, generic disclosures, sometimes referred to as ‘boilerplate’”.
IRO-2 ¶37(b) requires the basis for concluding that climate change is not material, if the undertaking reaches that conclusion and omits ESRS E1.
ESRS 2 ¶39 requires the undertaking to say so where it has no policies, actions or targets for a topic related to material impacts, risks and opportunities.
One defect is in the published text: IRO-1 ¶35(b) points to “ESRS 1 General Requirements, paragraphs 44 and 45” for severity and likelihood, but in the same regulation those paragraphs cover positive impacts and the start of financial materiality.
Severity and likelihood are in ESRS 1 ¶¶40–41, so cite those, and quote IRO-1 as printed only where you need its wording.
Information that is not material “shall not” be disclosed, except supplementary information under section 8.2 (¶24).
ESRS 2 disclosuresExplore
Module 01 / 04
IRO-1
The process: steps, thresholds, due diligence and consultation, changes, and when the assessment was last updated.
Module 02 / 04
IRO-2
The material impacts, risks and opportunities, and the disclosure requirements met.
Module 03 / 04
SBM-3
How material impacts, risks and opportunities interact with strategy and the business model.
Module 04 / 04
Topical standards
Applied only to material topics and sub-topics (¶¶29–30).
Groups and aggregation
At what level impacts, risks and opportunities are reported
A group assesses impacts, risks and opportunities for the consolidated group “regardless of the group’s legal structure” (¶55).
Where a subsidiary’s material matters differ significantly from the group’s, the information is disaggregated so readers can understand them.
Read the aggregation rules
¶52 asks for aggregation or disaggregation that reflects where significant variations arise, such as by topic, sector, subsidiary, geography or asset.
AR 33 adds that material geographies should be considered where the severity of impacts depends heavily on local context.
The level used for reporting is set separately from the level at which the assessment takes place (AR 16).
For a UK group with an in-scope EU subsidiary, the subsidiary’s assessment follows these rules, and the ESRS page lists the topical standards.
Aggregation rulesExplore
Module 01 / 04
¶52
Aggregate or disaggregate where significant variations arise: topic, sector, subsidiary, geography, asset.
Module 03 / 04
¶54
Disclose at the level that gives users the most relevant information.
Module 04 / 04
¶55
At group level, assess regardless of legal structure; disaggregate where a subsidiary differs significantly.
The UK vocabulary
UK SRS asks about risks and opportunities, not impacts as such
UK SRS S1 uses the phrase “sustainability-related risks and opportunities” and has no impact category reported for its own sake.
¶2 says an entity’s dependencies on resources and relationships, and its impacts on them, give rise to sustainability-related risks and opportunities, so an impact matters to UK SRS only as a source of one.
Read the UK test and how it relates to the ESRS
The test is single (financial) materiality: ¶18 asks whether information could reasonably be expected to influence decisions that primary users of general purpose financial reports make, and ¶3 frames effects as cash flows, access to finance or cost of capital.
The ISSB aligned that definition with the IASB’s, removing “enterprise value” from the materiality wording, as its Basis for Conclusions records at BC67.
¶B28 requires materiality judgements to be reassessed at each reporting date.
The financially material risks and opportunities from an ESRS assessment are therefore the natural starting point for UK SRS, and the UK test itself is set out under UK SRS materiality.
UK SRS S1Explore
Module 01 / 04
¶2
Dependencies and impacts on resources and relationships give rise to risks and opportunities.
Module 02 / 04
¶3
Risks and opportunities that could affect cash flows, access to finance or cost of capital.
Which text, which year
Impacts, risks and opportunities across the ESRS versions
The concept has been stable since the first ESRS, but the paragraph numbers changed when Annex I was replaced in full.
For a financial year starting in 2026 the undertaking chooses a version and must state which.
- 31 July 202301
First ESRS adopted
Delegated Regulation (EU) 2023/2772 introduces IRO-1, IRO-2 and SBM-3. - 31 May 202402
- 21 September 202603
Revised ESRS published
Delegated Regulation (EU) 2026/1563 replaces Annex I; the IRO architecture survives, renumbered. - 10 November 202604
- FY202605
Version choice
The 2023 ESRS as amended, those with eight reliefs, or the revised ESRS; state which. - FY2027 onwards06
Revised ESRS apply
Financial years beginning on or after 1 January 2027, for undertakings in CSRD scope.
Across a reporting year
The life of an impact, risk or opportunity, from identification to review
This sequence is an illustration of how one matter moves through the assessment, not a timetable the ESRS prescribe.
