Managing sustainability aspects will be a new norm

Sustainability reporting status in Estonia

Let´s Do It Foundation is currently engaged in project SusTool with the goal to develop a sustainability reporting tool for service and companies in the IT sector that helps better align business performance with sustainability standards. During the preparatory phases of the project, the current state of sustainability reporting in Estonia was studied through annual reports of various Estonian companies.

This report provides a summary based on approximately 30 companies’ public information about sustainability reporting and activities found in annual/sustainability reports and official websites of the companies. The companies whose reports were studies operate in various sectors, including IT, telecommunication, energy production, banking etc.

As companies are soon required to report according to the European Sustainability Reporting Standards (ESRS), it is expected that sustainability reporting will go through significant maturing compared to the current state. The standards cover the full range of environmental, social, and governance issues, including climate change, biodiversity, and human rights. They provide information for investors to understand the sustainability impact of the companies in which they invest. Currently the legal requirement for sustainability reporting in Estonia comes from the EU non-financial reporting directive, NFRD which was enforced in 2014, and became applicable to Estonian businesses from June 2021 when it was incorporated to into the Estonian Accounting Act. Based on §14(1) of the Act, an accounting entity is mandated to prepare an annual report which includes a management report, in addition to preparing annual financial statements. If a company’s annual report is audited, either because they want to or because it’s legally required, they also need to mention in their management report how their activities affect the environment and society, as per §24 paragraph 3, section 3 of the Estonian Accounting Act.

The directive allows flexibility in how reporting is carried out, but the report must cover environmental and social impacts of the business, the company’s anti-corruption measures, and a comprehensive description of its management. On June 1, 2021, new sections, §24(6) and §24(61), were introduced into the Estonian Accounting Act. §24(6) requires for large companies, defined as those with over 500 employees, to include information about the environmental and social impacts of their operations. They also need to address human resource management issues, demonstrate a commitment to upholding human rights in their activities, and provide an overview of their anti-corruption efforts. Additionally, they should offer relevant explanations in the annual report to give a comprehensive view of the company’s performance, development, position, and overall impacts of its activities.

The most popular sustainability reporting guidelines in Estonia currently followed by companies are the GRI standards. As GRI standards are internationally recognized, they allow companies to be confident that their sustainability report, when in accordance with the standards, provides the necessary information required by the regulatory demands. The following paragraphs provide an overview of the status of reporting across the three broad areas included in the ESRS.

Environmental topics

The most common area that is reported is related to climate and carbon emissions. In these areas most of the reports included in the analysis provide information on carbon emissions, including goals and action plans to reduce energy consumption or carbon footprint.  However, many of the companies do not provide a clear overview of the methodology used when providing information related to these topics. Lack of transparency is a common theme in many of the reports. Often the goals provided are rather ambiguous and lack specifics.

In addition to climate impact and energy topics, material use, and waste generation are also popular themes in corporate reports. Most companies provide information on how waste is disposed of, and some companies also provide specifics on amounts of waste and targets related to waste reduction.

The topics less covered regarding environmental matters are conservation of biodiversity, water usage and resource use. These areas are mostly included in the sustainability discussion in the reports of companies that have a direct impact, for example water companies.

Social topics

Most of the company reports that were studied provide at least minimal information regarding their own workforce, for example information about wages, diversity, training, health and safety etc. The level of details provided varies among the companies and more information is disclosed by bigger companies that report in more detail across all areas. It can be said that this is one of the areas with the most information provided compared to all the topics in the ESG range. Information is shared also about the policies companies have in place regarding consumers and end-users. The reports include sufficient detail about the processes in place to engage with consumers, for example customer feedback channels etc. The situation differs when looking for information provided on workers in the value chain which is not covered in most of the reports. Another area that is not covered is related to the impact on local communities.

Governance

As many topics regarding governance have been something that companies are used to reporting in their annual reports even before sustainability became a discussion topic, there is quite a lot of information provided. Most companies provide an overview of the governance composition and policies, as well as risk management and internal control processes. The forerunners of exemplary reporting also provide information regarding diversity and remuneration policies in their companies. As with other areas, the larger companies have specific policies and processes in place, for example there are several examples of designated committees or other bodies which are responsible for risk management or internal control. Other companies are much less thorough, only implementing a simple process of auditing certain governance related matters. The less reported topics in governance are related to business conduct. There is little information about policies on business conduct, political engagement and payment practices with the exception of some of the larger companies. One of the standout topics which is covered is anti-corruption activities, as these are diligently described in most reports.

Based on the reports covered for the current analysis, it can be said that sustainability reporting is still rather underdeveloped in Estonia with systematic reporting undertaken only by big companies who are required to report under the current obligations imposed by NFRD. Furthermore, the most detailed reporting is mostly seen from companies which are a part of multinational corporations. These are the companies that include detailed information about various ESG topics and provide specific goals to reach certain milestones regarding CO2 neutrality, energy efficiency etc. These companies tend to have separate sustainability reports or provide information in their lengthy annual reports. Others who report about the topics rather underwhelmingly, only have a few pages or paragraphs on these topics either in their annual reports or on their websites.

The observations made in this report align with the study conducted by Sustinere, an Estonian origin dedicated ESG and sustainability agency. They study annual reports of Baltic companies with the largest impact on society and evaluate the quality of the reporting, and the amount of ESG and sustainability topics covered. In addition, a similar report was compiled by SusTool Finnish project partner DIMECC which also provides very similar conclusions – despite having some forerunners providing very detailed sustainability reporting, the general level of reporting is poor also in Finland with falling short of the upcoming ESRS requirements.