Are We Ready for the Sustainability Report?
While sustainability reports are not part of our daily routine, their importance is enormous, and they are becoming increasingly widespread globally. This trend is driven by the growing demand for sustainability and the awareness of environmental challenges, which affect and encourage more and more companies to communicate their sustainability efforts transparently.
What is a sustainability report?
It is a document prepared by organizations, companies, or institutions to inform stakeholders (such as shareholders, customers, employees, and the public) about their sustainability performance and their social, environmental, and economic impacts. These reports serve not only to provide information but also act as tools for companies to enhance their social responsibility. The purpose of the report is to transparently showcase the results and progress achieved by the companies, as well as their goals for the upcoming period. Additional benefits include increasing the transparency of companies, supporting sustainable development, and assisting stakeholders in making informed decisions.
In terms of legal compliance, it is essential to prepare these reports and communicate sustainability activities transparently. Due to numerous regulations, responsibly operating companies pay attention to compliance and take sustainability aspects into account in their decision-making processes. This means that companies preparing sustainability reports have a competitive advantage. The report allows companies to communicate their sustainability efforts, contribute to social responsibility, and make a positive impact on the environment and society.
Who Is Required to Submit This?
Companies, large enterprises, and public service providers that fall under EU regulations are required to prepare sustainability reports if at least two of the following statements apply:
- The balance sheet total exceeded 10 billion HUF (approximately 26 million EUR or 27 million USD).
- The annual net revenue exceeded 20 billion HUF (approximately 52 million EUR or 54 million USD).
- The average number of employees exceeded 500.
Large enterprises must comply with the requirements for preparing sustainability reports by 2026. These economic entities are expected to publicly report on sustainability risks and opportunities and how these affect the performance and development of the business. The goal of the reports is to demonstrate the impacts on people and the environment, thereby supporting sustainable operations.
One of the key elements of the report is the conscious reduction of carbon dioxide emissions. CO2 quotas are not only legal requirements but also tools for promoting sustainable development. Companies need to increasingly cooperate with emission trading systems, such as the EU ETS, which is essential for achieving their sustainability goals.
Some quotas are already operational, while others are still in development; in some countries (such as India and China), these are not widely considered, and their goal for the future is to impose tariffs on goods coming from such countries.
But what are these quotas?
What is a CO2 quota? It is a permit for a certain amount of carbon dioxide or its equivalent greenhouse gas emissions.
“The ETS (Emission Trading System) affects over 10,000 power plants and factories. It establishes a carbon dioxide emission threshold known as the ‘polluter pays’ principle. Companies can only pollute the air below this limit in exchange for CO2 quotas. They must pay for these quotas in auctions, motivating them to keep emissions as low as possible. Each CO2 unit allows for the emission of one ton of carbon dioxide. Unused quotas can be sold by the companies.” – This can be read on the European Parliament’s website.
European Union Emission Trading System (EU ETS)
The current European Union quota system is the Emission Trading System, or ETS, which is one of the largest carbon markets in the world and started in 2005. It is a market-based regulatory mechanism that allows companies to buy and sell quotas. The European Union’s Emission Trading System is also referred to as CO2 quotas (or carbon quotas) because it is responsible for regulating carbon dioxide emissions.
The primary objective of the EU ETS is to reduce greenhouse gas emissions resulting from industrial activities and to combat climate change. Since the European Union is the third-largest carbon dioxide emitter in the world, it has set an ambitious goal to significantly reduce harmful emissions by 2030 compared to 1990 levels, aiming for net-zero emissions by 2050.
The main responsibility for defining and allocating the quotas lies with the European Commission:
- European Commission: Within the EU ETS framework, the European Commission determines the annual emission targets and the quota allocation schedule based on consultations between EU member states and the European Parliament.
- National Authorities: Member states participate in the allocation of quotas and the monitoring of emissions through their respective national authorities.
The EU ETS is specifically designed for high-energy-consuming industries and energy producers. From 2021, in its fourth phase (2021-2030), the EU ETS will cover over 11,000 power plants, factories, and other facilities across all 27 EU member states, as well as Iceland, Norway, and Liechtenstein. Below, I detail the types of facilities covered by the ETS:
- Power Plants: Fossil fuel-powered power plants (coal, oil, and natural gas power plants), combined heat and power (CHP) plants (power plants that produce both heat and electric energy).
- Industrial Facilities: Steel and iron production, cement manufacturing, chemical industry, paper and pulp production, glass manufacturing.
- Other Facilities: Oil refineries, ceramic and brick production.
- Aviation: Aircraft (the EU ETS also covers flights within the European Economic Area, EEA).
The Union’s Vision: CBAM – Carbon Border Adjustment Mechanism
The CBAM (Carbon Border Adjustment Mechanism) is a mechanism that offsets the carbon intensity of imported goods. This is one of the European Union’s newest tools to ensure that products manufactured within the EU have fair competition with foreign products, which may not be produced under such strict environmental regulations. The implementation is expected to take place between 2026 and 2034.
“While the EU ETS sets the total number of issued emission units concerning greenhouse gas emissions from relevant activities and allows for the trading of these emission units (a fixed cap-and-trade system), the CBAM does not set quantitative limits on imports to avoid limiting trade. Additionally, while the EU ETS applies to facilities located within the Union, the CBAM must be applied to certain goods imported into the EU customs territory.” – National Climate Protection Authority
GLOBAL PERSPECTIVE: OTHER EMISSION TRADING SYSTEMS
The fight against climate change is not solely the responsibility of the European Union; efforts are being made all around the world to reduce CO2 emissions and consciously monitor carbon footprints.
- California Cap-and-Trade Program: This is an emission trading system operating in the state of California, USA, aimed at reducing greenhouse gas emissions by setting a limit on emissions (cap) and providing opportunities for trading these quotas (trade).
- Regional Greenhouse Gas Initiative (RGGI): This is a regional initiative for the northeastern and mid-Atlantic states of the USA. Its goal is to reduce carbon dioxide emissions from electricity generation through the use of quotas and their trade.
- China National ETS: China launched its national emission trading system in 2021, initially focusing on the energy sector, but it is expected to expand to other sectors in the future.
Currently, small businesses are not required to produce sustainability reports, but we believe this will be essential in the future. Our colleague Szilvi is working on ensuring that INCON-LOGISTIC Ltd. will start preparing sustainability reports soon, which will help us monitor our CO2 emissions.
What do you think about these? Have you considered starting to work on sustainability reports in the near future? If you have any problems or questions regarding this, we would be happy to help you resolve and answer them! Feel free to reach out to us!
SOURCES
Key Facts About ESG Reporting | ESG 360° | Deloitte Hungary
https://www.europarl.europa.eu/topics/hu/article/20170213STO62208/amit-erdemes-tudni-az-eu-kibocsatas-kereskedelmi-rendszererol-es-reformjarol
https://nkvh.kormany.hu/cbam-az-importaruk-karbonintenzitasat-ellensulyozo-mechanizmus
https://ww2.arb.ca.gov/our-work/programs/cap-and-trade-program
https://www.rggi.org/
https://icapcarbonaction.com/en/ets/china-national-ets