Government draft of a CSRD implementation law: What companies can expect in terms of sustainability reporting

In terms of con­tent, the go­vern­ment draft lar­gely im­ple­ments the re­qui­re­ments of EU Di­rec­tive 2022/2464 1:1. In prin­ci­ple, the CSRD im­ple­men­ta­tion should have been com­ple­ted by 6 July 2024 at the la­test. Like other EU mem­ber sta­tes, Ger­many did not meet this dead­line.

© unsplash

Affected companies

The fol­lo­wing com­pa­nies, among others, will be sub­ject to the CSRD re­por­ting ob­li­ga­ti­ons in the fu­ture:

• Large cor­po­ra­ti­ons and equi­va­lent part­nerships wi­thin the mea­ning of Sec­tion 267 Ger­man Com­mer­cial Code (HGB)
• cor­re­spon­ding pa­rent com­pa­nies of large groups
• ca­pi­tal mar­ket-ori­en­ted small and me­dium-si­zed cor­po­ra­ti­ons and part­nerships trea­ted as such; ex­cept mi­cro-en­ter­pri­ses
• Com­pa­nies out­side the EU whose se­cu­ri­ties are tra­ded on an or­ga­nised mar­ket in Ger­many
• Com­pa­nies out­side the EU with a net tur­no­ver in the EU of at least EUR 150 mil­lion in the last two fi­nan­cial years and at least one large or ca­pi­tal mar­ket-ori­en­ted sub­si­di­ary or branch with a net tur­no­ver of at least EUR 40 mil­lion in the EU,
• cer­tain small, me­dium-si­zed, and large cre­dit in­sti­tu­ti­ons and in­surance com­pa­nies.

Staggered first-time application

From the 2024 fi­nan­cial year, a stag­ge­red first-time ap­pli­ca­tion is plan­ned for fi­nan­cial years be­gin­ning on or af­ter 1 Ja­nu­ary 2024:

• from 1 Ja­nu­ary 2024: Large com­pa­nies and pa­rent com­pa­nies of large groups of pu­blic in­te­rest with more than 500 em­ployees - this cor­re­sponds to the group of com­pa­nies that have been re­qui­red to publish a non-fi­nan­cial state­ment since 2017.
• from 1 Ja­nu­ary 2025: Other large com­pa­nies and pa­rent com­pa­nies of large groups
• from 1 Ja­nu­ary 2026: Ca­pi­tal mar­ket-ori­en­ted SMEs (these have the op­tion of opting out un­til 2028) as well as small and non-com­plex cre­dit in­sti­tu­ti­ons and cap­tive in­surance com­pa­nies
• from 1 Ja­nu­ary 2028: Com­pa­nies out­side the EU un­der the above cri­te­ria.

The re­por­ting ob­li­ga­tion exists at the in­di­vi­dual com­pany le­vel, Sec­tion 289b Draft of Ger­man Com­mer­cial Code (HGB-E), and at the con­so­li­da­ted le­vel for (sub)groups, Sec­tion 315b HGB-E, whe­reby sub­si­dia­ries can be ex­emp­ted from the re­por­ting ob­li­ga­tion un­der cer­tain con­di­ti­ons. Pa­rent com­pa­nies that are re­qui­red to re­port as in­di­vi­dual com­pa­nies can also ful­fill this re­por­ting ob­li­ga­tion via group re­por­ting, which is the so-cal­led self-ex­emp­tion of the pa­rent com­pany.

Content requirements for sustainability reporting

In ad­di­tion to some over­ar­ching dis­clo­sure re­qui­re­ments, which are spe­ci­fied in Sec­tion 289c HGB-E, e.g. with re­gard to the in­ter­ac­tion bet­ween sus­tai­na­bi­lity and the busi­ness mo­del or the con­side­ra­tion of sus­tai­na­bi­lity in cor­po­rate po­licy and ob­jec­tives, the ma­jo­rity of the re­port con­tent re­sults from down­stream EU re­gu­la­ti­ons.

The dis­clo­sures spe­ci­fied in Sec­tion 289c (1) to (5) HGB-E are to be made un­der the de­le­ga­ted acts on sus­tai­na­bi­lity re­por­ting stan­dards (the Eu­ro­pean Sus­tai­na­bi­lity Re­por­ting Stan­dards, ESRS for short) ad­op­ted ac­cor­ding to Ar­ti­cle 29b of Di­rec­tive 2013/34/EU. These are is­sued by the EU Com­mis­sion and are di­rectly ap­plica­ble in all mem­ber sta­tes, mea­ning they do not have to be trans­po­sed into Ger­man law. An in­itial set of over­ar­ching and cross-sec­tor, to­pic-spe­ci­fic stan­dards is cur­rently avail­able, for which a cor­ri­gen­dum to the Ger­man ver­sion was publis­hed on 9 Au­gust 2024 (see De­le­ga­ted Re­gu­la­tion - 2024/90457 - EN - EUR-Lex (eu­ropa.eu)).

