In the last few days, there have been frequent reports that companies in Serbia are required, as of February 1st, to report on non-financial data, in accordance with European Union directives, related to corporate governance, social responsibility, and environmental protection. 

Non-financial reporting is nothing new in the Republic of Serbia; amendments to the Accounting Law that came into force at the beginning of 2020 prescribe the obligation of non-financial reporting for large legal entities that are public interest entities and whose balance sheet date exceeds the criterion of an average number of 500 employees during the business year. 

By the opinion of the Ministry of Finance No. 011-00-00690/2020 dated November 2, 2020, this obligation applies to the category of large and medium-sized legal entities. All public companies, or companies preparing to become public, have the obligation to prepare corporate governance reports – the legislator’s intention was to align this law with relevant EU regulations. 

Considering the new EU directives, the situation is changing, and companies will have to take into account ESG standards. 

What are ESG standards and ESG reporting? 

ESG standards are a collective term for the impact of business on the environment, social environment, and corporate governance. 

The ESG concept consists of 3 components – Environmental, Social, and Governance. The first element (Environmental) relates to the environment. The environment encompasses several parts, such as the use of natural resources, waste management, climate change, environmental pollution, and investment in renewable and green energy. 

The second component (Social) relates to the impact of business on the social environment and therefore includes elements such as occupational health and safety, product quality, supply chains, human resource development, data protection, and socially responsible behavior. 

The third component (Governance) encompasses corporate governance, namely transparency, compliance with competition rules in the market, as well as the business culture of the legal entity. 

ESG reporting involves the transparent presentation of data related to these three components and qualitative measurements of company performance with defined risks and strategies. 

In July 2023, the European Commission adopted ESRS standards (European Sustainability Reporting Standards), and therefore ESG reporting will be mandatory for the 2024 financial year for business entities specified by the Non-Financial Reporting Directive (NFRD). 

What is CSRD? 

The EU Directive on Corporate Sustainability Reporting (Corporate Sustainability Reporting Directive – CSRD) came into force on January 5, 2023, thereby obligating over 50,000 legal entities to report on ESG standards. 

CSRD applies, under certain conditions, to legal entities of third countries that have subsidiaries operating within the EU or are present in the EU market. 

NFRD vs. CSRD? 

The Non-Financial Reporting Directive (NFRD) and the Corporate Sustainability Reporting Directive (CSRD) represent legal documents and guidelines for reporting on non-financial information. 

NFRD came into force in 2018 with two main objectives – to encourage corporate responsibility towards social and environmental issues and to provide transparent non-financial information for risk assessment and company valuation. This directive required companies to report on five key elements in their annual reports – environmental protection, respect for human rights, combating corruption, as well as gender, age, and professional diversity. 

NFRD applies to large public interest legal entities, i.e., public companies, banks, insurance companies, etc., which the home country designates as public interest entities provided they have more than 500 employees (as well as our Accounting Law). Some countries have adjusted and adopted the directive; for example, in Sweden, legal entities with more than 250 employees must comply with the directive. 

CSRD was created with the aim of expanding existing requirements – expanding the list of companies obliged to comply with the guidelines, including companies outside the EU, and introducing more precise reporting standards. 

What does CSRD introduce? 

The Corporate Sustainability Reporting Directive (CSRD) introduces several key innovations. 

Expanded list of companies 

CSRD significantly expands the list of companies required to comply with new rules. Over 50,000 legal entities now have the obligation of non-financial reporting, representing a significant increase compared to the previous directive. 

CSRD obligations apply to legal entities listed on EU regulated markets (with the exception of micro-enterprises) as well as to all companies based in the EU that meet at least two of the following three criteria: 

• have more than 250 employees;
• have a net turnover exceeding €40 million; 
• have total assets exceeding €20 million. 

Impact on companies outside the EU 

CSRD also applies to third-country companies with a net turnover exceeding €150 million and having a subsidiary or branch in the Union. To ensure proportionality and enforceability of such requirements, a threshold of net turnover exceeding €40 million will be applied concerning branches; for third-country company subsidiaries, thresholds defining whether the company is a large enterprise or a small or medium-sized enterprise will be applied, except for micro-enterprises whose securities are listed on a regulated EU market. Sustainability reports prepared by third-country company subsidiaries or branches should be prepared in accordance with the standards that the European Commission will adopt by June 30, 2024. 

