amending Directive 2013/34 / EU (Accounting Directive), Directive 2004/109 / EC (Transparency Directive), Directive 2006/43 / EC (Audit Directive) and Regulation (EU) No 182/2011 537/2014 (Audit Regulation) regarding corporate sustainability reporting.

Reasons and objectives of the proposal

The Non-Financial Reporting Directive (Directive 2014/95 / EU) amending the Accounting Directive was adopted in 2014. Companies covered by the Non-Financial Reporting Directive were required to report for the first time in 2018 in accordance with the provisions of the Directive for the financial year 2017.

The Non-Financial Reporting Directive applies to large public interest entities with an average number of employees of more than 500. These provisions have been incorporated in Croatia into the provisions of Article 21a of the Accounting Act.

In its resolution on sustainable financing in May 2018, the European Parliament called for the further development of reporting requirements under the Non-Financial Reporting Directive. In its Resolution on Sustainable Corporate Governance of December 2020, he welcomed the European Commission's (hereinafter referred to as the Commission) commitment for revising the Non-Financial Reporting Directive, called for extending its scope to additional categories of companies and welcomed the Commission's commitment to developing EU non-financial reporting standards.

The European Parliament also considered that non-financial information published by companies in accordance with the Non-Financial Reporting Directive should be subject to mandatory audit.

The main users of sustainability information published in the company's annual reports are investors and NGOs, social partners and other stakeholders. Investors want to better understand the risks and opportunities for investments arising from sustainability issues, as well as the impact of these investments on people and the environment. NGOs, social partners and other stakeholders want greater corporate responsibility for the impact of their business on people and the environment.

Users' needs for information have increased significantly in recent years and will almost certainly continue to increase. There are several reasons for this. One is the growing awareness of investors that sustainability issues can harm the financial results of companies, and the other is the growing market for investment products with a very clear intention to comply with certain sustainability standards or achieve certain sustainability goals. The COVID-19 pandemic is likely to further accelerate the growth in demand for information on the sustainability of societies, for example on worker vulnerability and the resilience of supply chains.

The aim of this proposal to amend these directives is to improve sustainability reporting at the lowest possible cost, in order to make better use of the potential of the European single market's contribution to a fully sustainable and inclusive economic and financial system in line with the European Green Agenda and the UN Sustainable Development Goals.

Major changes to these directives (according to Grant Thornton Croatia)

The scope of the Accounting Directive on sustainability reporting obligations is extended to credit institutions and insurance companies that does not have limited liability or are not considered to have limited liability under the Accounting Directive, including cooperative banks, mutual and cooperative insurance companies, provided that they meet relevant size criteria.

The information that companies should publish is determined in more detail. Compared to existing provisions, new information requirements are introduced from companies on their strategy, objectives, board and management role, main adverse effects related to the company and its value chain, intangible assets and how they have identified the information provided.

Companies should provide qualitative and quantitative information, information on future and past events and, where appropriate, information relating to the short, medium and long term.

All companies covered by the scope of the proposal are required to report in accordance with European Sustainability Reporting Standards. Sustainability standards are set by the European Commission. These standards are under development and will be published when the European Commission approves them.   

It is required that the Commission review the standards at least every three years to take into account relevant changes. It also stipulates that the Commission shall adopt sustainability reporting standards for small and medium-sized enterprises by 31 October 2023.

The Transparency Directive is amended to provide for the European Securities and Capital Markets Authority (ESMA) to issue guidelines to national competent authorities in order to promote the convergence of sustainability reporting supervision.

The provisions of the Audit Directive change the subject matter to include an audit of the annual and consolidated sustainability report by a statutory auditor or an audit firm that carries out a statutory audit of the financial statements.

The following provisions of the Audit Directive are also amended:

• Rules on certification, continuing professional education and mutual recognition of statutory auditors and audit firms to ensure that statutory auditors have the necessary level of theoretical knowledge of subjects relevant to the verification of sustainability reports and the ability to apply such knowledge in practice
• It is added that Member States stipulate that auditors conduct audits of sustainability reports in accordance with the auditing standards adopted by the Commission
• The Commission is empowered to adopt verification standards by means of delegated acts to determine the procedures to be followed by the auditor to draw conclusions on the verification of the sustainability report, including process planning, risk consideration and risk response and the types of conclusions to be included in the audit report. It also stipulates that auditors base their opinion on a sustainability report as part of a reasonable review procedure if the Commission adopts standards for reasonable review.
• The tasks of the Audit Committee in verifying the sustainability report are explained. In particular, the audit committee should inform the administrative or supervisory body of the audited entity of the outcome of the audit of the sustainability report and explain how the audit committee contributed to the integrity of the sustainability report and what is his role what was in that process. It should monitor the sustainability reporting process, including the digital reporting process and the process conducted by the company to identify information published in accordance with relevant sustainability reporting standards and make recommendations or suggestions to ensure its integrity. It should monitor the effectiveness of the company's internal quality control and risk management systems and, where appropriate, its internal audit of the audited entity's sustainability report, including its digital reporting required by the amended Accounting Directive, without compromising its independence. Finally, it should oversee the verification of the annual and consolidated sustainability report and review and oversee the independence of statutory auditors or audit firms.

The provisions of the Audit Regulation are amended to prohibit the provision of advisory services for the preparation of sustainability reports. The audit of the sustainability report is performed by certified auditors or audit firms that perform statutory audits.

Start of application

According to the provisions of the proposal for that directive, EU Member States should harmonize their regulations with the provisions of the proposed directive by 1 December 2022 for the implementation of the financial year from 1 January 2023, which is one of the most ambitious plans for such an initiative. The Commission has not developed sustainability standards, so the question justifiably arises as to whether it will publish sustainability standards by the set deadline. The development of this initiative will be monitored in the coming months.

Grant Thornton revizija d.o.o.

Ivica Smiljan, partner