Reporting ESG: What is it, who does it concern, when does it come, and how will it affect manufacturing companies?

ESG – an abbreviation that is increasingly talked about in business. Why should you not overlook it either? This article summarizes everything you need to know. We have prepared it in cooperation with the leading law firm Frank Bold Advokáti.

Environment (E), topics related to employees and society (S), and corporate governance (G) represent the main pillars of the sustainability framework. Companies in the EU will now have to include in their annual reports information on how they address these issues, along with specific figures. Regulation aims to stimulate ESG investments, which are expected to surpass conventional ones by 2025.

Companies that are already addressing ESG issues are better prepared for the economic transformation necessary in the face of climate change and other global crises. By managing their business sustainably, they also increase their ability to manage risks and address any negative impacts of their activities.

However, navigating ESG is challenging for companies and other market participants. Over the years, many standards have been developed focusing on sustainability reporting to varying extents (GRI, ISO standards, etc.). Therefore, the EU decided to harmonize sustainability reporting rules to make the information transparent and comparable so that customers, business partners, and investors in European markets can work with them. Already last year, the EU adopted a new directive, the Corporate Sustainability Reporting Directive (CSRD ), accompanied by detailed reporting standards.

We have summarized the main requirements of the upcoming regulation for you.

Over a thousand Czech companies will have the obligation to report ESG information

The new CSRD directive, approved by the European Parliament in November 2022, specifies when and to whom the new rules for disclosing sustainability information will apply. Over 50 thousand European companies that meet the directive’s requirements will have to disclose data on their energy and fuel consumption, employee engagement, or risk management. In the Czech Republic, currently over a thousand companies meet the criteria set by the directive. The majority of them are large enterprises.

The scope of information and data that companies will have to regularly disclose in their annual reports is defined by sustainability reporting standards, which will become a mandatory part of the CSRD directive after final approval.

The obligation to report ESG information according to the new standards will apply to a company:

• whose securities are traded on regulated stock markets (except for micro-enterprises);
• or which meets at least two of the following criteria:
  1. 250 or more employees,
  2. turnover of CZK 1 billion or more,
  3. assets in the balance sheet of CZK 500 million or more.

ESG reporting obligations will impact companies in several phases based on size

The CSRD directive sets the start of reporting obligations in four phases.

In the first phase from 2025, companies that were already affected by the previous NFRD directive for non-financial reporting – these are public interest entities (banks and financial institutions) and listed companies with more than 500 employees (e.g., ČEZ or Kofola in the Czech Republic) – will have to report.

Large companies will have reporting obligations from 2026, and small and medium-sized listed companies from 2027. From 2029, ESG information will also be reported by non-European groups with significant business in the EU. The relevant period for all disclosed information will be the previous calendar year.

What information should companies disclose in their ESG report?

Key data for ESG reporting depend on the sector in which the company operates. However, the most critical parts for companies generally include:

A) Climate – energy consumption and emissions

• Especially the company’s energy consumption and its energy mix (including the share of renewable sources and green hydrogen);

Examples of mandatory indicators according to the EU standard for climate change-related information reporting

• Final energy consumption in MWh, broken down by fuel; consumption of electricity, heat, steam, and cooling
• Composition of energy consumption in MWh and/or in percentages, broken down by renewable/non-renewable sources

Greenhouse gas emissions

• Absolute values of Scope 1 and 2 greenhouse gas emissions
  • Total carbon emissions Scope 1 – direct emissions (tCO2e)
  • Share limited by emissions trading systems (%)
  • Total carbon emissions Scope 2 – indirect emissions from energy (tCO2e, market-based)
• Total Scope 3 greenhouse gas emissions (tCO2e) categorized by material categories for Scope 3 – other indirect emissions (e.g., emissions related to purchased goods or sold products; goods transport, business trips, etc. by company type);

B) Employees and protection of their rights

• For example, workforce composition (contract type, diversity by job positions, vulnerable groups);
• gender pay gap;
• or established complaint mechanisms, provision of redress, and description of results.

C) Due diligence in sustainability and collaboration with suppliers

• Description of the process that the company has set up to identify negative impacts in value chains;
• description of the company’s activities to prevent or mitigate identified negative impacts;
• or description of stakeholder involvement in the due diligence process.

In the area of due diligence, the EU is currently discussing legislation that would require large companies and companies in risky sectors to implement due diligence processes and actively deal with negative impacts. To fulfill this obligation, companies must start setting up a corporate due diligence system.

D) Governance

• Description of corruption risks and corresponding measures to address them, political engagement of the company, ownership structure, or deadlines for payment of invoices for goods and services received.

Specifics for manufacturing companies regarding ESG reporting

Specifically, the Moravian-Silesian Region is home to many manufacturing companies or Czech branches of foreign manufacturing groups. Therefore, we have taken a closer look at the challenges that companies in this industry may face when reporting sustainability. However, ESG risks and material issues for a specific company depend on its business model and the materials it works with.

Carbon footprint

Manufacturing companies deal with processing various materials to produce products that they further sell to their customers or end consumers. The processing of materials for production takes place through technological processes such as shaping, welding, machining, or injection molding, which are energy-intensive. Therefore, a significant topic for manufacturing companies is the energy intensity of operations and the buildings where production takes place. Higher emissions are associated with energy consumption from non-renewable energy sources. Therefore, manufacturing companies should focus on reducing their carbon footprint, which originates from emissions, especially by increasing the consumption of energy from renewable sources.

Circularity

Circularity is also an important topic for manufacturing companies – describing the origin of the materials they use and handling the waste generated during their processing. The use of primary raw materials leads to the depletion of natural resources and increased emissions during their extraction, processing, and transportation. Therefore, crucial questions for manufacturing companies are recycling and reuse of waste.

Collaboration with suppliers

The setup of due diligence processes for collaboration with suppliers is related to the materials used. It serves as a means to identify, prevent, and mitigate environmental and human rights risks that may exist in supply chains. Risks associated with the extraction of wood, iron ores, and other minerals may include air and water pollution, loss of biodiversity, deforestation, soil degradation, violation of labor rights, corruption, conflict minerals, etc.

Safety and health protection in the workplace and employee rights

Finally, safety and health protection in the workplace and employee rights are crucial topics for manufacturing companies. Due to the increased scope of manual work and machine operation, there is an increased risk of workplace injuries at manufacturing companies. Employees should have the opportunity to report potential health and other risks in the workplace or non-compliance with adequate working conditions. Therefore, companies should have processes in place to prevent negative phenomena and address employee concerns if necessary.

Need advice on ESG or sustainability for companies?

The Moravian-Silesian Innovation Centre can help you. Are you dealing with changes in water, energy, circular economy, and ESG or technologies? In spring 2023, we are launching an Advisory Centre for Adaptation Technologies for small and medium-sized companies. We are happy to advise you on legislation, change projects, and feasibility studies.

Are you looking for new ways to save operating costs for your company? Do you care about the environment? Do you want to be trendy and gain a competitive advantage? Prepare for legislative changes? Do you want to know your carbon footprint? ENVI Scan will help you.