In the past, companies were free to choose how they reported on their sustainability. The Corporate Sustainability Reporting Directive (CSRD) now obliges EU companies to include sustainability reporting in their management reports.

The Corporate Sustainability Reporting Directive (CSRD) is a directive developed by the European Union that is intended to improve and standardize companies’ sustainability reporting. It replaces the Non-Financial Reporting Directive (NFRD) and aims to increase the transparency and accountability of corporate sustainability practices.

The CSRD will apply from January 1, 2024 to all companies listed on EU stock exchanges as well as large companies that meet at least two of the following three criteria:

• Balance sheet: Total assets over 25 million euros (previously 20 million euros).
• Sales: Net sales of over 50 million euros (previously 40 million euros).
• Employees: More than 500 employees on average during the financial year.

From 2025, all other large companies that were not previously subject to the NFRD will be required to report.

Small businesses are those that meet at least two of the following three criteria:

• Total assets: max. €4 million
• Net sales: max. €8 million
• Average number of employees: max. 50

Medium-sized companies are those that meet at least two of the following three criteria:

• Total assets: max. €20 million
• Net sales: max. €40 million
• Average number of employees: max. 250

Under the CSRD, companies must include sustainability information in their management reports. This includes:

• Reporting on environmental, social and governance factors (ESG)
• Disclose information about how sustainability issues affect the company and how the company impacts society and the environment
• Detailed information about the company’s sustainability goals and progress towards achieving them

Dual materiality is a core concept of CSRD that requires companies to:

• Report sustainability issues that influence the company’s business activities and value creation (“outside-in” perspective)
• while presenting the company’s activities that impact society and the environment (“inside-out” perspective).

The ESRS are the guidelines for the preparation of sustainability reports for companies. These ESRS standards define the specific metrics, data collection methods and reporting formats that companies must use.

The CSRD will be implemented gradually:

• Companies already subject to the NFRD and listed will have to report from January 1, 2024 in 2025.
• Large companies not currently subject to the NFRD must comply from January 1, 2025.
• Listed SMEs, small and non-complex credit institutions and captive insurance companies must report from January 1, 2026, with the possibility of opting out by 2028.

Yes, under the CSRD, companies must have their sustainability reports audited by an independent third party. Only auditors are allowed to examine the sustainability report as part of the annual financial statement audit, as there are no equivalent requirements for other independent auditors (e.g. appraisers) in Germany.

On July 24, 2024, the government draft to implement the Corporate Sustainability Reporting Directive (CSRD) into German law was passed, based on the draft bill of March 22, 2024, which provides for a 1:1 implementation of the EU requirements.

Scope 3 emissions refer to indirect greenhouse gas emissions that occur in a company’s value chain including upstream and downstream activities. Under the CSRD, companies must report on their Scope 3 emissions, which cover areas such as purchased goods and services, waste disposal and employee travel. Companies with up to 750 employees can be exempt from this requirement in the first reporting year.

To prepare for CSRD, companies should:

• Conduct a comprehensive review of their current sustainability reporting practices.
• Implement robust data collection and management systems to capture the necessary information.
• Train employees on the new CSRD reporting standards and requirements.
• Collaborate with external auditors to ensure compliance with verification requirements.

Companies can find more information on the European Commission’s official Corporate Sustainability Reporting website.