New corporate obligation: ESG reporting or sustainability report

The monitoring of the impact of business on the environment (E), employees and society (S) as well as topics related to management (G) are being included in Czech legislation. Companies will now prepare a so-called sustainability report. In 2024, this obligation will affect only the largest companies, but will gradually apply to other companies. Find out who is affected and what the ESG report should contain.

Who must publish a sustainability report?

Carbon footprint and emissions, waste management, product safety, working conditions of employees or the fight against corruption are all topics related to sustainability and ESG. Large corporations have been reporting on them for several years under theNon-Financial Reporting Directive (NFRD). The NFRD mandates the publication of sustainability reports for financial institutions and listed companies with more than 500 employees. This is not a new development - responsible business practices are already being addressed by investors and banks, for example.

However, under the new European CSRD (Corporate Sustainability Reporting Directive), other companies will also have to produce ESG reports. The CSRD was adopted by the European Parliament and the EU Council in December 2022 and will be implemented in the Czech Accounting Act from 2024.

It is estimated that approximately 1,100 Czech companies will report, but not every company will be subject to this obligation in 2024. Mandatory ESG reporting is being phased in, depending on the size of the company, in several stages:

• From 2024: Companies that have so far published sustainability reports on the basis of the original NFRD. This includes more than 20 of the largest Czech companies (e.g. CEZ, Škoda Auto, Kofola or Česká spořitelna).
• From 2025: Other companies that meet two of the three conditions above.
• From 2026: Small and medium-sized companies traded on the stock exchange.

The ESG report will be part of the annual report you publish as part of your financial statements. You will prepare it backwards for the previous calendar year - so if you have, for example, 300 employees and assets worth EUR 30 million, you must prepare your first sustainability report in 2026 (with information for 2025).

Content of the sustainability report

The aim of sustainability reports is for companies to be transparent about ESG impacts, risks and opportunities. The reports will focus on both the impact of external factors on their business and how the company itself impacts the environment.

The CSRD seeks to standardise the format of ESG reports so that businesses are clear about what information to report and what they need to know from their business partners. Therefore, standards have been developed to serve as the content structure for sustainability reports. They have been developed by the European Advisory Group EFRAG and are called ESRS (European Sustainability Reporting Standards). Their summary can be found in the European Commission Regulation.

ESRS standards include:

• two general areas on sustainability, covering e.g. information on management processes and ESG strategy, the company's business model or supply chain;
• ten themes grouped according to the ESG pillars.

ESG report content (sustainability report)

If you are subject to mandatory reporting, you must always report general information. However, you can omit certain other ESG areas from the reports if you can demonstrate that they are not relevant to your business. Legislators take into account that, for example, a service company deals with different issues than a manufacturing company.

In order to determine and be able to justify which ESG data to disclose and which not to disclose, you need to conduct a materiality analysis before you compile the report. This is the process of assessing the materiality of ESG areas for your company. If, based on the analysis, you omit certain topics, you will then explain why you made this decision in the report - describing the materiality assessment process.

Why is ESG worth addressing?

• ESG factors affect the performance and value of the business. Think of how companies have had their reputations damaged by cases involving environmental destruction or poor working conditions. By regularly assessing risks and impacts, you can prevent such problems.
• Sustainabilityis of interest to the public and financial partners. A responsible approach to business increases your competitiveness. Customers, existing and potential employees, the media, investors, banks and other companies are all concerned. It can help you in business negotiations, with branding and building trust and loyalty with clients and employees.
• You can't avoid it. Regulations are moving towards an increasing emphasis on ESG. When mandatory reporting starts to affect you, you have no choice but to process it.

You probably already address some ESG aspects in your company, just not formally. So you can use the new obligation as an opportunity to identify areas for improvement. But expect that the analysis, process setup and actual report preparation will take time, and don't delay.

Do you own a small business and the mandatory report does not apply to you? You may well be required to provide sustainability data by suppliers or customers, so ESG will eventually affect you too, although not directly. However, if you are able to deliver the information, you will gain a competitive advantage.