- 01 / Identify01
Find the matter
From strategy, business model, value chain, due diligence and sector data (¶¶27, 32–33). - 02 / Assess02
Apply the right lens
Severity and likelihood for impacts; likelihood and magnitude for risks and opportunities (¶¶40, 50). - 03 / Conclude03
Compare with the threshold
Qualitative considerations or quantitative thresholds, recorded (¶37, AR 13). - 04 / Disclose04
Report what is material
ESRS 2 and the material sub-topics only; immaterial information “shall not” be disclosed (¶¶24, 30). - 05 / Monitor05
Check at the reporting date
Update the assessment only where significant changes affect the conclusion (¶34).
Guidance
What EFRAG’s guidance adds, and what it cannot
EFRAG gives technical advice and the Commission adopts the ESRS, so the delegated regulation is the authority on impacts, risks and opportunities.
EFRAG’s IG 1 remains useful on method but maps the 2023 paragraph numbers.
Read the guidance status
IG 1 ¶65 says the assessment shall reflect both perspectives and their interconnections “but need not perform two separate and independent processes”.
EFRAG’s implementation guidance page lists IG 1–3 as relating to the 2023 ESRS, and no guidance for the revised ESRS as at 11 October 2026.
The status of each guidance document is on EFRAG implementation guidance, and who EFRAG is on the EFRAG page.
Guidance statusExplore
Module 02 / 04
One process
IG 1 ¶65: both perspectives, not two separate and independent processes.
Module 03 / 04
Revised ESRS
No implementation guidance listed as at 11 October 2026.
What goes wrong
Six mistakes with impacts, risks and opportunities
Treating IROs as risks only
Impacts are assessed in their own right and can be material without any financial effect (¶35).
Listing every possible IRO
Focus where material ones are likely (¶32(b)); top-down need not go to IRO level (AR 9).
Applying likelihood to actual impacts
Actual negative impacts are assessed on severity alone (¶40).
Averaging severity
Any one of scale, scope or irremediable character can make an impact severe (AR 22).
Counting planned policies
Only implemented actions reasonably assumed effective are considered (¶43, AR 27).
Citing IRO-1’s severity pointer
IRO-1 ¶35(b) points to ESRS 1 ¶¶44–45; severity is in ¶¶40–41.
Related frameworks
GRI 3 uses the same three severity characteristics for its impact-only test, and treats significance as the sole criterion for a material topic (GRI 3).
The ISSB’s educational material of November 2024 explains material information about risks and opportunities in four steps, and adds no requirement.
Frequently asked
Questions people ask
What are impacts, risks and opportunities in the ESRS?
They are the units a double materiality assessment tests.
Impacts are the undertaking’s actual or potential, positive or negative effects on people and the environment.
Risks and opportunities are sustainability matters that could affect the undertaking’s development, financial position, performance, cash flows, access to finance or cost of capital.
The ESRS abbreviate the three together as IROs.
What does IRO stand for?
Impacts, risks and opportunities.
The revised ESRS use it for the matters the undertaking assesses for materiality, and ESRS 2 names two disclosure requirements after it: IRO-1, on the assessment process, and IRO-2, on the material impacts, risks and opportunities and the disclosure requirements met.
Do I have to assess every impact, risk and opportunity individually?
No. Under the revised ESRS 1 the top-down approach lets an undertaking reach a topic-level conclusion from its strategy and business model, and AR 9 says it does not in general require assessment at the level of individual impacts, risks and opportunities. ¶32 also says the undertaking is not required to assess every possible impact, risk or opportunity, but focuses where material ones are likely.
How is an impact assessed?
An actual negative impact on severity; a potential negative impact on severity and likelihood; severity is scale, scope and irremediable character (revised ESRS 1 ¶40).
For a potential human rights impact, severity takes precedence over likelihood.
Positive impacts are assessed on scale and scope, plus likelihood if potential (¶41), and are never netted against negative impacts (¶44).
How is a risk or opportunity assessed?
On a combination of the likelihood of occurrence and the potential magnitude of the financial effects (revised ESRS 1 ¶50).
Risks and opportunities can arise from material impacts, from dependencies on natural, human and social resources, and from other factors such as exposure to climate hazards or regulatory change (¶48).
Can an impact become a risk?
Yes.
Revised ESRS 1 ¶35 says an impact can be financially material from the start or become financially material when it is reasonably expected to affect the undertaking’s financial performance, position, cash flows, access to finance or cost of capital. ¶48(a) names material impacts as one source of risks and opportunities.
Can a risk be material without a related impact?
Yes. ¶36 says the undertaking shall also evaluate whether there are material risks or opportunities not related to its impacts, such as physical risks, and ¶49 says dependencies may be sources of risks or opportunities regardless of potential impacts on the resources relied on.
Where are impacts, risks and opportunities disclosed?
In ESRS 2: IRO-1 describes the process used to identify and assess them, including thresholds and when the assessment was last updated; IRO-2 covers the material ones and the disclosure requirements met; SBM-3 explains how material impacts, risks and opportunities interact with strategy and the business model.
The topical standards then apply to the material topics and sub-topics only.
At what level are impacts, risks and opportunities reported?
