On 28 November 2022, the Council of the European Union adopted the Corporate Sustainability Reporting Directive (CSRD), following its prior approval by the EU Parliament on 10 November 2022. This already imposes extended reporting obligations on companies as of the reporting year 2024.
The EU Commission’s corresponding proposal to amend sustainability reporting already dates back to 21 April 2021. However, it was not until preliminary political agreement was reached between the Council of the European Union and the European Parliament on 21 June 2022 that the long-stalled legislative process regained momentum - the approval of the European Parliament followed on 10 November of this year.
In terms of content, the regulations that have now also been adopted by the Council of the European Union essentially correspond to those of 2021, albeit that the earliest reporting year has been postponed to 2024.
The Directive must now be published in the Official Journal and will enter into force 20 days later. The EU member states then have 18 months to transpose it into national law. The new regulations expand the group of companies affected by them quite considerably compared to the present legal situation.
Sustainability reporting (or non-financial reporting) by companies, which already existed, has also been fundamentally expanded and standardised.
The information required covers not only environmental aspects, but also other ESG concerns, such as social issues and employee interests, the respect of human rights, and the fight against corruption and bribery. A detailed article dated 28 January 2022 on the overall status of the CSRD can be found here.
Who does it affect?
The CSRD will significantly expand the group of companies required to report on sustainability. Previously, only large capital market-oriented corporations and commercial partnerships equivalent to corporations with more than 500 employees and - irrespective of their legal form and capital-market orientation - corresponding credit institutions and insurers were required to submit non-financial reports.
Far more companies are to be covered in future, essentially:
- all large corporations and commercial partnerships equivalent thereto via Sec. 264a of the German Commercial Code [Handelsgesetzbuch, HGB], irrespective of their capital-market orientation;
- all other capital market-oriented companies, with the exception of micro-companies;
- subsidiaries of companies from third countries, if the subsidiaries are large companies or listed on a European stock exchange and the parent company generates net sales of more than 150 million euros in the Union, as well as
- branches of companies from third countries if they generate net sales in the Union of more than EUR 40 million and the parent company generates net sales in the Union of more than EUR 150 million.
This will increase the number of companies in Germany subject to sustainability reporting requirements from the current number of around 500 to 15,000.
When do companies have to start reporting?
The CSRD stipulates four different stages for the beginning of the period of applicability:
- As of 01 January 2024: companies that are already currently subject to non-financial reporting requirements (reporting in 2025 on 2024 data);
- As of 01 January 2025: large companies not yet currently subject to non-financial reporting requirements (reporting in 2026 on 2025 data);
- As of 01 January 2026: other enterprises subject to a reporting obligation (reporting in 2027 on 2026 data).
- As of 01 January 2028: third-country companies (reporting in 2029 on 2028 data).
Small and medium-sized companies can decide until 2028 not to submit sustainability reports. However, in this case, their management report must contain an explanation as to why they did not do so (comply or explain).
What extended reporting obligations will there be?
In the future, companies that fall within the scope of the CSRD will have to disclose an extensive range of sustainability-related information. The scope of reporting obligations is again being significantly expanded compared to those existing at present. The information to be reported includes, among other things, a brief description of the company's business model, strategy, and sustainability risks and opportunities. In addition, companies must define clear ESG targets.
Here, companies not only have to report on their own business activities, but must also provide information on the value chain of their products and services, including details of business relationships and supply chains.
Even if no direct obligation to act in a sustainable manner exists with regard to the items that must be reported on, the reporting obligations and the accompanying public scrutiny aim to encourage the affected companies to rethink their corporate strategy in favour of greater sustainability (nudging).
Small and medium-sized companies as well as small and non-complex financial institutions and insurers have the option of limiting sustainability reporting to information on the business model, the corporate sustainability policy and the actual and potential impact of the company on sustainability aspects and the measures taken to control these.
The reporting requirements are specified in detail by uniform and binding EU sustainability reporting standards, the preparation of which has been transferred to the European Financial Reporting Advisory Group (EFRAG). The ERFRAG’s final drafts for the European Sustainability Reporting Standards (ESRS) were submitted to the Commission on 24 November 2022, and are expected to be adopted by the Commission by June 2023 (general principles) and June 2024 (supplementary information).
The location of the sustainability report is also to change in the future. To date, the non-financial declaration could be made either in the management report or in a separate non-financial report. This will now be a mandatory part of the management report and is subject to a limited content control by the auditor (limited assurance).
The sustainability report must be prepared in a standardised electronic format. Member states may also stipulate in national regulations that companies have to make the management report available to the public free of charge via the company website.
Violations of the sustainability reporting obligations entail a risk of coercive penalties and fines, as well as publication of the name of the person responsible for the violation (naming and shaming).
The need to obtain advice
The new reporting regulations pose considerable challenges for companies, especially for the multitude of smaller companies that were previously not subject to a sustainability reporting obligation. Since the legislative process is expected to conclude soon and the new regulations are to be implemented as planned, companies that fall under its scope definitely need to review their corresponding obligations with a sufficient time interval before the reporting year, so that they can establish the necessary processes and procedures for their reporting in good time.