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ESG Reporting: A Global Imperative

ESG (Environmental, Social, and Governance) reporting has evolved into one of the key components in achieving corporate well-being due to its impact on the companies themselves and all stakeholders.

In addition to the financial report, companies are expected to include reports on the impact of business on the environment, application of human rights, and corporate governance.

According to the definition of the International Finance Corporation, ESG is defined as a set of factors related to environmental, social, and governance issues that companies consider when managing their business, and investors when investing, in terms of risk, impacts, and opportunities which these factors carry. It is important to note that there are no universal standards in the true sense of the word. Several different frameworks/methodologies/standards can be used to define the criteria by which ESG performance is measured, disclosed, and assessed.

Namely, to achieve the goals set by the Paris Agreement 2016, later confirmed by the European Green Deal 2020 – sustainability and the transition to a safe, climate-neutral, and circular economy – the European Union began to establish a regulatory framework that prescribes obligations to disclose ESG information, establish ESG standards for financial market participants, and define economic activities that are considered sustainable. The ultimate expected outcome is an increase in investments in a sustainable economy, and directing investments where they will make the greatest contribution to sustainability, all of that to achieve a climate-neutral continent status by 2050.

Overview of EU legislation

Several key regulations of the European Union governing the reporting of companies on non-financial performance and sustainability are:

  1. Corporate Sustainability Reporting Directive – CSRD, Directive (EU) 2022/2464, require of European companies to report on their operations about corporate sustainability within regular annual reports, which is a reference to the Non-Financial Reporting Directive – NFR, Directive 2014/95/EU.
  2. Sustainable Finance Disclosure Regulation – SFDR, Regulation (EU) 2019/2088), which requires of participants in the financial market to include impacts on sustainable development in addition to financial indicators in the assessment of future investments.
  3. EU Taxonomy, Regulation (EU) 2020/852 prescribes which economic activities are considered climate neutral and serves as a single reference point concerning which investors, companies, public policymakers, and consumers can assess which economic activity is truly sustainable.

The proposal of Corporate Sustainability Due Diligence Directive (CSDDD, Directive) was adopted as one of the instruments that should require of companies to conduct research into how their operations and supply chains affect the environment and human rights. If adopted, the directive will introduce requirements for companies to identify, prevent, mitigate and consider all factors that may have an impact on ESG criteria. This instrument is complementary to the CSRD Directive, as it represents a tool for companies to meet their obligations under the Directive related to the disclosure of information on their impact on the environment and human rights.

The duties established by these regulations represent a sufficient basis for companies to comprehensively collect and truthfully report on their activities, which significantly contributes to reducing the occurrence of eco-manipulation (greenwashing).

Before the CRSD Directive, the NFR Directive established reporting principles for large companies. According to the NFR Directive, business entities must disclose information on their business model, sustainability policies, outcomes of those policies, risks and risk management, and key performance indicators related to the business. A company must provide information in its non-financial report on, at least, the following areas: environment, impact on society and employees, respect for human rights and prevention of corruption, and diversity on corporate boards (regarding age, gender, education, and professional experience).

The new CRSD Directive that entered into force on 5 January 2023, aims at eliminating the ineffectiveness of the NFR Directive and expand the scope of ESG reporting requirements to include, in addition to large and small and medium-sized enterprises, and finally non-EU companies and subsidiaries that operate in EU.

The requirements will come into effect gradually, depending on the classification of the company:

  • As of 1 January 2024, large publicly traded companies (those with more than 500 employees) will have to monitor and collect ESG data pursuant to the Directive (reporting year 2025).
  • As of 1 January 2025, any company that meets two out of the three following criteria must monitor and collect ESG data following the CSRD Directive: 250 employees, €40 million in revenue, or €20 million in balance sheet (reporting year 2026).
  • On 1 January 2026: A law will enter into force that will require most small and medium-sized enterprises (10-250 employees) to commence their reporting (reporting year 2027).
  • On 1 January 2028: the provisions of the CSRD directive requiring reporting from companies from third countries (European subsidiaries of non-European companies with a turnover of more than EUR 150 million) will enter into force.

As part of this package, the European Commission already adopted the European Sustainability Reporting Standards on 31 July 2023, which represent a significant step towards the standardization of reporting by companies in the European Union on climate change and other ESG-related activities. The standards came into force on 1 January 2024. However, on 8 February 2024, the European Commission agreed to postpone the deadline for these sector standards from mid-2024 to mid-2026. This will give companies more time to comply with the horizontal standards adopted in July 2023, which apply to all companies, regardless of their economic sector. In addition, CSRD establishes specific standards to be used by certain non-EU companies. This agreement also delays the deadline for adopting these standards from mid-2024 to mid-2026.

Reports by Companies in Serbia

Given the fact that the Republic of Serbia has the task of harmonizing its legislation with the EU legislation following its strategic commitment to accession to the EU, the largest part of the provisions of the NFR Directive has been incorporated into the framework of Art. 37 (non-financial reporting at the level of individual reporting entities), Art. 38 (consolidated non-financial reporting), and Article 34 (which defines the requirements for compiling a report on business operations) of the Accounting Act. Those required to prepare a non-financial report (legal entities that are companies of public interest and have more than 500 employees) must include this information in their Annual Business Report and submit it to the Serbia Business Registers Agency.

Bearing in mind the new changes in the EU, Serbia has the task of further harmonizing its regulations. The economic motive for investing in ESG is to maintain a position in the supply chain, since EU companies have already aligned their operations with ESG and require this from their suppliers. Also, one of the reasons is that banks require from their clients, when processing requests for financial services, to comply with ESG criteria.