Much more than a compliance issue

Tomasz Piasecki, Forvis Mazars Poland’s sustainability leader, talks to the BPCC’s Michael Dembinski about the challenges facing businesses of all sizes as they adapt to the reporting the ESG impact of their activities.

The EU’s Corporate Sustainability Reporting Directive regulates the mandatory reporting of companies’ sustainability performance. Many firms affected by the Directive are already fully compliant; others believe they are, but may fall short – while others still are lagging far behind. Please give us a quick recap of what CSRD means in practice – what the regulator expects, to whom the CSRD applies, and from when?

The CSRD aims at standardising and enhancing the quality of sustainability disclosures from companies operating in the EU. It replaces the Non-Financial Reporting Directive (NFRD) and introduces changes to sustainability reporting in the EU. The CSRD expects companies to provide detailed information on their identified risks and opportunities arising from environmental, social and governance (ESG) issues along with impacts of their own business activities on people and the environment. More specifically, the CSRD includes:

• Double Materiality Assessment (DMA): companies are required to analyse and disclose information on the impact of ESG on their financial performance and how their business activities impact society and the environment.
• Single standards: To ensure comparability and consistency, companies must adhere to European Sustainability Reporting Standards (ESRS) when preparing their reports
• Assurance: Companies must seek limited assurance on the information disclosed in line with national assurance standards (reasonable assurance standards at EU level are expected by October 2028)
• Digital format: Companies need to prepare their disclosures in the European Single Electronic Format (ESEF/iXBRL)

The CSRD gradually extends the scope of companies subject to sustainability reporting obligation, requiring:

• Companies subject to NFRD to publish reports in 2025 for financial years beginning on or after 1 January 2024
  • Large companies listed on EU-regulated markets meeting two of the three criteria below are to publish reports in 2026 for financial years beginning on or after 1 January 2025. The criteria are: €25m balance sheet total, €50m net turnover, and/or 250 or more employees (annual average)
• SMEs listed on EU-regulated markets that meet two of the three criteria below to publish reports in 2027 for financial years beginning on or after January 1, 2026
  • Criteria: €5m balance sheet total, €10m net turnover, and/or 50 employees (there are separate criteria for micro-enterprises)
• Non-EU parent companies with net turnover above €150m generated on EU markets over two consecutive years and with at least one EU subsidiary or branch generating a net turnover of €40m or more annually to publish reports in 2028 for financial years beginning on or after 1 January 2027.

Brexit means that EU and UK standards will become more and more divergent. In this particular area of non-financial reporting, do you see UK businesses that are present in the single European market having to comply with CSRD and with UK regulations, thereby creating duplication of effort in compliance?
Brexit has introduced additional compliance challenges for UK companies operating in the EU. Non-EU companies operating in the EU that fall under the CSRD criteria specified above will have to comply with the Directive as well as with the UK’s evolving sustainability reporting regulations. Equally to the EU companies, UK companies that fall under the CSRD criteria will have to report in line with the ESRS. Currently, the UK requires large listed firms, large private companies and financial institutions to report under the Task Force on Climate-Related Disclosures (TCFD) framework. However, the UK government is working toward its own sustainability disclosure framework, based on the International Sustainability Board (ISSB) standards. Luckily, the ISSB together with the European Commission and the European Financial Reporting Advisory Group (EFRAG) have prepared a joint Interoperability Guidance for entities that need to report under both standards. In result, part of the efforts made to report under one of the standards will help report under the other. This, however, will not fully eliminate duplication of efforts in compliance.

If you are a UK business here in Poland, how does CSRD affect what you have to report here, and what your corporate HQ back in the UK has to do to be compliant? Is there a risk that British businesses will become less competitive in EU markets as a result?
Subsidiaries or branches of UK companies in Poland that meet CSRD criteria will need to report in line with the ESRS standards, submit their reports to the relevant EU authority and seek assurance on their disclosures. The UK headquarters will need to support the EU entity in the preparation of the report and data consolidation. In case the EU operations are consolidated under a single parent company headquartered outside of the EU, the parent may need to adopt CSRD/ESRS requirements for its EU business. This additional reporting obligation will introduce additional work for compliance and reporting teams, and generate costs for the headquarters. This could put British companies at a competitive disadvantage compared to EU-based firms.

How do you assess the state of ESG reporting in Poland today? Can you see a difference between companies listed on the Warsaw Stock Exchange and those with foreign capital in terms of their approach to CSRD and non-financial reporting in general?
As of 9 December  the Polish Parliament has introduced an act implementing the CSRD directive, but full transposition into Polish law is not completed yet Firms are yet to be formally obliged to prepare their reports for financial year 2024. Large companies that were subject to the NFRD have already made efforts to build their ESG reporting capabilities, and have started preparing for the requirements introduced by the CSRD. Companies listed on the Warsaw Stock Exchange are aware of the importance of ESG, not only because of numerous regulations that they have to comply with but also because of external stakeholder pressure –  investors, rating agencies and non-profit organisations requiring listed companies to disclose ESG related information. Companies with foreign capital, especially those with links to EU countries with more mature ESG cultures, often exhibit more advanced practices thanks to the adoption of earlier, at the time voluntary, sustainability reporting frameworks such as TCFD, Global Reporting Initiative (GRI), or CDP. Currently, with the introduction of ESRS, all companies, both Polish and ones from other EU member states, have to learn on how to properly report under the single standards.

EU regulations are seen on one hand as making business across the EU less competitive globally, but at the same time businesses from outside the EU have to comply with those regulations or lose access to the world’s richest trading bloc. Considering the net effect on the planet’s environment, is there a chance that regulatory best practice will raise standards globally?
The EU takes its obligation under the Paris Agreement seriously. According to the European Commission, the EU launched the European Green Deal to overcome climate change and environmental degradation challenges, at the same time transforming the EU into a modern, resource-efficient and competitive economy and ensuring no net emission of greenhouse gases by 2050, economic growth decoupled from resource use, and no person and no place left behind. This ambitious and long-term plan is already facing challenges. Among the main ones is uneven global effort to achieve climate and environmental goals that leads to divergence between measures adopted by the EU and the rest of the World, and internal resistance to the transformation process that has already proven to be costly in the short and mid-term. The current negative impact on EU’s competitiveness caused by stringent EU sustainability related regulations is expected to ebb away with the full introduction of the Carbon Border Adjustment Mechanism (CBAM) aimed at eliminating carbon leakage from the EU. CBAM will act as a tariff for those trade partners that do not obey by the EU standards on sustainability and sustainable production. Whether the EU’s practices will raise global standards remains to be seen as much depends on actions taken by other major trading blocks, namely the US and China.