Corporate Responsibility ESG 2025

How will ESG reporting take place in practice, who does it (not) concern and what can be done for the company to have a better ESG rating? ESG reporting specialist Peter Szabó explains.

The National Council approved the amendment to Act No. 431/2002 Coll. on accounting, which is supposed to ensure the transposition of the EU directive on the reporting of information on the sustainability of enterprises, the so-called ESG reporting. For the accounting period from 1 January 2024, the obligation applies to some banks, insurance companies (except health insurance companies), reinsurance companies and trading companies that issued securities. From 2025, however, it will affect many companies in Slovakia as well. For whom ESG reporting will be an obligation, why it is appropriate to prepare for its fulfillment now, how it will proceed in practice and what is at risk if the company does not fulfill this obligation, Peter Szabó, an auditor from the company LeitnerLeitner, explained in an interview for Podnikajte.sk.

CSRD Directive vs ESG reporting
Before we go into the details, what can we imagine under the directive on the reporting of information on corporate sustainability and why is it actually being addressed?

Awareness of environmental protection and its importance is gradually growing, which is why companies are also interested in this issue. Some already publish data on how they approach sustainability in some way. Various initiatives are also devoted to the issue. For example, GRI - Global Reporting Initiative, an international organization that is the author of the most widely used standards for publishing information on sustainability. At the same time, selected companies have had to carry out financial reporting according to IFRS standards for a long time, which are starting to focus on the area of ​​sustainability. And last but not least, the EU has set climate goals, which also requires the introduction of a unified framework for reporting and monitoring sustainability goals in individual companies. Therefore, in 2022, the so-called sustainability directive (CSRD).

How does the CSRD directive relate to the ESG reporting obligation?


The directive is the basic framework for which companies ESG reporting will be mandatory and how data will be tracked as part of ESG activities. Based on it, the individual ESRS standards (European Sustainability Reporting Standard) were introduced, of which there are 12 and they regulate in more detail which data companies have to report.


And what exactly does the acronym ESG mean?

These are activities in three areas: Environment – ​​attitude towards the environment, Social – attitude towards employees and society/community, Governance – business management.

The new obligation will affect both larger and smaller companies - who (doesn't) have to report ESG?
Which companies are covered by the report?

Until now, ESG reporting concerned entities of public interest, i.e. banks, insurance companies or large accounting entities with a turnover of over 170 million euros. This will not change. However, it follows from the CSRD directive that from 2025, ESG reporting should also apply to large companies with a turnover of over 40 million euros, assets of 20 million euros and 250 employees. In Slovakia, these parameters were also adjusted for inflation, and the amendment to the Accounting Act set the limits - turnover over 50 million euros, assets of 25 million euros and 250 employees. Companies must meet two of the three criteria for two consecutive accounting periods. But there is also a certain exception, when a company does not have to deal directly with complex ESG reporting.

What is the exception?

It is possible to avoid the ESG report if it is a subsidiary of a company from the EU (parent companies from non-EU countries have a slightly different regime). From their side, it is only necessary to document the information where the consolidated annual report with ESG reporting of the parent company can be found.
However, since the ESG report will also take into account data on the activities of the Slovak branch, it is likely that its "mother" will send a questionnaire in which some data will be asked. Data collection is therefore not avoided, but the cost of preparing a report or its verification is eliminated.

Will ESG reporting already affect small and medium-sized enterprises?

Although this obligation will concern larger companies for the time being, they can also find out the given information about their supply chain. Thus, they can require data on their ESG activities from smaller companies - their suppliers. For example, we have clients who supply goods for larger companies, from whom they receive questionnaires to find out this information. In the first phase, they mainly concern the protection of the rights of employees, for example, they find out how health protection at work is ensured, whether companies do not violate the ban on employing children, etc. So far, it is mainly German companies that obtain information from Slovak suppliers, as the law on the supply chain applies in Germany - it mandates the given obligation. After the new obligation to find out information about the supply chain, ESRS standards also include. In addition, it is expected that ESRS standards for small and medium-sized enterprises should be adopted in the next few years, which will be in a simplified form.

Is it already known to what extent they will be set for smaller companies?

It is not yet completely clear, but it is expected that if there are 12 current ESRS standards, then those for small and medium-sized companies should be less (probably one). A draft standard for voluntary reporting of sustainability information for small and medium-sized enterprises is currently available.

Reporting on sustainability doesn't have to be a problem, the important thing is to have the data
How can ESG reporting be imagined in practice?

Reporting information on sustainability will be part of the company's annual report, which audited companies are required to compile today. Within it, there will now be a separate section with information on sustainability, which businesses will have to fill out.

Will this information be reported in a structured form?

ESRS standards will provide a structured form of the statement. Although there are 12 of them, they are divided into two general ones, five for the "E" area, four for "S" and one for the "G" area. Subsequently, they are divided into individual subcategories of data that need to be reported. For example, in the field of Environment, it is necessary to report information about the company's energy consumption, how it participates in the production of CO2, and so on. The annual report in which the ESG data will be reported should be published electronically using a prescribed form. Its format will be further specified.

Certain information about the impact of the accounting unit's activities on the environment and on employment is also currently included in the annual report. Will ESG reporting become more challenging?

I think it is a rather difficult task for companies. Of course, when it comes to questions about the number of employees or their gender composition, companies can fill it in. But more complex topics, such as monitoring greenhouse gas production and preparing a strategy to reduce it, can be more challenging to identify and report.

What can help companies with reporting?

On the one hand, it can help to turn to experts - advisers who are familiar with the topic, as studying the entire issue and standards or entrusting one of the employees with it could be too burdensome. Professional consultants can help the company fill in the necessary data. In addition, various startups are emerging that focus on the subject of ESG reporting and offer their applications and services to companies. Even before the company starts reporting data, it is necessary to start collecting it.

