Commentary by zemeunvalsts.lv

This summer, when the change of government was still an unrealised plan, a Latvian Radio broadcast mentioned the Irish experience, emphasising that the Irish government had once prepared a very specific, even detailed plan to resolve a problematic situation. What does that have to do with sustainability? A direct one, because – sooner or later, more directly or indirectly, to a greater or lesser extent – the European Union's major plans will affect almost every EU citizen and resident. That is why one would like to know in advance, for example, how much each of us will pay for the sustainability report mentioned in the article, how much it might cost a business owner, and what exactly a business owner who wants to continue operating in Latvia and, for instance, sell grown berries or fruit, or baked bread to any of the retail chains, will have to do and how many people they will have to hire or train specifically for the preparation of sustainability documents, etc. When talking about EU plans, which have also been supported by Latvia, there is a lack of specificity and precision – who, when, how much... How much sustainability will cost every citizen (if provided in this way...) and how exactly the need for sustainability reports will change the business environment in Latvia, whether accurate data appropriate to the Latvian situation is and will be available to the local Latvian entrepreneur, etc. One thing is becoming clear – there will not be less bureaucracy... (That does not sound green, nor forward-looking, nor sustainable...)

The requirement for companies to mandatory prepare sustainability reports in accordance with the European sustainability standard, which includes environmental, social responsibility, human rights, and various governance aspects, will significantly change the foundations of business and will affect every company that wishes to operate in the supply chains of large companies.

This is discussed in an interview by Agnese Alksne-Bensone, co-founder of the Latvian Corporate Social Responsibility platform (CSR Latvia) and owner of SIA Sustainability Partners. She acknowledges that preparations must begin immediately to meet the requirements of the EU Corporate Sustainability Reporting Directive, even though the first reports for large companies must be submitted for the 2025 financial year, otherwise there will be problems with providing full information for 2024.

What does the EU Corporate Sustainability Reporting Directive entail?

At its core is sustainability, which is already one of the most important cornerstones of business, while the EU Green Deal and the set goal of achieving climate neutrality give it an even more significant place. Consequently, many sectors and companies will have to adjust or even revise their current business models, which will, in a sense, be stimulated by the EU Corporate Sustainability Reporting Directive, which provides for the mandatory inclusion of a report on corporate social responsibility goals and their implementation in annual reports. The implementation of the directive is planned in several stages. The regulation will initially apply to large European companies, and later to medium-sized companies as well. It provides for the disclosure of information on sustainability risks, potential scenarios for the impact of risks on the company, and information on how the chosen business model affects social and environmental aspects. Specifically, the requirement to include a sustainability report in the annual management report from 1 January 2024 will apply to companies that meet two of the three size criteria – 500 or more employees, a net turnover of 40 million euros, or a balance sheet total of 20 million euros (these are companies that were affected by the previous directive on the disclosure of non-financial information).

Crucially, these companies must also prepare information for 2023. In turn, the reporting requirement from 1 January 2025 will apply to companies that meet two of the three size criteria – 250 or more employees, a net turnover of 40 million euros, or a balance sheet total of 20 million euros; and from 1 January 2026, the requirement will apply to companies that meet two of the three size criteria – 10 or more employees, a net turnover of 0.7 million euros, or a balance sheet total of 0.35 million euros. Companies from third countries will also not be exempt from preparing such a report, provided they meet the criteria of a net turnover of 150 million euros in the EU market and have at least one structure in the EU as of 1 January 2028.

The often-chanted mantra of 'cheaper' does not at all mean it is the only solution for selling a product (or service). The fact that a company does not harm the environment, acts in a socially responsible manner not only within its own structures but also demands the same from its cooperation partners, and is well-managed, will be a prerequisite for more rapid growth.

So, yet another additional report initially for large companies, and later for medium-sized ones.

That is a very simplified position. The directive stipulates that a company will report on sustainability by taking into account the 12 criteria set out in the ESRS (European Sustainability Reporting Standards) standards. Information on two of the standards – ESRS 1 (general requirements) and ESRS 2 (general disclosures) – must be provided by target companies on a mandatory basis. The standards are divided into three sustainability areas, defining essential sustainability aspects in the environmental, social, and governance domains. In the environmental section – climate change, pollution, water and marine resources, biodiversity and ecosystems, resource consumption and circular economy; in the social section – own workforce, workers in the value chain, affected communities, consumers and end-users; and in the governance segment – business conduct. Described in a document of approximately 350 pages, there are more than 80 disclosure requirements covering over 1,000 data points, including more than 80 quantitative indicators. Information on these aspects must be provided based on the company's double materiality analysis. Companies will also have to explain why information is not provided regarding one sustainability aspect or another.

