How to implement ESG principles in company policy

ESG factors (Environmental, Social and Governance) are becoming an essential part of modern business and legislation. With increasing demands for sustainability, transparency and accountability, European legislation introduces new obligations for companies to disclose information on the environmental, social and internal governance impacts of their activities. ESG factors affect not only the operation of companies themselves, but also their perception by the public and investors. A high rating in key areas will undoubtedly open up access to better credit conditions and investment for companies, which can have a significant impact on their market position and competitiveness. This article offers an overview of the obligations and recommendations for companies on how they can prepare for the new requirements. At the same time, there is no shortage of mention of possible sanctions for those who fail to comply with the EU standards.

The purpose of the ESG concept is a responsible and sustainable approach to business. The active integration of ESG principles into corporate strategies and management can significantly influence the selection of suppliers or, for example, a company's position in a bank loan application. Increasingly, it will depend on a company's value beliefs and its contribution to reducing the impact of climate change and minimising negative impacts within their economic activities (minimum emissions, reducing carbon footprints, active approach to environmental protection, efficient use of energy, waste separation and recycling, but also corporate culture including work safety, creating an inclusive non-discriminatory environment, the way the company is run including ethical values, etc.).

What is the legal framework for ESG?

The legal framework is governed by the European CSRD (Corporate Sustainability Reporting Directive), which was adopted by the European Parliament and the Council of the EU in 2022. Under this directive, companies are required to disclose detailed information on the ESG aspects of their business. In 2024, the directive will be implemented in the Czech Accounting Act, with all large companies with more than 500 employees and those that are listed on the stock exchange being required to report.

These companies are already required to submit comprehensive reports containing information on their environmental performance, social and labour practices and internal governance. The report will be part of the annual report that the company publishes as part of its financial statements going back over the previous calendar year. The Taxonomy Regulation (Regulation 2020/852 of the European Parliament and of the Council), which defines the criteria that can be considered sustainable or responsible, is relevant to the Czech environment.

From 2024, companies that have so far published sustainability reports under the original NFRD will be required to publish the report. From 2025, this obligation will also apply to companies that meet at least two of the following conditions: i) more than 250 employees; ii) annual net turnover above EUR 50 million; iii) value of assets above EUR 25 million. From 2026, small and medium-sized listed companies will also be required to report. So, if you are a company with 350 employees and assets worth €30m, you will be required to submit your first sustainability report in 2026 with data and information for 2025!

So what are the recommendations for companies to prepare for ESG reporting? Since companies will have to prepare their sustainability reports according to uniform standards (standards developed by the European Advisory Group EFRAG under the acronym ESRS - European Sustainability Reporting Standards), we recommend seeking advice from experts who can help companies understand their obligations under the legislation and application in practice. Developing comprehensive ESG strategies and policies can help companies not only meet legislative requirements, but improve overall sustainability and efficiency. It is also worth investing in ESG training for employees and management.

The company should ensure that the sustainability report is a separate section of the annual report and includes all mandatory sections, such as a description of the business model, strategy towards sustainability risks, plans and measures to achieve the set objectives. It should also clearly describe how the company's activities affect the ESG principles and, in turn, how the implementation of these principles affects its development, performance and market position.

This includes an analysis of the risks and opportunities associated with environmental, social and human rights aspects, including governance and anti-corruption policies. The company should also specify its short, medium and long-term sustainability goals, a description of progress made and how the company is meeting the goals. The monitoring of legislative developments should not be omitted, which has a positive impact in responding to possible changes or extensions of obligations. Last but not least, I recommend that companies maintain an open dialogue with employee representatives and other stakeholders on ESG-related topics.

What are the risks of non-compliance with ESG?

Failure to comply with the legislative requirements can lead to serious penalties, including fines, which can have a negative impact on a company's financial health. In addition to financial penalties, reputational damage can occur, which can have a negative impact on relationships with investors, customers and the general public and on the overall perception of the company. Companies should therefore take these obligations seriously and approach them proactively to avoid negative consequences.

Finally, it should be noted that specific sanctions are not defined in the CSRD and it will thus be up to the national legal systems of each Member State to establish a sanction mechanism for failure to comply with the obligation to disclose sustainability information. Possible types of sanctions (de lege ferenda) could be fines, disclosure of non-compliance with ESG reporting obligations, various forms of restrictions on business activities or even prohibition from participating in public procurement.