You have probably already heard the abbreviation ESG or even CSRD. If you’ve been wondering what these abbreviations mean for your business, continue reading to be prepared for the changes that are just across the horizon.
ESG stands for Environment, Social, Governance, which are already widely used categories within non-financial sustainability reporting. CSRD is an abbreviation for the Corporate Sustainability Reporting Directive, a directive issued by the European Union that entered into force in January 2023.
Who Will Report?
Reporting under the CSRD will be mandatory for companies meeting at least two out of the three following criteria:
- 40M EUR annual turnover
- 20M EUR total assets
- 250 or more employees
It is estimated that 50 000 companies in the EU will have to report under the CSRD. The number of companies in the Czech Republic with an obligation to report is estimated to be around 1 000.
When Will It Start?
The first mandatory reporting period will be 2024, so the first reports will have to be prepared in early 2025. These timelines are mandatory for large entities already reporting under the current Non-Financial Reporting Directive. The timeline for companies that will have to start reporting under the newly introduced CSRD is delayed by one year, so the first reporting period will be 2025, and the first reports will have to be submitted in early 2026. Limited auditor verification of the reports is expected as well.
What Will Be Reported?
The exact content of the reports is not yet clear as of the publication of this article, but it is clear that it will be related to ESG. The overall goal of ESG is to capture information about all non-financial risks and opportunities.
E – The Environmental pillar is the most complex to report on. Companies have to describe their impact on the environment, such as emissions, usage of materials, and natural resources. Positive initiatives impacting the environment are reported as well.
S – The Social pillar includes employee development and labor practices throughout the entire supply chain. Diversity, inclusion, human rights, and impact on local communities are all reported in this pillar.
G – The Governance pillar shows the company’s ethical standards, board construction from a diversity point of view, shareholder rights, and how the compensation of employees and board members aligns with company values and goals.
Impact on Companies Outside the Scope of CSRD
You may think that companies not directly required by CSRD to report will be fully exempt from these obligations. Our experience shows that this will certainly not be the case for several reasons.
- Your client may be obliged to report under the CSRD, and since companies have to take into account the entire supply chain, they will demand information from you to use in their own report.
- Sustainability criteria are slowly being considered by finance providers, and having a better sustainability rating may help companies get more favorable financing conditions.
- Public pressure may force companies outside the scope of CSRD to voluntarily prepare reports to not lose market position.
Even though it may seem that CSRD obligations are still far in the future, that is not the case. Our clients are already being asked by certain banks about their impact on the environment. Non-financial reporting, in general, may require completely new processes and tools to record the required information in your company, so it makes sense to get ready in advance.
Whether we like it or not, corporate sustainability reporting is coming, and we have to be prepared for it.