Starting in 2024, many German companies will face the challenge of preparing a sustainability report in accordance with the “Corporate Sustainability Reporting Directive” (CSRD). Large capital market-oriented corporations with more than 500 employees have been legally required to prepare a non-financial report since 2017. The CSRD expands both the scope of companies subject to reporting requirements and the content of the reports through mandatory standards. In the future, companies subject to reporting requirements must prepare a comprehensive sustainability report covering environmental, social, and governance (ESG) issues alongside their annual financial statements. This requirement applies to approximately 15,000 corporations in Germany. It affects not only large companies but also small and medium-sized capital market-oriented companies, with the exception of capital market-oriented micro-corporations.

The sustainability reporting requirement will take effect in phases, depending on the size or characteristics of the companies:

• Effective January 1, 2024: Companies already subject to the CSR Directive (large capital market-oriented corporations with more than 500 employees)
• Effective January 1, 2025: Large corporations that meet at least two of the following three size criteria: total assets exceeding 20 million euros, revenue exceeding 40 million euros, or more than 250 employees.
• Effective January 1, 2026: Listed small and medium-sized enterprises (SMEs) that meet at least two of the following three size criteria: total assets exceeding 350,000 euros, revenue exceeding 700,000 euros, or more than ten employees: During a transition period lasting until 2028, these SMEs have the option to waive the requirement to prepare a sustainability report if they explain the reason for doing so in their management report (“opt-out”).
• Effective January 1, 2028: Companies from third countries (“non-EU companies”) with net revenue exceeding 150 million euros and an EU branch (net revenue exceeding 40 million euros) or an EU subsidiary (large or publicly traded)

The detailed reporting requirements can be found in the uniform European sustainability reporting standards, the “European Sustainability Reporting Standards” (ESRS). The ESRS were adopted by the European Commission as a European delegated regulation and are therefore directly applicable in the member states.

Why must companies report on sustainability issues?

Transparency regarding the impact of companies’ business activities on the environment and society, as well as the impact of sustainability issues on companies (double materiality), is becoming increasingly important to society. It is not only lawmakers who are demanding sustainability information; banks, investors, customers, business partners, and other stakeholders are also seeking such information from companies. With the help of a standardized sustainability report, companies can systematically track and embed sustainability—with potentially positive effects on capital raising, cost structures, and business success.

Sustainability reporting requirements can further advance the transition to a sustainable economy—provided that companies can meet the reporting requirements with a reasonable level of effort and that the reporting obligations are commensurate with the size of the respective company.

What Matters Most: Practical National Implementation and Early Legal Certainty

EU member states are required to transpose the CSDR into national law by mid-2024. German lawmakers should act promptly so that companies can prepare for the challenges ahead. The extensive reporting obligations under the ESRS entail an enormous burden for companies, particularly the analysis of material impacts, risks, and opportunities (IROs) related to sustainability aspects under the dual materiality assessment and the collection of data along the value chain.

Given the complexity and level of detail required by the reporting obligations, this high burden also applies to companies that are already subject to reporting requirements. Nevertheless, the challenge is particularly great for companies newly subject to reporting requirements, as these companies must first establish detailed reporting structures and corresponding data collection processes. This requires extensive resources and entails high costs and a significant investment of personnel. The German legislature should therefore minimize the bureaucratic burden on companies as much as possible as part of Germany’s implementation of the CSRD.

The CSRD also provides for an audit of the sustainability report, initially with limited assurance; companies must implement sufficient internal processes and controls to ensure an error-free report. In principle, inaccurate information can give rise to criminal and administrative penalties—for example, fines of up to five percent of total annual revenue (Section 331 of the German Commercial Code (HGB) on Misrepresentation and Section 334 HGB on Administrative Fines). The legislature must therefore design the audit requirement in a practical manner when implementing the law in Germany. This must not impose additional burdens on companies or further tighten existing penalty provisions.