Environmental, Social and Governance (ESG) in Cyprus
By: N. Pirilides & Associates LLC
The EU regulation on Sustainability-Related Disclosures (“Disclosure Regulation”) is already in force since March 2021.
Its aim is to enhance transparency regarding integration of environmental, social and governance matters (“ESG”) into investment decisions and recommendations.
The ESG’s aim was to encourage corporations to scrutinize their responsibilities and role in society and become more conscious in the decisions they take.
This article will provide an overview of EU legal obligations on entities to report and disclose information on issues, which relate to both the society and the environment with the added colour of ESG and how these have been applied in the Cypriot law and in the practices of Cypriot corporate culture.
The EU embraced the concept of business transparency and accountability on social and environmental matters through the adoption of Directive 2014/95/EU on the disclosure of non-financial and diversity information (the “Directive” also known as “NFRD”). The Directive applies to certain large undertakings and groups of more than 500 employees.
The Directive has been transposed into the National Law of Cyprus and came into force since 2/6/2017, with the publication of the Companies Amended (No.3) Law of 2017 in the Cyprus Official Government Gazette.
According to the Cyprus Companies Law, as amended, (the “Law”), a Cyprus entity, which is considered a “large undertaking” under section 141A(1)(c) of the and/or “large group” in section 141A(2)(c) of the Law, embarks on the journey of non-financial reporting through the obligation imposed by section 151A (1) of the Law to produce a non-financial report. The relevant entity discharges its obligation for the production of such report if pursuant to section 151A (9)(b), the non-financial report of the entity is made publicly available, within six months of the balance sheet date in its website and referred to in the management report. Alternatively, as per section 151A (9)(a) the non-financial report is included in the management report and financial statements of the entity which will accompany the annual return for the respective year and filed with the Cyprus Registrar of Companies.
In June 2017 the European Commission (the “Commission”) published its guidelines to assist companies disclose environmental & social information. These guidelines are not mandatory and companies may elect to use international, European or national guidelines according to their business culture. Additionally, in June 2019 the Commission published guidelines on reporting climate-related information, which in practice consist of a supplement to the existing guidelines on non-financial reporting, which continue to be applicable.
Additionally, the EU Regulation 2019/2088 on Sustainability-Related Disclosures in the Financial Services Sector (“SFDR”). The SFDR requires all financial market participants and financial advisors will be required to disclose specific information on their approaches to the integration of a 'sustainability risk' into their investment decisions. The SFDR is already in force and directly applicable since March 2021.
The supervision of non-financial reporting does not currently fall under the Cyprus Securities and Exchange Commission’s (“CySEC”) competence at national level. However, at EU level, non-financial reporting falls under the competence of the European Securities and Markets Authority (“ESMA”), where CySEC participates in the relevant working streams. To this end, CySEC is monitoring non-financial reporting at national level in the context of conforming to its EU duties.
On 21/04/2021, the Commission adopted a proposal for a Corporate Sustainability Reporting Directive (CSRD), which would amend the existing reporting requirements of the NFRD. The proposal extends the scope to all large companies and all companies listed on regulated markets (except listed micro-enterprises), requires the audit of reported information, introduces more detailed reporting requirements, and a requirement to report according to mandatory EU sustainability reporting standards, requires companies to digitally ‘tag’ the reported information, so it is machine readable and feeds into the European single access point envisaged in the capital markets union action plan.
The CSRD envisages the adoption of EU sustainability reporting standards drafts of which would be developed by the European Financial Reporting Advisory Group (EFRAG). The standards will be tailored to EU policies, while building on and contributing to international standardisation initiatives. The first set of standards will be adopted by October 2022.
While CSR impacts internal processes and company culture, ESG is a measurable set of propositions that external partners and investors look at in their evaluation of a company. ESG illustrates a company's identification and quantification of its risks and opportunities, as well as highlights the ethics of a company. Conversely, the benefits of integrating ESG into business strategy may include increased returns and financial performance, access to new and emerging markets, increased resilience to market fluctuations, improved ability to attract investment and increased employee attraction and retention.
Cyprus companies have embraced the ESG practices and policies and this is evident through the creation of CSR Cyprus, the Cyprus Network for Corporate Social Responsibility in 2016, which has played a vital role in empowering the area of Corporate Social Responsibility. Cyprus companies are cultivating an ESG culture by educating company staff, planting trees, cleaning sea coasts, funding charities and education initiatives etc. In November 2021, our Group of companies, N. Pirilides & Associates LLC and Multilysis Services Limited has, within the framework of CSR, voluntarily offered help in the cleaning of a beach area in Limassol. We shall repeat something similar soon.
N. Pirilides & Associates LLC shall remain dedicated in providing advice and assistance on the ESG legal framework and on its implementation and shall continue to be inspired by the public interest.