This seems like a relevant question in Bulgaria in the summer of 2022. While the chatter has been intensifying lately, it has been mostly taking place in specialized business-oriented media and, by far, not as much in any mainstream source of information for the general public.
Indeed, the concept of non-financial reporting is not completely foreign to Bulgarian business. Listed companies have been required by the Public Offering of Securities Act (POSA) to report on compliance with internationally recognized good corporate governance standards ever since 2007. This obligation transformed, in 2016, into an obligation to publish a statement of corporate governance, which is essentially a declaration of conformity by the issuer with a chosen publicly available Code of Corporate Governance, or otherwise, an explanation for the failure to apply one and the reasons for that. As of the same year, the Accountancy Act (AA) extended by reference to POSA this obligation to certain Public Interest Entities (PIEs), including undertakings whose transferable securities were admitted to trading on a regulated market in any EU member state, credit institutions, insurers, and re-insurers.
As of 2017, in line with the Non-Financial Reporting Directive (NFRD), all PIEs which are also large undertakings pursuant to the AA and whose number of employees exceeds 500 have also been required to include in their activity reports a non-financial statement, including the information necessary to understand the development, results, condition of the enterprise, and the impact of its activities, as a minimum relating to environmental and social and employee issues, respect for human rights, and the fight against corruption and bribery.
While it may seem like quite a large circle of mandated entities because the definition list of PIEs includes – besides the above-mentioned EU-listed companies, credit institutions, and insurance companies – pension insurance companies, investment intermediaries, collective investment schemes, financial institutions qualifying as large undertakings pursuant to AA, energy trading companies qualifying as large undertakings, etc., the threshold of 500 employees along with the PIE scope limits the mandated companies to a very small number indeed and, therefore, renders the direct exposure of businesses to non-financial reporting practically insignificant.
Obviously, the introduction of the rules of the forthcoming Corporate Sustainability Reporting Directive (CSRD) will significantly enlarge the cohort of affected entities by putting in scope all large companies and listed companies (except for listed micro-enterprises), while also pushing for mandatory audits, and the business world is generally aware of that. However, this is still perceived as yet another compliance requirement in an ever-growing line of such that businesses will have to endure. What escapes the attention of the average Bulgarian entrepreneur are the implications of such reporting and disclosures beyond the immediate cost and administrative burden of compliance.
For once, the disclosures may have an impact on the financing opportunities of the companies. Some banks are already signaling that their financing decisions going forward would be strongly based on sustainability considerations. The EU policies are geared towards sustainable finance as a means of promoting and supporting the achievement of the goals of the Green Deal and EU climate and sustainability objectives, meaning that, through enforcement of the policy, the ESG criteria would be having a decisive role in private financing decisions too.
While the CSRD will only affect a few large businesses, it will indirectly affect their smaller suppliers, service providers, and all kinds of business partners, the interactions with whom might have an impact on the disclosures of the reporting companies.
Finally, because of the Green Deal and climate-related considerations used most often when talking about sustainability, the general perception is that ESG is mostly environment-related, green compliance. This could lead to underestimating the other two pillars and especially social considerations, which could present no smaller of a challenge, especially in an economy that has been facing a lot of challenges for years.
With all the above, it is time for Bulgarian businesses to raise their awareness and to address ESG as the complex matter that it is, rather than as the next level of compliance. It would also help a lot if the government invested some time and effort in communicating all the relevant aspects and helping businesses find their way through the variety of mostly vague and inconsequential messages from various experts and consultants in the online space.
Svetlin Adrianov, Partner and EY Law Leader for Bulgaria, Albania, and North Macedonia
This Article was originally published in Issue 9.7 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.