Non-financial reporting - Not just relevant for large corporations

The value of a company can no longer be represented purely by financial metrics. Innovative strength, employee satisfaction, the consumption of natural resources or social responsibility influence a company's long-term success and are also reflected in financial metrics. Investors or customers are increasingly valuing ecological or social concerns in their investment or purchasing decisions. The legislature and the EU also see these topics as a new growth strategy within the framework of the "Green Deal" and aim to make the Union a modern, resource-efficient, and competitive economy without net greenhouse gas emissions by 2050. Consequently, non-financial reporting (or sustainability reporting) for companies is becoming ever more relevant, and the regulations governing it are becoming ever more extensive.

Legal provisions

In Austrian company law, large corporations have already been required to provide an analysis of key non-financial performance indicators, including information on environmental and employee matters, as part of their management report. Similar requirements already existed in other European countries. From the EU's perspective, however, these requirements had only been inadequately implemented in practice. Furthermore, there was a lack of uniform quality standards and minimum requirements for adequate sustainability reporting. This made it difficult for investors, customers, and also a broader public to compare non-financial information or to trust its reliability.

Non-Financial Reporting Directive (NFRD)

The EU's NFRD (Directive 2014/95/EU) and the resulting "Law on the Improvement of Sustainability and Diversity (NaDiVeG)" obliged certain large companies in Austria to also report on non-financial aspects and diversity-related information in their annual financial statements and management reports from 2017 onwards.

Who is affected?

The directive covers large undertakings that are also undertakings subject to public interest, and employ more than 500 employees on average during the financial year. Essentially, these are companies oriented towards the capital market, or credit institutions and insurance companies, numbering around 120 in Austria.

What needs to be reported?

A non-financial statement must include information on the business result, the course of business, the company's situation, and the impact of its activities. These details must also pertain to the following sustainability topics:

• Environmental, social and employee concerns,
• on respect for human rights and
• on the fight against corruption and bribery.

The information must include a description of the business model. Furthermore, a presentation of the concepts and measures regarding sustainability issues, including the resulting risks, is required. In addition, large public limited companies are required to supplement the Corporate Governance Report with a diversity concept. Companies were able to publish the information as part of the annual financial report or as a separate report.

With the implementation of the NFRD in the member states, criticism quickly arose. Firstly, the number of affected companies was deemed too low. Secondly, the submitted reports showed deficiencies in terms of completeness, comparability, and reliability.

Corporate Sustainability Reporting Directive (CSRD)

The EU Commission has revised the NFRD and published the future CSRD (Directive 2022/2464/EU) in December 2022. The CSRD supplements reporting standards and auditing obligations, and also significantly expands the circle of companies required to report. Non-financial reporting should align with the goals of the EU Action Plan for Financing Sustainable Development be brought into harmony, and Capital flows directed towards a "green" economy.

Who is affected?

From now on, the reporting obligation applies to so-called "large corporations". These are all companies that meet at least two of the three size criteria:

• Total assets over €20 million.,
• Net sales revenue exceeding €40 million,
• average number of employees exceeding 250 during the financial year.

Furthermore, capital market-oriented small and medium-sized enterprises "SMEs" are also included. However, a separate, proportionate standard is to be developed for these and they will only be required to comply three years later. At the group level, it is also to be based on the existence of a "large group", whereby simplifications may be possible within reporting group structures. The directive also provides that companies based outside the EU are covered by the reporting obligation under certain conditions. This applies to

• Third-country companies with a turnover of €150 million in the EU,
• whose subsidiaries meet the above size criteria or
• whose branches achieve more than €40 million in turnover.
• Third-country undertakings listed on a regulated capital market in the EU.

When does the reporting obligation apply?

The reporting requirements of the CSRD will initially apply to a limited circle of companies for financial years commencing on or after 1 January 2024, and this circle will then be successively expanded.

• from 2025 for companies already subject to the NFRD (reporting year 2024);
• 2026 for large undertakings not currently subject to the NFRD (reporting year 2025);
• 2027 for capital market-oriented SMEs and companies from third countries (reporting year 2026) with the possibility of deferral until 2028;
• 2028 for companies from third countries (reporting year 2029).

This means that around 2,000 companies in Austria will have to draw up a sustainability report from 2025. Throughout the EU, the number of companies required to report will grow from around 11,000 to approximately 49,000.

What needs to be reported?

The CSRD aims to close existing gaps in reporting regulations and expand sustainability reporting overall. The goal is to increase the accountability of European companies on sustainability matters and to introduce mandatory reporting standards at the EU level for the first time. In terms of content, the CSRD is oriented towards ESG logic. This means that key figures from the Environmental, Social, and Governance areas must be published, as well as key figures on EU Taxonomy (Classification of sustainable economic activities). Furthermore, disclosure obligations are based on the principle of double materiality. Under this principle, companies are obliged to report on both the impact of their own business operations on people and the environment, and on the impact of sustainability aspects on the company.

I am not affected - am I affected? CSRD reporting obligation as an opportunity for SMEs

SMEs (unless capital market-oriented) are exempt from the obligation of sustainability reporting under the CSRD. However, the new regulations can also have a major impact on such companies. Many small companies already voluntarily prepare a sustainability report, having recognised that this can improve their reputation. Customers and potential employees are increasingly paying attention to sustainability. They want to know how a company impacts its environment, meaning how it balances social, ecological, and economic concerns. Furthermore, it offers the opportunity to differentiate oneself from competitors in the industry. In the future, reporting will increasingly be required as part of tenders, funding applications, or existing business contracts, even more so than before. The need for transparency is not limited to company-specific aspects; the entire value chain needs to be mapped. Therefore, many large (reporting-obliged) companies will, in the future, impose their own standards on suppliers and contractual partners.

The new mandatory sustainability reporting also brings a considerable amount of effort for small and medium-sized enterprises. In addition to the formal requirements that must be met, engaging with the topic also helps to fundamentally consider how sustainability is practised within the company and how one wishes to position themselves in this regard. This, in turn, can be an opportunity for SMEs.

Picture: © Adobe Stock - Kalawin