The CSRD Expands ESG Reporting Obligations Depending on the Size of the Company

With the new Corporate Sustainability Reporting Directive (CSRD), the reporting of many EU companies from the 2024 financial year onwards is to include sustainability-related information that is necessary for an understanding of the company's business performance, results, position, and the impact of its activities.

In future, less large and non-capital-market-oriented companies will also be obliged to report on sustainability, which is referred to as "ESG reporting" (Environmental / Governmental / Social) in line with Anglo-American corporate reporting. The European legislator considers companies with an annual average of 250 employees to be subject to reporting requirements. In addition, the balance sheet total at the end of the year must exceed 20 million euros or the turnover for the financial 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 financing via equity and/or debt capital are always required to comply with the new sustainability reporting obligations. The only exceptions (as of today) are micro-enterprises with fewer than 10 employees and/or a turnover of less than EUR 20 million. From 2028 at the latest, all companies - with the exception of micro-enterprises - must expect to report ESG information on a mandatory basis.

Number of companies subject to reporting requirements grows massively as a result of the CSRD

Leading auditing firms estimate the number of companies in Germany that will be required to report in the future at around 15,000, and as many as 50,000 across Europe. If the timetable set by the EU works out - and there are no delays in the legislative process - the new CSRD standards should already apply for the 2023 financial year.

The CSRD currently provides for a phased timeline for the entry into force of the new reporting requirements:
 

• From the 2024 financial year, public interest entities with more than 500 employees that are already subject to the NFRD ("Non-Financial Reporting Directive" of the EU) will be affected by the CSRD rules, with reports due for the first time in 2025. However, these companies must continue to comply with the previous NFRD rules until January 1, 2024.
• Large companies that are not subject to the NFRD - i.e. companies with more than 250 employees and/or more than EUR 40 million in net profit and/or more than EUR 20 million in total assets must comply with the CSRD rules from January 1, 2025 (the reporting information must then be published for the first time in 2026).
• The CSRD contains a time-limited moratorium for listed SMEs. These companies can suspend the reporting obligation until 2028. Otherwise, the corresponding information will become mandatory from 2026 (with effect from 2027).

The new CSRD follows a doublemateriality perspective ("double materiality"). In principle, this means that in future, users of financial statements will be provided with information that is either 1) material to the success of the business or 2) material from an environmental or social perspective. Previously, both had to apply to the "non-financial statement". So far, however, a conservative interpretation on the part of the company has in many cases meant that reporting on such matters has been rather sparse. While the focus was currently on information on environmental protection, social responsibility, anti-corruption and diversity on company boards on the basis of the CSR EU Directive dating back to 2014, the CSRD now requires specific information in reporting on

• sustainability goals,
• the role of the management board and supervisory board,
• the most important adverse effects of the company and
• on intangible resources not yet recognized.

European legislators are currently very busy trying to meet their own requirements with regard to the planned new sustainability reporting. Somewhat later than originally planned, the European Expert Forum on Recommendations for International Financial Reporting (the so-called "EFRAG") has now published drafts of new environmental guidelines - the "European Sustainability Reporting Standards" (ESRS). These regulations in turn focus on the six environmental objectives known from the EU taxonomy. The specific environmental protection disclosures are in turn 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). The already familiar individual units of the new disclosures with regard to corporate governance include, for example, the disclosure of potentially adverse effects from the supply chains for production ("Principal Adverse Impacts").

In addition to two basic provisions on requirements and disclosures, the ESRS Set of Standards currently includes a further ten supplementary provisions for specific regulatory areas:

The culture of "transparency about the impact of companies on people and the environment" desired by the EU Commission through the new CSRD rules is in any case credibly supported by the "line-up" of the above-mentioned ESRSs.

Auditors are also in the starting blocks. The current draft provides for an audit of the information (initially with a so-called "limited assurance"). If a company subject to reporting requirements fails to comply with the obligation to publish the information, official sanctions may also be imposed in the form of fines.

The market for corporate financing is also increasingly demanding assessments from independent rating agencies with regard to the ESG performance of reporting groups.

With the lowering of the size thresholds, many companies that have not published any environmental reports—or have done so only to a very limited extent—will undoubtedly be faced with the new environmental reporting requirements starting in 2024. Good advice is certainly hard to come by, especially since the required ESG information is officially being elevated to the status of financial statement components. Consequently, the same timing and quality requirements apply to CSRD disclosures as to the financial close.

Do the established processes need to be updated?

Most likely, because it won’t be possible without well-functioning information-gathering processes and clearly defined responsibilities. Understanding the company’s internal level of readiness—in terms of the organization’s ability to respond to new reporting requirements—will also help in implementing appropriate measures.

Can technology help?

Certainly. However, in the coming months—once the EU has provided greater clarity regarding the specific content of the reports—it will become clear whether, for example, Germany’s largest software company can set standards in the SAP Cloud for Sustainable Enterprises can set standards in the market for end-user companies. In this context, integrating CSRD non-financial data and financial figures for the financial statements onto a finance platform that is as seamless as possible and accessible to everyone within the group is also a promising option. Distributed responsibility within corporate groups, barrier-free collection of the necessary information (e.g., via cloud tools with web interfaces such as the SAP Data Collection App) and deeply integrated Last Mile of Reporting applications (such as Amana Smartnotes) will certainly help to overcome the challenges ahead.

A platform for holistic strategic sustainability management is green.screen. All relevant data converges on this platform, which was developed by Arvato Systems. As ESG reporting software, it professionalizes and digitizes environmental reporting and carbon footprint calculations. The platform enables data to be collected, analyzed, and presented in accordance with ESRS standards. In addition, support for the LSME (Listed SME) and VSME (Voluntary SME) standards will be added in the future to ensure that reporting meets the latest requirements. This software enables ESG data to be captured accurately and completely, allowing for the creation of transparent and meaningful reports.

From the perspective of a balanced cost-benefit analysis, the additional expense associated with investments in this area of finance—provided that implementation measures are well-planned and integrated—can have positive effects in the medium to long term on management decisions, employee retention, refinancing costs, and the company’s reputation. Academic studies also indicate that measures in the area of ESG and sustainability management can have potentially positive effects on cash flows and could thus contribute to increasing the company’s value in the long term.