ESG Reporting – Who Does It Apply To and Is It Mandatory?
More and more companies are wondering whether they are subject to ESG requirements, and it’s no surprise. The obligation to report on ESG emerged as a result of changes in the CSRD directive, and by the end of 2023, it was widely discussed that the largest enterprises would need to expand the scope of their published reports. Today, we know that it’s not only these companies. Find out who is affected by ESG and who is subject to the non-financial reporting obligation.
In an ideal world, every company should have a comprehensive ESG risk management strategy. This ensures that it not only cares for its own interests but also for the well-being of its employees and business partners. ESG refers to actions that align with sustainable development and responsibility standards, which are mandated by the CSRD directive. Who does it apply to? Who must fulfill the ESG reporting obligation? We answer these and other questions in this article.
ESG, which stands for Environmental, Social, and Governance
Let’s start by explaining the concept. ESG refers to non-financial criteria related to business management, aiming at the company’s sustainable development. This development should consider three aspects: environmental, social, and governance. It is important to note that these aspects are not mutually exclusive, but rather interdependent and influence each other. For example, poor practices related to personnel management can lead to consumer dissatisfaction, and poor governance can lead to fraud and corruption.
The concept of ESG risks refers to the potential harm that a company’s activities can cause to society, the environment, and its own corporate governance. These risks are significant enough to expose the company not only to operational difficulties but also to legal liability. Moreover, they also impact the company’s reputation, financial performance, and relationships with other entities. This is why there is so much talk today about conscious ESG management, even in the context of companies that are not legally required to comply with this obligation.
Where did the obligation to report ESG come from?
In recent years, the European Union has adopted a number of regulations aimed at supporting efforts for a sustainable economy and limiting the effects of climate change. An example is the NFRD, the Non-Financial Reporting Directive, or the SFDR, the Sustainable Finance Disclosure Regulation, regarding the disclosure of sustainability-related information in the financial services sector. It is therefore no surprise that we have finally seen the adoption of a specific directive, namely the CSRD.
The Corporate Sustainability Reporting Directive (CSRD) was published on December 16, 2022, and came into effect in January 2023. It replaced the Non-Financial Reporting Directive (NFRD), which was previously the most important legal act regulating the disclosure of non-financial information (in Poland, through the amended Accounting Act).
According to the directive, starting from 2024, large companies will be required to report information on the impact of their activities on the environment, society, and corporate governance. It is estimated that the CSRD will apply to around 49,000 large companies in the EU, including 3,600 in Poland. However, it is important to note that its scope also includes small and medium-sized enterprises. Furthermore, the CSRD provides for the gradual expansion of the group of entities that will be required to report non-financial information.
Who is subject to the obligation of ESG reporting?
The ESG report is nothing more than a company’s statement of its actions towards sustainable development, aimed at key stakeholders such as investors, financial and insurance institutions, customers, employees, and local communities. The obligation to report ESG is clearly defined and has specific groups that must meet certain criteria.
The obligation to report ESG applies to:
- For 2024: large public entities and companies employing more than 500 employees and meeting one of two financial criteria: total assets above 20 million EUR and/or revenues above 40 million EUR;
- For 2025: all large companies (including private ones), meeting two out of three criteria: employing more than 250 employees in a given financial year; total assets above 25 million EUR and/or annual revenues above 50 million EUR;
- For 2026: small and medium-sized enterprises (SMEs), with the option to delay data collection and reporting until 2028 and 2029, meeting two out of three criteria: average number of employees in the financial year exceeding 10; total assets above 350 thousand EUR and/or revenues above 700 thousand EUR.
By 2027, selected companies based outside the EU, but with a branch or subsidiary in Poland and achieving annual revenues above 150 million EUR in the EU, will be required to prepare and submit their ESG report. This means that even Chinese or American corporations with branches in the EU will have to provide data on sustainable development.
Voluntary reporting as proof of awareness of ESG risks
ESG reporting is not a new concept in Poland. Many companies in our country publish sustainability reports even though they are not formally required to do so. This voluntary sharing of ESG-related information is largely driven by market trends and the desire to stand out from the competition, which ultimately is a positive approach.
It should be understood that ESG risks are a combination of opportunities and threats for a business. If they are poorly managed, they can lead to a loss of trust among customers, employees, investors, and even result in fines and financial penalties. However, if an organization adopts an integrated approach to risk, is open to it, and clearly communicates its goals, it can enjoy benefits such as improved profitability, a positive image, trust, and even more opportunities for expansion and growth. Therefore, businesses should actively manage ESG risks, even if they are not formally obligated to do so, to protect their reputation, ensure long-term stability, and fulfill their commitments to stakeholders.
Sustainable Development Reporting Standards
Although many companies already publish CSR reports, they tend to do so at their discretion, and these reports are often seen as marketing efforts. This is about to change.
Entities subject to the CSRD will be required to adhere to specific guidelines. What should be included in the report is determined by the European Sustainability Reporting Standards (ESRS), which are annexes to the CSRD directive. These standards, effective from 2024, replace the previously voluntary non-financial reporting standards. It is important to note that they hold the same weight as, for example, ISO standards.
In the ESRS, we find the necessary criteria and templates, including the format of the report. Not only does it include classifications based on areas such as employees and water resources, but it also provides very specific guidelines. For example, it is not enough to report the amount of renewable energy used in production – it must be related to goals in specific units, and the degree of achievement must be expressed in percentages. This ensures that reports from companies across the community will be comparable. And what if a company lacks complete data? In such cases, it will need to estimate based on sector-specific data.
Does ESG apply to small businesses?
Finally, it’s worth answering the question: does ESG reporting only apply to large companies? The answer is no. The CSRD directive does have a specific list of who it applies to, but it can also impact collaborating entities. This is already noticeable in industries where there is strong pressure for ESG compliance – even if a company is too small and doesn’t formally meet ESG criteria to produce such a report, it may still be asked for it by its partners, companies considering cooperation, or even by banks when applying for credit.
With this in mind, it’s worth leveraging the potential that ESG offers and building your competitive advantage on it. You don’t have to do it alone, educate yourself, or implement new regulations – we can help you efficiently implement and manage ESG, and teach you how to report on it. With our support, your company won’t fall behind and will build an even stronger position in the market.