New and expanded obligations regarding ESG reporting and disclosure

Draft law in the Sejm

On October 10, 2024, the government submitted to the Sejm a draft law amending the Accounting Act, the Act on Statutory Auditors, Audit Firms, and Public Oversight, as well as certain other acts.

The purpose of this law is to implement the provisions of the European Union’s Corporate Sustainability Reporting Directive (CSRD).

According to the draft law, certain entities will be required to annually provide, in a separate section of the management report, the information necessary to understand the entity’s impact on sustainability matters and to comprehend how sustainability issues affect the entity’s development, performance, and financial situation, referred to as “sustainability reporting.”

It is worth noting that the Non-Financial Reporting Directive (NFRD) was previously in force, and its provisions were incorporated into the Polish Accounting Act. At that time, an obligation to disclose non-financial information was imposed on large public interest entities, which employed an average of more than 500 full-time employees annually, and whose balance sheet total at the end of the financial year exceeded PLN 85,000,000 or whose net revenue from the sale of goods and products for the financial year exceeded PLN 170,000,000. These entities (which were and still are relatively few in number) were first required to report non-financial information in 2018, disclosing data for the year 2017.

However, the draft of the new Act, which is based on the Corporate Sustainability Reporting Directive (CSRD) (replacing the NFRD), imposes more detailed requirements and has a broader scope of application.

Who will the new obligations apply to?

Firstly, it should be noted that the new regulations related to sustainability will apply to entities that are:

• joint-stock companies;
• partnerships limited by shares;
• general partnerships or limited partnerships, all of whose partners bearing unlimited liability are joint-stock companies, partnerships limited by shares, or entities from other countries with a similar legal form;
• insurance companies and reinsurance companies;
• national banks, branches of credit institutions, or branches of foreign banks.

Entities obligated to present information related to sustainability reporting in a separate section of the management report will include:

• small entities that are issuers of securities admitted to trading on one of the regulated markets of the European Economic Area;
• medium-sized entities that are issuers of securities admitted to trading on one of the regulated markets of the European Economic Area;
• all large entities.

Moreover, entities that are:

• medium-sized entities that are issuers of securities admitted to trading on one of the regulated markets of the European Economic Area;
• small entities that are issuers of securities admitted to trading on one of the regulated markets of the European Economic Area;
• small and non-complex institutions within the meaning of the EU regulation on prudential requirements for credit institutions;
• internal insurance companies as defined in the Insurance and Reinsurance Activities Act;
• internal reinsurance companies as defined in the Insurance and Reinsurance Activities Act;

– may prepare sustainability reports in a limited statutory scope, referred to as “simplified sustainability reporting.”

In addition to the standard and simplified forms of sustainability reporting, there will also be “group sustainability reporting” relating to the activities of the entire capital group, which will be required to be prepared by the parent entity in a large group.

The draft law also provides for additional exemptions from the obligation to prepare sustainability reports under certain conditions, which applies, for instance, to subsidiaries of a parent entity headquartered or managed within the territory of the European Economic Area, including lower-tier parent entities, provided that, among other things, information regarding the subsidiary and its subsidiaries is included in the group’s sustainability reporting, and the group report is submitted to the appropriate court register, etc.

It is worth noting that the law will update the criteria for determining the size of an entity.

What will be the components of the sustainability report?

The sustainability report (in its non-simplified version and not concerning the group) must include, among other things:

1. a concise description of the entity’s business model and business strategy, including a description of:

• the resilience of the entity’s business model and business strategy to risks related to sustainability issues;
• the opportunities for the entity related to sustainability issues;
• the entity’s plans, including implementing actions and related financial and investment plans aimed at ensuring that the entity’s business model and business strategy consider:

• how the interests of the entity’s stakeholders and the entity’s impact on sustainability issues have been taken into account in the entity’s business model and business strategy;
• the method of implementing the entity’s strategy with respect to sustainability issues;

2. a description of the goals set by the entity regarding sustainability issues, including absolute greenhouse gas emission reduction targets at least for the years 2030 and 2050, a description of the progress made by the entity towards achieving these goals, and a statement as to whether the entity’s environmental-related goals are based on decisive scientific evidence;

3. a description of the role of the entity’s manager and the members of the supervisory board or other supervisory body regarding sustainability issues, as well as their expertise and skills related to fulfilling this role or the access of the entity’s manager and the members of the supervisory board or other supervisory body to such expertise and skills;

