ESG reporting and the new EU legislation: implications for EU businesses and how we can help

In recent years, there has been a notable shift in the way businesses are expected to operate, moving from traditional profit-driven models toward more sustainable and responsible practices. The increasing emphasis on Environmental, Social, and Governance (ESG) criteria reflects this change, as companies are called to be more transparent in their operations and impact on society.

As part of this global trend toward accountability, the European Union (EU) has introduced new legislation aimed at enhancing and standardizing ESG reporting. These changes are not just regulatory requirements; they are an essential step toward building a more sustainable and equitable future. The new legislation is set to have significant implications for EU businesses, particularly in how they manage and report on their ESG performance.

What is ESG Reporting?

ESG reporting refers to the disclosure of a company’s activities and performance in three key areas:

1. Environmental – How a company’s activities affect the environment, including resource use, waste management, pollution, and its carbon footprint.
2. Social – The company’s impact on society, including labor practices, human rights, diversity and inclusion, and community engagement.
3. Governance – The practices and policies that guide a company’s leadership, including transparency, ethical decision-making, and regulatory compliance.

ESG reporting allows investors, stakeholders, and the public to evaluate how well a company is performing in these areas and whether it is managing risks related to environmental degradation, social injustice, and poor governance. For companies, ESG performance is now viewed as a critical component of long-term sustainability and financial stability.

New EU Legislation on ESG Reporting

The European Union has taken significant steps to enhance and harmonize ESG reporting requirements, aligning with its broader sustainability goals outlined in the European Green Deal and Agenda 2030 for Sustainable Development. Two key pieces of legislation are central to these efforts:

1. Corporate Sustainability Reporting Directive (CSRD)

The CSRD is the cornerstone of the new EU legislation on ESG reporting. It significantly expands the scope and depth of ESG disclosure requirements compared to its predecessor, the Non-Financial Reporting Directive (NFRD).

Key Features of the CSRD:

• Broader Scope: The CSRD applies to all large companies and listed companies, including non-EU companies with significant operations within the EU. This means that over 50,000 companies will now be required to disclose ESG data, compared to the previous directive, which applied to only around 11,000 companies.
• Standardized Reporting: The directive introduces the requirement for standardized ESG reporting, which will be based on the EU sustainability reporting standards developed by the European Financial Reporting Advisory Group (EFRAG). This aims to ensure consistent, comparable, and reliable ESG data across all companies.
• Digital Reporting: Companies will be required to provide their sustainability information in digital format using the European Single Electronic Format (ESEF). This will make it easier for stakeholders to access and analyze ESG data.
• Audit Requirement: ESG reports will need to be audited by an external third party, ensuring the accuracy and reliability of the information.
• Double Materiality: The CSRD requires companies to report not only on how sustainability issues affect their financial performance but also on how their operations impact the environment and society (this is known as double materiality).

Key Reporting Areas under CSRD:

• Environmental: Companies will need to report on their carbon emissions, energy use, water consumption, and efforts to tackle climate change and biodiversity loss.
• Social: Reporting will focus on issues like labor conditions, diversity and inclusion, community engagement, and product safety.
• Governance: Companies must disclose information related to business ethics, board diversity, anti-corruption measures, and tax transparency.

2. EU Taxonomy Regulation

Alongside the CSRD, the EU Taxonomy Regulation provides a framework for determining which economic activities can be considered environmentally sustainable. The taxonomy aims to guide investment toward green projects by providing a clear definition of what constitutes an environmentally sustainable activity.

Key Features of the EU Taxonomy:

• Sustainable Activities: The taxonomy sets criteria for various sectors, such as energy, manufacturing, and agriculture, to define what activities can be classified as environmentally sustainable.
• Reporting Obligation: Companies covered by the CSRD will also need to report on how their activities align with the EU Taxonomy, specifically whether their operations contribute to environmental objectives such as climate change mitigation, adaptation, and biodiversity protection.

How Does the New EU Legislation Impact Businesses?

The introduction of these new regulations means that businesses in the EU (and those operating within the EU market) will face enhanced reporting obligations. The impact of these regulations can be summarized in the following ways:

1. Increased Transparency: Companies will need to be more transparent about their ESG performance, which could affect investor confidence, consumer behavior, and brand reputation.
2. Enhanced Accountability: With the introduction of audit requirements and digital reporting, businesses will need to ensure their ESG data is accurate, verifiable, and accessible. This may require improvements in data collection, management, and reporting systems.
3. Focus on Sustainability: The legislation encourages companies to adopt more sustainable practices across their operations. This could lead to the adoption of cleaner technologies, greater efforts to reduce carbon emissions, and more robust social and governance policies.
4. Legal and Financial Risks: Non-compliance with the new regulations could result in legal and financial penalties. Additionally, businesses that fail to meet these ESG reporting requirements may face challenges in attracting investment, as investors increasingly prioritize companies with strong ESG performance.

ESG Reporting Deadlines

The deadlines for implementing the new reporting requirements are as follows:

• First Reports Under the CSRD: Companies subject to the CSRD must start reporting on their ESG activities from the financial year 2024, with the first reports due in 2025.
• EU Taxonomy Reporting: Companies will need to start disclosing their alignment with the EU Taxonomy for the 2022 financial year, with reports due in 2023.

How Our Team Can Help Businesses Navigate ESG Reporting

At our organization, we understand that adapting to the new ESG reporting requirements can be challenging, especially for businesses unfamiliar with the intricacies of sustainability disclosures. That’s where we come in.

We offer a comprehensive range of services to help businesses comply with EU ESG legislation and leverage the benefits of sustainable practices:

1. ESG Reporting Strategy Development: We can help you develop a clear strategy for ESG reporting that aligns with EU regulations. Our team can guide you through the process of determining what to report, how to collect data, and how to ensure compliance with the CSRD and EU Taxonomy.
2. Data Collection and Management: Accurate and consistent data is at the heart of effective ESG reporting. We provide services to help businesses implement systems for data collection, management, and analysis to ensure your ESG performance is accurately captured.
3. Audit and Assurance: As ESG reports will need to be verified by an external auditor, we can assist in preparing your data and reports to ensure they meet the audit requirements and align with EU sustainability standards.
4. Communication and Stakeholder Engagement: We help businesses craft clear and transparent ESG communications to engage stakeholders, investors, and consumers. Our services include creating impactful sustainability reports, media campaigns, and social media strategies to highlight your company’s commitment to sustainability.
5. Sustainability Consulting: Our experts can guide you in adopting sustainable practices across your operations, from reducing carbon emissions to improving governance and social standards. We provide tailored advice to help you meet both regulatory requirements and sustainability goals.
6. Training and Capacity Building: We offer training programs to help your team understand the nuances of ESG reporting and ensure that everyone is equipped to support your sustainability efforts.

The EU’s new ESG legislation marks a significant shift in how businesses are expected to report on their environmental, social, and governance performance. With tight deadlines, detailed reporting requirements, and increased accountability, businesses must take immediate steps to ensure compliance. However, this shift also presents an opportunity to improve business operations, attract investment, and boost consumer trust by adopting sustainable practices and transparent reporting systems.

By partnering with us, your business can navigate the complexities of ESG reporting with ease. From data collection to strategy development and auditing, we provide the tools and expertise needed to help you succeed in this new regulatory landscape. Together, we can turn compliance into a competitive advantage and contribute to a more sustainable future for all.

Get in touch with us through our email: projects@planet3pm.si