Precise reporting standards and the principle of double materiality 

CSRD introduces precise standards for non-financial reporting; companies are obliged to report on the impacts on the environment, social aspects, and corporate governance. 

One specificity of the new rules relates to the principle of double materiality. It concerns two aspects that companies must consider when reporting on corporate sustainability: 

The Inside-Out perspective relates to the impact companies have on people and the environment, such as environmental pollution or human rights violations. 

The Outside-In perspective considers how ESG issues create risks and opportunities for the companies themselves; examples include opportunities for developing new sustainable products, the risk of reputation loss, or the introduction of new carbon emission taxes.  

The aim of the principle of double materiality is to focus corporate sustainability reporting on topics that are most important for the company and stakeholders; such reports contribute to greater transparency, more efficient allocation of time and resources, and better decision-making within the company. 

What sanctions does the CSRD prescribe? 

CSRD does not directly prescribe sanctions for non-compliance by companies. However, it foresees the obligation of states to impose sanctions that are effective and take into account the degree of responsibility, financial power of the company, significance of profits generated, loss to third parties, previous company behavior, and degree of cooperation. 

When must companies prepare a sustainability report? 

Legal entities subject to NFRD submit a sustainability report in 2025 for the financial year 2024. 

Companies that are new subjects to CSRD submit a sustainability report in 2026 for the financial year 2025. 

Listed small and medium-sized enterprises (SMEs) submit the aforementioned report in 2027 for the financial year 2026 (but may also submit the first report in 2029 for the previous financial year). 

What is CS3D? 

The Proposal for a Corporate Sustainability Due Diligence Directive (CSDDD/CS3D) was adopted in June 2023, with enforcement expected during 2024. 

CS3D complements the EU Battery Regulation by introducing due diligence in the value chain concerning raw materials not covered by the Regulation but does not require certification for placing products on the EU market.

 

CS3D will apply to companies headquartered in the EU that meet one of the following conditions: 

• Enterprises that, on average, have had more than 500 employees and a worldwide turnover exceeding €150 million in the last financial year for which financial statements were prepared; 
• Enterprises that did not meet the above conditions but, on average, had more than 250 employees and a worldwide turnover exceeding €40 million in the last financial year, provided that at least 50% of that turnover was generated in one or more of the sectors listed in the directive (textile, leather, and related products manufacturing and wholesale trade of textiles, footwear, and clothing; agriculture, forestry, fishing, food production, and wholesale trade of the same; extraction of mineral resources regardless of the extraction location, metal production, non-metallic mineral products manufacturing, and wholesale trade of mineral resources). 

Regarding companies established in third countries, CS3D applies to: 

• Companies that have achieved a net turnover exceeding €150 million in the EU in the financial year preceding the last financial year; 
• Companies that have achieved a net turnover exceeding €40 million but not exceeding €150 million in the Union in the financial year preceding the last financial year, provided that at least 50% of the net turnover worldwide was generated in one of the aforementioned sectors. 

What does CS3D require from companies? 

This directive requires companies to address actual and potential adverse impacts on the environment and human rights. Specifically, CS3D requires companies to integrate the concept of due diligence into their corporate policies and establish their due diligence policy. 

The directive prescribes mandatory elements that the due diligence policy must contain, such as a description of how the company approaches due diligence, a code of conduct with described rules and principles, a description of procedures established for the implementation of due diligence, including measures taken to verify compliance with the code of conduct and its extension to business relationships. 

Companies will need to conduct periodic assessments of business operations and measures and operations of subsidiaries to monitor the effectiveness of identifying and preventing adverse effects on the environment and society. Such assessments will be based on qualitative and quantitative indicators and will be conducted at least every 12 months. Due diligence policies will be updated according to the results of the assessments. 

 

Please note that this piece does not offer legal advice but rather represents the author’s standpoint.   

 

Lucija Vranešević Grbić, the author of this article, is also a member of the WOLEP Corporate Law Practice. In July 2023, she hosted a webinar on the topic of Electric Vehicles and Alternative Batteries: Legal Implications. Our law firm is planning to participate in similar activities in 2024, so stay tuned for more updates!