• Martyna Kasperska

    lawyer, Duraj Reck & Partners Law Firm

Downloadable materials:

18 October 2023

Non-financial reporting obligations – a new instrument to fight greenwashing

The EU’s Corporate Sustainability Reporting Directive, or Corporate Sustainability Reporting, has been in force for almost a year now. Corporate Sustainability Reporting Directive (CSRD). The directive provides for an extension of the scope of obligations related to non-financial reporting, i.e. reporting on environmental, social and governance issues. Large companies listed on the stock exchange, i.e. those that already report under the NFRD, must first prepare for the changes it entails. They will be the first to report in 2025 taking into account the new rules, and the data that will be covered by the report should be collected as early as the beginning of 2024.

This does not mean that the requirements of the CSRD will not extend to other companies. The Directive provides for a gradual extension of the scope to new groups of entities. In 2026, other large non-listed entities that are not subject to the obligations of the NFRD will start reporting. In the following year, 2027, reports will be presented, among others, by listed small and medium-sized enterprises. These entities may exceptionally exercise their right to opt out of reporting by two years. Finally, in 2029, certain subsidiaries and branches of non-EU companies operating in the EU will also be subject to obligations.

The aim of the CSRD is to create a clear and uniform framework for sustainability reporting. The new regulations are intended to effectively curb greenwashing practices and prevent companies from providing selective data or data that cannot be compared or verified. With the new rules, companies will have to disclose sustainability information primarily to two groups: investors and users. The need for data on sustainability stems from the growing awareness of the risks and opportunities associated with the approach of specific companies to environmental and social issues.

The provisions of EU directives are not directly applicable and require prior implementation into national legal systems. In the case of CSRD, EU member states have until 6 July 2024. transposition into national law. However, despite the fact that national regulations are not yet in force, the largest listed companies must already start preparing for the preparation of non-financial reports in the new version.

The first set of sustainability reporting standards (European Sustainability Reporting Standards – ESRS), adopted in July this year by the European Commission in the form of a delegated regulation, comes to the rescue. They are designed to ensure that reporting entities prepare reports in a uniform manner. The standards will only become applicable after the official publication of the regulation, and their application is planned for 1 January 2024. They cover all sectors and apply to all entities covered by the CSRD (regardless of the sector or sectors in which the entity operates). By June 2024, the Commission is expected to adopt further sets of reporting standards, including: sectoral standards, simplified standards for small and medium-sized listed enterprises, and standards for non-EU entities.

The reporting standards adopted so far introduce two general standards, the first of which is a universal reporting manual, and the second provides for which information should be presented at a general level on all sustainability issues. In addition, the ESRS includes ten thematic standards, addressing: climate change, pollution, water and marine resources, biodiversity and ecosystems, resource use and the circular economy, employment, workers in the value chain, affected communities, consumers and end-users, and governance issues.

The information reported in the reports should be understandable, relevant, verifiable, comparable and faithfully presented. Importantly, the reports will cover not only historical data – the reporting entities should present both a retrospective view and the entity’s strategies and goals in the short, medium and long term.

The reports are to constitute a separate section of the activity report and are to be prepared in the XHTML electronic reporting format. The regulations also require the financial statements to be audited by a statutory auditor or an audit firm.

Adapting to the new requirements, especially for some entrepreneurs who have not submitted non-financial reports so far, will require the introduction of organizational changes and the need to start building a database of large amounts of data from individual areas of the company’s operations. Taking into account the breadth of the regulations and the relatively short time left for preparations, the practical implementation of the new reporting rules will certainly be a huge challenge.

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