What Is Step B?
Step B is the exhaustive identification phase. The company takes the contextual map built in Step A and aggressively hunts down every single actual and potential impact, risk, and opportunity (IRO) tied to its entire value chain.
The goal is to generate a massive, unfiltered Long List of IROs. At this stage, you do not filter for materiality. You simply document every single thing that is happening or could happen.
Constructing the IRO Universe
To build this massive Long List, the company merges two heavy data streams:
- The AR16 Mandate: The company systematically works through every single topic, subtopic, and sub-subtopic on the ESRS 1 AR16 list, interrogating its operations against each one.
- Entity-Specific Traps: The company actively hunts for hyper-specific risks unique to its bizarre business model or obscure geography that the AR16 list failed to capture.
Building the Long List for a Fast-Fashion Retailer:
- Environmental: Massive microplastic pollution from synthetic garments (Impact). Severe supply chain disruption from cotton crop failures linked to drought (Risk).
- Social: Child labour accusations deep in the tier-4 supplier network (Impact & Risk). Chronic underpayment of retail staff in direct operations (Impact).
- Governance: Massive bribery risks securing textile factory permits in high-risk jurisdictions (Risk).
Notice that none of these are judged as "material" yet. They are simply identified and thrown onto the Long List for severe interrogation in Step C.
Weaponizing Due Diligence
For identifying negative impacts, Step B heavily relies on the company's existing due diligence machinery.
ESRS explicitly defines due diligence as the militant process of identifying, preventing, and mitigating negative impacts. If a company runs a highly aggressive, legally compliant human rights due diligence program, that program should automatically generate the vast majority of the social impacts required for the Step B Long List.
Capturing Non-Impact Risks and Opportunities
Step B explicitly forces the company to identify financial risks and opportunities that arise completely independently of the company's own impacts.
You must systematically hunt down dependencies. You must document exactly how deeply your business model relies upon:
- Free access to millions of gallons of clean freshwater.
- A highly educated, inexpensive local labor force.
- An environment free of catastrophic floods.
If you depend on these factors, you must list the severe financial risks that trigger if those factors vanish.
The Granularity Mandate
The ESRS demands extreme precision. You cannot simply list "Water" on your IRO Long List. You must drill down to the appropriate level of granularity to prevent hiding massive risks inside generic categories.
EFRAG IG1 explicitly demonstrates this. You do not stop at "Water and Marine Resources" (Topic). You push down to "Water Withdrawals" or "Water Discharges" (Sub-subtopics).
The golden rule of granularity: You absolutely must drill down far enough to guarantee that a massive, specific risk (e.g., toxic chemical discharge) is not mathematically obscured by averaging it into a broad, benign category (e.g., general water usage).
The Final Output of Step B
Step B produces the Long List. This is a massive database containing hundreds of specific actual and potential IROs.
For every single IRO on this list, the database must strictly define:
- Which specific part of the value chain it occurs in (Own operations vs. Tier 2 supplier).
- Whether it is actual (happening now) or potential (could happen).
- The exact time horizon (short, medium, or long-term) for potential events.
This highly structured Long List is then pushed directly into the brutal mathematical gauntlet of Step C.
Key Takeaways
- 1Step B produces the unfiltered Long List of all actual and potential IROs - no materiality filtering happens at this stage
- 2The Long List is built by systematically working through ESRS 1 AR16 and hunting for entity-specific risks the checklist missed
- 3Due diligence machinery is the primary engine for identifying negative impacts across the value chain
- 4Dependencies must be explicitly documented - map how deeply the business relies on natural resources, labor pools, and social stability
- 5Every IRO on the Long List must specify its value chain location, whether it is actual or potential, and the relevant time horizon