The discussion on the sustainable development of enterprises has been going on in the European Parliament for several years. Initially, it operated in accordance with the NFRD directive. In 2023, the CSRD directive came into force, covering ESG reporting – from then on, most companies in the European Union must respect human rights, limit the negative impact on the environment, and raise corporate governance standards. Are you an entrepreneur? Are you wondering: “ESG reports – what does it mean?” Are you considering who the new order applies to? Take a look at our compendium. We will explain everything to you.
ESG reporting – what is it?
ESG reporting is a special type of non-financial report that allows entrepreneurs to present activities other than purely economic development indicators. Every year, businessmen must provide specific entities with a report containing non-financial information, i.e. on projects undertaken in the area of environmental protection, social issues and management. The explanation lies in the acronym ESG. What does this mean literally? E stands for Environmental, S stands for Social and G stands for Governance.
In accordance with the NFRD (Non-Financial Reporting Directive) of 2014, ESG reporting concerned a narrow group of entrepreneurs. Only the largest listed companies (so-called public interest entities) were subject to it, which additionally had to meet the following criteria (at least two of three conditions):
• reach PLN 85 million of total balance sheet assets at the end of the financial year,
• obtain PLN 170 million of net revenues from the sale of goods and products for the financial year,
• employ more than 500 employees.
The NFRD Directive had a simple assumption – to increase entrepreneurs’ knowledge about the impact of their activities on social, environmental and corporate governance issues. The decision to create it resulted – primarily – from the observation of how much impact large companies have on the environment (including due to the number of people employed and the revenues generated). However, the EU regulation was criticized for the insufficient quality of data disclosed by entrepreneurs. As a result, there was limited trust in non-financial reports – they were sometimes useless.
CSRD – what is it?
Everything changed on January 5, 2023, when the revolutionary CSRD directive (Corporate Sustainability Reporting Directive) came into force, which was adopted by the European Parliament much earlier – on November 10, 2022. Pursuant to its principles, reporting obligations have been significantly extended, not only to listed companies. The basic assumptions have not changed – ESG reporting was still to apply to fairly large economic entities that meet the following requirements:
• revenues exceeding PLN 170 million net during the year,
• assets and liabilities of at least PLN 85 million.
But that’s not all. The European Parliament has established that from 2026, ESG reporting will apply to most companies operating in the European Union – not only large, but also medium-sized and small enterprises. Financial information will now be published in accordance with European standards and – importantly – will be subject to independent, mandatory audits. Providing false data is a crime for which you are subject to criminal and financial liability (this applies not only to the president, but also to the company’s management board).
CSRD implementation schedule
You can now answer the question: “CSRD – what is it?” Let’s move on. The implementation schedule of the CSRD directive has already been precisely formulated. Looks like this:
• From January 1, 2024, the CSRD will cover all entities that were already subject to the NFSD (public interest entities). These companies will have to prepare the first reports with new standards in 2024 and then present the protocols in 2025.
• ESG reporting will be subject to large enterprises (all companies employing more than 250 employees) – from January 1, 2025. The reports must be presented in 2026.
• ESG reports will not exclude the newest group (small and medium-sized enterprises, listed on the stock exchange, employing more than 10 employees). The new rules apply to them from January 1, 2026, and non-financial reports must be presented in 2027.
How to deal with the new directive? What to do?
The largest companies that already publish non-financial reports have an easier task – but they cannot ignore their obligation. Creating a new ESG report? What does this mean in practice? Companies should first:
• look at the analysis of risks and opportunities, the selection of important topics,
• look at human rights and environmental protection issues from the perspective of your own organization,
• determine the differences between current and new disclosures required by ESRS,
• assess your own readiness for changes,
• estimate the scope of information and data that the company will ultimately need to obtain.
Enterprises that will encounter non-financial reports for the first time in the coming years have a lot of catching up to do. They are facing a transformation – taking important steps towards compliance with the CSRD. This is about:
• regulatory readiness analysis,
• assessment of the completeness of required policies (e.g. climate policy),
• structuring the data collection and verification process (in terms of quality), possibly supported by technological tools,
• planning the process of identifying significant ESG areas, risks and opportunities,
• starting a decarbonization plan – start by calculating the carbon footprint in scope 1, 2 and 3,
• defining the value chain in terms of the industries and geographical areas from which the suppliers and key recipients of a given company come from.
How to create an ESG report?
Entrepreneurs are wondering about the appearance and structure of the ESG report. All information contained in the document should be presented transparently, objectively, reliably and in a way that can be verified. Technology comes to the rescue. Incube ESG is a tool for creating an ESG report at every stage, built based on the world’s largest technologies, i.e. IBM, Qalcwise, or CDM. Using Incube ESG, you can automate the entire process, starting from materiality analysis, through dialogue with stakeholders, gap analysis, creating an ESG strategy, monitoring the implementation of the strategy, and ending with ESG reporting.