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From 2023: CSRD expands reporting requirements

What changes for your business

CSRD Replaces NFRD: Implications for Sustainability Reporting
Digital Transformation

According to the new Corporate Sustainability Reporting Directive (CSRD), from the 2023 financial year onwards, the management report of many EU companies should contain sustainability-related information that is necessary for understanding the company's business performance, results of operations, position and the impact of its activities.

Which Companies Are Subject to Reporting Requirements Under the Corporate Sustainability Reporting Directive (CSRD)?

In the future, less large and non-capital market-oriented companies will also be required to report on sustainability. The European legislator considers companies whose annual average number of employees reaches 250 to be among the companies subject to the reporting obligation. In addition, the balance sheet total at the end of the year must exceed 20 million euros or sales for the fiscal year must exceed 40 million euros - this applies regardless of whether an individual company or a group is capital market-oriented or not. Companies that use a regulated market for equity and/or debt financing are always required to comply with the new sustainability reporting requirements. Only micro-enterprises are exempt (as of today).

Number of reportable companies grows massively due to CSRD

Leading auditing firms estimate the number of companies in Germany that will have to report in the future at around 15,000, and across Europe as many as 50,000. If the timetable set by the EU works out - and there are no delays in the legislative process - the new CSRD standards should already be valid for the 2023 financial year. From the year 2025/2026, the group of "affected" companies will be expanded again, because the EU is planning an SME standard for reporting on sustainability aspects.

What Information Must Be Included in Sustainability Reporting According to the CSRD?

The new CSRD follows a double materiality perspective. In principle, this means that in the future, the users of financial statements will be provided with information that is material either for the success of the business or from an environmental or social point of view. Up to now, both have to apply to the "non-financial statement". In the past, however, a conservative interpretation on the part of the company has in many cases meant that reporting on such matters has been rather thin. Whereas the current focus was on information on environmental protection, social responsibility, anti-corruption and diversity on company boards based on the CSR EU Directive dating from 2014, the CSRD now requires concrete information in reporting on:

  • Sustainability goals,
  • The role of the executive and supervisory boards,
  • The most significant adverse impacts of the company, and
  • On intangible resources not yet recognized in the balance sheet.

In order to meet its own requirements with regard to the planned new sustainability reporting, the European legislator is currently very busy. From mid-2022, the drafts of new environmental guidelines - the "European Sustainability Reporting Standards" (ESRS) - are to regulate the content of the reference framework for ESG reporting by companies in the future. The ESRS are also intended to focus on the six environmental goals familiar from the EU taxonomy. This concrete environmental protection information will in turn be flanked by information on social aspects (such as equal opportunities and working conditions) and core corporate governance issues (such as lobbying activities and risk management). Among the already known individual units of the new disclosures with regard to corporate governance is, for example, the disclosure of potentially adverse effects from the supply chains for production ("Principal Adverse Impacts"). However, it seems certain that the EU taxonomy will continue to play a role in corporate reporting - and will not be replaced by the CSRD.

The Audit Obligation Is Coming

Auditors are also waiting in the wings. Indeed, the current draft provides for the audit of the disclosures (initially with a so-called "limited assurance"). If a reporting company does not comply with the obligation to publish the information, official sanctions may also be imposed in the form of fines.

Challenges for the Finance Department Increase

As a result of the reduction in the size criteria, from 2023 many companies will undoubtedly also be confronted with the new environmental reporting obligations that have not previously published any reporting at all or only to a very limited extent. Good advice is certainly expensive, especially since the required information within the management report officially promotes the CSR disclosures to components of the financial statements. This means that the same time and quality requirements apply to CSRD information as to the financial close.

Will the established processes need to be updated?

Very likely, because it will not work without well-functioning information procurement processes and clearly defined responsibilities. Knowing the company's internal maturity level in terms of the organization's responsiveness in the face of new reporting requirements will also help to get appropriate measures in place.

Can technology help?

Most certainly. However, the coming months will show whether Germany's largest software company, for example, will be able to set standards in the market for user companies with its SAP Cloud for Sustainable Enterprises, once the EU has also ensured greater clarity in terms of the concrete content of reports. In this context, the integration of CSRD non-financials and the figures for the financial statements on a finance platform that is as consistent as possible and available to everyone in the group is also a promising option. Distributed responsibility in corporate groups, barrier-free collection of the required information (e.g. via cloud tools with a web interface such as the SAP Data Collection App) and deeply integrated last mile of reporting applications (such as Amana Smartnotes) will certainly help to master the challenges ahead.

“Green” Group Reporting à la EU Taxonomy

With the target date "2050", the environmental protection ambitions of the so-called "EU Green Deal" still seem to be far in the future. However, due to the "EU Taxonomy Regulation," information on ecologically sustainable activities must already be available in the corporate reporting of many European companies for the year 2022.

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Written by

Prof. Dr. Martin Wünsch
Expert for SAP S/4HANA Transformation & Finance