CSRD and ESRS: New Requirements for Sustainability Reporting

The reporting obligation regarding Corporate Social Responsibility (CSR) is a regulation that requires companies above a certain size to report on non-financial aspects such as social, environmental, or employee concerns. This also includes respect for human rights, diversity, and the fight against corruption and bribery. Previously, the EU directive "Non-Financial Reporting Directive" (NFRD) applied to CSR reporting, but this is now undergoing a fundamental update with the new CSR directive (Corporate Sustainability Responsibility Directive = CSRD). The CSRD was published in the Official Journal of the European Union on December 16, 2022, and has changed significantly both qualitatively and quantitatively compared to the EU-NFRD. The goal: The approved changes are intended to further advance the transition to a sustainable and competitive economy in the sense of the European Green Deals and increase the transparency of sustainable aspects. To this end, a company's reporting on sustainability is to be brought closer to traditional financial reporting and must henceforth be reported as a separate annex to the management report.

While there was previously no rigid format for sustainability reporting, this changes with the new CSRD: In the future, the European Sustainability Reporting Standards (ESRS) will be mandatory for all reporting companies. They regulate what exactly must be specified in which format and are established by EFRAG (European Financial Reporting Advisory Group). The standardized reports are also intended to be useful for investors, consumers, and shareholders, allowing them to better compare information from different companies. Additionally, there is now a verification obligation: While some companies have voluntarily had their reports verified in previous years, with the introduction of the new CSR directive according to ESRS, it will become mandatory to have the report verified by an external institution regarding compliance with standards and the accuracy of the data. The "Verification Statement" will be published together with the sustainability report.

• Significantly more companies are affected than before.
• The report imposes increased requirements on the quality and comparability of non-financial information.
• The sustainability report is now a mandatory part of a company's management report and may no longer be submitted separately.
• The CSRD introduces a new understanding of materiality and establishes the concept of double materiality.
• The report should include both sustainability goals and KPIs.
• Verification by an independent, external entity is now mandatory.
• The sustainability report must be submitted in electronic form and with appropriate tagging of the content.
• Management bears the responsibility: The balance sheet oath is to be extended to the sustainability report in the future.

However, the new CSR directive cannot be viewed in isolation, as the reporting obligation correlates with other regulatory measures that are also intended to promote the transition to a sustainable economy. For example, Sustainable Finance aims to create the basis for a sustainable EU-wide financial system: Capital market-oriented companies must disclose information about the share of sustainable activities in revenue, assets, and investments. The German Supply Chain Act, which has been in effect since January, also requires companies to fulfill extensive due diligence obligations towards people and the environment in their value chain. For those affected, it is becoming increasingly important to use digitalization strategies to increase transparency in work processes and enable a seamless data exchange with supply chain partners. This way, they can verify whether their suppliers and subcontractors adhere to the same ethical and sustainable standards as they do.

1. Required content: According to the CSRD, the sustainability report is to go significantly deeper compared to the NFRD. The new directive stipulates that companies must provide information about the business model and strategic direction of the company, taking into account stakeholder interests. Furthermore, the report should include sustainability opportunities and risks, the provision of performance data (KPI), an analysis and evaluation of the data, as well as the identification of new operational and possibly strategic goals. Last but not least, it includes information on the value chain and outlines the role of management in steering sustainability goals. This also includes a description of the due diligence processes and measures to avert negative impacts along the supply chain. Factors of the ESG criteria such as resource consumption, CO2 emissions, energy use, or efforts towards equality play a crucial role here. The goal of the report should be to make the facts and progress of the company in the area of sustainability clearly recognizable. 2. Affected companies: In the future, more and more companies will gradually fall under the new CSR reporting obligation, so it is advisable to deal with the content and requirements early on. Previously, around 500 companies in Germany were affected by the NFRD. Now, the number is expected to increase thirtyfold to around 15,000. It applies: All those who were already required to prepare a CSR report must continue to do so. Additionally, all companies oriented towards the EU-regulated market, as well as those large companies that are not capital market-oriented and meet two of the following criteria, will now be included:

• They have more than 250 employees.
• The balance sheet total exceeds 20 million euros.
• The net sales exceed 40 million euros.

Capital market-oriented SMEs are also no longer exempt from the new CSRD if two of the following criteria apply:

• They have more than ten employees.
• The balance sheet total exceeds 350,000 euros.
• The net sales exceed 700,000 euros.

Furthermore, non-EU companies must also submit a sustainability report if they have at least one branch or subsidiary in the EU and their revenue in the EU exceeds 150 million euros.

3. Deadlines for implementation: The introduction of submission deadlines runs parallel to the gradual expansion of reporting companies:

• 2024: Companies that are already required to submit a sustainability report must comply with the new guidelines for the first time for the fiscal year 2024. Reporting for 2024 will then take place in 2025.
• 2025: Companies that now fall under the reporting obligation due to their number of employees, balance sheet total, and/or net sales must prepare a report for 2025 for the first time, with submission in 2026.
• 2026: Affected publicly listed SMEs must prepare a report according to the new CSR directive for the fiscal year 2026, with submission in 2027. However, there is a transition period with the option to postpone the first application by two years ("Opt-out"). EFRAG is currently working on reporting standards that are specifically intended for SMEs.
• 2028: Affected non-EU companies are required to publish a sustainability report according to ESRS for the fiscal year 2028, with submission in 2029.

Additionally, there should be a transition period until 2028 for indirectly affected companies that are part of the supply chain of obligated companies. The latter must provide all necessary information from the entire value chain and, if necessary, justify why some data is not available and what efforts are being made to supplement it. To avoid potential time pressure, indirectly affected companies should prepare to provide relevant information about their sustainability efforts possibly even earlier.

With the new CSRD, companies must demonstrate how they ensure that ethical and sustainable standards are maintained along the value chain in their supply chain management. Once again, the keyword here is transparency, and this applies to all parties involved: Even SMEs that have not been affected so far will increasingly be asked for sustainability-relevant data in the future – for example, by banks that must increasingly pay attention to sustainability when granting loans or by partner companies that need a clear overview of their own supply chain. Therefore, it is worthwhile for everyone to raise awareness of sustainability issues early on and position themselves by providing the relevant information.