Dear Readers,
We recently often see abbreviations such as ESG, CSRD, NFRD or ESRS. Generally and briefly, those abbreviations relate to non-financial audit of corporations and other institutions. The purpose of this article is to inform you about non-financial audit, legal grounds thereof, and the effectiveness schedule and, last but not least, to explain the above-mentioned abbreviations.
The matter is split into several parts due to the extensive nature thereof; the first part deals with general information, to be followed by additional articles that will focus on individual ESG reporting areas in detail.
CSRD Directive
The European Commission adopted the Corporate Sustainability Reporting Directive, the “CSRD”, in 2022 (effective since 5 January 2023). The Directive sets forth new standards for non-financial reporting for certain groups of companies from 2024, the purpose being coping with adverse climate changes and negative environmental impact thereof.
The CSRD Directive replaces the previous Non-financial Reporting Directive (the “NFRD”) of 2014 and substantially expands the group of entities that the duties will apply to. Member states are obliged to transpose the Directive into their respective national legislations no later than by 6 July 2024.
Non-financial reporting under the CSRD Directive will be subject to a mandatory review by an external auditor.
Duties under the CSRD
Deadlines for the first reports under the CSRD Directive vary depending on compliance with defined criteria (the enterprise’s size and type):
The first reports (non-financial audits) under the CSRD will be required from large companies, to which this duty has applied already under the NFRD (these in fact include large corporations with more than 500 employees, publicly traded companies, insurance companies and banks), in 2025 for the year 2024.
Another group includes other large companies that have not been obliged to report under the NFRD so far (enterprises that meet two out of the following three criteria for two successive periods: more than 250 employees, turnover over EUR 40 million, or the annual balance sheet bottom line amount of a minimum of EUR 20 million). Those corporations will be obliged to submit non-financial audit in 2026 for the year 2025.
The final group is composed of listed small- and medium-sized enterprises (i.e. those with their stock tradable on a stock exchange), including small-sized and less complicated loan institutions and captive insurance companies. Such companies will be obliged to disclose non-financial audit in 2027 for the year 2026.
However, reporting requirements will in fact apply to a much higher number of entities due to the obligation to cover the whole supplier chain.
The above-described requirements apply to corporations registered in the EU. This obligation will be introduced for companies from outside the EU in 2028 (i.e. reporting in 2029).
ESRS Standards
In order to make reporting easier, general standards, the European Sustainability Reporting Directive (ESRS), were issued. They involve 12 standards that have only applied to large corporations so far; the specific form thereof for small- and medium-sized companies has not been clarified (it is however expected that they will be less detailed). Additional standards, for example for individual sectors, or reporting standards for enterprises from outside the EU, etc., should be adopted in the near future. Effect of those standards has been postponed.
The ESRS Standards are divided into the following categories:
This brings us to the abbreviation ESG: Environment, Social, Governance that, in short, indicates an enterprise’s environmental and social impact and its approach to governance. Using this method, it is possible to quantify a corporation’s sustainability and responsibility. We will address individual parts of the ESG reporting in articles to follow.
If you need more information about this topic, please feel free to contact us. We are ready to help you.
Lenka Kolmanová Jiří Vidiečan
kolmanova@edmutilitas.cz vidiecan@edmutilitas.cz