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.

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.