How to prepare for a new law that will be a major change for companies

The clock is literally ticking

A new EU directive will require a number of companies to report on their sustainability efforts starting next year, and for some, it could be a significant challenge, especially if they haven't already started preparing.

ESG: Companies, both large and small, are facing a significant task as it becomes mandatory for large corporations to report on their sustainable practices beginning next year. This will also impact small and medium-sized enterprises through what's known as ESG reporting.

Although the ESG directive initially applies only to publicly traded companies with more than 500 employees, as well as financial institutions, mortgage credit institutions, and insurance companies, small and medium-sized enterprises will face new reporting requirements this year and next. The reason is that larger companies, due to the legislation, are starting to look into their supply chains and analyze which of their subcontractors can provide the necessary data.

EU companies are required to report on ESG matters

The EU has adopted a directive called the Corporate Sustainability Reporting Directive, which mandates that larger companies report on sustainability as part of the management report in their annual financial statements. ESG stands for Environment, Social, and Governance, which means companies must report on their environmental impact, contributions to a fairer society, and good corporate governance, including ethics, leadership, decision-making, and reporting.

From 2024, the directive will apply to all publicly traded companies with more than 500 employees, financial institutions, mortgage credit institutions, and insurance companies. Companies, both publicly traded and non-publicly traded, with more than 250 employees will be subject to the requirements starting from the fiscal year 2025, while publicly traded companies with fewer than 250 employees must comply with the requirements from the fiscal year 2026, except for micro-companies.

The directive requires companies to report on various aspects of their value chains, including CO2 emissions, where companies must calculate emissions for the most important elements throughout their value chains. Smaller companies should, therefore, expect that their customers and suppliers will demand information on emissions and generally take a greater interest in the sustainability efforts of the company. This can also involve wastewater emissions, employee conditions, and biodiversity.

In other words, a significant upheaval is awaiting a majority of companies, and this is being felt by companies like Solteq and Ecovadis, which provide advice on ESG among other services.

A set of recommendations on how to prepare for the new ESG reporting requirements

Solteq and Ecovadis have together developed a set of recommendations on how to best prepare for the new reporting requirements, which they see as having several benefits.

"I believe that we can all hopefully benefit from more and more companies being forced to report on ESG. There's an old saying that you can't change what you can't measure. But if people start measuring ESG and evaluating the reports, they are, by definition, hopefully driving a positive change spiral. I'm thinking in terms of reducing emissions, ensuring people are treated better, getting a fairer wage, and so on," says Robert Ekqvist, a strategic enterprise account executive at Ecovadis.

Good advice according to consultant Janne Huovilainen from Solteq, a Nordic provider of IT services and software solutions with offices in Aarhus, the first thing a company should do is to familiarize itself with the topic.

"You should start by finding out what the reporting requirements are. There is plenty of public information, but if you look at the EU website, it is formulated in a difficult-to-understand language. Therefore, for some, it may be necessary to use external experts," he says, adding, "Step number two is to start looking at your value chain. Once you know what to report, you should start thinking about how to obtain the relevant data from suppliers. For some, it is not easy to obtain such data."

The ESG consultant emphasizes the importance of establishing a process afterward.

"You should be able to show where the data comes from and what you have done with the data being reported. This entire data management process should be transparent and auditable. When it comes to reporting, a good rule of thumb is that 20% of the work consists of actually preparing the report, and the remaining 80% is about integrating data and managing all the information you need to report. So, reporting is the end result of all the hard work that comes before it," he says.

Robert Ekqvist from Ecovadis adds that it is important to repeat the process regularly.

"So for companies that haven't started yet, there is still time, but the clock is literally ticking. The sooner you shift from being reactive to proactive, the more likely you are to get things done in a credible and accurate manner," he says.

A clear competitive advantage

While the task of ESG reporting may give many companies a headache, there is much to be positive about in the new EU directive.

Robert Ekqvist explains that companies can turn reporting into a clear competitive advantage. And he is not just talking about companies in sustainable industries.

"If you look at companies that are not inherently sustainable or in industries that are not, it can be a competitive advantage or a differentiating factor for them to say, 'Yes, we may be very polluting, but we have reduced our emissions by the highest percentage in a year or something like that.' In this way, the directive provides an opportunity to push all industries in a more sustainable direction," he says.

ESG stands for Environment, Social, and Governance, and reporting in these three categories will be required in annual reports for some companies starting in 2024.

Solteq & EcoVadis was interviewed by: Kristoffer Hanberg Clemmensen, Erhverv+

Interested in finding out more?

Check out our recent webinar with EcoVadis and Informatica on Turning ESG Compliance into a Business Benefit. The webinar addresses key issues for companies subject to the CSRD: