IRO-1 – Description of the processes to identify and assess material resource use and circular economy-related impacts,risks and opportunities

🗂️ ESRS E5 Resource use and Circular Economy, page 3

The undertaking shall describe the process to identify material impacts, risks and opportunities related to resource use and circular economy, in particular regarding resource inflows, resource outflows and waste, and shall provide information on:

(a) whether the undertaking has screened its assets and activities in order to identify its actual and potential impacts, risks and opportunities in its own operations and its upstream and downstream value chain, and if so, the methodologies, assumptions and tools used in the screening;

(b) whether and how the undertaking has conducted consultations, in particular, with affected communities.

Application Requirements

AR 1. When conducting a materiality assessment on environmental subtopics, the undertaking shall assess the materiality of resource use and circular economy in its own operations and its upstream and downstream value chain, and may consider the four phases below, also known as the LEAP approach:

(a) Phase 1: locate where in the undertaking’s own operations and along its upstream and downstream value chain the interface with nature takes place;

(b) Phase 2: evaluate the dependencies and impacts;

(d) Phase 4: prepare and report the results of the materiality assessment.

AR 2. With regard to ESRS E5, phases 1 and 2 rely mainly on the materiality assessments conducted under ESRS E1 (including energy consumption), ESRS E2 (pollution), ESRS E3 (marine resources, water consumption) and ESRS E4 (biodiversity, ecosystems, raw materials). Indeed, circular economy eventually aims at reducing the environmental impact of the use of products, materials and other resources, minimizing waste and the release of hazardous substances and hence at reducing impacts on nature. This application requirement focuses mainly on the third phase of this LEAP approach, while the fourth phase addresses the outcome of the process.

AR 3. The process to assess the materiality of impacts, dependencies, risks and opportunities shall consider the provisions in ESRS 2 IRO-1 Description of the processes to identify and assess material impacts, risks and opportunities and IRO-2 Disclosure Requirements in ESRS covered by the undertaking’s sustainability statement.

AR 4. The sub-topics related to resource use and circular economy covered by the materiality assessment include:

(a) resource inflows including the circularity of material resource inflows, considering resource use optimisation, intensity of materials and products and renewable and non-renewable resources;

(b) resource outflows related to products and services; and

AR 5. In Phase 3, to assess its material risks and opportunities based on the results of Phases 1 and 2, the undertaking may:

(a) identify transition risks and opportunities in its own operations and its upstream and downstream value chain, including the risk of staying in a business-as-usual scenario:

i. policy and legal, e.g., bans on the extraction and use of non-renewable resources, regulations on waste treatment;

ii. technology, e.g., introduction on the market of new technologies to replace existing use of products and materials;

iii. market, e.g., shifting supply, demand and financing; iv. reputation, e.g. changing societal, customer or community perceptions.

(b) identify physical risks including depletion of stock and use of virgin and non-virgin renewable resources, and of non-renewable resources; (c) identify opportunities categorised by:

i. resource efficiency: e.g., transition to more efficient services and processes requiring less resources, eco-design for longevity, repair, reuse, recycle, by- products, take-back systems, decoupling activity from extraction of materials, intensifying circular material use, creation of a system that allows for dematerialization (e.g., digitisation, improving utilisation rates, weight reduction); practices to ensure products and materials are collected, sorted, and reused, repaired, refurbished, remanufactured;

ii. markets: e.g., demand for less resource-intense products and services, and new consumption models such as product-as- a-service, pay-per-use, sharing, leasing;

iii. financing: e.g., access to green funds, bonds or loans; iv. resilience: e.g., diversification of resources and business activities (e.g., start a new business unit to recycle new materials), investing in green infrastructures, adopting recycling and circularity mechanisms that reduce the dependencies, capability of the undertaking to safeguard future stocks and flows of resources; and v. reputation.

AR 6. The undertaking may consider the following methodologies to assess its impacts, risks and opportunities in its own operations and along its upstream and downstream value chain:

(a) Commission Recommendation 2021/2279 on the use of the Environmental Footprint methods to measure and communicate the life cycle environmental performance of products and organizations (Annex I – Product Environmental Footprint; Annex III – Organisation Environmental Footprint); and

(b) Material Flow Analysis (MFA) from the European Environment Agency.

AR 7. When providing information on the outcome of the materiality assessment, the undertaking shall consider:

(a) a list of business units associated to resource use and circular economy material impacts, risks and opportunities in the context of the products and services of the undertaking and the waste it generates;

(b) a list and prioritisation of the material resources used by the undertaking;

(d) the material opportunities related to a circular economy;

(e) the material impacts and risks of a transition to a circular economy; and

(f) the stages of the value chain where resource use, risks and negative impacts are concentrated.