The Corporate Sustainability Reporting Directive is no joke, but an inevitable reality

Today, we increasingly hear words like “sustainability” or “ilgtspēja”; unfortunately, for many entrepreneurs, these words are as understandable as abracadabra magic words. We live in a world of limited resources, and in a society with diverse desires and interests, it is essential to find a balance between society’s (including future generations’) interest in living in a favorable environment and, on the other hand, ensuring economic activity and promoting development.

In addition to the current regulations, companies in the European Union, and of course in Latvia, must carefully follow developments related to the Corporate Sustainability Reporting Directive (CSRD), whose requirements will need to be met when reporting in accordance with the European Sustainability Reporting Standards (ESRS).

Although the directive is still a draft, its final version may be adopted in the near future. It should be noted that the draft directive already stipulates (and it cannot be ruled out that this will remain unchanged) that the reporting obligation will come into force in 2024 and will apply to 2023 and subsequent financial years. Even now, entrepreneurs should assess whether the directive will apply to them, what requirements will need to be met, and what further actions are necessary. For example, a company can start evaluating the information and data it possesses, whether an internal process system has been developed within the company, and how it specifically operates.

Conversely, if the directive’s requirements do not apply to a company, there might be a strategically important reason for the company’s operations or development to voluntarily choose to fulfill the obligations set out in the directive. For example, it could help access financial instruments, or, for instance, the company’s owners could be more transparent about their capital management, thereby becoming more attractive to an increasingly growing, sustainability-minded segment of society.

It is expected that initially, the directive will apply to large companies employing more than 250 workers, with an annual turnover exceeding 40 million, or total assets exceeding 20 million. At the same time, it must be monitored whether the company is a public company employing at least 10 workers or with a turnover exceeding 20 million. The requirements could also apply to companies not registered in the European Union but with securities on a regulated market within the European Union. It is also foreseen that, later, proportionate directive requirements could be extended to small and medium-sized enterprises.

For example, non-financial statements will have to be audited and approved by an auditor. The requirement for a mandatory auditor’s opinion is introduced to ensure that companies comply with the new sustainability standards. The directive stipulates that companies will have to provide the following information:

1. a) on environmental factors, including information on:
2. i) climate change mitigation;
3. ii) adaptation to climate change;

iii) water and marine resources;

1. iv) resource use and circular economy;
2. v) pollution;
3. vi) biodiversity and ecosystems.
4. b) on social factors, including information on:
5. i) equal opportunities for all, including gender equality and equal pay for equal work, training and skills development, as well as the employment and inclusion of people with disabilities;
6. ii) working conditions, including secure and adaptable employment, wages, social dialogue, collective bargaining and employee involvement, work-life balance, and a healthy, safe, and well-adapted working environment;

iii) respect for human rights, fundamental freedoms, democratic principles, and standards as set out in the International Bill of Human Rights and other key UN human rights conventions, the International Labour Organization’s Declaration on Fundamental Principles and Rights at Work, ILO core conventions, and the Charter of Fundamental Rights of the European Union.

1. c) information on governance factors, including information on:
2. i) the role of the company’s administrative, management, and supervisory bodies, including with regard to sustainability matters, and their composition;
3. ii) business ethics and corporate culture, including anti-corruption and anti-bribery measures;

iii) the company’s political engagement, including lobbying activities;

1. iv) the management and quality of relationships with business partners, including payment practices;
2. v) the company’s internal control and risk management systems, including in relation to the company’s reporting process.

It should be noted that Environmental Standards will be binding regardless of the company’s industry. They provide for the submission of specific and concrete information on pollution, water and marine resources, biodiversity and ecosystems, and circular economy. They also include the requirements of the European Taxonomy, including with regard to financial exposure to physical and transition risks related to climate change.

It can be seen that the directive provides for extensive information reporting obligations across three very significant and comprehensive areas. In this regard, it is important to note that governments will need to ensure they can manage the directive’s information disclosure – current internal policies will need to be reviewed, responsibilities for actions will need to be clearly delegated, and governments will need to consider whether their current reporting practices adequately cover legal obligations or if additional actions will be necessary.

Companies will also need to monitor and optimize their actions in response to issues such as child labor, worker exploitation, safe and healthy working conditions, biodiversity loss, and pollution. For this purpose, the following due diligence actions will need to be taken:

1. incorporate due diligence procedures into their policies;
2. identify actual or potential adverse impacts on human rights and the environment;
3. prevent or mitigate potential impacts;
4. cease or minimize actual impacts;
5. establish and maintain a complaints mechanism;
6. monitor the effectiveness of due diligence policies and measures;
7. publicly report on due diligence.

Given the rapid evolution of information disclosure obligations, companies are already being, and will continue to be, subjected to several additional reporting/investigation duties on a wide range of issues, with information disclosure requirements that will only continue to grow. Therefore, it is important to follow development trends in this direction or to consult professionals.