ESG – A new opportunity for businesses in Bulgaria

The last 30 years climate change and global warming have become a global problem. This is why the need for initial voluntary implementation of environmental, social and corporate governance (ESG) principles at every stage of the life cycle of any economic activity is becoming increasingly important and even mandatory.


It is becoming increasingly evident that in the coming years ESG sustainability will be a major focus for businesses in all economic sectors worldwide, which is why there is a clear trend to incorporate ESG sustainability as a mandatory “measure” for the viability of each individual economic entity.


The idea of introducing ESG is to ensure a measurable positive impact on the environmental, social and corporate environment that goes beyond financial results. The concept of ESG suggests that this should be achieved through the so-called double materiality assessment. This will not only enhance the company’s reputation, but will also ensure stable growth and competitive advantage in the long term to ensure the appropriate use of the world’s dwindling resources.


Is ESG mandatory?


It would appear at first sight that sustainability reporting obligations within the EU will mainly apply to large undertakings. Starting from 2024, non-financial reporting comes into force for large undertakings with more than 500 employees, from 2025 – for companies with more than 250 employees and a turnover of more than EUR 40 million, and from 2026 – also for small and medium-sized undertakings whose securities are admitted to trading on a regulated market.


What the Corporate Sustainability Reporting Directive (CSRD) does not explicitly mention is that, in order to draw up their non-financial statements, large undertakings will also have to collect and analyse information from the companies that are part of their so-called own supply chains. Therefore, albeit indirectly, almost all companies (regardless of their size and assets) will be involved in the implementation of the ESG strategies and policies of large companies.


The indirect involvement of small businesses (as part of the supply chain) will be further developed with the adoption in the second half of 2024 of the Corporate Sustainability Due Diligence Directive (CSDDD) which will introduce a mechanism for oversight by large companies of the compliance of their suppliers and sub-suppliers with a number of requirements related to human rights, environmental and biodiversity protection, etc.


What does ESG reporting involve?


To comply with the CSRD, businesses need appropriate standards for reporting sustainability in an objective and non-discriminatory manner. In the EU, this task was entrusted to the European Financial Reporting Advisory Group (EFRAG). The final approved standards are subdivided into 12 main categories, 82 subcategories and nearly 1,000 indicators, and cover generally the following areas:


  • Environmental (climate, water, circular economy, pollution and biodiversity);
  • Social (equality, working conditions and respect for human rights);
  • Governance (corporate bodies, internal control and risk management systems, anti-corruption, whistleblowing, AML, GDPR, etc.).


How will ESG be introduced in Bulgaria?


Bulgaria has an obligation to transpose the new ESG requirements by the beginning of July 2024. At the moment, public discussions on the subject create the feeling that the transposition of CSRD in our country will rather follow the already familiar model of formal compliance with “yet another compliance regime imposed by the EU”.


In purely legislative terms, the CSRD will be transposed through amendments to the Accountancy Act and the Independent Financial Audit Act, and the responsibility for certification of the accuracy ofinformation in non-financial statements will lie with chartered accountants.


It is also planned for the Institute of Certified Public Accountants to organise courses which will help auditors obtain the necessary additional qualification on how to check the performance of non-financial indicators in accordance with the EFRAG standards. For now, the introduction of the figure of the ESG officer, known in many other European countries, is not being considered.


How is ESG expected to affect the business environment?


The aim of ESG policies is to sooner or later force a fundamental change in the thinking and strategy of every company in order for companies to remain part of a sustainable supply chain. On the other hand, the implementation of the standards will result in natural growth and innovation, and companies that take ESG aspects into account in their activities will be preferred both by investors and by a large part of consumers. At the same time, a better internal corporate environment, opportunities for equal growth and overall well-being for employees will also be reported.


Of course, in order to take advantage of this opportunity, businesses should carry out a legal and f inancial assessment of their activities in view of their compliance with the adopted ESG standards. In this regard, the formal implementation of ESG policies as “yet another compliance regime imposed by the EU” could in the foreseeable future lead to the impossibility of obtaining bank financing, and to the gradual but irreversible “exclusion” of the relevant company from the economic turnover (due to the “unsustainability” of its business model).