At the level that reflects where significant variations arise, such as by topic, sector, subsidiary, geography or asset (revised ESRS 1 ¶52), without obscuring material information (¶53).
At consolidated level the assessment covers the group regardless of its legal structure, with disaggregation where a subsidiary differs significantly (¶55).
Does UK SRS use impacts, risks and opportunities?
UK SRS S1 asks for sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s cash flows, access to finance or cost of capital (¶3).
Impacts enter only as a source of those risks and opportunities: ¶2 says an entity’s dependencies and impacts on resources and relationships give rise to sustainability-related risks and opportunities. It is single (financial) materiality.
What happens when an action on one topic creates a risk on another?
Revised ESRS 1 ¶51 asks the undertaking to present its disclosure so that the connection is understood.
AR 32 gives the example of a climate transition plan creating material negative impacts or risks for the own workforce: those are disclosed under own workforce with a cross-reference, and the climate disclosure explains how they are addressed.
Are policies taken into account when assessing a negative impact?
Only in a limited way.
An actual negative impact is assessed as it manifested in the reporting year.
A potential negative impact takes account of prevention and mitigation only if the policies and actions are implemented and can reasonably be assumed to work; actions not yet implemented are not considered (¶43), and a policy that merely implies future actions is not considered either (AR 27).
Does the ESRS 2 IRO-1 cross-reference to severity point to the right paragraphs?
No. In the published text IRO-1 ¶35(b) refers to “ESRS 1 General Requirements, paragraphs 44 and 45”, but in the same text ESRS 1 ¶44 is about positive impacts and ¶45 opens financial materiality.
Severity and likelihood are in ESRS 1 ¶¶40–41, so cite those.
Do I need to reassess impacts, risks and opportunities every year?
Not from scratch.
At each reporting date the undertaking considers whether significant changes could affect its earlier conclusions and updates the assessment if they do (revised ESRS 1 ¶34).
UK SRS S1 ¶B28 likewise requires materiality judgements to be reassessed at each reporting date.
Sources
Primary sources
Every figure, date and status on this page traces to the instrument’s owner.
Secondary commentary is never the source for a number.
Checked against 13 sources fromEUR-LexCouncil of the EUEFRAGDepartment for Business and TradeIFRS FoundationIFRS Foundation / EFRAG
- EUR-LexCommission Delegated Regulation (EU) 2026/1563 — revised ESRS 1, Chapter 3 (¶¶22–55, AR 8–AR 33)
How impacts, risks and opportunities are identified, assessed, connected and aggregated. Applies to financial years beginning on or after 1 January 2027.
- Council of the EUC(2026) 5010 final, Annex I — the revised ESRS as transmitted
The same text before publication in the Official Journal.
- EFRAGESRS Knowledge Hub — revised ESRS 2, IRO-1, IRO-2 and SBM-3 (delegated-act text)
Where the process and the material impacts, risks and opportunities are disclosed.
- EUR-LexCommission Delegated Regulation (EU) 2023/2772 — the first ESRS
The 2023 text, with its own paragraph numbers; a version choice applies for FY2026.
- EUR-LexDirective 2013/34/EU, consolidated 18 March 2026 — Art 19a(1) and Art 34(1)
The two limbs of sustainability reporting, and the assurance opinion on the process that identifies what is reported.
- EUR-LexDirective (EU) 2026/470 (Omnibus I)
Who reports from FY2027: undertakings exceeding both 1,000 employees and €450 million net turnover.
- EFRAGIG 1: Materiality Assessment Implementation Guidance (May 2024)
Non-authoritative; written for the 2023 ESRS. One assessment, both perspectives (¶65).
- EFRAGESRS implementation guidance documents — project page
No implementation guidance is listed for the revised ESRS as at 11 October 2026.
- Department for Business and TradeUK SRS S1 General Requirements — ¶¶2, 3, 17–18, B19, B28
The UK vocabulary: sustainability-related risks and opportunities, judged by single (financial) materiality.
- IFRS FoundationIFRS S1 Basis for Conclusions — BC67
Materiality aligned with the IASB’s definition; “enterprise value” removed from the materiality wording.
- IFRS FoundationSustainability-related risks and opportunities and the disclosure of material information (November 2024)
Educational material; it adds no requirement.
- IFRS Foundation / EFRAGESRS–ISSB Standards Interoperability Guidance, §1.1
The financial-materiality definitions are aligned; the regimes are not.
- Global Reporting InitiativeGRI 3: Material Topics 2021
GRI’s impact-only test, with the same severity characteristics.
Continue reading
Read next
The method
The double materiality assessment
The full ESRS method, step by step, with a scoring grid.
The impact lens
Impact materiality
Severity, likelihood and the four kinds of impact.
The financial lens
Financial materiality
Likelihood and magnitude of financial effects.
Thresholds
Materiality thresholds
Why no standard sets a number, and how to record your own.