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What is ESG reporting and why is it becoming important in accounting?

In brief: ESG reporting is becoming a mandatory part of corporate governance - new regulations require sustainability information to be included alongside financial statements. For accounting, ESG is not a separate topic but part of everyday data and processes - energy consumption, employee data, investments, and risks are already largely within the scope of accounting. Even if the requirements currently do not apply to everyone, it is worth preparing now - especially for companies collaborating with major market players or planning growth. ESG is an abbreviation increasingly heard not only in business but also in the public sphere. It is highlighted as one of the main trends in accounting that needs attention. The reason for this is that it is starting to affect a broader segment of society, and its implementation deadlines are gradually approaching. But what exactly lies behind this abbreviation? E (Environmental) – how the company impacts the environment (CO₂, energy, waste, etc.); S (Social) – employees, working conditions, diversity, safety; G (Governance) – transparency in corporate management, ethics, risks. ESG reporting, in turn, is the company's obligation to disclose information about its impact on the environment (Environmental), society (Social), and governance (Governance). It includes data on emissions, energy consumption, employee structure, internal policies, and risk management. At first glance, it may seem unrelated to accounting, but that's not entirely true. Let's delve deeper into what ESG reporting entails and the accountant's role in it. ESG regulations One of the first European Union directives requiring companies to report on sustainability was NFRD (Non-Financial Reporting Directive). However, its requirements were expanded with another directive - CSRD (Corporate Sustainability Reporting Directive). Its main addition - a broader range of companies required to report on sustainability and very specific standards for report content (defined by the supplement - ESRS directive). Additionally, companies must not only show their impact on the environment/society but also how ESG risks affect their own business. And that's not all. EU taxonomy regulation defines which business activities are considered "environmentally sustainable" - a company cannot arbitrarily decide that a process is green. However, EU directives and regulations are not laws - each member state has the opportunity to adopt and adapt them to its legal system. Consequently, in Latvia, ESG reporting requirements are determined by the Sustainability Information Disclosure Law, which is primarily based on all the aforementioned EU directives. Although it may seem that lawmakers have everything clearly defined and strictly regulated, these requirements are still in the implementation phase and currently apply to only a small portion of companies. Who is currently subject to ESG reporting? Currently, it applies to two types of companies: Large companies with more than 250 employees or a turnover exceeding €50M, or a balance sheet total exceeding €25M. Publicly listed SMEs - listed on the stock exchange but do not exceed the criteria for large companies. Small companies are currently not obligated to meet these requirements - but if they collaborate with large companies, they may need to prepare. If you've concluded that you fall into one of these categories required to submit an ESG report, it's also important to know when it needs to be done. For large companies, the report must be prepared for the year 2026 and published in 2027. For publicly listed SMEs, the report must be prepared for the year 2027 and published in 2028. What is ESG reporting in accounting? Many directives, laws, and deadlines, but how does it relate to accounting? Quite directly, as based on the CSRD directive, the ESG report becomes an official part of the annual report. Sustainability information must be included in the company's management report and will be reviewed by official institutions - audited. And it is the accountant who prepares the annual report in the company, so it is necessary to know what data is required and how it should be presented in the report. Previously, sustainability data often consisted of marketing slogans, PR, or very loosely interpreted information. However, under the new legislation, this will no longer be acceptable. ESG information must be of the same quality as financial data. Let's look at some positions that need to be included in the report and their data sources: Energy consumption - invoices, cost accounting; Fuel consumption - transport cost accounting; Number of employees - personnel and payroll accounting; Investments in sustainability - fixed asset accounting; Supplier structure - debtor/creditor data. It may seem like this resembles a traditional financial report. However, financial reporting shows how the company has performed in the past in monetary terms. ESG reporting shows how the company impacts the environment and society, and how these factors will affect its future. Additionally, this report includes data such as pay disparities, corruption risks, and governance policies, which are only partially quantifiable. ESG reporting is not just a new regulatory requirement but a significant shift in corporate thinking and management. It is gradually becoming an integral part of financial and management processes, where the accountant's role no longer limits itself to traditional data recording but also involves contributing to the quality, transparency, and compliance of sustainability data. Therefore, understanding ESG today is not an advantage - it is becoming a necessity for every company that wants to be ready for future requirements. Frequently Asked Questions (FAQ) What is ESG reporting? ESG reporting is the company's obligation to disclose information about its impact on the environment (Environmental), society (Social), and governance (Governance). It includes data on emissions, energy consumption, employee structure, internal policies, and risk management. According to Corporate Sustainability Reporting Directive requirements, ESG information is included in the company's management report and becomes an official part of the annual report. Which companies in Latvia are subject to ESG reporting? In Latvia, ESG reporting is gradually becoming mandatory for large companies and publicly listed companies. According to the Sustainability Information Disclosure Law, it applies to companies meeting at least two of the following criteria: more than 250 employees; turnover exceeding €50 million; balance sheet total exceeding €25 million. For large companies, the first mandatory sustainability reports must be published for the 2026 reporting year (in 2027). How are ESG data incorporated into accounting? ESG data is collected and structured similarly to financial data. Some information is already present in accounting systems - for example, energy costs, fuel consumption, employee numbers, and investments. Accounting helps: ensure data accuracy; document calculation methodologies; prepare verifiable reports. The ESG report is included in the management report and is gradually becoming auditable, thereby significantly increasing the role of the financial function in this process.