Uncertainties regarding sustainability reporting for 2024

Background

According to the requirements of the Corporate Sustainability Reporting Directive (CSRD), companies must report in detail on how they deal with social and environmental challenges together with their annual financial statements. To this end, on July 24, 2024, the Federal Cabinet passed a draft law to implement the Corporate Sustainability Reporting Directive (EU Directive 2022/2464 or CSRD Implementation Act for short), after the Federal Ministry of Justice published a corresponding draft bill on March 22, 2024. The first reading in the German Parliament (Bundestag) took place on September 27, 2024. However, the bill could not be passed by the Bundestag due to the break-up of the governing coalition. The bill has thus failed due to the so-called principle of discontinuity and must be reintroduced into the legislative process in the 21st legislative period.

Consequences for fiscal year 2024

The existing reporting obligations under Sections 289b to 289e and Sections 315b, 315c of the German Commercial Code (HGB) for certain large capital market-oriented companies, credit institutions, and insurance companies with more than 500 employees will continue to apply for fiscal year 2024. This means that the legal framework created by the CSR Directive Implementation Act (CSR-RUG of April 11, 2017, Federal Law Gazette I 2017, p. 802 et seq.) in 2017 for the obligation to provide non-financial (group) reporting based on the Non-Financial Reporting Directive (NFRD 2014) continues to apply.

In accordance with Section 289d HGB, companies are free to use European frameworks such as the European Sustainability Reporting Standards (ESRS) for their non-financial reporting. In the opinion of the Institute of Public Auditors in Germany (IDW) dated November 14, 2024, and updated assessment of the IDW dated December 20, 2024, the ESRS are to be regarded as a recognized reporting framework due to their integration into European law and can therefore also be used for the reporting obligations of the fiscal year 2024. This includes the partial application of individual standards, provided that the applied ESRS and their specific content are clearly and comprehensibly disclosed by the requirements of Section 289d HGB.

In its briefing paper dated December 18, 2024, the DRSC (German Accounting Standards Committee) recommends that companies should use the ESRS as a framework for the NFE in order to ensure legally compliant and comprehensive reporting. The extension of the materiality principle through dual materiality, the clear requirement to present an ESRS-compliant NFE as a separate section in the management report, and the option to use existing data and sector-specific standards as part of the transitional provisions are particularly noteworthy. The briefing paper also addresses the conflict between ESRS and HGB requirements and proposes prioritizing the ESRS requirements in case of contradictions.

For companies with fewer than 750 employees, ESRS offers additional relief through transitional reporting provisions. The briefing paper provides detailed information on how the ESRS are compatible with the existing requirements of HGB and which transitional provisions can be used.

For a detailed analysis and specific application instructions, please refer to the full DRSC Briefing Paper.

Implications for the auditing profession

The delay in the implementation of CSRD brings specific challenges for auditors. Currently, non-financial reporting is not subject to any external substantive audit requirement. Auditors only review the submission by Section 317 (2) sentence 4 HGB.

Article 4 (2) subparagraph 2 of the amended EU Audit Regulation clarifies that fees for the assurance of sustainability reports are exempt from the fee cap. This exemption applies to all fiscal years beginning on or after January 1, 2024, regardless of whether the CSRD has already been transposed into national law. This means that fees for audits of sustainability reports for the fiscal year 2024 are not covered by the fee cap, even if the reporting goes beyond the previous requirements of the Accounting Directive and the CSRD has not been implemented in time.

Fees for advisory and support services in connection with the introduction of CSRD reporting are not covered by the provision of Art. 4 para. 2 subpar. 2 of the Audit Regulation (APrVO). They continue to be considered non-audit services and are therefore to be taken into account without restriction when calculating the fee cap.

It remains unclear whether voluntary consolidated sustainability reporting by a German parent company in 2024 will meet the requirements of the CSRD and whether subsidiaries from other EU member states will be exempt from the reporting obligation. Although this requires the full application of the ESRS, the mandatory audit by a registered sustainability auditor represents a significant hurdle. Due to the lack of implementation of the CSRD, corresponding authorizations cannot yet be entered into the professional register in Germany. It is open whether an audit by non-registered auditors could could still be recognized as exempt.

The retroactive application of the CSRD Implementation Act (CSRD-UmsG) to the fiscal year 2024 is classified by the IDW as inadmissible under constitutional law due to a violation of the prohibition of retroactivity under Article 20 of the German Constitution. However, an implementation of the law in 2025 would be considered constitutional if the requirements were applied for the first time for the fiscal year 2025. Companies would thus be obliged to prepare a sustainability report to the requirements of the CSRD from 2025 onwards. For companies with different fiscal years, the application date remains dependent on the entry into force of the law and possible adjustments in the government draft.

Critical commentary

The delay in the implementation of the CSRD into national law requires a high degree of flexibility from auditors and while it provides companies with additional preparation time, it also creates legal uncertainties. Nevertheless, early adaptation to the new reporting requirements remains a strategic investment that not only strengthens competitiveness but also ensures the long-term sustainability of companies.