ESG Watch: Bulgaria Legal Updates

Introduction

In recent years, Environmental, Social, and Governance (“ESG”) criteria have emerged as pivotal factors influencing corporate strategy and investment decisions globally. The ESG standards serve as a measure of a company’s dedication to sustainability, ethics, and corporate responsibility, offering competitive advantages like improved reputation, talent attraction, and stakeholder trust.

In Bulgaria, understanding the evolving ESG legal landscape is essential for compliance, risk management, and seizing opportunities. This newsletter shares the latest updates on the ESG regulations in the European Union (“EU”) and Bulgaria to keep businesses informed about sustainability requirements and upcoming developments.

Aligning the Bulgarian Accountancy Act with the Corporate Sustainability Reporting Directive

On March 5, 2024, a draft bill was released for public consultation to amend and supplement the Bulgarian Accountancy Act. The proposed changes aim to align Bulgarian law with the provisions of:

• Directive (EU) 2022/2464[1] (“CSRD”), and
• Commission Delegated Directive (EU) 2023/2775[2]

Bulgaria is required to align its legislation with the above EU regulations by July 6, 2024. However, due to the current political situation, potential delays may arise.

Proposed amendments

The proposed amendments implement the sustainability reporting requirements of the CSRD, which will replace the existing less granular non-financial reporting obligations of certain large undertakings established pursuant to Directive 2014/95/EU[3] (“NFDR”).

• Sustainability reporting

Large undertakings, and small and medium-sized undertakings  (except micro undertakings), which are public companies, should incorporate in their audited reports a separate section for a sustainability report. This section aims to explain how the company’s sustainability efforts affect its growth, performance, and position. The report should be made in accordance with the European Sustainability Reporting Standards (“ESRS”), adopted by the European Commission on July 31, 2023, and should take into account the EU taxonomy for sustainable activities set out in Regulation (EU) 2020/852[4] and its implementing acts.

The sustainability report must be audited by a statutory auditor or an audit firm. A draft bill for amendment of the Bulgarian Independent Financial Audit Act is expected to be released for public consultation, where the bill will outline the specific qualification requirements for auditors of sustainability reports.

• Consolidated sustainability reporting – Parent companies of a large group should also provide information in their consolidated audited reports to explain the group’s effects on sustainability issues.
• Undertakings under item (i) above that are subsidiaries of a non-EU (third-country) parent company should publish a sustainability report for the parent company. This obligation applies if the non-EU parent company has generated a net turnover of EUR 150 million in the EU for each of the last two consecutive financial years.
• The criteria for categorizing “micro”, “small”, “medium” and “large” undertakings have been adjusted due to significant inflation in 2021 and 2022. Thus, the “balance sheet total” and “net turnover” indicators were increased by 25% to account for inflation.

Which companies are affected first and from when?

The first reporting shall apply to:

• large public-interest[5] entities with more than 500 employees, and
• public-interest entities serving as parent entities of large groups with more than 500 employees

Under the draft bill, the first reports are due from 2025 for financial year starting on January 1, 2024. The reporting requirements will be phased in gradually from 2024 to 2028 for the different companies in scope of the new regulation.

Other key developments

While the transposition of CSRD in Bulgarian law is forthcoming, the EU has taken further steps to increase transparency on ESG matters and discourage the making of misleading environmental claims (so-called “greenwashing”).

Empowering Consumers for the Green Transition Directive

One such step is the newly adopted Directive (EU) 2024/825[6] (“Law on Greenwashing”), which aims to protect consumers from misleading information and unfair commercial practices related to greenwashing and product circularity.

The Law on Greenwashing notably prohibits marketing practices, which are perceived as hindering consumers in making informed transactional decisions, such as:

• the making of generic environmental claims dubbing consumer products as “eco-friendly”, “green”, etc., where such claims cannot be substantiated or are true only to specific aspects of a product or a trader’s activity, but not to the product as a whole
• the use of sustainability labels, such as bio-marks, which are not based on a certification scheme or awarded by a public authority
• the product is labeled as carbon neutral or environmentally friendly, when this is achieved by offsetting greenhouse gas emissions outside the product’s value chain, e.g. by supporting general environmental initiatives or investing in carbon credits

The Law on Greenwashing further promotes the use of more durable products and prevents early obsolescence of goods. It requires traders to provide extra information about how products can be reused or recycled and bans misleading claims and practices related to a product’s durability, reparability, software support or recyclability.

Member States, incl. Bulgaria, should transpose the Law on Greenwashing in their domestic law by March 27, 2026, and apply it from September 27, 2026.

Green Claims Directive

The ban on greenwashing is complemented by a proposal of the European Commission for a directive on substantiation and communication of explicit environmental claims (“Green Claims Directive”). The Green Claims Directive aims to further strengthen consumer protection against unsubstantiated environmental claims by imposing various obligations on traders who wish to market products or traders as environmentally friendly in business-to-consumer commercial practices, incl. through the use of environmental labelling.[7]

Notably, traders should assess any explicit environmental claims relating to a product or a trader, whether made in textual form or contained in an environmental label, with a view of ensuring that consumers are provided with verified, scientifically substantiated, and complete (from a product life-cycle perspective) information on the environmental impacts, environmental aspects or environmental performance of the product or trader.

Under the proposal, explicit environmental claims and environmental labelling schemes should be verified and certified by an accredited third-party conformity assessment body before the environmental claim is made public or the environmental label is displayed by a trader. The verification should be completed within 30 days with an option to extend this period in duly justified cases. The substantiation and verification requirements shall apply to all traders, other than microenterprises, which nonetheless may decide to apply them on a voluntary basis.

The Green Claims Directive sets out further rules on the monitoring of compliance with the requirements of the directive and provides for various (incl. sanctioning) powers of designated competent authorities.

In March 2024 the Green Claims Directive has been adopted by the European Parliament at first reading and is currently awaiting the adoption of a position by the Council. The proposal envisages a transposition term of 18 months and – if adopted – the Green Claims Directive should begin to apply 24 months after its entry into force.

Corporate Sustainability Due Diligence Directive

Other elements on the EU’s green agenda have recently suffered setbacks, most notably the proposal for a corporate sustainability due diligence directive (“CSDDD”), which in February 2024 failed to receive the necessary support from the European Council and will likely be reopened for debate only after the upcoming European elections in June 2024.

The proposal was aimed at complementing the current non-financial reporting under the NFRD and its amendments with the CSRD. It suggested that certain companies should have a legal obligation to perform due diligence to identify, prevent, mitigate and account for external harm resulting from adverse human rights and environmental impacts in the company’s own operations, its subsidiaries and in the value chain.

Given the intended role of the CSDDD, the uncertainties surrounding its adoption for now raise questions concerning the proper information collection and implementation of the CSRD reporting requirements.

This document does not constitute legal advice and it only aims to provide general information about the legislative landscape to date.

[1] Directive (EU) 2022/2464 of the European Parliament and of the Council of 14 December 2022 as regards corporate sustainability reporting.

[2] Commission Delegated Directive (EU) 2023/2775 of 17 October 2023 as regards the adjustments of the size criteria for micro, small, medium-sized and large undertakings or groups.

[3] Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups

[4] Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088.

[5] “Public interest entity” refers to a listed EU undertaking, as well as certain other specific types of undertakings, such as credit institutions and insurance undertakings.

[6] Directive (EU) 2024/825 of the European Parliament and of the Council of 28 February 2024 amending Directives 2005/29/EC and 2011/83/EU as regards empowering consumers for the green transition through better protection against unfair practices and through better information.

[7] I.e. a sustainability label covering one or more environmental aspects of a product, a process or a trader.