Act No. 171/2023 Coll., on the protection of whistleblowers (the “Act“), came into force on 1 August 2023 and brought institutional protection of whistleblowers into the Czech legal system in the framework of the transposition of the EU Whistleblower Protection Directive[1]. How are whistleblowing, non-financial reporting and ESG related? Find out more in the article below.
Whistleblowing and its legal framework
In particular, the law defines the duties of obliged entities in establishing an internal whistleblowing system, regulates the submission and assessment procedure for notifications of wrongdoing and sets out the conditions for providing protection to the individual who made the notification (the “whistleblower“) from retaliation.
A whistleblower is typically an employee, but may also be, for instance, a volunteer, an intern, a contractor or its employees, a job applicant, a member of a company’s elected body, a shareholder, or a trustee of a trust. Without a doubt, care must be taken that the whistleblowing legislation is not understood to be exclusively about employees, as the express wording of the Act does not say so.
Selected entities have been obliged to have an effective internal whistleblowing system in place since 1 August 2023, whereas some of the obliged entities employing between 50 and 250 employees on the date of the Act’s entry into force had a longer time limit and were only obliged to introduce an internal whistleblowing system as of 15 December 2023.
Among the obliged entities subject to the effectiveness regardless of the number of employees are, among others, persons operating in the field of capital market business, insurance, persons obliged under the Act on Certain Measures against the Legalization of Proceeds of Crime and Terrorist Financing, investment companies, funds or other persons specified by the Act, as well as municipalities with more than 10,000 inhabitants.
The introduction of an internal reporting system necessarily entails a certain level of dedication of selected employees of the organization implementing the system – we recommend focusing in particular on the following six areas:
- Choosing the forms of notification and the design of the notification system
- Identification of the responsible person
- Internal documentation – guidelines and templates
- Revision of current documentation
- External communication
- Internal promotion and communication
You can read more about whistleblowing and the implementation of an internal whistleblowing system in the following section of our website: https://www.peytonlegal.cz/category/whistleblowing/.
Non-financial reporting and ESG
The European Union’s Corporate Sustainability Reporting Directive (CSRD) will gradually introduce new obligations to provide more detailed and comparable information on the sustainability of companies and on the non-financial aspects of their business from 2024.
The European Sustainability Reporting Standards (ESRS) provide guidance on what information companies will be required to report and how.
The acronym ESG comes from English and stands for “Environmental, Social, and Governance” and originally referred to criteria for assessing investments in terms of so-called socially responsible investments for investors interested in investing with sustainability, while keeping social benefit on their minds. Over time, however, some parts of ESG have become part of the legal systems of developed countries, including the Czech Republic, and are therefore gradually becoming mandatory for companies.
Pillar “E” – Environment
Environmental criteria, also referred to as environmental factors, which are hidden under the letter E, are one of the three basic categories of ESG criteria or factors and, together with social and governance factors, form the basic reference framework for non-financial reporting.
The area addressed by the environmental criteria is the environmental impact of the resource consumption and activities of the company subject to ESG reporting. Whether this is to reduce the impacts of climate change or to reduce as much as possible the pollution that occurs as a result of the company’s activities as a whole, i.e. also throughout the supply chain.
Pillar ‘S’ – Social
The social factor (‘S’) refers to social factors such as employee rights, health and safety standards, gender equality and equal pay – issues that can have a negative impact on society. It also examines internal policies relating to issues such as inclusion, the company’s relationships with employees, customers and other stakeholders. Product safety and quality and consumer protection are some of the numerous social indicators that are taken into consideration. It should be stressed that monitoring these (and the following) indicators not only aims to improve working conditions for employees and relations inside and outside the company, but also, and for some businesses in particular, to improve the overall performance and profitability of the company, as well as to reinforce the company’s profile vis-à-vis its business partners and its clients – the consumers.
In the context of ESG reporting, companies are obliged to monitor these parameters and social phenomena and to include relevant information and analysis in their reports. Mandatory so-called indicators include, for example, (i) engagement process and complaints mechanisms for employees, (ii) description of employees (by time and form of legal relationship, gender and region), (iii) OSH indicators, (iv) gender pay gap and overall salary gap, and (v) serious labor and human rights incidents.
