Final standards for ESG reporting are on the table. Companies must learn to track their impacts

More than 1,000 Czech companies will report ESG data according to the European Commission's Uniform European Sustainability Reporting Standards, adopted this week. This is a key milestone in Europe's sustainable finance agenda to ensure transparency in the market and effective redirection of finance into sustainability. The final standards are based on a November draft by EFRAG's advisory body, with direct input from experts at Frank Bold. We summarize the impact of the standards on firms and the main changes from the original proposal in the article. 

The standards include strategic ESG information and ten thematic areas including climate, pollution, water, biodiversity, circular economy, own workforce, workers in the value chain, affected communities, end users and business governance. The largest corporations - around 20 companies in the Czech Republic, such as ČEZ, Kofola and O2 - will report on these in their annual reports as early as 2025, with most companies having this obligation in 2026.

The obligation will apply to all large and small and medium-sized enterprises traded on the stock exchange and to all companies meeting at least two of the three criteria: 1. net turnover of at least CZK 1 billion, 2. more than 250 employees, 3. assets in the balance sheet exceeding CZK 500 million.

"The ESG data in the annual reports will be a source of information for banks and investors who are required by law to monitor the ESG impacts of their investments. Together with other European Union tools such as the Taxonomy, the mandatory reporting of ESG data is intended to enable the allocation of money to green economy and sustainability, thus meeting the objectives of the Green Deal, " explains Filip Gregor, member of the EFRAG Sustainability Reporting Board and head of the ESG team at Frank Bold Advisory.

What will be absolutely mandatory?

The disclosure requirements are divided into two cross-cutting or general standards and ten thematic standards in three overarching areas, E (environment), S (social) and G (governance).

All companies subject to ESG reporting obligations will have to report general information (ESRS 2, General Disclosures), which includes information on, for example, sustainability management, business model and supply chain, corporate ESG strategy and, last but not least, how the company has carried out a so-called materiality analysis, which is a process of identifying material impacts, risks and opportunities.

It is the materiality analysis that is crucial for companies, as now the reporting of all thematic ESG indicators, including for example energy consumption, greenhouse gas emissions, water consumption or employee data, which were mandatory in all circumstances in the original EFRAG proposals, will depend on this assessment.

However, companies must provide a good justification for "omitting" thematic ESG information. For all environmental and "governance" topics, they will need to describe the process by which they assessed the materiality of impacts, risks and opportunities.

At the same time, in the climate area, if a company assesses, for example, that it does not have a significant impact on greenhouse gas emissions, it must provide a detailed explanation of the results of the materiality analysis. "Learning how to do materiality analysis properly will now be absolutely critical for companies. It cannot be done intuitively; the standards require very precise procedures and specific information. That is why we at EFRAG are now working on a guide that will take companies through the analysis process," adds Filip Gregor of Frank Bold Advisory.

More time for reporting on carbon footprint and social issues

In the final proposal, the European Commission gave smaller companies more time to report on some thematic indicators. The phasing-in of reporting obligations applies to companies with fewer than 750 employees (regardless of whether they have securities traded on an exchange or not).

For these companies applies:

• one-year delay for reporting Scope 3 GHG emissions information, i.e. indirect emissions from the supply chain, products and services, such as the carbon footprint of materials, emissions associated with financial investments or end-of-life products
• two-year delay for reporting data on biodiversity
• one-year delay for reporting information on own employees
• two-year delay for reporting on indicators related to social issues in the corporate value chain (e.g. information on supplier workers)

There is also a one-year grace period for all companies to report in detail on the financial impacts of, for example, climate change, drought or biodiversity loss. For the first year, only the obligation to identify the relevant financial risks and to describe the financial impacts in general terms will apply.

"The deferral gives companies time to set up or modify existing reporting policies and processes so that they can then meet the detailed requirements of the standards on the form and content of ESG disclosures, known as datapoints. In this regard, it is important to note that compliance with the requirements of the standards is subject to audit," says Gregor.

How should Czech companies report? According to the first comprehensive guide

If a company is new to ESG, the initial orientation to the topic can be complex and full of questions: What legislation applies to the firm, what data does it need to report, and what purpose does it all serve?

The first comprehensive guide to ESG reporting, which explains the content of the EU sustainability reporting standards, is designed to help companies. If they start working on these steps this year, companies will have enough time to get up to speed on the topic, set up good processes and get the necessary support from experts. Indeed, their capacities will fill up quickly as the deadline for compliance approaches.

The guide, which is the first of its kind in Europe, was created earlier this year by experts Frank Bold Advisory together with Deloitte. It was created for the Prague Stock Exchange and the European Bank for Reconstruction and Development to support large listed companies, banks and insurance companies that will be affected by ESG reporting next year, but it is also useful for everyone else. In fact, ESG disclosures through supply chains also affect medium-sized and smaller companies. However, it is advisable to consult the information in the guide with experts as the document was written before the final ESG standards were adopted.

The preparation of the guide included an analysis of the readiness of the largest Czech companies for mandatory ESG reporting. It shows that most of them significantly underestimate the onset of ESG regulations and do not prepare for them. This carries the risk that these companies will not be able to react in time and take advantage of the opportunities that ESG reporting will bring, for example, so-called green financing.

Companies can download the guide free of charge on the Frank Bold Advisory website.

Get ahead with ESG reporting

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