Corporate Sustainability Reporting Directive: Acting Before it Becomes Expensive

Corporate Sustainability Reporting Is Coming

On 10 November 2022, the European Parliament has adopted the EU Directive on Corporate Sustainability Reporting (Corporate Sustainability Reporting Directive - "CSRD"). The adoption by the Council took place on 28 November 2022. The CSRD amends the Directives 2013/34/EU, 2004/109/EG and 2006/43/EG as well as the Regulation (EU) No. 537/2014. After the adoption by the Council, the CSRD will be published in the Official Journal of the European Union and will enter into force 20 days thereafter. Subsequently, the member states will have to implement the CSRD within 18 months.

What Are Sustainability Aspects?

Art. 1 CSRD names here:

• the sustainability factors within the meaning of Art. 2 Number 24 of the Regulation (EU) 2019/2088, which include environmental, social and employee matters, the respect for human rights and combating corruption and bribery as well as
• governance factors.

Who is affected?

• As of 1 January 2024: large entities of public interest (with more than 500 employees) which are already now subject to the Non-Financial Reporting Directive ("NFDR"), the reporting obligation begins in 2025;
• As of 1 January 2025: large entities which are currently not subject to NFRD (an entity is considered to be large if it fulfils at least two of the following three criteria: more than 250 employees, revenue of more than EUR 40m and balance sheet total of more than EUR 20m), the reporting obligation begins in 2026; and
• As of 1 January 2026: listed SMEs and certain other entities, the reporting obligation for these begins in 2027, whereby SMEs can have themselves exempted from this obligation by 2028.

In addition, there will be reporting obligations for non-European entities if they achieve a net revenue of more than EUR 150m in the EU and if they have at least one branch or subsidiary in the EU.

What Does Reporting Include?

The report is supplemented by the chapter Corporate Sustainability Reporting which has to be created in a consistent electronic format in accordance with the ESEF Regulation (European Single Electronic Format).

The CSRD distinguishes between information covered by Corporate Sustainability Reporting and standards for reporting.
The former includes pursuant to the new Art. 19 a (2) of the amended Directive 2013/34/EU:

"A) a brief description of the business model and strategy of the company, including information i) on the resilience of the business model and strategy of the company with regard to sustainability aspects; ii) on the opportunities of the company in connection with sustainability aspects; iii) on the way in which the company intends to ensure that its business model and its strategy are compatible with the transition to a sustainable economy and limiting global warming to 1.5 °C in accordance with the Paris Convention; iv) on the way in which the company takes account of the interests of its stakeholders and the impact relevant to sustainability of its activities in its business model and strategy; DE 52 DE v) on the way in which the strategy of the company is implemented with regard to sustainability aspects;

B) a description of the sustainability goals which the company has set itself and the progress it has made in order to achieve these goals;

C) a description of the role of the administrative, management and supervisory bodies in connection with sustainability aspects;

D) a description of the sustainability policies of the company;

E) a description i) of the due diligence process implemented with a view to sustainability aspects; ii) of the most important actual or potential negative effects which are associated with the value chain of the company, including its own business activities, its products and services, its business relationships, and its supply chain; iii) of any measures aiming to prevent, reduce or remedy actual or potential negative effects and of the success of these measures;

F) a description of the most important risks to which the company is exposed in connection with sustainability aspects, including the most important dependencies in this area and the way in which it manages these risks;

G) indicators which are relevant for the disclosures referred to in para-graphs a to f."

Furthermore, information on intangible assets should be provided, including details on intellectual capital, human capital, social capital, and relational capital.

The information has to include forward-looking and retrospective as well as qualitative and quantitative information, "where appropriate" also information on the value chain of the company, including information on its own activities, products and services, its business relationships, and its supply chain. As regards all information it is laid down that the companies also have to communicate the procedure for determining the information and have to take into account short-, medium- and long-term time horizons in the framework of this procedure.

In this context, the new Art. 19 c of the amended Directive 2013/34/EU stipulates that the standards should determine what information has to be reported by SMEs.

The Commission adopts standards which specify the information which companies have to provide on environmental, social and governance factors. In this context, accurately defined key figures are queried in order to ensure the comparability of the information.

Control and Publication

• The Corporate Sustainability Reporting will be subject to an external examination of the contents. This examination occurs from the first reporting year. The examination may also be carried out by the auditor. Details for the coming years have not yet been determined.
• The sustainability report has to be disclosed.

Practical Tips

• Every company should clarify whether and to what extent it is affected by the CSRD.
• The developments concerning the standards have to be followed actively.
• Compliance with the sustainability requirements in the business year before the first reporting is decisive, not the year of the first reporting;
• Budgets for personnel planning or external service providers as well as the procurement of the software required for the reporting obligations have to be planned in due time.

We will be happy to support you with any questions you may have related to the CSRD.

Insa Cornelia Müller