Pillar “G” – Corporate Governance
The governance aspect of ESG deals with corporate governance and transparency in relation to shareholders and other stakeholders such as business partners, investors and employees. ESG governance sets structures and protection schemes and provides important rules for everyone and the company to follow, such as a company-wide code of conduct for employees. When you see a company involved in a scandal or getting adverse media coverage due to internal misconduct, it is often the result of a failure of ESG governance.
Key ESG governance topics include shareholder structure, board or management diversity, executive compensation, corporate policies, business ethics and conduct, tax and general financial transparency and strategy, risk management, non-competitive practices, data protection, privacy and cybersecurity, defined ESG decision-making structure, and many others.
We have informed you in detail about the different pillars of ESG in our ESG section, which you can follow here: https://www.peytonlegal.cz/category/esg/.
Whistleblowing as part of Pillar “G”
We group whistleblower protection under ESG into Pillar “G”, specifically into subgroup G1-1 – Corporate Culture and Conduct Measures of the ESRS.
Under this group of measures, businesses will be required to report on internal policies that have been adopted to establish a corporate culture with respect to internal and external corporate conduct. These include, in particular, internal reporting, investigation and remediation procedures, prevention of corruption and bribery, and whistleblower protection in particular.
However, whistleblower protection is also reflected in other sub-groups within ‘G’ – these are both supplier relationship management, but also, for example, the prevention and detection of corruption or bribery.
Benefits of whistleblowing for ESG as a whole
Whistleblower protection is a principle that, if internal whistleblowing mechanisms are set up in a way that is truly capable of protecting whistleblowers from the negative consequences of their whistleblowing within the company, can be a ground-breaking tool in other areas of ESG as well, even completely outside the ‘G’ pillar.
By protecting corporate whistleblowers with mandatory provisions, the Act also contributes to the environmental “E” and social “S” impact reduction objectives. This may include reporting conduct by which a company violates legal provisions protecting the environment or discriminates against some of its employees and others.
It can therefore be concluded that even strictly within the Act’s narrowest scope, an internal whistleblowing system has a significant impact and benefit for a company wishing to meet the ESRS and ESG objectives and individual reporting points, as this will provide potential whistleblowers with a tool to alert the company to possible irregularities or violations in the relevant areas.
At the same time, if the internal whistleblowing system is extended to other reporting options and reports can be directed to areas not regulated by the Act, the introduction of whistleblowing in the company may have an even broader and more fundamental impact on the fulfilment of the ESG objectives.
Compliance as a value
While it may seem that whistleblowing is essentially just another broad set of obligations for companies to comply with under the law, shall they wish to avoid sanctions, we consider it desirable to look at the issue from a broader perspective.
Above all, by properly fulfilling their duties, companies will ensure that they are reputable partners which can be relied on not only by their customers, but also by their business partners and, no less importantly, by potential investors.
They will thereby ensure a high standard of transparency and credibility in their projects and their business. A higher level of transparency can further help not only to meet the prescribed legal standards, but also to facilitate any future transactions, whereby a potential investor can rely to a large extent on the fact that if there are infringing tendencies in the company, which might otherwise represent unforeseen litigation expenses after entering the company, they would have been dealt with earlier precisely with the use of a functional whistleblowing system.
Conclusion
Within a complex and dynamic ESG system, whistleblowing is an integral part of the “G” pillar in particular, i.e. corporate governance. The proper implementation of the legislation on this issue is a challenge for companies (as well as for the non-profit and public sector) on the one hand, in terms of the correct implementation of all the important provisions of the Act, on the other hand, an opportunity to demonstrate the positive aspects of their functioning in a framework of a higher standard of transparency and, last but not least, an opportunity to build the image of their organization through their corporate culture.
The implementation of an internal whistleblowing system and compliance with the whistleblowing legislation certainly has a beneficial effect on the fulfilment of ESG objectives and works across ESRS in the process of non-financial reporting, but also in demonstrating compliance to its customers in B2B relationships.
If you have any questions regarding legal matters on the topic of whistleblower protection or ESG, please do not hesitate to contact us.
[1] Directive (EU) 2019/1937 of the European Parliament and of the Council of 23 October 2019 on the protection of persons who report breaches of Union law
Mgr. Jakub Málek, managing partner – malek@plegal.cz
Vít Hořejší, legal assistant – horejsi@plegal.cz
Ráchel Kouklíková, legal assistant – kouklikova@plegal.cz
6. 6. 2024