12.06.2023 Business law

ESG or reporting of non-financial information

One of the basic goals of the European Union for the coming decades is the economic development of Member States within the framework of a sustainable development model that takes into account not only the financial aspects of economic activity carried out by market participants, but also the impact of this activity on the environment, social issues and transparency of management. In connection with these goals, sustainable development has become an important element of the European legislation which constantly introduces new legal solutions to force market participants to change the current business model.

The basic tool that will be helpful in assessing market participants in terms of their activities in a sustainable manner is the obligation for entities to report non-financial information related to their activities.

The legal bases for non-financial reporting and sustainability criteria are regulated in many EU documents, such as the NFRD Directive (Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups).

It is worth remembering that intensive work is currently underway on the development of the European Sustainability Reporting Standard (PTF-ESRS). This work is being carried out by EFRAG (European Financial Reporting Advisory Group) and will result in documents containing clear and uniform guidelines on how to report and assess information in areas such as environmental, socio-employee and governance issues.

ESG Definition

ESG are non-financial criteria on the basis of which non-financial information should be reported in the management reports of entities, which consists of the following criteria:

E – Environment,

S – Social responsibility,

G – Corporate governance.

Within these criteria, the management reports should contain information such as:

  1. as part of environmental information reporting – information on ways to mitigate climate change by the entity, use of resources, issues related to pollution,
  2. as part of reporting information on social responsibility – information on the activities of the entity aimed at equal treatment and equal opportunities for all, issues related to the pursuit of equal pay for work of equal value, information on the existence of works councils,
  3. as part of reporting information related to corporate governance – information on the role of administrative, management and supervisory bodies, issues related to sustainable development, business ethics and corporate culture, information on whistleblower protection.

Entities obliged to ESG reporting

So far, the obligation to report non-financial information has applied mainly to financial market entities, but after the entry into force of Directive 2022/2464 of the European Parliament and of the Council (CSRD Directive) on 5 January 2023, the obligation to report non-financial information will soon apply to an increasing number of entities, also from outside the financial market.

According to the new regulations, EU Member States, including Poland, should introduce the provisions necessary to implement CSDR Directive by 6 July 2024, and the rage of entities that will be obliged to report non-financial information will be significantly extended.

For the financial year 2024, public-interest entities that are large undertakings or parent undertakings of a large group will be required to report non-financial information if the number of employees in the financial year exceeds 500 persons and which at the balance sheet date exceed at least 2 of the following 3 criteria:

  • balance sheet total: EUR 20,000,000;
  • net sales revenues: EUR 40,000,000;
  • average number of employees during the financial year: 250

For the financial year 2025, other large entities (enterprises) or parent entities of a large group that exceed at least 2 of the following 3 criteria as at the balance sheet date will also be required to report non-financial information:

  • balance sheet total: EUR 20,000,000;
  • net sales revenues: EUR 40,000,000;
  • average number of employees during the financial year: 250.

In the subsequent financial year, small and medium-sized enterprises that are public-interest entities if they meet the criteria set out in the CSRD Directive, small credit institutions, which are large or small and medium-sized public-interest entities, captive insurance and reinsurance companies, provided that they are large or medium-sized or small listed entities, will be required to report non-financial information.

Apart from regulations that directly introduce the obligation to report non-financial information on some entities, some entities that are not obliged to do so have already decided to do so. Entities disclose non-financial information not only for reputational reasons. Increasingly, financial institutions or other contractors of entities force such action, because when making a decision to start cooperation, they analyze not only the financial issues of a given entity, but more and more often pay attention to non-financial aspects of operations. Consumers, too, seeking to act with increasing awareness, choose products from individuals whose activities meet sustainability standards.

Though for the time being the obligation to report non-financial information covers a relatively small number of entities, in a short time it may turn out that entities will report this information voluntarily to maintain their position on the market. That is why it is so important that entities take action at this stage to prepare for reporting non-financial information.

Learn more: Sustainability: Organization and Product Carbon Footprint – Seminar

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Karolina Piątek Junior Associate
TGC Corporate Lawyers
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