There is no question that sustainability is one of the key issues of the next decades for both companies and the economy as a whole.

In addition to the obvious need for action from an ecological perspective, it is also increasingly a matter of long-term profit potential. A McKinsey survey in 2021 for the DACH region (comprising the German, Austrian and Suisse markets), for example, found that more than three quarters of consumers (78%) consider sustainability as a factor when making purchasing decisions.

In order to promote and advance sustainability, legislation at both the European and national levels prioritises the corresponding reporting by means of the Corporate Sustainability Reporting Directive (CSRD). It is intended to make it easier to manage, track and assess sustainability measures.

However, directives and laws are complex and subject to constant development. This blog post therefore deals with:

• which legal guidelines currently apply to sustainability reporting
• what fundamentally changed for companies in April 2021
• What the decision of the European Council in November 2022 means for German companies
• what further changes can be expected
• how companies can successfully master the challenge of sustainability reporting

This is because a proactive approach is essential. Rolling up one's sleeves when it comes to sustainability is what makes change possible in the first place and signals to stakeholders the willingness to assume economic, environmental and social responsibility.

What Exactly Is the CSRD and Why Is It So Important?

Sustainability reporting has been a household word for large companies since at least 2017. At that time, the EU directive "Corporate Sustainability Reporting Directive (CSRD)" was implemented into German law as the "CSR Directive Implementation Act (CSR-RUG)" and into Austrian law as the "Sustainability and Diversity Improvement Act (NaDiVeG)". Originally introduced as the "Non-Financial Reporting Directive (NFRD)", the new name of the EU directive with the term "Corporate Sustainability" emphasises the focus on sustainability as a business objective. Thus, the topic is treated integrally in corporate reporting and placed on par with financial topics.

The CSRD defines the scope and content of companies' reporting obligations with regard to sustainability. Initially, these applied to publicly traded companies as well as financial service providers and insurance companies with more than 500 employees and more than € 40 million in turnover or a total of more than € 20 million in assets. In 2018, a study in Germany identified 487 companies that are required to report according to these regulations under the CSR-RUG.

With the adopted EU Directive of 2022, KPMG estimates that this number will increase to approximately 15,000 by 2028, when the last, smaller companies will be required to report. In the EU, the number will climb to a total of 50,000 affected companies. EU-wide, the increase is therefore roughly 300%, whereas in Germany the number soars to around 3,000%.

The CSRD is Evolving: Comparison of 2017 and 2022

Based on feedback from practical experience, the EU then drafted a revised version of the CSRD in April 2021. The changes are focused on one thing in particular: sustainability is taking on an increasingly important role, which should ultimately be on a par with financial reporting.

Decided by the European Council on November 28th, 2022, the Council together with the European Parliament published the renewed Directive (EU) 2022/2464 on December 14th, 2022, which thereby became effective. EU countries now have 18 months to transpose this renewed EU directive into national law. For Germany, this means that the currently applicable CSR-RUG of 2017 must be adapted.

The equal relevance with financial information can be seen, among other things, in the form of reporting. Previously, in addition to the management report, sustainability could also be reported in the Federal Gazette or on the company's website. Under the revised EU Directive, however, publication as part of the management report is mandatory. Among other things, this shortens the time left for reporting after the end of the reporting period.

In line with the higher requirements, the audit of the report is also changing. So far, this has been voluntary, but, with the implementation of the revised EU Directive, it will be obligatory. Initially, the lighter criteria of limited assurance will apply. From 2026 on, however, the stricter requirements of reasonable assurance will apply, which will also be applied to financial reporting.

Another striking difference is the extension of the scope of the reporting obligation. With the CSRD, all companies that fulfil at least two of these three characteristics are now covered:

• the company has total assets of € 20 million or more;
• the company has net sales of € 40 million or more;
• the company has 250 employees or more

All companies listed on the stock exchange are also subject to the obligation. The only exceptions are micro-enterprises that do not exceed a total assets of €350,000 and net sales of €700,000 and do not have more than 10 employees on average per year - two of these three criteria must be fulfilled for a company to be considered a micro-enterprise.

As of 2017

As of 2022

Who is the EU Directive aimed at?

• Publicly traded companies
• Financial service providers and insurance companies

• Large corporations
• Listed companies (except micro-enterprises)

What are the criteria by which companies are subject to reporting requirements?

• Total assets ≥ € 20 million
• Net sales ≥ € 40 million
• ≥ 500 employees on an annual average

At least 2 out of 3 criteria must be met.

Large companies:

• Total assets ≥ € 20 million
• Net sales ≥ € 40 million
• ≥ 250 employees on an annual average

Capital market-oriented SMEs:

• Total assets ≥ € 350,000
• Net sales ≥ € 700,000
• ≥ 10 employees on an annual average

Non-EU companies with EU branches or EU subsidiaries:

• Net sales ≥ € 150 million

What time frame does the report need to cover?

• Reporting year

• Reporting year
• Short, medium and long-term forecasts

How is the EU Directive implemented and interpreted?

• National law

• Europe-wide standards

How is the sustainability report audited?

• Voluntary

• Mandatory, external

How should the report be presented?

• Management report or Federal Gazette or company website

• Management report in uniform, electronic format

Moreover, stricter requirements are placed on the content of sustainability reports. Whereas the report previously only had to cover one year, short, medium and long-term forecasts and analyses are now expected. Europe-wide standards for this are still being developed, but are structured around the three core areas of governance, environment and society. The six environmental goals are already fixed, the first two of which already had to be taken into account in the 2021 reporting year:

1. climate protection
2. adaptation to climate change
3. sustainable use and protection of water and marine resources
4. transition to a circular economy
5. pollution prevention and control
6. protection and restoration of biodiversity and ecosystems

The following standards for sustainability reporting in the areas of society and governance are now added (Chapter 6a, Article 29b).

