Preparing us for the new ESG reporting era
The purpose of ESG reporting is to increase transparency and accountability in how companies report information about environmental, social, and governance factors. From 2024, the ESG reporting CSRD will expand the scope and depth of sustainability reporting. It will affect most companies within EU, approximately 50 000 companies, starting between 2024-2026 depending on the company’s characteristics. Read below to understand how and when your company will be affected by the new ESG regulations.
What does ESG mean and why is it important?
ESG stands for Environmental, Social, and Governance and is a non-financial reporting, which measures companies from a sustainability perspective. The current mandatory ESG reporting is mainly covered by NFRD (Non-Financial Reporting Directive) and is applicable to all companies of public interest with more than 500 employees. Companies covered by NFRD are required to prepare a sustainability report to help investors understand the results, development, and consequences of the company´s operations. It includes measurements such as environmental-, social- and personal related issues, respect for human rights, and the fight against corruption, and bribery.
The new ESG directive is called CSRD (Corporate Sustainability Reporting Directive) and will revise the current regulations and make the requirements stricter. It will also ensure that the regulations follow mandatory EU standards. Approximately 50 000 companies will be affected. The standards will be determined by the European Financial Reporting Advisory Group and the EU commissions is expected to have the first version of the new standards before June 30th, 2023. According to the proposed directive, the sustainability report will be a part of the annual report in the director’s report. It will also be mandatory to have it reviewed by a third party.
Who are affected and when?
CSRD will be implemented in national law, and it will affect all large companies and listed companies within EU but also some non-EU companies operating in EU. The new rules will also be applied to listed small and medium sized companies depending on their character.
The legislation is planned in the following three phases:
- 2024-01-01: Companies already covered by NFRD. The new rules will be applied for the 2024 financial year, affecting the reports published in 2025.
- 2025-01-01: Large companies currently not covered by NFRD. The new rules will be applied for the 2025 financial year, affecting the reports published in 2026.
- 2026-01-01: Listed small and medium sized companies, small and non-complex credit institutions, and captive companies. The new rules will be applied for the 2026 financial year, affecting the reports published in 2027.
According to the Swedish Annual Accounts Act (ÅRL), sustainability reporting is mandatory for all companies that meet one or more of the following conditions:
- The average number of employees in the company has been more than 250 in each of the last two financial years.
- The company’s reported balance sheet total has for each of the last two financial years been more than SEK 175 million.
- The company’s reported net sales for each of the last two financial years have been more than SEK 350 million.
It is also applicable to companies that meet the following criteria:
- Companies of public interest
- Companies that, on average, had more than 500 employees during the last financial year
How can Sofigate help?
Adopting to the new ESG reporting needs preparations and will not happen overnight. Sustainability needs to be addressed comprehensively. It is not only about emissions.
Rather it is an enterprise-wide topic, which often is viewed too narrowly. Leadership is also an important aspect and makes the difference in developing sustainability. Enterprises need concrete roadmaps, correct partners with the needed execution power. Lastly, technology plays a major role in making enterprises sustainable. Developing enterprise sustainability depends on data management, system landscape and overall technology management.
Interested in knowing more? Read the related article: ESG: A Comprehensive Value Generator for Nordic SMEs
Anna Naumburg is Manager at Transformations in Sofigate Sweden.