Se­pa­rate, re­du­ced re­por­ting ob­li­ga­ti­ons and spe­cial stan­dards are plan­ned for ca­pi­tal mar­ket-ori­en­ted SMEs and com­pa­nies out­side the EU, which are cur­rently still being de­ve­lo­ped by the EU. The EU is also working on ad­di­tio­nal sec­tor-spe­ci­fic ESRS.

The in­di­vi­dual dis­clo­sure re­qui­re­ments to be in­clu­ded by com­pa­nies in the sus­tai­na­bi­lity re­port are sub­ject to the prin­ci­ple of dual ma­te­ria­lity. This me­ans that com­pa­nies must re­port both on ma­te­rial sus­tai­na­bi­lity risks and op­por­tu­nities (fi­nan­cial ma­te­ria­lity, "out­side-in ef­fects") and on the com­pany's ma­te­rial ef­fects on the eco­nomy, en­viron­ment, and so­ciety (im­pact ma­te­ria­lity, "in­side-out ef­fects").

In ad­di­tion, the ad­apta­tion of the EU Ac­coun­ting Di­rec­tive by the CSRD its­elf, cor­re­spon­ding re­fe­ren­ces in the ESRS, and pro­vi­si­ons in the go­vern­ment draft, in­clu­ding on the scope of the au­dit of the sus­tai­na­bi­lity re­port in sec­tion 324c (1) HGB-E, mean that the re­qui­re­ments of Ar­ti­cle 8 of Re­gu­la­tion (EU) 2020/852 on the EU Ta­xo­nomy must be com­plied with.

Re­gar­ding the pre­pa­ra­tion pro­cess, Sec­tion 289b (6) HGB-E spe­ci­fies that em­ployee re­pre­sen­ta­ti­ves should be in­vol­ved in the pre­pa­ra­tion of the sus­tai­na­bi­lity re­port. Ac­cor­din­gly, they must sub­mit their com­ments to the body re­spon­si­ble for re­viewing the (group) ma­nage­ment re­port.

Note: In ad­di­tion to the CSRD re­por­ting ob­li­ga­tion, com­pa­nies are also ob­li­ged to dis­close cer­tain con­tent un­der the Supply Chain Sus­tai­na­bi­lity Ob­li­ga­ti­ons Act (LkSG). To avoid du­pli­cate or si­mi­lar re­por­ting ob­li­ga­ti­ons, the sus­tai­na­bi­lity re­port can re­place the LkSG re­port, Sec­tion 10 (5) and (6) Draft of LkSG (LkSG-E). Howe­ver, this re­qui­res that this re­port con­ti­nues to be publis­hed on the com­pany web­site and sub­mit­ted to Fe­deral Of­fice for Ex­port Con­trol (BAFA).

Sustainability report as part of the (Group) management report

Ac­cor­ding to the re­qui­re­ments of the CSRD Im­ple­men­ta­tion Act, sus­tai­na­bi­lity re­por­ting must be in­clu­ded in the (group) ma­nage­ment re­port in a cle­arly re­cog­nisa­ble sec­tion, Sec­tion 289b HGB-E. The pre­vious op­tion to ful­fill the re­por­ting ob­li­ga­tion in the form of a se­pa­rate sus­tai­na­bi­lity re­port out­side of the (group) ma­nage­ment re­port will no lon­ger ap­ply in the fu­ture.

Ac­cor­ding to Sec­tions 289g, 315e HGB-E, the ma­nage­ment re­port must in the fu­ture be pre­pa­red in a stan­dar­di­sed elec­tro­nic re­por­ting for­mat (so-cal­led ESEF for­mat) with cor­re­spon­ding la­be­ling of the con­tents of the sus­tai­na­bi­lity re­port in the form of so-cal­led ESEF tag­ging.

Alt­hough the go­vern­ment draft re­fers to the cor­re­spon­ding De­le­ga­ted Re­gu­la­ti­ons of the EU Com­mis­sion, the ad­op­tion of the re­gu­la­ti­ons re­la­ting to tag­ging (the so-cal­led tag­ging ta­xo­nomy) in par­ti­cu­lar is cur­rently still pen­ding.

The go­vern­ment draft the­re­fore pro­vi­des for a post­po­ne­ment of the first-time im­ple­men­ta­tion of the ob­li­ga­tion to pre­pare the (group) ma­nage­ment re­port in ESEF for­mat and the man­datory tag­ging of the sus­tai­na­bi­lity re­port to the 2026 fi­nan­cial year in para. 7 of the ar­ti­cle on se­pa­rate fi­nan­cial re­por­ting and in para. 6 of the ar­ti­cle on group fi­nan­cial re­por­ting of the In­tro­duc­tory Act to the Ger­man Com­mer­cial Code (EGHGB-E).

