How Financial Institutions and Companies Can Prepare for Non-Financial Reporting

– There is a lot of work ahead of all of us in terms of aligning business operations and creating a common approach that investors and companies can use when investing in projects with a positive impact on climate and the environment. At the same time, this transition towards sustainability opens up opportunities for Croatian entrepreneurs to initiate changes in the economy – said Josip Zaher, Vice President of the Croatian Chamber of Economy for Finance and Trade.

At the workshop, Ivana Žepić and Kristina Horvat from the Ministry of Finance presented the upcoming legislative framework for sustainable financing and non-financial reporting. Currently, the obligated parties for non-financial reporting are large enterprises that are public interest entities and have more than 500 employees, with the first reports published in 2018 for the 2017 business year.

– By transparent reporting, we can more easily attract investors and we are closer to a sustainable economy – said Žepić, while Horvat presented the new EU Directive on Sustainable Corporate Reporting in more detail.

The goal of the Directive is to address issues from both the user’s and the reporting companies’ side, such as uncertainty about what to report. The Directive aims to ensure better information for investments and reduce systemic risk in the financial system caused by climate change and similar sustainability issues. The scope of application includes all large enterprises and so-called listed companies (SMEs) and non-EU companies listed on EU regulated markets, with standards and the scope of reports for medium and small enterprises being simpler, as well as sanctions. It is expected that the earliest 2024 will be the year when reporting according to the new standards will begin.

How well these non-financial reports are prepared will be an important factor for the financial industry, which can assess where to allocate funds based on credible information and also ensure further investments and capital raising – by proving to investors that their financial products are indeed sustainable.

The physical risks of climate change significantly affect the stability of the economy and thus the financial system and will have a significant impact on the existing business models of entrepreneurs. Global trends already indicate awareness of changing models in light of the increase in investments in financial instruments with an ESG label.

Silvana Božić from HANFA presented the obligations of the financial industry regarding the publication of sustainability data, emphasizing the assessment of the harmful effects of investment decisions on sustainability factors. She pointed out that climate change and related natural disasters significantly affect sustainable business operations. In the first half of last year, losses caused solely by climate change amounted to $71 billion, while only $29 billion was insured.

Martina Librenjak from HANFA spoke about the new EU legislative framework on sustainable financing and explained the obligations for data publication for financial participants, while Tajana Labudović presented HANFA’s guidelines for the preparation and publication of ESG-relevant information for issuers, emphasizing that reporting is not an end in itself, but aims to raise awareness and encourage a change in business strategy among companies.

– Finance is the engine of the world, and that is why it was important to make it green without losing profitability. ESG reports stimulate those who prepare them to create business strategies and raise awareness of the risks of their business for the climate, environment, and society. This makes it easier for them to reorient towards sustainable economic operations – said Labudović.

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By Regulation (EU) 2020/852 establishing a framework to facilitate sustainable investments and amending Regulation (EU) 2019/2088 or the Taxonomy Regulation, adopted in June 2020, criteria are established for determining whether an economic activity is environmentally sustainable for the purposes of determining the degree of environmental sustainability of investments.

The Taxonomy Regulation was presented by Ana Juras from the Ministry of Economy and Sustainable Development, highlighting that the Commission has made a proposal that still needs to go through the EU Council. The taxonomy is a classification tool that helps investors and companies make informed decisions about investing in environmentally acceptable activities. It contains a list of economic activities and performance criteria, indicating how much each activity contributes to six environmental objectives.

Branka Pivčević Novak from the Ministry of Economy and Sustainable Development spoke about climate action as the very center of the European Green Deal. It is estimated that the average global temperature increase will continue to rise from the current +1.1 °C to 3 °C by the end of the century. The business sector needs to be aware of this new reality and contribute to climate goals, and for data preparation and reporting, companies have the EMAS tool at their disposal.

In the new framework package, among other things, are the Taxonomy Regulation (Regulation (EU) 2020/852 of the European Parliament and Council establishing a framework to facilitate sustainable investments and amending Regulation (EU) 2019/2088), SFDR regulation (Sustainable Finance Disclosure Regulation – Regulation (EU) 2019/2088 of the European Parliament and Council on sustainability-related disclosures in the financial services sector), and the Corporate Sustainability Reporting Directive (CSRD).