The 5 most common myths about ESG reporting and standards

Mandatory ESG reporting is a topic that more and more Czech companies are addressing. So far, it applies directly only to large companies, but in the coming years it will affect a number of medium and smaller companies. Either because they will seek "cheaper" money from banks or investors or because they will be in the supply chain of companies that have this obligation.

What are the most common myths about ESG reporting? We pick out the most common ones and explain how it really is.

1. Myth: The CSRD requires companies to reduce emissions and other sustainability activities

Truth: In reality, companies just need to communicate their goals in these areas

The European Sustainability Reporting Directive only aims at transparency, it does not prescribe specific actions for companies. Thus, companies are not obliged to improve in ESG (Environmental, Social and Governance), but only to disclose information according to European standards that are relevant for the functioning of sustainable finance and the reduction of greenwashing.

Nor do companies need to adopt specific targets, policies and measures. The standards prescribe how firms should communicate their objectives for major topics, but a firm can simply state that it has not adopted any objective.

So some of the information reported (for example, on corporate governance and strategy) is based on what is material to your business in terms of impact and risk. To make it clear how your company has identified material topics, you are required by the standards to describe an analysis of the risks you face from climate transformation and an analysis of the material impacts on people and the environment in your supply chain.

The people who will assess how you are doing in which ESG area and what targets you are setting will in fact be investors, banks or business partners who may decide to provide funding or further cooperation based on your reports.

2. Myth: Mandatory reporting will be too costly for companies and will reduce their competitiveness

Truth: Transparent company surveys show the opposite

EFRAG's latest cost-benefit analysis together with the CSRD impact assessment shows that the additional cost of mandatory ESG reporting will be very small in relation to the overall cost and will be proportional to the size of the company.

According to the latest study, the majority of companies surveyed expect that reporting to EU standards "will lead to better coordination and cooperation between companies in the value chain" and that "in practice, more specific guidelines for data collection will reduce the administrative costs of reporting."

At the same time, most of the companies included in the cost-benefit analysis believe that disclosing information according to the standards will "give them a competitive advantage", specifically highlighting "a greater likelihood of winning tenders and tenders, greater attractiveness to new customers and/or easier access to finance".

For example, Romanian research from 2019 shows that good sustainability reporting leads to better business growth.

3. Myth: European standards further complicate the fragmented ESG reporting system

Truth: Actually, it's just the opposite and there is a unification

The European standards are aligned with all major international initiatives, including the TCFD, GRI, emerging international standards under IFRS and UN and OECD standards for sustainability due diligence. The EU standards are thus a single tool for reporting on a company's financial and environmental impacts (the so-called double materiality principle)

Therefore, large corporations that already report under GRI or TCFD do not need to switch to a completely different system with which they would have no experience at all.

4. ESG reporting is important only for large companies, most SMEs do not need to deal with it

Truth: ESG will certainly affect small and medium-sized companies in supply chains and those traded on the stock exchange

Large companies are already increasingly demanding that SMEs provide them with ESG data such as Scope 1 and 2 emissions or information on the origin of materials and their processing. This applies to smaller companies that are part of the supply chain of large companies with reporting obligations. Companies that are able to provide this data will gain an advantage with customers. In terms of legislation, only listed SMEs will have to report.

5. Myth: Disclosure under EU standards will not apply to most companies for several years

Truth: Mandatory reporting will be phased in from 2024 to 2026, depending on the size and type of company.

Originally, the CSRD was supposed to be effective by 2023 for all large companies in the EU, but the final directive postponed the date by another year and proposed a phased introduction of reporting:

• 2024 for large listed companies with more than 500 employees;
• 2025 for other large listed and unlisted companies with more than 250 employees;
• 2026 for listed small and medium-sized companies with a two-year exemption period.

However, it is advantageous for companies to start reporting before they are required to do so by legislation. We know from our experience that collecting data and setting up processes takes a lot of time for companies. The first report doesn't have to be perfect, it mainly serves companies to identify gaps and improve processes for data collection.

Moreover, it is expected that more than half a trillion euros will be mobilised in the coming years to achieve the 2030 climate and environmental goals. Countries and companies that wait to introduce ESG reporting will put themselves at a disadvantage in accessing sustainable finance.

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