The directive focuses on a company's ability to determine its impact through the 'double materiality' analysis. This involves determining the impact of the company's business model on environmental, social, and governance aspects, as well as the impact of external conditions – such as climate change, labour availability, technological revolution, and resource availability – on the company's development and long-term growth.

The requirement is that a company must be able to respond to the problems caused by climate change by developing transition plans for a green economy. The climate transition plan should determine how the company will adapt as the world shifts to a low-carbon economy. It must include high-level ambitions to mitigate climate risks, including GHG reduction targets, actions the company plans to take to achieve these targets (including how these actions will be financed), governance and reporting systems to support plan implementation, and science-based information.

Another cornerstone can be considered taking responsibility for the supply and value chain. This means that the company will have to be able to assess the impact of its supply and value chains on sustainability aspects and must provide plans, control mechanisms, and goals to prevent negative impacts and enhance positive ones within its sphere of influence. These boundaries are defined using the 'double materiality analysis of sustainability aspects'. One will not be able to write just anything in these reports, as they will be part of the company's annual management report, and one must bear in mind that these reports will also be audited by an auditor.

Thus, the regulation of corporate social responsibility and sustainability practices will have changed the fundamental purpose of business – from pure profit-seeking at any cost to profit-seeking while being aware of the cost of the business model. What was a company's voluntary choice several years ago may now become a competitive advantage. It is the ability to explain to investors, consumers, and employees how profit is generated, what impact it has on social, environmental, and good governance issues, as well as explaining plans regarding the prevention of negative impacts. Overall, current estimates suggest that the Corporate Sustainability Reporting obligation will directly affect approximately 50,000 companies in the European Union.

Are there companies in Latvia that have prepared sustainability reports of this content?

Currently, the obligation to publish sustainability reports, or ESG (Environment, social and governance) reports, already applies to companies whose shares or bonds are listed on the stock exchange. Consequently, there are companies that prepare and publish sustainability reports in their annual reports, which, in turn, are evaluated not only by these companies' existing and potential shareholders or bondholders but also by existing and potential business partners (buyers of products, services, and/or raw material suppliers). Since the end of 2021, changes in the corporate governance regulation for large state and municipal capital companies have been in effect; among these changes is also the obligation for capital companies to prepare non-financial reports for the previous reporting year.

There are still companies that have chosen to prepare such reports voluntarily, but until now it has been more of a report on 'good deeds' – how they have reduced emissions, saved (reduced) resources, and made operations more efficient. Of Latvia's 100 most valuable companies, only 10-12% prepare sustainability reports, which is very few, and even fewer are the companies that have set future goals in these reports. This means that, essentially, everyone must start preparing for the implementation of the EU directive requirements. It can be concluded that the previous sustainability reports, which served as 'good deeds' accounts, are difficult to compare with those that will be required in the future, especially if the impacts indicated and the goals set must be data-driven and verified by independent experts (assessors). Unfortunately, most have not done anything like this in preparing sustainability reports so far, even though nearly 10 years ago a regulation was adopted in the EU inviting large companies to prepare such reports voluntarily; such a solution did not work, which is why preparing this report has now become a mandatory requirement. It should be taken into account that a sustainability report can be a significant argument for a company to receive a loan for its plans, as well as an essential criterion for attracting new deals (product buyers).

No company is 100% self-sufficient; manufacturers and traders in particular have a significant number of suppliers, which can be even very small. Will these large buyers of raw materials and services not demand that these small suppliers, to whom the directive's requirement does not apply, prepare such reports, for example, various verified data on generated emissions, including the size of the CO₂ footprint, employees, etc., because otherwise they will not be able to create their own sustainability report?

Since traders and manufacturers must have traceable supply chains, it is quite logical that those involved in them will have to be ready to provide relevant information. Undeniably, it is precisely through supply chains that even companies to which the directive's requirements do not apply will, in a sense, be involved in fulfilling its main leitmotif.

In such a case, will there not be curiosities, where, for example, a Latvian farmer is unable to provide the requested data to the processor or trader, and the latter, instead of the local supplier, chooses a supplier of an analogous product abroad, who is able to provide the requested information? As a result, the delivery of a specific product (raw material) will have a significantly larger CO₂ footprint because the transport distance will be significantly greater.

That is a good question, currently theoretical, because – undeniably – such a risk exists. Traders must and will have to look at how transporters and suppliers, all the way to their origins, fulfil sustainability requirements regarding the environment, the social sphere, and good governance. Around the world, there are more and more companies that do not want to cooperate (buy or sell goods, provide or receive services) with entrepreneurs who use child labour, employ workers in inhumane conditions, do not protect the environment, etc. If a company has clearly defined values that its owners see as an integral part of the business, then accordingly, the company has to and will spend additional attention and resources. Traders and manufacturers have the opportunity to ensure this traceability by involving independent experts (assessors) or by visiting the specific agricultural or other product producers themselves with audits.

