Companies Are Expected to Be Accountable, But Is Anyone to Enforce It?

The world is changing, and so are standards, companies, expectations, needs, and ways of doing business. The public increasingly expects responsible and ethical behavior from corporations, which inevitably affect communities wherever and whenever they operate. This is why ‘social responsibility’ has become a buzzword in the business world in recent years. In addition to the growing number of companies paying attention to how business practices affect marginalized groups, the environment, and society as a whole, regulatory bodies are also raising their expectations.

– The European Union has recognized that the corporate sector can play the most important role in developing sustainability. This primarily includes adequate and rapid responses to climate change, namely the six climate and environmental goals embedded in the EU taxonomy. Therefore, the greatest engagement is expected from organizations that recognize their significant impact on climate and the environment in their operations, namely sectors currently covered by the taxonomy – emphasized Daria Mateljak, executive partner at Hauski & Partner.

Checks Are Beginning

However, the question is how expectations, regulations, and new sustainability standards will affect the companies themselves, their operations, and who will manage and control everything. Mateljak emphasizes that it is crucial to seriously understand that the corporate world is facing significant changes, affecting everything from company management, the way they operate, strategic thinking to market presence.

She explains that, regardless of the sector, large companies must seriously commit to integrating ESG (environmental, social, and governance) criteria into their operations due to their reach, as it is not just about regulatory requirements they are now exposed to but also about stakeholder demands and expectations. This does not only relate to environmental impact, as she notes, the social dimension is also gaining strength, and the new regulation prescribes checks or in-depth assessments of companies’ impacts on society and human rights, not only direct but also along their value chain. Therefore, companies will be under pressure from investors, large buyers, and end-users, who will expect ‘greener’ and socially responsible products and services, in addition to regulators and state institutions.

– We can say that there will be legally structured checks, but also those that delve into the domain of business legitimacy, which depends on the judgments of various stakeholders. For stakeholders to have a solid foundation for informed assessment, it is necessary to improve the quality of sustainability reporting. Companies in Croatia must understand that these reports are strategic, not a marketing tool – emphasized Mateljak.

What CSRD Brings

The director of the Croatian Business Council for Sustainable Development (HR PSOR), Mirjana Matešić, told us that the new European Directive on Corporate Sustainability Reporting (CSRD) has recently been adopted and will come into effect at the beginning of 2023, and will be integrated into national legislation by the beginning of 2024, when its application begins.

And what changes with it? First of all, it replaces the previous Non-Financial Reporting Directive. The scope of the Directive expands to all large companies, all companies listed on regulated EU markets, except for micro-enterprises listed on the stock exchange, as well as companies that do not have a business establishment in the EU but are listed on regulated EU markets, and subsidiaries in the EU of companies from third countries.

Matešić adds that other innovations include the introduction of mandatory limited assurance of reported sustainability information, meaning that an external independent body must confirm compliance with the Directive’s requirements and the accuracy of the information, and in a later phase, an expansion to reasonable assurance is expected.

– Another novelty is the obligation to report according to EU sustainability reporting standards (ESRS), which have also just been adopted, and the obligation to publish sustainability information as a mandatory part of the corporate management report, meaning that the report can no longer be standalone – added Matešić.

Tanja Basta, a sustainability expert at Tetra Pak, Eastern Europe region, emphasized that CSRD sets a framework for reporting standards, which is an important step towards transparent representation of achieved results in this area and opens the possibility for clear comparisons among stakeholders.

– We believe that compliance with the CSRD directive can help companies build or enhance trust and credibility – emphasized Basta, adding that, when it comes to Tetra Pak, they do not wait for any regulation or directive to come into force to start applying rules and standards.

At Tetra Pak, she says, they have set a challenging goal – to lead the sustainability transformation in their industry – and they understand that they can only achieve this by implementing concrete activities in the value chain.

The Auditor’s Job

However, this raises one of the pressing issues: people and their expertise in this area. Matešić points out that the question is how many managers are capable of understanding what is expected of them and how much knowledge they have to implement the expected transformation, adding that it has become clear in the past year that there are not enough experts who understand sustainability issues, i.e., ESG experts who could meet the demand for that knowledge.

– The biggest challenge for the business sector is the lack of specialists and employees trained for sustainable finance – agrees Nikolina Markota Vukić, president of the Institute for Socially Responsible Business (IDOP).

For this reason, Matešić adds, new positions are now opening up, but companies are increasingly struggling to attract experts who will be able to help them comply with new requirements. The Directive on sustainability reporting sets criteria for who will be able to externally verify sustainability reports.

– These are auditors and audit firms that have not conducted the statutory audit of financial statements and independent verification service providers who have been trained and met criteria such as passing professional exams and demonstrated high levels of professional ethics, independence, objectivity, confidentiality, and so on – explained Markota Vukić.

Necessary Education

In Croatia, there are several consulting organizations that have been providing support services to the business and financial sector in achieving sustainable development for years. One of them is the Institute for Socially Responsible Business (IDOP), which was founded in 2015 by 14 experts from the fields of social, economic, and technical sciences, and provides consulting services in the process of preparing sustainability reports.

Although there are already consulting organizations in Croatia capable of providing expert guidance and advice in integrating corporate sustainability management, Matešić emphasizes that they are by no means sufficient to serve all those who will seek help. At the same time, she believes that it is important to approach education in the ESG segment quickly, to understand what it means in the primary business of the company, and how to adapt or change the business strategy.

– In Croatia, we do not have specialized education for these topics; people dealing with them are self-taught, retrained, or have acquired knowledge outside Croatia. We at HR PSOR have been trying for a decade to spark interest among universities for establishing a specialized postgraduate study of sustainable development, for which a curriculum has been developed, but there is no interest, as if our academic community does not recognize new trends and increasingly necessary knowledge – concluded Matešić.