• Information on social factors:
  • Equal treatment and equal opportunities
  • Working conditions
  • Respect for human rights
• Information on governance factors:
  • Role and composition of the company's governing bodies
  • Corporate ethics and culture
  • Political commitment of the company
  • Relationships with business partners
  • Internal control and risk management

In this context, the focus will be even more on quantifiable data. In the EY Webinar "New Corporate Sustainability Reporting Directive (CSRD) - Sustainability-related disclosure requirements in the management report 2023", Yvonne Meyer, Associate Partner of Climate Change and Sustainability at EY Carbon, emphasised: "Purely qualitative information is no longer sufficient. With the upcoming standardisation, we primarily expect a very clear requirement for quantitative KPIs, which will then have to be collected and reported." The establishment of processes to ensure a reliable data set is therefore essential - especially because companies do not have much time left to adapt to the higher requirements of the revised CSRD.

When Do the CSRD Changes Apply and What Do They Mean for My Company?

In 2025, the first report under the revised CSRD will be due. However, the data basis for this is that of the previous year. The corresponding processes for data collection must therefore be in place by the beginning of 2024 at the latest in order to provide a sufficient foundation for sustainability reporting.

In implementing the CSRD, the European Council and the European Parliament have opted for the following tiered model of what type of companies are required to report and from when:

• As of January 1st, 2024 companies that are already subject to reporting requirements within the meaning of the CSR-RUG (Report 2025)
• As of January 1st 2025 for large companies that are currently not reportable in the sense of the CSR-RUG (Report 2026)
• As of January 1st 2026, listed SMEs, as well as small and non-complex credit institutions and captive insurance companies (Report 2027)
• As of January 1st, 2027, non-EU companies with EU branches or EU subsidiaries (Report 2028)

Subsidiaries are still exempt from the reporting obligation and must refer to the group report. However, this does not apply if the subsidiary is already also large and publicly traded. 

A study on the implementation of the first iteration of the CSRD quotes an SDAX company on the following problem: "For the first report, we relied on topics and data that are recorded by us. That was the big problem: a lot of things are not covered." The stronger focus of the revised EU directive on quantitative measurements exacerbates this situation in many areas.

• April 2021: The first proposal for the CSRD is published and is intended to replace the NFRD
• June 2022: The CSRD 2.0 is finalised
• November 2022: The proposal is adopted by the European Council
• December 2022: The final CSRD including the new EU reporting standards (EFRAG) is published
• January 2023: The new EU directive goes into effect
• November 2023: Sector-specific additions to the EU reporting standards are expected
• January 2024: First reporting period for selected companies under the new CSRD begins
• July 2024: The EU directive must have been transposed into national law by this time
• January 2026: The requirement level of the external audit will be raised from limited assurance to reasonable assurance
  

If your company was already subject to the reporting obligation in the past, it is therefore now necessary to critically review existing reporting measures and align them with a higher information requirement. If you fall under the CSRD for the first time as a result of the changes, the challenge is to establish the necessary internal processes early on to ensure thorough and data-based reporting.

But even SMEs, which have not yet been part of the target group of the CSRD or the CSR-RUG, will be measured by stakeholders against higher standards. In any case, transparency in sustainability will only become more relevant. The time to act is now.

3 Steps Your Company Should Implement Now to Be Ready for the CSRD Changes

2023 is the year of the dress rehearsal for approximately 500 large companies, but it should also be embraced by SMEs. The fundamental questions need to be raised:

• How do I get a clear picture of the status quo?
• Do I have enough staff in the relevant areas or do I need external support?
• Do I have the technical basis in place to collect data related to energy use, waste management, pollution, etc.?

With these questions in mind, there are three concrete steps that companies can take now to be well prepared.

1.) Take preemptive action to prepare for the increased reporting obligations

With the 2024 financial year as the first reportable year, now is the time to plan and set up processes for data collection. Nicole Richter, Partner in EY's Climate Change and Sustainability Services practice, pointed out in the aforementioned webinar that companies should expect a learning curve: "My recommendation is to start early - preferably the day before yesterday. The topic is indeed extremely complex."

2.) Creating a solid database 

Yvonne Meyer also confirms how important data quality will be. "The big issue in many companies will probably be the question of auditability. The difficulty will then be to go back down the data path, because companies that are just setting up their reporting systems in particular are probably not yet robust enough in this respect." To design systems that enable such tracking, external support can be extremely helpful. 

3.) Get support on board

Partners like Resourcify specialise in making sustainability measurable and controllable. With the user-friendly Resourcify platform, waste and recycling streams can be seamlessly tracked, managed and optimised. Working with external companies to cover the full sustainability scope in reporting offers long-term benefits: Automated data and easily trackable KPIs can be used to set, achieve and document a wide range of environmental goals.

The CSRD and the Future

The current EU directive of December 2022 is certainly not the last refinement of the legal framework for the promotion of sustainability. The topic of reporting is therefore not only a challenge, but above all an opportunity. More transparency also means more opportunities. In a survey of companies regarding the first generation of the CSRD, three quarters of the company respondents stated that the new legal situation had had a positive effect on their understanding of sustainability.

Whether it be zero waste or another sustainability goal, the same tools and data that enable reliable reporting also create the space to achieve strategic business goals.