Lack of ESG reporting and the consequences for the company
As awareness of the impact of business activities on the environment, society, and corporate governance grows, so do the expectations of companies in terms of transparency and sustainability. One tool for assessing these aspects is ESG (Environmental, Social, Governance) reporting. The absence of such a report can have serious consequences for companies, both in Poland and internationally.
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ESG reporting obligation
Sustainability has become a critical issue for companies. According to the Corporate Sustainability Reporting Directive (CSRD) adopted by the European Union, all large companies and small and medium-sized enterprises, except micro-enterprises, have a non-financial reporting obligation. The ESG reporting requirement includes the collection of data on environmental issues, human rights, anti-corruption, and corporate governance. ESG reports must be submitted by listed companies and other companies that meet the criteria of company size, total assets, and net income.
Large public interest entities (with more than 500 employees, subject to the NFRD) are already required to report by January 1, 2025. Large companies (over 250 employees, not subject to the NFRD) will be subject one year later. Other companies will have a reporting deadline of January 1, 2027, starting in 2026.
What should every business owner know about the CSRD? Read THIS article.
Financial penalties for lack of a non-financial report
Companies covered by the CSRD will need to prepare for changes as there will be penalties for failure to report. Each country implementing the Directive is required to introduce penalties for inadequate reporting, including administrative fines, the amount of which will depend on the size of the company and the nature and frequency of the breaches.
Companies that fail to comply with the obligation to report non-financial data by the CSRD will be subject to financial penalties, the amount of which will be determined by each country. In Poland, the details of the sanctions will be known within 18 months of the implementation of the CSRD. Sustainability information will be part of the management report and will be treated as equal to financial information. Currently, failure to prepare a report or including unreliable data in the report is punishable by a fine, imprisonment for up to two years or both. The Ministry of Finance plans to amend the provisions of the Accounting Law to include penalties for sustainability reporting violations.
What are the sanctions for non-compliance with ESG regulations?
EU ESG regulations do not introduce direct administrative or criminal sanctions, but non-compliance may result in penalties under national regulations.
The entry into force of the Polish regulations implementing the EU Corporate Sustainability Reporting Directive (CSRD) will put non-financial data on an equal footing with financial data, meaning that the consequences of omitting or misrepresenting an ESG report will be much more severe.
What are the risks for Polish companies for not having a sustainability report?
In Poland, ESG reporting is regulated by the Accounting Act. Article 79 of this law requires non-financial reporting, and the consequence of failing to do so is a fine or even a restriction of freedom for up to two years. The fine can range from over one million zlotys to almost 30 million zlotys, depending on the company’s income. The amount of the fine is determined by the court.
The Financial Supervision Act empowers the Financial Supervision Commission (Komisja Nadzoru Finansowego, KNF) to enforce ESG regulations, such as the SFDR. In case of violations, the KNF may
- Order the cessation of activities that lead to violations,
- Require the removal of the board member responsible for the violation
- prohibit the provision of certain financial products, or impose fines.
The Accounting Act provides for fines or restriction of liberty for failure to post non-financial reporting documents on the website.
In addition, greenwashing activities are considered by the OCC to be a violation of the collective interests of consumers. The Chairman of the OCCP may order the cessation of such practices and impose a penalty of up to 10% of the entrepreneur’s annual turnover. Criminal provisions for falsifying ESG data are planned for the future.
What other member countries have approached the topic of penalties for lack of ESG?
In Germany, in addition to the implementation of the EU CSRD, the Supply Chain Due Diligence Act has already been in effect since the beginning of 2023. This means that the largest German companies will have to comply with a number of legal standards related to both human rights and environmental protection. Interestingly, these regulations also affect Polish entrepreneurs, as they apply not only to German companies but also to their direct and indirect suppliers.
Penalties provided for by German legislation can be very severe, up to half a million euros or 2% of turnover for companies with an annual turnover of more than 400 euros. To avoid financial losses, German companies must carefully review their supply chain. They can also require their suppliers to implement ESG.
The French government, on the other hand, has introduced penalties for non-compliance with CSRD requirements, including fines of up to €75,000 for various violations, with the additional threat of five years in prison.
Consequences of not reporting ESG
Reputation losses: Companies that fail to implement sustainability and report environmental impacts can experience serious image losses. Consumers are increasingly choosing products and services from socially and environmentally responsible companies, and the lack of an ESG report can negatively affect their perception of the brand.
Consumer and investor boycott: In the context of ESG reporting, a lack of sustainability transparency can lead to a boycott by consumers and investors, resulting in decreased sales of goods and difficulty raising capital.
Deterioration of business relationships: Insufficient commitment to non-financial reporting can deteriorate relationships with business partners, who increasingly expect their suppliers to comply with ESG standards. These companies may seek more responsible partners, affecting supply chain stability.
Declining stock values: Investors are increasingly incorporating sustainability data into their investment decisions. The lack of an ESG report can lead to a decline in share value, as companies that do not comply with ESG principles are seen as riskier investments.
Difficulty in obtaining financing: financial institutions, by the CSRD, require companies to report non-financial information. Companies that do not meet these requirements may face difficulties in obtaining loans and other forms of financing.
ESG implementation and its benefits
Implementing ESG is not only about meeting reporting obligations but also about monitoring progress in sustainability, respect for human rights, environmental protection, and climate change mitigation. Regular ESG reporting helps companies better manage risks, improve operational efficiency, and build trust among stakeholders.
First, regular ESG reporting helps companies better manage risks. Identifying and monitoring risks related to environmental, social, and governance aspects enables earlier detection of potential problems and appropriate responses. Second, ESG implementation leads to improved operational efficiency. By analyzing and optimizing processes, companies can reduce resource consumption, cut emissions, and reduce waste. Third, companies that apply ESG build trust among stakeholders. Transparency and honesty in reporting sustainability-related activities increase a company’s credibility in the eyes of customers, investors, business partners, and employees.
Companies have no choice - they must report ESG
New EY research shows, that boards should encourage management to treat sustainability as a key element of the business. They should also guide investment decisions so that capital is allocated to sustainability projects that not only deliver on environmental promises but also improve the company’s bottom line.
"Companies that do not engage in sustainability activities should expect to be disciplined by regulators to be more proactive on environmental, social, and ethical issues. This will prompt their boards to seek a credible business case and create an ambitious vision to strategically integrate ESG into the way they do business."
Summary
The lack of an ESG report can have serious consequences for companies, both in Poland and internationally. Financial penalties, loss of reputation, and deterioration of investor relations are just some of the potential losses, which is why it’s so important for companies to take ESG reporting seriously and provide accurate and transparent information about their environmental, social, and corporate governance activities.
The new obligations associated with the entry into force of the CSRD may cause concern for companies. The European Union’s regulations are primarily designed to ensure a sustainable and secure future. Climate change is happening here and now, and the only way to control it is to reduce the CO2 emissions (carbon footprint) generated by companies all around the world.
Achieving corporate carbon neutrality helps combat the climate crisis. The easiest way to get started on the path to carbon neutrality is to calculate your carbon footprint. If you need help, Plan Be Eco will help your company through the entire process. We offer a very intuitive tool that allows you to report on all 3 areas. Schedule a free consultation with an expert.
