Poland: draft bill implementing the EU Corporate Sustainability Reporting Directive (CSRD) has been published

On 19 April 2024, a draft of amendments to the Accounting Act, the Act on statutory auditors, audit firms and public supervision and certain other acts was published on the website of the Government Legislation Centre, implementing the following EU directives:

• directive (EU) 2022/2464 of the European Parliament and of the Council of 14 December 2022 amending Regulation (EU) No 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU, as regards corporate sustainability reporting (CSRD)
• commission Delegated Directive (EU) 2023/2775 of 17 October 2023 amending Directive 2013/34/EU of the European Parliament and of the Council as regards the adjustments of the size criteria for micro, small, medium-sized and large undertakings or groups

Below, we present the most important changes.

Details of changes proposed by the EU Corporate Sustainability Reporting Directive

CSRD requires all large companies and all listed companies (except listed micro-enterprises) to disclose information on what they see as the risks and opportunities arising from social and environmental issues, and on the impact of their activities on people and the environment. Companies subject to the CSRD will have to report according to European Sustainability Reporting Standards (ESRS). These standards apply to companies under the scope of the CSRD regardless of which sector they operate in. They are tailored to EU policies, while building on and contributing to international standardization initiatives (like Global Reporting Initiative standards).

The proposed law introduces changes consisting of:

• defining entities required to prepare sustainability reports;
• defining entities exempt from the obligation to prepare sustainability reports;
• imposing obligation to prepare reports in accordance with the ESRS;
• introducing attestation requirement for sustainability reporting;
• introducing rules for experts to acquire credentials to attest sustainability

Sustainability reports will be prepared in accordance with ESRS, which are issued as an executive act of the European Commission. Currently, the first set of standards has been issued. The standards are composed of 2 cross-cutting standards (ESRS 1 and ESRS 2) and 10 topical standards covering all environmental, social and corporate governance topics (ESRS E1-E5, ESRS S1-S4, ESRS G1).

Moreover, sectoral standards are being developed to be used alongside the basic ESRS, as well as standards for small and medium-sized listed entrepreneurs. Adoption of standards for third-country entrepreneurs is planned for 2026.

Sustainability reports will be subject to auditor's examination. It may be the same expert who audits the financial statement or another who is authorized to audit sustainability reports. According to the bill, all the auditors who were authorized to audit financial statements on January 1, 2024 will be qualified to audit sustainability reports by virtue of law. However, they will have to undergo additional training within two years. Otherwise, they will no longer be eligible to audit sustainability reports.

When CSRD directive entry into force?

The requirement to prepare and publish the report will be introduced in stages:

• 2025 for 2024 – listed companies having more than 500 employees and meeting one of the criteria: total assets over PLN 110 [EUR 25] million or net income over PLN 220 [EUR 50] million;
• 2026 for 2025 – large companies (meeting two of the criteria: total assets over PLN 110 [EUR 25] million or net income over PLN 220 [EUR 50] million or more than 250 employees) and large groups (meeting two of the criteria: total assets over PLN 132 [EUR 30] million or net income over PLN 264 [EUR 60] million or more than 250 employees);
• 2027 for 2026 – medium (meeting two of the criteria: total assets less than PLN 110 [EUR 25] million or net income less than PLN 220 [EUR 50] million or less than 250 employees) and small (meeting two of criteria: total assets less than PLN 33 [EUR 7,5] million or net income less than PLN 66 [EUR 15] million or less than 50 employees) listed companies;
• 2028 for 2027 – subsidiaries or branches within the scope of the corporate group of the ultimate parent from a third country or an independent entity from a third country provided that:
  • the subsidiary is a listed small or medium-sized enterprise or a large enterprise and the ultimate parent has generated net revenue from the sale of goods and services exceeding 150 million EUR at the group level for each of the last 2 financial years within the European Union;
  • the branch has generated in the preceding financial year net revenue from the sale of goods and services exceeding 40 million EUR and ultimate parent’s net revenue from the sale of goods and services exceeded 150 million EUR for each of the last 2 financial years within the European Union.

Korean undertakings

Sustainability reporting for third-country entities (including Korean entities) is prepared in accordance with:

• sustainability reporting standards for third-country entities (to be adopted in mid-2026);
• ESRS or standards recognized as equivalent by the Executive Act on Equivalence of Sustainability Reporting Standards (Executive regulations establishing equivalent standards have not been adopted yet, is not possible to determine whether the draft Korean Sustainability Disclosure Standards, which were published in April 2024, will be considered equivalent).

What is more, subsidiary is exempt from the requirement to prepare sustainability report if it is included in the sustainability report of the third-country parent's corporate group.

Exemption from the obligation to prepare corporate group sustainability report for a subsidiary parent company applies if that company and its subsidiaries will be included in corporate group sustainability report of the higher-level parent company:

• from EEA country
• from a third country

The above exemptions do not apply to a large entity that is an issuer of securities in the EEA.

Selected risks arising from CSRD implementation

Sustainability report preparation is a complicated, long-term and resource-intensive process. Part of the data will be published obligatorily, whilst the publication of the remaining data depends on conducting a double materiality analysis. It is a concept that provides criteria for determining whether sustainability information is required to be disclosed. The CSRD describes double materiality as the requirement to report both on the impacts of the activities of the undertaking on people and the environment impact materiality, and on how sustainability matters affect the undertaking financial materiality. Sustainability information meets the criteria of double materiality if it is material from the impact perspective, the financial perspective, or both perspectives.