Agricultural production is and will be one of the most complex areas for calculating impact. Specifically, every farmer can report on what they have bought and used, but unfortunately, they will not be able to answer for and prove the CO₂ emissions of the land used for the production of their produce, because such data simply does not exist, or obtaining it requires a lot of time and resources.

Unfortunately, in my practice, while trying to calculate the CO₂ footprint, I have to conclude that the accurate data is incomplete and therefore accounting methods based on information available in international databases must be used.

So, the CO₂ footprint for agricultural producers in Latvia and, possibly, other EU member states is calculated based on data from a different climatic zone and soil? This means a very high probability that the non-financial sustainability report will reflect data that will not correspond to reality!

Unfortunately, at the moment, it is impossible to completely exclude such a situation. I hope that by the time agricultural producers are asked for the CO₂ footprint of their impact, there will be relevant research in Latvia regarding specific soils and the impact of the crops grown on them on CO₂ sequestration and emissions.

Such research, by involving scientists, can be conducted, for example, by industry associations.

I hope that the Ministry of Climate and Energy will start dealing with this issue, which is essential for many land users.

Currently, the only solution would be to use the exceptions provided in the directive for sustainability reporting, indicating that the relevant data is not available, but that research is being conducted to be able to rely on scientifically based data.

That would be like a patch, indicating that the specific landowner is in the process of obtaining the relevant data. It should be taken into account that the meaning of the directive's standards lies in the fact that the company realises it must think about environmental and social aspects. It is a kind of bridge of understanding to implement the transition to a greener and more socially responsible economy, not just in words but also in deeds.

What will the companies in Latvia's largest export-generating sectors do, which use Latvian-sourced timber resources for their product production? Specifically, to obtain processable logs, they must be cut down and brought to the production facility, and they may also face criticism from nature lovers that this causes damage to living nature, while at the same time, leaving trees to rot, unlike young growth which sequesters CO₂, they actually generate it!

The purpose of preparing a sustainability report is not to ban any kind of economic activity, but to find a balance between economic activity, the surrounding environment, and the person living and the person working. And after all, there are already science-based studies that can unravel this Gordian knot. The existence of forests in Latvia does not mean we are green and cannot be even greener. At the same time, it is clear that in Latvia, in those lands that are not suitable for agriculture, forests will have to be planted. For any industry that consumes resources, it was and will be a matter of a reasonable balance between the economic, social, and environmental pillars.

Fine, the forestry sector can plant new forests, but what should be done in sectors that extract natural resources, for example, peat, from which the substrate is prepared for growing tree seedlings, vegetables, and flowers, which again sequester CO₂ emissions, but in Europe, it is considered an undesirable industry?

That is an even more complex area than agriculture. Peat extraction and substrate production are an important sector in Latvia, while the European Union does not see a future for this sector. And again, that is not an argument to close and liquidate everything, but to look at what we can do. The directive already says: in case a company finds that it has a significant impact on climate change and biodiversity, there must be a transition plan on how it will act, what the goal is, and how much its achievement will cost. It seems that the peat industry needs and will need research that would allow for situation-appropriate decisions based on scientifically grounded data.

Latvia imports a sufficient amount of products, for example, metal products for both construction and metalworking needs. Who is responsible for the CO₂ emissions created during metal extraction, production, and transport, and their accuracy?

Of course, the sustainability report and its standards apply to builders, real estate project developers, and wholesalers of building materials, including metal products, who meet the criteria of the directive's target audience, as well as those involved in supply and value chains with those who meet these criteria.

In essence, the customer is the one who can determine what kind of metal products from which supplier and country they want. And again, the directive's basis is to make companies in this sector think and understand what their impact on the environment and social aspects is, and whether all links in the chain are traceable, whether – abroad – the interests of local community residents have not been significantly impacted, if employees have received fair and justified compensation, etc. This means that the mines for specific metal, for example, aluminium, should be certified, but if it is not possible to obtain such certifications, most likely, the customer themselves must go or hire someone they trust to check what and how is happening in the specific extraction quarry or production facility abroad. For example, industries can create their own registries of responsible raw materials. One example is the currently emerging database/registry of so-called green building materials. A company can currently rely only on documents that prove (certify) traceability or perform self-checks. At the moment, the latest technologies are not yet being used to ensure traceability, but it is only a matter of time (e.g., fintech algorithms, etc.). It should be noted that for companies whose business models are based on outsourced workers (with or without the help of agencies), responsibility for the well-being of these employees is one of the social aspects that will also have to be evaluated. In this case, by well-being, we mean, for example, the observance of these workers' labour rights, human rights, etc. The customer must be responsible for what has or has not been done by the companies (people) contracted through outsourcing, as well as how green and safe those services are.

