Constantly expanding and becoming increasingly diverse, complex, and risk-laden, the environmental, social, and governance landscape affects and challenges most businesses. New laws and regulations are having broad implications for organizations. According to EY Global Law Leader Cornelius Grossmann, “we are seeing a major pivot from a world in which sustainability was about messaging and voluntary commitments, to a world in which implementation is key and reputational risks are becoming more acute.” Nowadays, society no longer expects companies to simply do no harm, but also expects them to appropriately address environmental and social matters. In order for those matters to be properly addressed, it is crucial to focus on legal requirements for compliance in terms of ESG.
ESG-Related Requirements in Lithuanian Legislation
According to the laws currently in force in Lithuania, companies, in addition to annual financial reports, must also prepare an annual publication that must include an analysis of non-financial performance, inter alia information related to environmental protection, personnel, etc. These requirements are mandatorily applicable for those entities which fall under the definition of large companies, public interest companies, and state or municipal companies.
A company is considered to be large if at least two of the following indicators are confirmed on the last day of the financial year: (1) the value of assets indicated in the balance sheet exceeds EUR 20 million; (2) the net sales revenue during the reporting financial year exceeds EUR 40 million; (3) the average annual number of employees during the reporting financial year exceeds 250 employees.
A public interest company is defined as a company whose activities are important to the public, in terms of scale or nature, due to the number of its customers. Public interest companies are those whose securities are traded on the regulated market, commercial banks and the Central Credit Union, financial brokerage companies, collective investment undertakings, pension funds, occupational pension funds, and management companies that manage at least one aforementioned entity, as well as associations of participants of occupational pension funds, insurance companies, and reinsurance companies. State and municipal companies may qualify as public interest companies under certain conditions established by the law.
Large public interest companies, whose average annual number of employees during the reporting financial year exceeds 500 on the last day of that year, shall include in the annual report a social responsibility report containing the information specified in Article 8 of EU Regulation 2020/852 (Taxonomy Regulation): in particular, information on the proportion of the turnover, capital expenditure, or operating expenditure of such large non-financial companies that is associated with environmentally sustainable economic activities. Social responsibility reports must also include the following information: a brief description of the company's business model, a description of the company's policy including the control over the implementation of this policy, the results of the company's policy, information on the main risks related to the company's activities and how the company manages those risks, and non-financial key performance indicators related to specific activities.
While it would be disproportionately burdensome to extend such a requirement to smaller companies, those companies may voluntarily decide to publish such information.
The CEO and members of the management and supervisory bodies are responsible for the preparation and publication of the company's annual report and separate social responsibility report, in accordance with the procedure established by law. CEOs and members of the management and supervisory bodies who do not perform their duties according to the competence assigned by law, or perform them improperly, must compensate the company and/or other persons for all the damage caused.
Under the Taxonomy Regulation, the European Commission had to come up with the actual list of environmentally sustainable activities by defining technical screening criteria for each environmental objective through delegated acts. As long as those are not issued yet, many large companies in Lithuania prepare their reports on non-financial activity by following alternative soft law rules such as guidelines, recommendations, or standards – for instance, the GHG protocol, GRI standard, etc. Implying that, despite ambiguous guidance from regulators, stakeholder pressure and competing goals within the business itself put a huge amount of pressure on organizations in relation to ESG compliance.
Lauras Butkevicius, Partner, and Evelina Nedzinskaite, Associate, EY Law