Reporting according to ESG indicators. What does it cover and who will it involve?

The popular acronym ESG stands for Environmental, Social, Corporate Governance, and refers to standards for corporate sustainability and responsible development, and because of that it is becoming increasingly prominent in business relationships. This means that companies implementing ESG requirements that target, measure and report on the environmental, social and governance aspects of their business activities are more attractive to the contractors.

The submission of an ESG report is the culmination of the implementation and application of corporate sustainability requirements. It involves providing non-financial information about the activities that companies undertake in the areas of the environment, society, and governance.

Mandatory ESG reporting has become a “reality” with the adoption of the European Sustainability Reporting Standards (ESRS) by the EU Commission. This means that sustainable corporate management based on environmental, social and governance areas will become a standard requirement for many companies. The EU Commission’s adoption of the ESRS makes European companies subject to a sanctioned set of guidelines under which companies included in the Corporate Sustainability Reporting Directive (CSRD) will be required to file an ESG report.

Who will be obligated to report ESG?

Entities required to report in accordance with ESG standards are defined in the CSRD. According to these directives, reporting will be gradually implemented in the upcoming years as follows:

-ESG reporting will apply, starting in 2024, to companies and groups that have so far been required to do non-financial reporting under the Non-Financial Reporting Directive (NFRD). These include companies with more than 500 employees and, which have balance sheet total of more than €20 million and/or annual revenues of more than €40 million. These entities will be required to file their first reports in 2025.

-Next, mandatory reporting will apply, starting in 2025, to large companies that meet 2 of the following 3 criteria:

• employment of more than 250 employees,
• balance sheet total of more than €20 million,
• annual revenues of more than €40 million.

These companies will be required to file their first reports in 2026.

-Starting from 2026, small and medium-sized companies that are listed on a regulated market and meet 2 of the following 3 criteria will be required to report:

-The final phase of the ESG reporting obligation is to oblige, from 2028, companies based outside of EU, and which have a subsidiary or branch in Poland and have annual revenues of more than €150 million in the EU.

Entities that will be obligated to report on ESG should start gathering the information necessary to file the report well in advance, as the ESRS introduces very demanding reporting rules.

ESRS Standards.

ESRS, or European Sustainability Reporting Standards, are the indicators for sustainability reporting. Their creation was intended to standardize non-financial reporting methods for ESG information. They were introduced as part of the CSRD adopted by the EU Commission on July 31, 2023.

ESRS standards can be divided into groups consisting of separate but still related elements.

The first group of standards includes the so-called General Requirements (ESRS 1), which do not contain any reporting indicators, they only contain general principles to be followed when using the standards and creating sustainability reports.

The second group is the General Disclosures (ESRS 2) and contains set of 12 required disclosures, which include general information about the reporting entity, strategy, governance, and materiality analysis conducted for the report.

The next groups of standards cover individual ESG topics and can be divided as follows:

What are the advantages of ESG reporting for the company?

ESG reporting brings numerous benefits to business, both financial and social. Companies that report their sustainability activities are characterized as more attractive to both contractors and employees.

Additionally, reporting on environmental and social issues can lead to efficiency improvements, through measures such as energy savings, emissions reductions, or optimized resource management. Implementing such measures can reduce the cost of running a company and increase the efficiency of an organization’s operations. ESG reporting is also an opportunity to identify organization’s most important influences, organize internal processes, and review goals and performance.

Author: Marcin Jóźwiak