How to do it?

From my point of view, data collection is probably the most complicated part of ESG reporting. Companies often already have the necessary information in a certain way, but it is "scattered" around the company - the personnel department records data about employees, somewhere on the invoices there may be information about energy consumption and the like. In order for data collection to be structured, it is first of all necessary to determine which data the company needs to collect. There are more than a thousand data points in the ESRS standards, but not all of them must be reported by every business. EFRAG (European Financial Reporting Advisory Group) has published a database that summarizes these points, and each company can then see which data points relate to it and which data it should collect. Subsequently, it is necessary to set up the internal data collection system and the method where, since and at what intervals the information will be recorded. So that it does not happen that suddenly at the end of the year, when, for example, energy consumption for the whole year has to be reported, this data will be additionally determined at once.

Are there any information systems that will help companies with data collection?

Various enterprise systems are being developed to help with data collection. Large companies that need to find out data from their supplier, for example, create their own platforms where the supplier logs in and fills in the questionnaire the data that the customer needs to find out from him and which must be taken into account in the ESG report.

ESG rating can affect the financing of the company and the establishment of cooperation
ESG rating is also associated with ESG reporting. What is it about?

This is a kind of evaluation of the company based on how it achieves indicators in individual ESG areas. Some investors or banks are already looking at it when comparing companies. There are dozens of ratings provided by smaller or larger rating companies. However, the evaluation does not have a standardized form, it is up to each company whether to give the evaluated company five stars or ten points, or a unit as a mark. They also have their own criteria according to which they award the evaluation. For now, therefore, the ratings do not have much informative value, but it can be expected that over time a rating that will be used by everyone will prevail.

You mention investors and banks. How can ESG reporting or ESG rating affect company financing or business cooperation?

When granting loans, banks already ask their clients for various data about their business in the form of questionnaires, and it can be assumed that they will later take into account the information provided in the annual reports. These will be public and can be compared. Then business partners and banks will be able to choose who they will cooperate with or whom they will provide finance to. It may happen that the bank does not want to provide the company with a standard loan. At the same time, they can use it by approaching a company with "dirty" production and a lower ESG rating and offering it the possibility of financing a green transformation.

How can a company improve its rating?

In the first phase, I recommend identifying a strategy, where the company is at the moment and what and how it wants to achieve. Maybe he already implements some measures in the field of sustainability, maybe he needs to introduce some. Then you need to determine the data that must be monitored in order to be able to evaluate whether the set goal is being met. If the company wants, for example, to produce less CO2, he must monitor what production he has now and determine how he wants to achieve the reduction. Determine a certain strategy, where he wants to go. However, in my opinion, it is counterproductive if the company focuses on improving the rating in only one area. It is more important to set a strategy from the point of view of several areas (including "S" and "G").

ESG audit: who can do it and how is it done?
Can you also give specific examples of measures by which the company can improve its score?

In the "Environment" area, it can be about reducing energy consumption, introducing a circular economy, solving waste management (for example, if a company has disposable pallets, it can look for other uses for them and reduce its carbon footprint). In the "Social" field, it can be the elimination of gender inequality, the introduction of a transparent employee evaluation system. In the "Governance" section, it is e.g. improving processes in the field of company management for the purpose of fulfilling legislative obligations or introducing a code of ethics or regulations on how to fight corruption.

What is your practical experience - do companies already deal with data collection or implementing measures?

Gradually, yes. But for some, this topic is already becoming annoying. The term "ESG" is thrown at them from all sides. In practice, they are just starting to deal with it, but they are discouraged by the fact that it is a relatively complex topic that will require a large deployment of resources.

What do companies solve most often first? Which area do they deal with the most?

They usually start with how to reduce energy consumption. For example, if they have energy-intensive production, they look for ways to save. It can also help them financially. Subsequently, they focus on the creation of CO2 emissions (how they can eliminate it - travel less by car, buy electric cars for the fleet, use more public transport, limit air travel, etc.). In the next step, some companies devote themselves to the area of ​​social responsibility. They work with communities where they operate. Alternatively, they support disadvantaged groups, foundations and non-profit organizations.

Is it worth taking these measures voluntarily?

Apart from the fact that ESG activities may be required by business partners or banks, they may also mean a competitive advantage for the company.

The new obligation will require an investment, watch out for fines
ESG reporting should be subject to verification by an auditor. What is important for the company to know in this context?

Verification will be mandatory as information on sustainability will be reported as part of the annual report. It can be the same person or company that verifies the financial statements, but it can also be a different auditor that verifies only the part of the annual report devoted to ESG reporting. It is important to say that in order to verify sustainability data, an auditor must have a separate license. We, as auditors, are therefore now undergoing training to know how to approach the verification of these non-financial data. Therefore, the company should pay attention to whether the auditor has the corresponding license and whether he has completed the relevant training.

ESG audit: who can do it and how is it done?
What costs should companies expect in relation to ESG reporting?

For large companies, this can be a cost of tens to hundreds of thousands of euros per year. In the case of smaller companies, the costs can be in the hundreds to thousands of euros. This includes the costs of internal employees who will deal with the issue, setting up processes for data collection, possible licenses for new software solutions, costs of external experts and, of course, the costs of verifying this information.

What are the risks for companies that are subject to ESG reporting for not fulfilling this obligation?

They may be fined for non-compliance with the Accounting Act. The amount will depend on the severity of the violation. It can be amounts up to two percent of the company's assets, but no more than 1 million. euro

Source:

https://www.podnikajte.sk/zakonne-povinnosti-podnikatela/esg-reporting-na-slovensku-od-2025

Author:

Libuša Removčíková