Audit of sustainability reporting

As part of the (Group) ma­nage­ment re­port, the sus­tai­na­bi­lity re­port will be sub­ject to a man­datory con­tent au­dit in the fu­ture. In­iti­ally, a li­mited as­surance en­ga­ge­ment is en­vi­sa­ged. The CSRD pro­vi­des for a la­ter change to a sta­tutory au­dit ob­li­ga­tion with re­ason­able as­surance cor­re­spon­ding to the au­dit of the fi­nan­cial state­ments and is im­ple­men­ted in the ar­ti­cle on the au­dit in the Draft of the In­tro­duc­tory Act to the Ger­man Com­mer­cial Code (EGHGB-E).

Note: The CSRD pro­vi­des for the EU Com­mis­sion to is­sue cor­re­spon­ding au­diting stan­dards for the im­ple­men­ta­tion of au­dits with both li­mited and re­ason­able as­surance. Un­til these have been de­ve­lo­ped, re­cog­nised stan­dards for the au­dit of non-fi­nan­cial in­for­ma­tion (e.g. ISAE 3000 (Rev.)) will be used.

In the fu­ture, it will be man­datory for the sus­tai­na­bi­lity re­port to be au­di­ted by an au­di­tor or au­diting firm. The au­di­tor of the sus­tai­na­bi­lity re­port can also be the au­di­tor of the an­nual or con­so­li­da­ted fi­nan­cial state­ments.

Note: The ex­planatory me­mo­ran­dum to the go­vern­ment draft re­fers to the fact that there are cur­rently no equi­va­lent le­gal re­qui­re­ments in Ger­many with re­gard to trai­ning and sui­ta­bi­lity tes­ting, qua­lity as­surance sys­tems, sanc­tion re­gimes, lia­bi­lity, and su­per­vi­sion for en­viron­men­tal ve­ri­fiers or other in­de­pen­dent pro­vi­ders of as­surance ser­vices so that these pro­vi­ders can­not be aut­ho­ri­sed to au­dit sus­tai­na­bi­lity re­ports un­der the CSRD.

Au­di­tors for sus­tai­na­bi­lity re­ports must be re­gis­te­red. Re­gis­tra­tion is pos­si­ble un­der fur­ther con­di­ti­ons up to twelve months af­ter the CSRD Im­ple­men­ta­tion Act co­mes into force.

The au­di­tor of the sus­tai­na­bi­lity re­port is to be elec­ted se­pa­ra­tely by the re­spon­si­ble bo­dies as part of his or her ap­point­ment. The elec­tion should take place be­fore the end of the fi­nan­cial year to which the au­dit re­la­tes.

Note: For fi­nan­cial years be­gin­ning be­fore 1 Ja­nu­ary 2025, the ap­poin­ted au­di­tor, if ap­poin­ted for the an­nual or con­so­li­da­ted fi­nan­cial state­ments but not as the au­di­tor of the sus­tai­na­bi­lity re­port, is ge­ne­rally deemed to be the au­di­tor of the sus­tai­na­bi­lity re­port by vir­tue of le­gal fic­tion.

The scope of the au­dit co­vers whe­ther the (Group) ma­nage­ment re­port has been ex­pan­ded to in­clude a sus­tai­na­bi­lity re­port un­der le­gal re­qui­re­ments, whe­ther Art. 8 of the Ta­xo­nomy Re­gu­la­tion has been com­plied with, and whe­ther the ma­nage­ment re­port for fi­nan­cial years be­gin­ning af­ter 31 De­cem­ber 2025 has been pre­pa­red in ESEF for­mat and the sus­tai­na­bi­lity re­port has been tag­ged by the tag­ging re­qui­re­ments. The au­dit re­sults must be pre­sen­ted in a se­pa­rate au­dit opi­nion.

Note: The se­pa­rate au­dit re­port pro­vi­ded in the draft bill was no lon­ger in­clu­ded in the go­vern­ment bill.

As the sus­tai­na­bi­lity re­port is part of the (Group) ma­nage­ment re­port, it is sub­ject to mo­ni­to­ring by the Su­per­vi­sory Board, which can ap­point an Au­dit Com­mit­tee to deal with is­sues such as mo­ni­to­ring the sus­tai­na­bi­lity re­por­ting pro­cess as part of the ac­coun­ting pro­cess and au­diting the sus­tai­na­bi­lity re­port.

Outlook

The CSRD should ac­tually have been trans­po­sed into na­tio­nal law by 6 July 2024. It now ob­li­ges nu­me­rous Ger­man com­pa­nies to publish a sus­tai­na­bi­lity re­port for the first time - in a stag­ge­red man­ner. It is esti­ma­ted that around 15,000 com­pa­nies in Ger­many will be af­fec­ted. The ma­jo­rity of these com­pa­nies will have to pre­pare a sus­tai­na­bi­lity re­port for the first time in 2026 for the 2025 fi­nan­cial year and have it au­di­ted. Gi­ven the im­mense amount of re­por­ta­ble con­tent and the fact that many com­pa­nies do not yet ex­pli­citly hold data in this re­gard, com­pa­nies should start ma­king the ne­cessary pre­pa­ra­ti­ons at an early stage.