The main risks are related to adequate time-planning to carry out the process, including arrangement of the process. Some of the reportable data must be obtained from external parties, including contractors. This involves the need to contractually guarantee access to data.

In addition, during the preparation, the report may reveal that some procedures or policies have not been implemented at a particular entity. The reports will be read by stakeholders, including financing entities such as banks that place a high emphasis on ESG issues.

Recommendation

Given the above, we recommend analyzing whether branches or subsidiaries of entrepreneurs from so- called "third countries" operating in Poland or other EU countries meet the conditions subjecting them to the new reporting obligations. Third-country entities should decide on the method of reporting.

When subject to the obligations, the process of preparing the sustainability report should be preceded by a double materiality analysis, as well as a gap analysis of the data planned to be presented in the report. Consequently, even if an entrepreneur will be obliged at a later date, he should start the process sooner.

The alert in PDF file is available for download here.

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European Parliament approved the agreement reached on the Corporate Sustainability Due Diligence Directive (CSDDD, also as CS3D)

On 24 April 2024, the European Parliament officially approved the agreement reached on the final text of the Corporate Sustainability Due Diligence Directive (CSDDD). As a next step, the Council must formally approve the text (expected in May) before it can then be published in the EU Official Journal (expected in June). Member states, including Poland, will have two years to transpose the new rules into their national laws.

CSDDD requires firms and their upstream and downstream partners, including supply, production and distribution to prevent, end or mitigate their adverse impact on human rights and the environment. Such impact will include slavery, child labour, labour exploitation, biodiversity loss, pollution or destruction of natural heritage.

Details of the Corporate Sustainability Due Diligence Directive

CSDDD requires companies to identify and assess environmental and human rights impacts across their chain of activities. Due diligence should cover human rights and environmental adverse impacts generated throughout the majority of the life-cycle of production, distribution, transport and storage of a product or provision of services, at the level of companies’ own operations, operations of their subsidiaries and of their business partners in their chains of activities.

The chain of activities should cover activities of a company’s upstream business partners related to the production of goods or the provision of services by the company, including the design, extraction, sourcing, manufacture, transport, storage and supply of raw materials, products or parts of the products and development of the product or the service, and activities of a company’s downstream business partners related to the distribution, transport and storage of the product, where the business partners carry out those activities for the company or on behalf of the company.

Companies will be obliged to:

• integrate due diligence into their policies and risk management systems;
• identify and asses actual or potential adverse impacts;
• prevent and mitigate potential adverse impacts, and bring actual adverse impacts to an end and minimize their extent;
• carry out meaningful engagement with stakeholders;
• establish and maintain a notification mechanism and a complaints procedure;
• monitor the effectiveness of their due diligence policy and measures;
• publicly communicate on due

Companies shall take appropriate measures to:

• map their own operations, those of their subsidiaries and, where related to their chains of activities, those of their business partners, in order to identify general areas where adverse impacts are most likely to occur and to be most severe;
• based on the results of the mapping, carry out an in-depth assessment of their own operations, those of their subsidiaries and, where related to their chains of activities, those of their business partners, in the areas where adverse impacts were identified to be most likely to occur and most

Member states will create or designate a supervisory authority to investigate and impose penalties on non-complying companies. These will include “naming and shaming” and fines of up to 5% of companies’ net worldwide turnover.

Company can also be held liable for damage caused to a natural or legal person resulting from failure to comply with due diligence obligations.

When CSDDD directive entry into force?

The rules will apply to EU companies and parent companies with over 1000 employees and a worldwide turnover higher than 450 million euro. It will also apply to companies with franchising or licensing agreements in the EU ensuring a common corporate identity with worldwide turnover higher than 80 million euro if at least 22.5 million euro was generated by royalties.

The new rules (except for the communication obligations) will apply gradually to EU companies (and non-EU companies reaching the same turnover thresholds in the EU):

• from 2027 to companies with over 5000 employees and worldwide turnover higher than 1500 million euro;
• from 2028 to companies with over 3000 employees and a 900 million euro worldwide turnover;
• from 2029 to all the remaining companies within the scope of the directive (including those over 1000 employees and worldwide turnover higher than 450 million euro).

Member State competent to regulate matters covered by CSDDD shall be the member state in which that company has a branch. If a company does not have a branch in any member state, or has branches located in different Member States, the Member State competent to regulate matters covered CSDDD shall be that in which that company generated the highest net turnover in the EU in the financial year preceding the last financial year.

Recommendation

CSDDD leaves out any specific details on how companies should map their own operations. Companies will need to develop their own methodology, which means changes to compliance system and relation between companies and stakeholders. Although the European Commission is expected to publish guidelines on how to identify adverse impacts, the guidelines will not be available until six months before the rules start to apply. Companies should therefore not rely on waiting until the guidelines from the Commission are available since mapping out the value chain is crucial. Also it is important to identify the general areas where the most severe and probable impacts are likely to occur.

The alert in PDF file is available for download here.