The issue of responding to global sustainable development challenges through appropriate management of environmental, social, and corporate governance factors (in short: ESG – environmental, social, and governance) is becoming increasingly important. European regulations already adopted by Poland impose new information obligations on companies in the area of so-called non-financial information, emphasizes Prof. J. Męcina, advisor to the Management Board of the Lewiatan Confederation and lecturer at the University of Warsaw.

These new obligations are driven by growing pressure from the business environment, including changing expectations of investors and the financial sector, legislative changes, rising social awareness, and the resulting concern about potential damage to a company’s reputation. Strong motivators also include new business opportunities, such as growing demand for sustainable products and services, the desire to improve attractiveness in the labor market, and the need to respond to changing consumer behavior.

In recent years, the European Union has adopted a number of regulations aimed at supporting actions for a sustainable EU economy and mitigating the effects of climate change. Among the proposed new legislative instruments were the revision of the directive on non-financial reporting (NFRD), the adoption of the EU Taxonomy Regulation (Regulation 2020/852), and the Sustainable Finance Disclosure Regulation (SFDR) on the disclosure of information related to sustainable investments (Regulation 2019/2088). While the first two will have a direct impact on companies’ reporting obligations, the SFDR applies only to financial market participants. Nevertheless, its effect will be increased investor demand for non-financial information.

On 10 November 2022, the European Parliament adopted the Corporate Sustainability Reporting Directive (CSRD), whose provisions impose on companies the obligation to regularly disclose information about their impact on society and the environment. It will replace the less detailed Non-Financial Reporting Directive (NFRD), which covered a smaller number of companies. ESG (environment, social responsibility, corporate governance) constitutes a set of business-relevant indicators providing a comprehensive picture of a company. Among the identified indicators subject to mandatory reporting in the environmental area are: climate change, drought and water scarcity, biodiversity, land use, resource management, pollution, and waste. In the area of social impact, the following categories were identified: labor issues, occupational health and safety, human rights, relations with the local community, and product safety. The final reporting area covers governance-related indicators, such as corporate governance, ethical standards, anti-corruption and anti-bribery measures, and the protection of privacy and data security.

With regard to materiality analysis, the ESRS introduce the principle of double materiality, which helps determine whether a given topic or piece of information should be included in the sustainability report. This principle combines financial materiality and impact materiality. This means that for a topic/information to be considered material, it may be material solely due to the company’s impact on its environment, solely due to the financial consequences of the issue for the company, or it may meet both criteria. In all three cases, the issues are treated as equally material.

From 2024, the Corporate Sustainability Due Diligence Directive (CSDDD) will apply. It defines companies’ obligations to identify actual and potential adverse impacts on human rights and the environment and establishes liability for breaches of these obligations. The scope of the CSDDD covers companies’ own operations, the activities of subsidiaries, and entities within the value chain with which the company has “established business relationships,” both direct and indirect.

The Lewiatan Confederation identifies the following actions required under the CSDDD:

• incorporating due diligence principles into company policies

• identifying actual or potential negative impacts and preventing and mitigating them

• developing preventive action plans and codes of conduct agreed with business partners to limit the organization’s negative impact

• meeting due diligence requirements as elements of contracts within the supply chain

• incorporating ESG objectives into remuneration criteria for management positions

The CSRD introduces mandatory reporting: for the 2024 financial year for EU companies with more than 500 employees; for the 2025 financial year for EU companies with more than 250 employees; for the 2026 financial year for SMEs and other EU-listed companies employing more than 10 employees; and for the 2028 financial year for non-EU companies with revenues exceeding EUR 150 million in the EU.

The main challenges related to ESG reporting and proposed preparatory actions include:

• conducting an organizational readiness assessment from a regulatory perspective

• reviewing or developing an ESG strategy

• performing a double materiality analysis

• identifying gaps in policies, processes, and competencies and addressing them

• analyzing the value chain for ESG risks

• designing or updating data collection systems and ensuring data quality

• mapping processes

• measuring the carbon footprint (Scopes 1, 2, and 3) and calculating other missing indicators

Companies may choose the reporting approach that best suits their needs, provided it meets legal requirements. As Prof. J. Męcina emphasizes, companies have several reporting options. The first is preparing a Management Report supplemented with ESG data. Increasingly, key ESG issues are discussed in annual management reports; however, such information is usually limited to the most important topics and indicators to fit the style and format of financial reports. Additional information may be disclosed via the company website or a sustainability/ESG report, with good practice being to refer readers to the relevant documents.

The second method is preparing a Sustainability Report, which allows all information on environmental, social, and governance issues to be compiled in a single, standalone document. This form gives companies greater flexibility in presenting ESG activities and results in a way that best suits their needs. Companies covered by the NFRD may publish a non-financial information statement limited to the topics required by the directive or a full sustainability report.

The most advanced form is an Integrated Report. Such a report combines financial reporting elements with sustainability issues in a single document, presenting the company’s strategy and value creation model.

Author: Prof. Dr. habil. Jacek Męcina (Advisor to the Management Board of the Lewiatan Confederation)

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