Nordia Law

New Sustainability Reporting Requirements for Limited Liability Companies – What Do They Mean?

At the beginning of 2024, changes aligned with the EU’s Corporate Sustainability Reporting Directive (CSRD) came into effect, introducing new obligations for limited liability companies and other entities. The directive, approved by the EU in 2022, has been implemented into Finnish national legislation through amendments to the Accounting Act, the Limited Liability Companies Act, and the Auditing Act. These changes aim to enhance corporate accountability and transparency on sustainability issues, including environmental impacts, social responsibility, and adherence to good governance.

Amendments to the Limited Liability Companies Act assign sustainability reporting responsibilities primarily to the board of directors and the general meeting. The board is responsible for ensuring that the company prepares a sustainability report in compliance with legal requirements. The general meeting, in turn, must appoint an assurer for the sustainability report unless the company’s auditor assumes this role.

The company’s own auditor may act as the assurer without a separate decision by the general meeting for the financial year in which the company is required to prepare its first sustainability report, provided that the auditor, or if an audit firm has been appointed as the company’s auditor, the principal auditor, holds a special qualification as a sustainability report assurer or has otherwise acquired sufficient knowledge of sustainability reporting and its verification. After the first year of sustainability reporting, a separate decision must be made regarding the assurer.

Who Is Subject to the Reporting Requirement?

In Finland, the sustainability reporting requirement applies to entities defined under Chapter 7 of the Accounting Act. These include:

• Limited liability companies, for which there are specific provisions regarding threshold values,
• Cooperatives,
• Insurance companies, and
• Credit institutions.

Associations and foundations are excluded. Consequently, the requirements focus primarily on business and economic operators with significant environmental and societal impacts.

The requirements will be introduced in phases, starting with publicly listed large companies, groups, and credit institutions, which will publish their reports in spring 2025 covering the year 2024. A year later, in spring 2026, the obligation will extend to all large companies as defined in the Accounting Act, including unlisted companies. All listed companies are required to prepare the sustainability report from 2027 onwards.

A company qualifies as a large enterprise if it meets two of the following three criteria for two consecutive financial years:

• A balance sheet total exceeding €25 million,
• Revenue exceeding €50 million, or
• An average of over 250 employees.

Strengthening the Role of Auditors

Changes to the Auditing Act elevate the role of auditors by assigning them the task of assuring sustainability reports, if the general meeting does not choose to appoint another person as the assurer. This ensures the reliability of the reports and increases investor and stakeholder confidence in the disclosed information. Assurance also seeks to harmonize corporate sustainability reporting across the EU.

Expanding the auditor’s role, requires updated expertise, as sustainability reporting differs from traditional financial reporting. It encompasses aspects such as emissions reporting, energy efficiency data, and indicators related to employee well-being and diversity.

Objectives of Sustainability Reporting

Sustainability reporting is part of the EU’s broader sustainable development agenda, aiming to promote the green transition and make economic activities more responsible. Under the CSRD, companies must provide more detailed and standardized information, improving the comparability of reports across companies and industries.

The content of the reports is based on the European Sustainability Reporting Standards (ESRS), which cover:

• Environment (e.g., climate change mitigation and resource efficiency),
• Social responsibility (e.g., human rights and equality), and
• Governance (e.g., anti-corruption and anti-bribery measures).

The requirements help companies identify and manage sustainability-related risks and opportunities while promoting transparency towards customers, investors, and other stakeholders.

Compliance with sustainability reporting requirements demands proactive efforts from companies.

The Board and Management Should Evaluate:

• What sustainability-related information is currently collected and reported?
• How can data collection processes be improved to meet future requirements?
• Does the organization have sufficient expertise to implement sustainability reporting and manage related risks?

Addressing these questions helps companies transition smoothly to the new reporting framework. Compliance with the legal changes not only meets regulatory demands but also offers an opportunity to strengthen corporate responsibility and market competitiveness.

The new sustainability reporting requirements present new challenges for limited liability companies but also create opportunities for sustainable business practices, where financial and environmental goals can go hand in hand.

Key Steps for Preparation

Large enterprises subject to the requirements under the Accounting Act should begin preparations in 2024. Necessary actions include:

Understanding Reporting Requirements

Management and the board must familiarize themselves with the ESRS and assess what data the company must provide. This helps identify gaps between current practices and future demands.

Establishing Reporting Processes and Structures

Companies should create clear processes and allocate responsibilities for sustainability reporting. This may involve staff training, upgrading IT systems, and ensuring adequate resources.

Preparing for Data Collection

Data collection must start by early 2025 to ensure all required information is available for the first report. This may include adopting methods to measure environmental impacts, social responsibility, and governance practices.

Conducting a Double Materiality Analysis

Initially, companies must perform a double materiality analysis to identify which sustainability issues are significant both for the company’s operations and its stakeholders. This analysis examines both the company’s impact on the environment and society and how sustainability challenges affect the company.

Collaborating with Auditors

Early discussions with auditors about reporting requirements and assurance processes can smooth the transition.

Why Is Preparation Important?

Starting preparations early ensures compliance with statutory requirements and builds trust and transparency with stakeholders. Sustainability reporting can also offer strategic benefits, such as a competitive edge, by enhancing the company’s reputation as a responsible actor.

Companies that address data collection and process development in advance can avoid the rush and potential errors during the transition. Sustainability reporting is not just a legal obligation but also an opportunity to develop more sustainable and long-term business practices.