The EU Directive on sustainability reporting¹ entered into force on 5 January 2023, and related legislative work has been under way in 2023, headed by the Ministry of Economic Affairs and Employment. The Government proposal to Parliament for Acts amending the Accounting Act and the Auditing Act and for certain related Acts was discussed by the Commerce Committee on 20 October 2023. The objective is to have the legislative amendments ready for parliamentary approval in 2023.

Companies subject to sustainability reporting shall, in accordance with the phased application timetable included in the proposal for the Accounting Act (see the paragraph below), prepare, disclose to and register with the Finnish Patent and Registration Office (PRH) in digital format their financial statements and their management report, which includes a sustainability report. Regarding reporting to the PRH, there remain many unresolved practical issues, in which the PRH will play a key role. The legislative proposals do not have an impact on the issues regulated by the ESEF-RTS² concerning listed companies.

Reporting would begin with large PIEs³ who have reported for the past six years non-financial information in accordance with the Accounting Act. For these PIEs, reporting would commence in 2025 and would cover 2024. A year later, other listed and unlisted large undertakings⁴ would commence reporting. Listed small and medium-sized undertakings would be the third group to commence reporting, in 2027. Listed small and medium-sized undertakings would be given the option to postpone the preparation of sustainability reporting by two years. The thresholds determining the size category of an undertaking have remained unchanged since 2013. The European Commission is thus proposing a review of these thresholds to account for the impact of inflation, and the related delegated act should be adopted towards the end of 2023⁵.

Sustainability information in digital format

According to the proposed legislative amendments, sustainability information should in future be reported in a dedicated section of the management report. The information should be in digital XHTML format and include digital XBRL sustainability tags. The technical reporting requirements for sustainability information in digital format are based on EU regulations. The taxonomy for sustainability reporting will be annexed to the Commission Delegated Regulation in the same manner as the taxonomy for IFRS reporting.

The aim has been that the taxonomy for sustainability reporting would be available for reporting data for 2024 but, due to the adoption process at the EU level, it seems that the target date will not be achieved, and the start of digital reporting will be postponed, at least concerning the XBRL markups in sustainability information. The European Commission is planning to provide more detailed information about the matter in a Q&A document. The objective is instead to incorporate into the ESEF-RTS the taxonomy for reporting information as referred to in Article 8 of the taxonomy regulation on sustainable investment⁶ at an earlier date so that application would start already in 2024.

Financial statements in digital format

The proposed legislative amendments⁷ require that undertakings subject to sustainability reporting also provide their financial statements in digital XHTML format with XBRL markups. Regarding financial statements, the legislative amendments would grant the PRH the authority to define the content and scope of financial reporting in digital format for non-listed companies, and the PRH would therefore define the taxonomies used and the related time schedule for the XBRL tags of the financial statements of non-listed companies.

In contrast, listed companies would still be subject to reporting requirements under ESEF regulations⁸. The registration of listed companies’ financial statements and sustainability information with the PRH would take place with the similar ESEF-RTS-compliant financial statement and management report materials that are submitted to the Finnish release storage (OAM) in accordance with the provisions of the Securities Markets Act⁹. The XBRL markups into the listed companies’ consolidated financial statements are made using ESEF taxonomy. A decision by the PRH could, however, order that the PRH-defined taxonomy would also be used in the financial statements prepared in digital format by a parent undertaking of a listed company, as of the 2026 financial statements.

If an undertaking subject to sustainability reporting was unable to submit, due to an impediment caused by reasons other than the undertaking itself, the documents required by the proposed legislative amendment, and in accordance with a decision taken by the PRH, the undertaking would be considered to have fulfilled its obligation if it has itself disclosed the documents in accordance with the legislative proposal.

Assurance

The proposed legislative amendment also includes a requirement for the assurance of sustainability information. This requirement is included in the Auditing Act, which is currently being amended. The Act would be applied in accordance with the same timetable as the amendments to the Accounting Act concerning sustainability reporting.

In addition, the provisions of the Securities Markets Act concerning the assurance of the ESEF financial statements of listed companies will be amended, according to which the assurance or auditing of ESEF financial statements would be mandatory and no longer voluntary (proposed chapter 7, section 8, subsection 4 of the SMA). In the report of the Commerce Committee (in Finnish), the Government proposal has been specified so that obligatory assurance should be applied for the financial statements for the annual reporting periods beginning on or after 1 January 2024.

The proposed legislative amendment largely leaves the level of assurance and the practical carrying out of assurance to generally accepted auditing standards. The FIN-FSA considers it important that assurance would be as harmonised as possible across the various entities. The FIN-FSA encourages entities to comply with the recommendation of the association of Finnish auditors (in Finnish), which may be updated due to the legislative amendment.

Supervisory powers

The FIN-FSA’s supervisory powers are also being specified. The FIN-FSA would supervise the sustainability information of listed companies and of FIN-FSA supervised entities, i.e. entities operating in the financial markets that are required under the Accounting Act to prepare a sustainability report. The supervisory powers concerning sustainability reporting would be similar to those concerning IFRS enforcement and will apply also to unlisted entities supervised by the FIN-FSA.

The proposed legislative amendment does not mention the supervision of sustainability reporting by entities other than those within the FIN-FSA's mandate. The issue will possibly be discussed in the context of the national implementation of the Directive on corporate sustainability due diligence¹⁰, which is currently being prepared in the European Union.

For further information, please contact:

Riitta Pelkonen, Senior Specialist, riitta.pelkonen(at)fiva.fi 

¹ Directive (EU) 2022/2464 of the European Parliament and of the Council, amending Regulation (EU) No 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU, as regards corporate sustainability reporting.
² Commission Delegated Regulation 2019/815 (ESEF RTS).
³ Accounting Act, chapter 1, section 9 Public-interest entity: 1) a Finnish entity which has issued a share, bond or another security subject to trading on a regulated market as referred to in the Securities Markets Act; 2) a credit institution referred to in the Act on Credit Institutions; 3) an insurance company referred to in the Insurance Companies Act. A public-interest entity whose average number of employees during the financial year has exceeded 500 has to include in its management report a statement of non-financial information.
⁴ Accounting Act, chapter 1, section 4 c Large undertaking: a large undertaking refers to a reporting entity exceeding at least two of the following three thresholds at the balance sheet date of the previous financial year and the one immediately preceding it: 1) total assets EUR 20,000,000; 2) net turnover EUR 40,000,000; 3) average number of employees during the financial year 250.
⁵ Delegated act details - Register of delegated acts (europa.eu).
⁶ Regulation (EU) 2020/852 of the European Parliament and of the Council on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088.
⁷ Proposed legislative amendments to chapter 7, sections 22-25 of the Accounting Act.
⁸ ESEF (European Single Electronic Format), Commission Delegated Regulation 2019/815 (ESEF RTS).
⁹ OAM, Nasdaq Helsinki.
¹⁰ Directive on corporate sustainability due diligence.