Sustainability is becoming increasingly pivotal in the corporate sector, mainly due to emerging EU regulations. The introduction of the European Union's Corporate Sustainability Reporting Directive (CSRD) will also lead to substantial changes for Hungarian businesses.
What is CSRD?
The CSRD establishes the sustainability reporting obligations for companies, aiming to enhance transparency and accountability concerning environmental, social, and governance (ESG) factors. The directive extends reporting requirements from large corporations to include publicly listed small and medium-sized enterprises (SMEs), with a gradual implementation timeline.
Who is required to prepare a sustainability report?
The reporting obligations under the CSRD are being phased in:
- Starting from 2025: Large companies that meet at least two of the following criteria: 250 or more employees, €40 million in net turnover, or €20 million in balance sheet total.
- From 2028 onwards: All SMEs defined by the EU will be subject to the reporting requirements, except micro-enterprises.
It is important to note that smaller companies in the supply chain could also be affected if they are partners of larger firms already subject to these reporting obligations.
Why is reporting under the CSRD necessary?
Thanks to new EU regulations, sustainability is becoming an increasingly critical issue in the corporate sector. The CSRD will bring about significant changes for Hungarian companies as well. Reporting under this directive is crucial for businesses and their stakeholders for several reasons:
- Regulatory compliance: Adhering to the CSRD is mandatory for companies operating within regulated markets. Compliance ensures the legality and stability of business operations.
- Enhanced transparency: Transparent communication of ESG factors increases the company's credibility, making it a more reliable business partner and an attractive investment opportunity. Transparency is especially significant for financial institutions, as sustainability risks can impact financing conditions and decisions.
- Improved competitiveness: Companies prioritizing sustainability will likely gain a market advantage as an increasing number of customers and investors favor such businesses.
- Future-proofing: Sustainability reporting enables companies to proactively address environmental and social challenges, minimize risks, and seize new business opportunities.
Sustainability reporting is a way for companies to meet new expectations and an opportunity to shape their future responsibly and contribute to developing a more sustainable economic system.
What are the benefits of sustainability reporting?
- Transparency and trust: A public sustainability report fosters trust among investors, customers, and other stakeholders.
- Competitive advantage: Incorporating sustainability into corporate strategy enhances market positioning and makes companies more appealing to potential business partners.
- Risk management: Sustainability reporting aids in identifying and mitigating long-term environmental and social risks that could affect the company's operations.
How do you prepare for reporting?
Companies should begin preparing for sustainability reporting under the CSRD immediately.
Preparation involves reviewing internal processes and systems, optimizing data collection and management, and incorporating sustainability considerations into corporate strategy.
Begin with a Double Materiality Analysis
A double materiality analysis is the first and most critical step in achieving CSRD compliance. This analysis examines sustainability issues from two perspectives:
How do environmental, social, and governance (ESG) factors affect the company's operations?
This includes issues such as:
- Risks associated with climate change, like operational disruptions due to extreme temperatures.
- Increased energy prices or raw material shortages.
- Regulatory changes that introduce new costs or obligations.
How does the company impact the environment and society?
This involves the effects of the company’s activities on:
- The climate through greenhouse gas emissions.
- The living conditions of workers within the supply chain.
- The well-being of local communities, for example, through water consumption or waste production.
A double materiality analysis helps companies understand internal operations and the broader impact across their value chain and stakeholder groups, ensuring that the most pertinent ESG issues are addressed.
This analysis provides a strong foundation for developing sustainability strategies and reports, allowing companies to focus on the issues that truly matter. It is a key step in CSRD compliance and essential for building long-term trust with stakeholders. CSRD megfelelésének egyik alapköve, és kulcsfontosságú az érintettekkel való hosszú távú bizalom kialakításában.