ESG Newsletter 1/2024 – ESG legislation: The key to a sustainable future and its implementation in the Czech Republic
In today’s business world, where environmental, social and governance (ESG) factors play an increasingly important role, it is essential that companies understand the relevant legislation, fully engage in its compliance and adopt its principles. Sustainability, the proper care of people and honest management should be an integral part of every company’s business. The subsequently acquired transparency that the implementation of these factors brings can be an important feature of the company on the market.
We are bringing you an overview of the key EU regulations that shape this area and at the same time we want to explain how this legislation is implemented in the Czech Republic.
Overview of EU legislation
The European Union is adopting more and more regulations aimed at promoting sustainable and ethical business practices. These include CSRD (Corporate Sustainability Reporting Directive), ESRS (European Sustainability Reporting Standards) and EU taxonomy, which together define a framework for transparent and sustainable businesses.
CSRD: Expanding the scope and detailed reporting
The company will need to provide detailed information on how their activities affect the environment and society, including issues such as climate change, social rights and the fight against corruption. The CSRD replaces and extends the NFRD (Non-Financial Reporting Directive), currently applicable to all large and publicly traded companies in the EU.
The key changes include an extended scope, more detailed reporting and the necessity of an external audit, with the main criteria for categorising companies being the amount of turnover achieved, the balance sheet amount and the number of employees. The Directive emphasises the provision of detailed information on the impact of the company’s business activities on society and the environment.
The CSRD will be applied over four stages. First, large public-interest entities with more than 500 employees (already subject to the NFRD) will adhere to the Directive, then large companies (which were not subject to the NFRD until now) will prepare a sustainability report for 2025 pursuant to the Directive, and in the following years small and medium-sized enterprises will also start following the Directive, unless there is a decision to apply a two-year delay. In the final stage, the Directive will also apply to entities outside the EU that meet the aforementioned conditions.
ESRS: Assistance in the preparation of non-financial reports
European Sustainability Reporting Standards, otherwise known as ESRS, were developed by EFRAG (European Financial Reporting Advisory Group). The aim of these standards is to ensure the consistency and comparability of reports across sectors and countries. As of 1 January 2024, Set 1 is in effect, which includes 12 sector-neutral standards covering the entire spectrum of ESG topics and 82 disclosure requirements. These standards cover all 3 ESG pillars and focus on a total on 70 sub-areas.
Environmental issues are addressed by ESRS E1 on climate change, ESRS E2 on pollution, ESRS E3 on water and marine resources, ESRS E4 on biodiversity and ecosystems, ESRS E5 on resource use and the circular economy.
Social issues and human rights are addressed by ESRS S1 on the company's own workforce, ESRS S2 on value chain workers, ESRS S3 on affected communities, and ESRS S4 on consumers and end users.
Reporting and management issues are addressed in ESRS G1 on business behaviour.
For all these above-mentioned areas, the companies must describe how they assessed the significance (materiality) of the given topic. If the topic is not relevant to the nature of their business, it is necessary to explain why.
EFRAG is currently working on the preparation of sector-specific requirements.
EU Taxonomy: Defining sustainable activities
As part of the Green Deal, the European Union is committed to achieving carbon neutrality by 2050. The current economy is facing a transformation into a zero-emission economy, which will require a great volume of financial capital.
The main aspects of EU Taxonomy include:
- Six environmental objectives: climate change mitigation, climate change adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems.
- Sustainability criteria: in order to be considered "sustainable", economic activity must contribute to one or more of these objectives and must not significantly harm any of the other objectives. The condition for achieving the objectives of an economically-sustainable investment is to contribute to at least one of the objectives while not significantly harming the other objectives.
CBAM: Carbon border tax
In the EU countries, a carbon balancing mechanism has been in force at the borders since October 2023, complementing the current emission allowance trading system. It concerns products imported from third countries linked to high carbon emissions, specifically: iron and steel, cement, fertiliser, aluminium, hydrogen, electrical energy.
The mechanism is in a transitional period until 31 December 2025. This means that importers are currently not obliged to pay the fees for goods imported into the EU, but are obliged to submit quarterly reports on carbon dioxide emissions emitted in the production of those products. In January 2024, companies importing the above-mentioned commodities will already have to report for the last fourth quarter of 2023. From 1 January 2026, these importers will be required to have the status of an authorised CBAM declarant. They can obtain this during the transition period.
Implementation of EU legislation in the Czech Republic
The Accounting Act: The scope and content of the sustainability report
In the Czech Republic, the area of non-financial reporting is governed by the Accounting Act, which imposes the obligation on companies to submit a Sustainability Report, defines its contents and also defines the entities on which the obligation is imposed. The report must be drawn up in the ESEF format. At the same time, the law provides for penalties for non-compliance with the obligation to prepare the report. If such an offence is committed, the company may receive a fine of 3% of the total value of the assets.
The Act on Auditors: The procedure and outcome of the sustainability report audit
The Act on Auditors in the field of non-financial reporting follows the Act on Accounting, in particular with the obligation to prepare the sustainability report and have an auditor verify it. It includes a definition of the auditor’s activities on the verification of the sustainability report, while the verification of the sustainability report will be carried out on a level of limited assurance and the scope of the audit will be defined by the auditor. The requirements for professional practice of auditor assistants and examinations before entering the profession are extended. The content of the auditor's report on the verification of the sustainability report is specified and the amount of the penalties for breaches of legal obligations in connection with the verification of the sustainability report is supplemented. Existing auditors will not be able to verify the sustainability report until they complete the required continuous vocational training. This information will be entered in the Register of Auditors. The transitional provisions specify deadlines for fulfilling the selected obligations, e.g. for new auditors in the field of examinations prior to entering the profession and compulsory practice.
The amendment to the Act on Auditors came into force on 1 January 2024 and the changes contained therein should be applied for the accounting period starting after the amendment came into force.
Working groups: Development and implementation
In the Czech Republic, there are various working groups dealing with ESG and sustainability issues. These groups are comprised of experts from different sectors with the aim of developing and implementing ESG and sustainability strategies.
The Confederation of Industry of the Czech Republic (SPČR) is a partner for the Ministry of Finance of the Czech Republic and has set aside capacities within the Confederation and its individual members who are actively engaged in the transposition.
Moving toward a sustainable future
Understanding and adapting to the ESG legislation is a necessary step toward sustainable growth and better social responsibility. We are prepared to support your company in this important process. Together we can work to achieve your ESG goals and contribute to creating a more sustainable world.
We will be happy to help you analyse the current situation, find the strengths and weaknesses of your business, set up processes to collect data or prepare strategies for the future, so that you do not get lost in the area of ESG and non-financial reporting.
Authors: Zuzana Rozsívalová, ESG Manager, Mazars in the Czech Republic
Karolína Gajdíková, ESG Specialist, Mazars in the Czech Republic
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