4. a description of the entity’s policies regarding sustainability issues;

5. information about the existence of incentive systems related to sustainability offered to the entity’s manager and members of the supervisory board or other supervisory body;

6. a description of:

• the due diligence process implemented by the entity concerning sustainability issues, including the due diligence process implemented in accordance with EU law governing the due diligence processes of entities;
• the most significant actual or potential adverse impacts associated with the entity’s own activities and its value chain, including its products and services, business relationships, and supply chain, actions taken to identify and monitor these impacts, as well as other adverse impacts that the entity is obligated to identify in accordance with other EU law regarding the due diligence process of entities;
• any actions taken by the entity as part of the due diligence process to prevent, mitigate, address, or eliminate actual or potential adverse impacts and the outcome of those actions;

7. a description of the most significant risks to the entity regarding sustainability issues, including a description of the main types of the entity’s dependencies on these issues and how the entity manages these risks;

8. indicators relating to the information referred to in points 1–7 above.

The information covered by sustainability reporting is presented in short-, medium-, and long-term perspectives, as specified in the sustainability reporting standards or the sustainability reporting standards for small and medium-sized entities.

The entity also discloses in its sustainability reporting the materiality assessment process it conducted to identify the information included in such reporting.

Additionally, the draft Act provides for supplementary elements, exemptions, and specifies the conditions under which these supplementary elements or exemptions will apply. Furthermore, different elements will be required in the case of simplified reports and reports prepared within a capital group.

From when will the new obligations have to be fulfilled?

The obligations provided for in the draft Act will apply for the first time to sustainability reporting or sustainability reporting for a capital group prepared for the financial year commencing:

1. after December 31, 2023 (thus, in principle, the obligation will pertain to the year 2024 and will be executed in 2025) in the case of:

• large entities whose balance sheet total at the end of the financial year and net revenues from the sale of goods and products for the financial year amount to PLN 110,000,000 and PLN 220,000,000, respectively;
• parent entities of large groups whose balance sheet total at the end of the financial year and net revenues from the sale of goods and products for the financial year amount to PLN 132,000,000 and PLN 264,000,000, respectively;

2. after December 31, 2024 (thus, in principle, the obligation will pertain to the year 2025 and will be executed in 2026) in the case of:

• large entities other than those specified in point 1);
• parent entities of large groups other than those specified in point 1);
• the National Economy Bank (Bank Gospodarstwa Krajowego);

3. after December 31, 2025 (thus, in principle, the obligation will pertain to the year 2026 and will be executed in 2027) in the case of:

• medium-sized entities that are issuers of securities admitted to trading on one of the regulated markets of the European Economic Area;
• small entities that are issuers of securities admitted to trading on one of the regulated markets of the European Economic Area;
• small and non-complex institutions defined in the EU regulation on prudential requirements for credit institutions, provided that they are:

• internal insurance companies as defined by the Insurance and Reinsurance Activity Act and internal reinsurance companies as defined by that act, provided that they are:

4. after December 31, 2027 (thus, in principle, the obligation will pertain to the year 2028 and will be executed in 2029) in the case of:

• dependent entities whose highest-level parent entity is based or has its management seat outside the European Economic Area (including where there is no statutory exclusion and subject to meeting additional specified statutory conditions), or
• branches within the meaning of the Act on the Principles of Participation of Foreign Entrepreneurs (including upon meeting additional specified statutory conditions).

Summary

We will still have to wait for the adoption and entry into force of the Act (despite the deadline for implementing the relevant directive having passed on 7 July 2024). However, we are keenly awaiting the manner and scope in which the new ESG obligations will be implemented, including the assessment and reporting of the potential impact of organizations on society and the environment, as well as the adoption and management of sustainability strategies in real business contexts.

According to the explanatory memorandum to the draft Act, the law will affect approximately 3,460 large entities, around 960 parent companies of large capital groups, approximately 112 small and medium-sized entities admitted to trading on a regulated market, and several dozen other entities.

Thus, the new reporting obligation will cover a fairly large group of entities. In light of this, we look forward with great interest to the adoption of the Act. We also recommend that businesses falling within the aforementioned groups begin preparing to properly comply with the described obligations, because sooner or later the new regulations will be implemented and come into force.