In the beginning of August 2023, the European Commission has approved European Sustainability Reporting Standards that will come into effect 01 January 2024. It is a set of rules, which all companies will follow in the future during sustainability reports, also known as ESG (Environmental, Social, Governance). ESRS was designed by the European Financial Reporting Advisory Group and will enter European law until 31 December 2023.
Collection of ESG data will be mandatory for large companies starting January 2025, however nonfinancial criteria will be affecting smaller companies very soon. For example, banks already use ESG factors when deciding about a working capital loan, or an investment loan and use said factors to set the interest rate. To add, large companies already require ESG data for reports from their supply chains. This is why Peter Vaško from consulting firm Grant Thornton advises that every company should slowly start gathering the necessary data and look for ways to better its own ESG ranking.
Areas for measuring the impact of companies on the environment
Now besides the typical financial rating of European companies, which is backed by the annual audit report, there will be non-financial ESG reporting. It measures intangible parameters, with which the company may harm the environment. This type of reporting began due to a directory of the European Union called Corporate Sustainability Reporting Directive. CSRD states that as of 2024 all companies will have to gather specialised information about meeting the environmental and social standards as well as the standards of the management area. These areas will measure the potential harm the company could cause to the environment and vice versa, how the environment could hurt the company (e.g. climate change). The endorsed ESRB standards present detailed disclosure requirements.
Even the smaller companies should care about ESG, or they could be in trouble
As of the year 2025, meaning fort he monitored period of the year 2024, companies that meet at least two of the three criteria will be obliged to collect data and evaluate the performance of individual indicators and, from early 2026, to publish an ESG report. These criteria are assets worth more than EUR 20 million, net turnover more than EUR 40 million, number of employees more than 250. In Slovakia, the obligation will apply to an estimated amount of 700 to 800 companies. Peter Vaško the expert on ESG from a consulting company Grant Thornton, emphasises that even those companies to which it does not apply yet should begin to measure their ESG parameters. "How a company affects the environment, treats its employees and manages its business is already of interest to banks today and in the near future ESG scores will be taken into account by business partners and the general public. Banks will be less and less willing to lend to projects or companies that are not environmentally or socially sustainable. The ESG profile will also be of interest to business partners, as companies with a poor ESG score in their value chain will make it more difficult for them to do their own business. Last but not least, the reputation of the companies will also play a role," says Peter Vaško.
This change is already partly in practice today. For example, banks are required by the European Banking Authority (EBA) to assess environmental, social and governance factors alongside financial risks when lending since June 2021.
Companies can measure their ESG profile with a survey
Reporting according to ESG standards is not exactly simple. To measure their ESG profile the company needs a bulk of data from varying areas, like from human resources, energy supplying, manufacturing etc. This is where the so-called self-assessment surveys guide the companies on what kind of data to collect and where to find it. One of the first surveys made for Slovak companies is project Synesgy (service.synesgy.com/sk), which covers CRIF – Slovak Credit Bureau. Companies can register free of charge and fill in the data. The outcome is their total ESG score, which is an evaluation with some tips for certain improvements.
Out of the three pillars of ESG, companies in Slovakia have so far been predominantly dedicating themselves to saving resources, according to the experiences of Grant Thornton. "Companies typically deal with the installation of photovoltaic power plants on the roofs of buildings or the replacement of older lighting with energy-saving LED lights. In this case, the motivation is mainly the rising cost of energy. To a lesser extent, companies are already working with ecological or social criteria, including equal access to employees and remuneration," says Peter Vaško.
He expects that thanks to approved ESG criteria and intense communication about the topic, the companies will now be more interested in proper environmental measures and will take steps to improve the situation in the social area and in the management area.
ESRS standards will be implemented step by step
Since ESRS standards are complex and difficult for companies in terms of data collection, their implementation will come more slowly. This means that:
- all standards (including disclosure requirements and data points within each standard) will be subject to a materiality assessment by the reporting entity (with the exception of 'General requirements' and 'General disclosures'; ESRS 1 and ESRS 2);
- companies with fewer than 750 employees may omit: in 2026, the GHG emissions data in Scope 3 and the disclosure requirements in the standard on 'Own workforce'; in 2026-27, the disclosure requirements in the standards on biodiversity and on value
chain workers, affected communities, consumers and end-users;
At the same time, the European Commission has decided that the voluntary indicators will include biodiversity transition criteria (ESRS E4) and selected indicators on "non-employees" within the company's own workforce (ESRS S1), with the company explaining in the report why it considers a particular sustainability topic to be irrelevant.
In addition, the Panel has introduced some flexibility in relation to the disclosure of mandatory data. For example, it has provided greater flexibility in the disclosure of financial impacts arising from sustainability risks and stakeholder engagement, as well as in the choice of methodology that should be used in the materiality assessment process. In addition, the EC has modified some data points related to the disclosure of information on corruption and bribery in an effort to increase greater protection for whistle-blowers.
The EC and EFRAG (European Financial Reporting Advisory Group) worked closely with the International Sustainability Standards Board (ISSB) and the Global Reporting Initiative (GRI) in the development of the ESRB standards to ensure a high degree of interoperability. This means that companies' reporting under ESRS will be globally compatible.
The following legislative steps
After the August, approval of ESRS standards comes a two-month period of by the European Parliament and the Council of the EU that could possibly extend to four months. If any objections arise (since changes will not be applicable during this period), the process for the first ESRS group would have to start over.
Standard ESRS includes (info box):
Two crosscutting standards, which apply to all sustainability questions
- ESRS 1 – General requirements ESRS 2 – General disclosures
- SRS E1 – Climate Change ESRS E2 – pollution
- ESRS E3 - Water and sea resources ESRS E4 – Biodiversity and ecosystems
- ESRS E5 – Use of resources and circular economy
- ESRS S1 – Human Capital
- ESRS S2 – Employees in a value chain
- ESRS S3 – Impact on external communities ESRS S4 – Consumers and ultimate owners
- ESRS G1 – Business Conduct