ESG initiatives are rapidly becoming the status quo in the business world. Most corporations have some kind of sustainability measures in place in at least one of the three pillars – environmental, social, or governance. The majority of businesses in Bulgaria currently implement ESG projects voluntarily, indicating that stakeholders are not legally required to, for instance, incorporate climate mitigation and social responsibility initiatives into their organizations. But ESG trends aren’t going unnoticed by the regulators and ESG is gradually transforming into a compliance matter. However, beyond compliance, ESG lays the foundation for a competitive corporate strategy, positive climate action, and the discovery of new business opportunities.
ESG Reporting Requirements
Many of the recent regulatory initiatives at the EU and national levels are aimed at encouraging capital allocation to sustainable investment. Thus, investors need a clear framework to screen ESG-related information and weed out companies that are all talk and no do. This issue is addressed by the proposed Corporate Sustainability Reporting Directive (CSRD) and Regulation (EU) 2020/852 on the establishment of a framework to facilitate sustainable investment (Taxonomy Regulation).
The CSRD extends the scope for mandatory non-financial reporting to all listed companies on EU-regulated markets and all companies that exceed at least two of the following: (1) annual turnover of EUR 40 million; (2) balance sheet total of EUR 20 million; or (3) 250 employees on average per year. It introduces an obligation for external assurance of the reports following applicable auditing standards. The CSRD will also require reporting specific information on sustainability matters as well as the role of management toward sustainability targets. Companies will need to gather quantitative and qualitative data to demonstrate and prove progress. Therefore, obligated entities need to prepare for such reporting in advance, especially in the case of large multinational companies where reporting obligations will have to be managed in parallel in different jurisdictions, including outside the EU. As the reports will be much more data-driven, corporations will need to establish internal processes for the collection and analysis of the necessary data. It is expected that the first reports will need to be submitted in 2024 for the 2023 financial year. Once the CSRD is adopted, we expect its provisions will be replicated in Bulgarian legislation without change.
The Taxonomy Regulation focuses on the environmental aspect of ESG and defines sustainable activities based on six environmental objectives. It requires the disclosure of key performance indicators such as the proportion of the company’s turnover accrued from environmentally sustainable activities. Overall, the Taxonomy Regulation aims to prevent greenwashing by defining technical and measurable standards for a sustainable business and Bulgarian companies will have to swiftly adjust their policies to it. Currently, greenwashing may trigger liability under Bulgarian law for misleading advertisements or unfair commercial practices applied to consumers.
Risk Mitigation Strategy
Although the above-mentioned legislation may seem like yet another administrative burden, the mere reporting requirements are not the heart of ESG regulations. The goal for each director should be strategic planning and the adoption of risk mitigation policies for all ESG-related risks. The risks in question may seem distant and directors tend to prioritize more pressing matters over climate goals set for 2050. However, such risks can strike suddenly and the unprepared may fall behind. No company is immune to increasing consumer pressure looking for green products or reputational damage arising from poor employee satisfaction or a lack of environmental awareness.
Bulgarian companies have to recognize the growing emphasis on ESG standards and legislation, which will become crucial for their global competitiveness in the near future. A good starting point for the risk mitigation strategy of every company is the revision of all corporate policies on ESG or their creation if overlooked in the past. These may include environmental measures such as going paperless, limiting waste, and improving the energy efficiency of buildings and processes. Further, amendments to contractual terms might be required to ensure that business partners share the same environmental and social values. A default on contractual ESG obligations or misleading disclosures may be caused not only by the company’s actions but also through association with questionable clients and suppliers. Directors need to be particularly careful with inaccurate disclosures to state bodies as, under Bulgarian law, they are criminally liable for them.
By Stefana Tsekova, Partner, and Dimitar Kairakov, Senior Associate, Schoenherr