Implementation of the CSR Directive

On the horizon, further changes in financial reporting are visible. This time it concerns the implementation of non-financial reporting provisions regarding ESG.

We present you the first part of our publication.

Today we describe the draft Act amending the Accounting Act, the Act on Certified Auditors, Audit Firms and Public Oversight, and certain other acts (hereinafter referred to as the “amending act”), primarily implementing Directive (EU) 2022/2464 of the European Parliament and of the Council of 14 December 2022 amending Regulation (EU) No 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU concerning the reporting of undertakings on sustainable development (OJ EU L 322 of 16 December 2022; hereinafter referred to as the “CSRD Directive”), which is currently at the stage of public consultation.

 As indicated by the amending act, the proposed changes introduce:

• expanded scope of reporting undertakings obliged to provide information on sustainable development. This scope will include: large undertakings, undertakings that are the parent company of a large group, small and medium-sized undertakings admitted to trading on a regulated market (excluding listed micro-enterprises), and undertakings meeting certain conditions and criteria for the size of dependent undertakings and branches based in a European Union Member State, where their ultimate parent undertaking or standalone undertaking is subject to the laws of a third country;
• obligation to prepare sustainability reporting according to uniform EU standards – departing from the previous discretion in choosing reporting standards in favor of mandatory application of European Standards of Sustainable Reporting;
• expanded scope of reported information – information on environmental, social (including human rights), and corporate governance sustainability issues will be more detailed than before;
• obligation to present sustainability reporting in a separate section within the undertakings activity report;
• obligation to verify sustainability reporting – mandatory verification by certified auditors will be introduced;
• obligation of digitization – activity reports of undertakings providing information on sustainable development will be mandatory prepared in XHTML format (human-readable electronic format), and a separate section on sustainable development will be marked in in-line XBRL format (this will facilitate machine-readable and data analysis on sustainable development issues).

The amending act, in terms of implementing the CSRD Directive, primarily modifies the Accounting Act. In the further part of the article, we will refer to the proposed legal regulations (articles) of the amending act referring precisely to the Accounting Act.

At the outset, it should be indicated that Article 1 point 22 of the amending act proposes the introduction of a new chapter (Chapter 6c) to the Accounting Act, which will constitute the main part of the implementation of the CSRD Directive.

It is indicated that in principle, the provisions of this chapter will apply to joint-stock companies, limited partnerships by shares, and general and limited partnerships whose all partners with unlimited liability are joint-stock companies, limited partnerships by shares, or companies from other countries with a legal form similar to these companies, as well as to undertakings such as insurance companies or credit institutions.

The amending act is to introduce Art. 63r sec. 1 of the Accounting Act, which specifies the exact scope of the subject matter of these obligations, indicating that reporting will be required for undertakings such as small and medium-sized enterprises that are issuers of securities admitted to trading on one of the regulated markets of the European Economic Area, as well as large undertakings, which will be obliged to present in a separate part of the activity report information necessary to understand the impact of the undertaking on sustainable development issues and the impact of sustainable development issues on the development, results, and situation of the undertaking.

In Article 63r sec. 2 of the Accounting Act (individual reporting), the scope of subject matter reporting is specified, indicating that sustainability reporting (hereinafter referred to as “SR”) includes:

1. a concise description of the undertaking’s business model and business strategy, encompassing:

(a) the resilience of the undertaking’s business model and business strategy to risks related to sustainability issues;

(b) opportunities for the undertaking related to sustainability issues;

(c) undertaking plans, including implementing actions and related financial and investment plans, to ensure that the business model and business strategy of the undertaking address:

(i) transition to a sustainable economy;

(ii) limiting global warming to 1.5°C in accordance with the Paris Agreement based on the United Nations Framework Convention on Climate Change adopted on December 12, 2015;

(iii) achieving climate neutrality by 2050 in accordance with Regulation (EU) 2021/1119 of the European Parliament and of the Council of 30 June 2021 establishing the framework for achieving climate neutrality and amending Regulations (EC) No 401/2009 and (EU) 2018/1999 (OJ EU L 243 of 9 July 2021, p. 1);

(d) where applicable, the extent to which the undertaking’s activities are associated with the use of coal, oil, and gas;

(e) how the undertaking’s business model and business strategy address the needs of undertaking stakeholders and the undertakings impact on sustainability issues;

(f) how the undertakings strategy is implemented in relation to sustainability issues;

• description of specific objectives set by the undertaking regarding sustainability issues, including, where appropriate, absolute emission reduction targets for at least 2030 and 2050, description of progress made by the undertaking towards achieving these objectives, and statement whether the undertaking’s environmental-related objectives are based on conclusive scientific evidence;
• description of the role of the undertaking’s management and members of the supervisory board or other supervisory body in relation to sustainability issues and their expertise and skills related to fulfilling this role or access of such bodies to such expertise and skills;
• description of the undertaking’s policies regarding sustainability issues;
• information on the existence of incentive systems concerning sustainability issues offered to the undertakings management and members of the supervisory board or other supervisory body;
• description:

(a) due diligence process implemented by the undertaking regarding sustainability issues, where applicable, in accordance with European Union law provisions on conducting due diligence processes by undertakings;

(b) key actual or potential adverse impacts associated with the undertakings own activities and its value chain, including its products and services, business relationships, and supply chain, actions taken to identify and monitor these impacts, as well as other adverse impacts that the undertaking is required to identify in accordance with other European Union law provisions on conducting due diligence processes by undertakings;

(c) any actions taken by the undertaking to prevent, mitigate, manage, or address actual or potential adverse impacts, and the outcome of these actions;

• description of the main risks for the undertaking regarding sustainability issues, including a description of the main types of undertaking dependencies on these issues and how these risks are managed by the undertaking;
• indicators related to the information referred to in points 1–7.

Importantly, the above information covered by SR is presented in applicable cases from a short-, medium-, and long-term perspective.

Moreover, where applicable, sustainability reporting includes:

1. information on the undertaking’s own operations and its value chain, including its products and services, business relationships, and supply chain;
2. references to other information contained in the activity report and additional explanations related to this information, as well as references to amounts disclosed in the annual financial report and additional explanations related to these amounts.

In Article 63x of the Accounting Act, parallel principles for reporting prepared within capital groups (group reporting) have been introduced.

At the same time, Article 63s para. 1 of the Accounting Act defines the undertakings authorized to prepare simplified reporting, which includes (simplified reporting):

1. a medium-sized undertaking that is an issuer of securities admitted to trading on one of the regulated markets of the European Economic Area;
2. a small undertaking that is an issuer of securities admitted to trading on one of the regulated markets of the European Economic Area;
3. a small and non-complex institution as defined in Article 4 para. 1 point 145 of Regulation (EU) No 575/2013;
4. an internal insurance company within the meaning of Article 3 para. 1 point 53a of the Act of September 11, 2015, on insurance and reinsurance activities;
5. an internal reinsurance company within the meaning of Article 3 para. 1 point 53b of the Act of September 11, 2015, on insurance and reinsurance activities.

In summary, as indicated above, the amending act introduces three types of SR:

• individual reporting (Article 63r of the Accounting Act);
• group reporting (Article 63x of the Accounting Act);
• simplified reporting (Article 63s of the Accounting Act).