How can a company that, for example, has ordered the weeding and watering of flower beds on its territory check how much salary the hired person pays to their employees?

Perhaps it currently seems like an impossible mission to some, but it will have to be possible. Essentially, the recipient of the service will already have included in the contract with the service provider the question of wages, employment control possibilities, and solutions, as well as how exactly the services will be provided and what measures will be taken to provide them in an environmentally friendly way.

If every company must be able to determine its CO₂ footprint, then employers must also be able to calculate it, for example, how much greenhouse gas emission arises from employees travelling from work to home and back. Is it clear at the moment how an employer will be able to conclude who arrived at work and how – by private car, by car but sharing with a colleague, by train, by public bus that uses electricity as fuel, who uses diesel, or their own bicycle, or if they walked, because the CO₂ emitted for this purpose depends on the distance and method of travel. How will that be calculated? By asking employees for a report every day or based on some assumptions and algorithms?

Employers can develop motivation systems that will motivate employees to use more environmentally friendly solutions, for example, public transport or walking. There are already employers who are encouraging employees to switch from internal combustion diesel cars to electric cars, providing such options accordingly.

Similarly, if an employer wants employees to cycle to work and perhaps also to clients, there must be appropriate infrastructure to park bicycles, and even more importantly, the ability for employees to take a shower, especially if it is +30 °C outside. At the same time, during the C19 pandemic, remote work increased significantly, which significantly reduced the CO₂ footprint for office employees, and the volume of business trips also decreased because all meetings were moved to an electronic environment. This is precisely why many offices are now switching to partially remote work; more economically advantageous solutions are being sought, perhaps moving to smaller premises or setting them up efficiently.

Maybe employers, alongside their production facility, should build apartment buildings for their employees, just as it was accepted in Soviet times?

The idea – that employees live closer to their workplace – is nothing new or surprising; it aligns with the theory of economic development. The classic triangle – resident, entrepreneur, and local government – who should actually be the one to take the first step to promote economic development? It is the local government, which should effectively be the one to create favourable conditions for business, which then creates jobs for local people to work in. But an entrepreneur cannot afford to wait. There are already companies that are building such housing for their employees. I would like to remind you that before the 2008 economic crisis, there were employers in Latvia who paid for employees' transport to and from work, paid for warm food (lunch), and even accommodation.

There is also a requirement that everyone must set goals on how to reduce their negative impact.

Yes, there is such a requirement! In the context of sustainability, it will be necessary to evaluate and understand what data the company has available at all, how it was obtained, or if it has traceability. At the same time, the company will have to set goals for itself to reduce its negative impact on the environment. It is possible that in such an evaluation of its operations, a company may have to conclude that its economic activity results in heaps of waste and huge pollution, which will be a significant signal to evaluate or change its future activities. This does not mean ending economic activity, but the ability to seek and find solutions that reduce the company's environmental footprint, for example, by changing some product raw materials or ingredients. This is not only about some kind of reporting but about a detailed, carefully substantiated analysis based on data with a meaningful understanding of whether the existing business model causes damage to the environment and people or not, rather than based on assumptions.

Will there not be a pledge – we will reduce, for example, electricity consumption by 0.1% – and will that be enough? Moreover, it will be difficult and very expensive for new production facilities to become even more energy-efficient than, for example, those working in old buildings.

I don't think so, even though in production facilities with better technologies, even a 0.1% reduction in electricity consumption will be a significant achievement, but it will be even more impressive if, while increasing production volumes, a reduction in electricity consumption is achieved. Effectively, for highly technological production facilities, the goal would be to maintain the existing bar, which has already been set high. At the same time, one can look at how to change the product recipe (ingredients used, materials) so that it becomes more environmentally friendly and has a lower CO₂ footprint. Furthermore, one can look at higher indicators not only in the environmental and pollution, waste, and noise segment, but also in the social impact segment – how it will affect human well-being, longevity, and other aspects. Latvia has committed to reducing the amount of waste landfilled in waste polygons to 10% of what is collected, as well as reducing CO₂ emissions and becoming climate neutral. This means that everyone will have to play their part in achieving these goals, especially since Latvia does not have a few relatively large polluters whose technology replacement could immediately yield a large effect and achieve the set goals for the state as a whole. And also, in this process, in essence, a company will not be allowed to claim that it is climate neutral, but will be able to say that it is on the path to climate neutrality, as otherwise it will be considered greenwashing with all the resulting consequences. A very important part of the evaluation will be the section regarding employees, what the attitude towards them is, including what the current employees' age is, and whether there are young employees.

If the employees in a company are 55+, then the question is whether it can call itself sustainable, and if it wants to operate successfully in the future, it must take care of attracting young employees. And that is just another nuance, because these new requirements will turn the operations of many companies upside down, force them to change, or in the best case, adjust their chosen business model and also their outlook on the future.