ESG reporting obligations getting closer – new challenges for companies
Today, sustainability and corporate responsibility are becoming increasingly important, and companies must look beyond traditional measures of success such as profit. More and more attention is being paid on the impact that companies have on the environment, society, and corporate governance – ESG (Environmental, Social, and Governance).
In December 2022, the European Union took a significant step towards more sustainable business with the adoption of the Corporate Sustainability Reporting Directive (CSRD). This directive aims to systematize and detail the non-financial information that companies will be required to publish annually. The CSRD is intended to replace the current Non-Financial Reporting Directive (NFRD).
In July 2023, the European Commission took an important step by adopting the European Sustainability Reporting Standards (ESRS). This set of guidelines establishes the official reporting rules for ESG, applicable to all companies covered by the CSRD directive.
In 2024, companies must begin collecting data to be able to report ESG issues to their stakeholders in accordance with the new guidelines. By 2029, all EU regulated companies will be directly subject to this obligation.
What does this mean for companies?
For all companies subject to the CSRD directive, the adoption of ESRS means:
- Mandatory reporting on sustainability issues: Companies will be required to disclose information about their environmental, social and corporate governance impacts based on ESRS standards.
- Harmonized reporting system: The ESRS provide a unified and transparent ESG reporting system, making it easier to compare the performance of different companies.
- Increased transparency and accountability: ESG reporting in accordance with ESRS increases the transparency of companies’ operations and allows them to demonstrate their commitment to sustainability.
Who will be affected by the new obligations?
Ultimately, the requirements of the CSRD Directive will have to be met by:
- All companies listed on a regulated market in the EU, including SMEs (except micro-enterprises).
- Large companies meeting at least two of the following three criteria: more than 250 employees, net turnover exceeding 40,000,000.00 EUR, or a balance sheet total exceeding 20 million EUR, in accordance with Directive 2013/34/EU.
- Non-EU companies operating in the EU and generating net turnover of more than 150,000,000.00 EUR, with either a subsidiary in the EU subject to CSRD, or a EU branch with a net turnover of more than 40,000,000.00 EUR.
Subsidiaries will not have to publish sustainability reports if they are included in the consolidated management report of the parent company which complies with CSRD or ESRS requirements, or another equivalent standard. Large listed companies will not be covered by this exemption.
Stages of implementation of ESG reporting standards
The ESG reporting obligation will be introduced gradually over the next few years, according to the following schedule:
From 2024:
The reporting obligation will apply to companies and capital groups that were previously required to report in accordance with the NFRD directive. This includes the largest public interest entities, companies employing over 500 people, and those meeting specific financial criteria (balance sheet total over 20,000,000.00 EUR and/or annual revenues over 40,000,000.00 EUR). The first ESG reports in accordance with ESRS standards will be submitted by these entities in 2025.
From 2025:
The reporting obligation will apply to all large companies that meet at least two of the following three criteria: over 250 employees, balance sheet total over 25,000,000.00 EUR, annual revenues over 50,000,000.00 EUR. These entities will submit their first ESG reports in accordance with ESRS standards in 2026.
From 2026:
The reporting obligation will apply to small and medium-sized enterprises listed on the regulated market that meet at least two of the following three criteria: over 10 employees, balance sheet total over 350,000.00 EUR, annual revenue above 700,000.00 EUR.
From 2027:
The reporting obligation will apply to selected companies based outside the EU with a subsidiary or branch in Poland which achieve annual revenues over 150,000,000.00 EUR in the EU. These entities will submit their first ESG reports in accordance with ESRS standards in 2028.
Reporting Standards (ESRS) – What information will be covered?
The current ESG reporting regulations consist of 12 ESRS documents, with the first two define cross-cutting ESG standards mandatory for all entities required to report:
- ESRS 1 Sets out general principles for the use of standards and the creation of sustainability reports. It does not contain indicators but serves as a key basis for the entire reporting system.
- ESRS 2 Includes a set of 12 mandatory indicators relating to general information about the company, strategy, management, and materiality analysis carried out for the report.
In addition to these cross-cutting standards, ESRS includes three thematic groups of detailed standards that cover specific areas of sustainability:
Environment:
- ESRS E1 – Climate Change
- ESRS E2 – Pollution
- ESRS E3 – Water and Marine Resources
- ESRS E4 – Biodiversity and Ecosystems
- ESRS E5 – Resource Use and Circular Economy
Society:
- ESRS S1 – Employment
- ESRS S2 – Employess in the Value Chain
- ESRS S3 – Social Environment
- ESRS S4 – Consumers and End Users
Corporate Governance:
- ESRS G1 – Business Practices
It is important to emphasize that the shape and scope of ESRS will be subject to periodic verification and changes, which may lead to further expansion in practice.
Benefits and Challenges of ESG Reporting
ESG is not only a set of new obligations for companies, but a key element of development strategy in the 21st century. For businesses, this means an opportunity to build a competitive advantage, increase risk resilience, and create a more sustainable future.
Benefits of ESG Engagement:
- Increased competitiveness: Companies that are the first to implement ESG standards will gain valuable experience and get ahead of the competition, which will attract new customers, investors, and business partners.
- Improving image and reputation: A responsible approach to environmental, social, and governance issues builds a positive image of the company and strengthens trust in it among stakeholders.
- Access to green financing: Companies with good ESG scores can more easily raise capital for investments in sustainable technologies and solutions.
- Reduced risk and improved efficiency: Implementing modern technologies and sustainable solutions leads to improved resource efficiency and lower operating costs.
ESG implementing challenges:
- Costs: Implementing ESG can be costly, especially for smaller businesses. This may lead to higher operational costs, and consequently affect profitability.
- Data collection, analysis, and reporting: ESG reporting requires the collection and analysis of large amounts of data, which can be complex and time-consuming. In addition, it will require appropriate IT tools and employee competencies.
- Alignment of processes and organizational structures: This may require changes in the way the company operates and the implementation of new procedures.
Summary
The CSRD is a significant step towards more transparent and accountable business practices in Europe. Companies that want to succeed in the future success must take ESG reporting seriously and adapt to the new guidelines.
It is worth starting preparations now, because if companies will have to report ESG in accordance with the CSRD directive in the future, it is necessary to determine the scope of their reporting and collect the necessary data in advance.
If you have any questions regarding this topic or if you are in need for any additional information – please do not hesitate to contact us:
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