Kathrin Ankele und Judith Winterstein
State-of-the-art sustainability reporting requires an intensive examination of the key sustainability aspects of a company. This comprises a sustainability strategy with targets and measures for improving the company`s sustainability performance as well as responsibilities and processes.
The Corporate Sustainability Reporting Directive (CSRD) will set the content-related as well as formal framework for many companies in the EU.
What’s behind it?
The EU Commission is moving forward in terms of sustainability. An umbrella concept was presented with the Green Deal, and further interrelated sustainability regulations will follow. These will not only concretize and increase the previous requirements in various areas, from supply chain due diligence to product information and sustainability reporting. They will also affect a considerably larger group of companies. However, there are quite a few companies in this expanded target group that have not yet systematically addressed sustainability or have established a corresponding reporting system.
If your company belongs to this group and you want to be well positioned for the extended sustainability reporting obligation, we will show you what to expect and how you can meet the requirements.
Sustainability reporting today
Since 2017, the CSR Directive Implementation Act (CSR-RUG for short) has been in force in Germany as the national implementation of the EU Non-Financial Reporting Directive (NFRD). In simple words, this affects capital market-oriented companies with more than 500 employees and a turnover of at least 40 million euros or a balance sheet total of at least 20 million euros, i.e., around 550 companies.
Sustainability reporting next level
In the meantime, the Corporate Sustainability Reporting Directive (CSRD) has been proposed as a new directive, the name indicates a shift in focus. The EU Commission’s proposal is to be transposed into national law by the end of 2022. The CSRD provides the framework, the practical implementation is regulated by the European Sustainability Reporting Standards (ESRS). The cross-sectoral (sector agnostic) reporting standards are to be adopted by the end of June 2023, sector-specific standards by the end of June 2024.
Stepwise reporting obligations
The reporting obligation will stepwise affect a total of around 15,000 companies in Germany, i.e., almost 30 times more than at present. The following deadlines and target groups are planned (years of publication):
Reporting standard
In the future, the reporting standard will no longer be freely selectable (e.g., GRI, DNK, or an own format, provided this is justified), but the ESRS will apply on a mandatory basis. These are currently being developed by the European Financial Reporting Advisory Group (EFRAG) and agreed with stakeholders in a consultation process.
Double materiality
Further, there is a change regarding the materiality analysis used to determine the report content: on the one hand, in future all sustainability aspects will be considered material on which either a company’s business activities have an impact (inside-out) or, conversely, which have an impact on its business activities (outside-in). With this so-called double materiality, an “and” has thus become an “or”, as one of the two criteria is sufficient.
On the other hand, all sustainability aspects marked as mandatory in the ESRS automatically become material, unless the opposite can be demonstrated in a comprehensible manner.
Publication of the sustainability report
In future, the sustainability report must be part of the management report.
Mandatory audit of the sustainability report
Up to now, the non-financial report can be submitted voluntarily to auditors for a substantive review. The CSRD goes one step further and requires an external audit of the sustainability report. Initially, the audit depth of limited assurance is sufficient; this will probably be gradually increased to reasonable assurance.
On the one hand, the audit will examine the extent to which the reporting standard (CSRD and ESRS) has been complied with, and on the other hand, the process for collecting the report content and the labelling in accordance with the requirements of the electronic reporting format, including the indicators in Article 8 of the Taxonomy Regulation, will be assessed.
Sanctions for violations of reporting requirements
It is also planned to integrate sustainability reporting into the sanctioning regulations under commercial law. The EU Commission does not provide details on the type and level of sanctions. But the member states are called to consider criteria such as the severity and duration of the infringement, the degree of responsibility or the financial strength of the natural or legal person responsible, while determining the concrete type and level of sanctions. In any case, violations in connection with annual financial statements, management reports and non-financial statements will be punished more severely in future. The planned sanctions include, for example, public disclosure of the natural and legal persons responsible and fines and penalties imposed.
Creating a good foundation: Step by step to CSRD compliance
According to CSRD, a sustainability report must address the following topics, which are specified in the sector-agnostic and sector-specific ESRS:
- Information on the six environmental objectives of the European Union: climate change mitigation, climate change adaptation, water and marine resources, resource use and circular economy, pollution, biodiversity, and ecosystems.
- Information on social aspects: Equal opportunities for all, working conditions and respect for human rights, fundamental freedoms, democratic principles, and standards
- Information on governance aspects: Role of the company’s administration, management, and supervisory boards (including in relation to sustainability concerns), corporate ethics and culture, political engagement, management, and quality of relationships with business partners, company internal control and risk management systems
Even though the sustainability reporting obligation will not become relevant for most companies until 2026 or 2027, we advise you to take action now. In particular, those companies that are (systematically) addressing sustainability for the first time due to the reporting obligation should not wait and take the following steps:
- Very few companies start from scratch when it comes to sustainability. Therefore, a gap analysis is recommended at the beginning, which identifies the goals and measures already developed and defines the gaps with regard to CSRD-compliant reporting.
- With the materiality analysis the most relevant sustainability aspects of the company are determined, together with relevant internal and external stakeholders. For this purpose, an impact, risk, and opportunity assessment of the business activities must be carried out regarding defined sustainability aspects. You can also use the materiality analysis as a starting point for your sustainability strategy if not yet developed.
- Based on the material sustainability aspects, a sustainability program with short-term targets and measures can be defined as well as a roadmap including responsibilities and processes.
If required, we will support you with our expertise to plan and implement these steps. In addition, we work closely with recognized communication agencies. As a team, we support you in creating a CSRD-compliant sustainability report – tailored to your needs. From materiality analysis to print and/or online reports.