ESG reporting

What is ESG reporting?

“ESG reporting” refers to disclosure of ESG information, often including information both on specific ESG issues and on social responsibility and sustainability in general. In practice, terms such as “ESG report”, “sustainability report” and CSR report” are therefore often used synonymously, although ESG, sustainability and CSR have different meanings. 

Who is required to report on ESG performance?

Reporting can be voluntary or mandatory depending on the specific circumstances of the organisation. When Danish companies publish ESG reports or ESG information as part of their annual report, it is often a combination of voluntary and mandatory disclosures.

Companies and groups that are subject to section 99(a) and (b) or section 107(d) of the Danish Financial Statements Act are required to report on social responsibility issues as part of their financial statements. These years, new reporting requirements are being introduced with the EU Corporate Sustainability Reporting Directive (CSRD) as the main basis for ESG reporting in Denmark.

Some companies, including e.g. financial undertakings, are subject to ESG reporting requirements according to rules in addition to the Financial Statements Act. Furthermore, ESG reporting under the CSRD will from now on have to be signed by the company’s auditor. To begin with, it will be a limited assurance audit report, i.e. the level below the normal audit opinion expressed on the financial statements.

Although the CSRD only applies to large, listed undertakings and some financial undertakings in the first year, other companies and organisations are already starting to prepare for the new requirements to be sure to be able to retain and attract customers, capital and employees in the short, medium and long term.

The relevant companies will i.a. be required to report on ESG issues throughout their value chain, including in relation to their services, business partners, and suppliers.

Thus, the reporting requirements will have a spill-over effect on companies that, while not themselves subject to the rules, are part of the value chain of a reporting company.

Development of ESG reporting requirements

Businesses are cooperating with governments and organisations to develop international frameworks, standards, guidelines, and certification schemes in relation to ESG. 

For a number of years, there has been an increase in initiatives in relation to climate and environmental issues as well as human rights, diversity and inclusion. Some standards and frameworks are now being referred to directly or even incorporated into the legislation, including for instance the Science Based Targets Initiative (SBTi), which is being mentioned as an option to meet certain environmental standard requirements of the CSRD, and the UN Guiding Principles on Business and Human Rights, which are being mentioned explicitly in the CSRD and the EU Taxonomy Regulation for sustainable investments.

Regulatory requirements with respect to ESG reporting

In Denmark and the EU, the CSRD is the cornerstone of ESG reporting, i.a. because of the strict requirements in relation to the assessments to be made before reporting and the anticipated public attention in the area.

However, your organisation may very well be subject to other legislation that also involves ESG reporting such as the Sustainable Finance Disclosures Regulation and the EU Taxonomy Regulation. 

What if your organisation is not compliant?

If your business does not comply with the reporting requirements, either because it does not submit financial statements or because the information provided is insufficient, it will be at risk of general sanctions for non-submission of financial statements and violation of mandatory disclosure rules. Such non-compliance may result in fines or an order to submit or rectify the information and  - ultimately - compulsory dissolution of your business.

In addition to the formal sanctions, we also see that various stakeholders - such as the press, organisations, competitors or citizens - read the published ESG reports (or lack of reports), and that lack of credible, adequate and correct information can have significant adverse consequences by affecting your business reputation or even your external ratings. Finally, we see an increasing trend of lawsuits relating to climate and human rights filed by affected stakeholders who are not necessarily investors or employees or otherwise formally affiliated to the business.

Why is ESG reporting important?

The term "ESG" has gradually moved into the minds of many Danish business owners. The development is partly driven by increasing regulatory requirements and partly motivated by the desire to be a responsible business which is perceived as a decent organisation that can be trusted by customers, investors, employees and the outside world.

Many companies rely on ESG as one of several parameters when making strategic decisions to adapt their products and services and the workplace and value chain to a more sustainable future.

A high-quality ESG report can be a means to make - often quite diffuse - ESG and sustainability issues more tangible by explaining your company’s efforts using both qualitative and quantitative information.

Mandatory and voluntary ESG disclosures - the most important difference

While the CSRD applies only to large, listed companies and some financial institutions in the first year, players in the value chains - such as suppliers and business partners - are already now being asked to meet contractual ESG requirements. The coming into force of the CSRD in the business community may therefore seem somewhat blurred in practice.

To be able to draw up a good and reliable ESG report, it is important to know which information must be disclosed and which information may be disclosed. Further, other legislation on fair marketing, privacy, anti-competitive practices, and intellectual property rights will continue to apply. That will in some cases make disclosure of all data inadvisable.

Work strategically with your ESG efforts

It has long been recognised in international standards and frameworks that integration of ESG into a company's strategic work and decision-making process is of paramount importance. It is important in order to contribute to a sustainable development and implement value-adding ESG practices in the individual business.

With the CSRD, the requirement for businesses to publish a short description of their business model and strategy has now been put into statutory form at EU level.

In our experience, businesses are better off integrating ESG and sustainability into their operations rather than treating it separately. Thus, ESG reporting should not be the sole purpose of working with ESG. You may use both the CSRD and other ESG legislation as a source of inspiration when setting your priorities and defining your goals, KPIs, actions, and follow-up mechanisms.

Steps towards strategic ESG work

Based on our experience, the following steps may serve as a guide to working strategically with ESG and sustainability:

ESG reporting is a complex process 

In our experience, the process of planning, drawing up and publishing an ESG report involves a vast number of internal and external stakeholders. Our role as legal adviser in such processes will often include:

• description of the organisation’s values, actions and governance in policies and procedures and determination of the state of compliance in the organisation or its value chain
• description of the organisation’s mandatory disclosures under the Disclosure Regulation, the EU Taxonomy Regulation and, going forward, the CSRD and the CSDDD
• assessment of the organisation’s compliance or marketing statements to avoid “colour washing” - this will often lead to corrective actions and improvements before final reporting
• assessment of any adverse effects and disputes.

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