As part of the growing focus on sustainability in society as a whole, dedicated reporting on ESG (environmental, social, governance) aspects is becoming increasingly important for companies. Accordingly, the EU Commission is also currently striving to expand the amount of meaningful and high-quality sustainability information companies provide. The objectives pursued in this context are:
- on the one hand, to highlight sustainability-related risks and strengthen the confidence of investors and consumers in companies
- on the other hand, to emphasize the importance of sustainability information as a basis for combining long-term profitability with social justice and environmental protection.
The revision of the CSR Directive 2014/95/EU
The EU Commission published its proposals for the revision of the CSR Directive 2014/95/EU on April 21, 2021.
With these proposals, the Commission aims to further develop the existing non-financial disclosure requirements into comprehensive sustainability reporting and thereby increase transparency in sustainability areas.
Time frame of the new guideline requirements
The proposed regulations will apply for the first time to financial years beginning on or after January 1, 2023. In addition, sustainability-related reporting requirements for financial years beginning on or after January 1, 2026 will also to apply to capital market-oriented small and medium-sized enterprises (SMEs).
Who is affected by the CSR Directive?
With the current proposals, the EU Commission plans to massively expand the scope of application of sustainability reporting and include in particular:
- all large limited liability companies
- as well as large banks and insurance companies (regardless of their legal form).
Similar adjustments are planned for reporting at Group level, whereby certain exemption options are also planned, particularly within a Group.
This is likely to lead to a near thirty-fold increase in the scope of application from currently around 550 to around 15,000 reportable companies in Germany. In the context of the EU, an estimated 50,000 companies will be affected (up from just under companies 12,000).
For those new to sustainability reporting in particular, the procedural as well as resource challenges are likely to be underestimated.
Where should the sustainability report appear?
With the revision proposals, in the future the sustainability report is to be included as a mandatory part of the management report of companies. This is intended to limit the current heterogeneity in the provision of non-financial data.
In what format should the sustainability report be made available?
The Commission proposals also provide for reporting in a uniform electronic format in accordance with ESEF Regulation (EU) 2019/815 for the financial statements and management report.
Accordingly, the sustainability information:
- in XHTML format and
- to be labeled according to a digital categorization system (so-called taxonomy) still to be developed.
The taxonomy is intended to complement the development of an EU-wide platform for business information (so-called European Single Access Point) and match with the Commission's previous work on digitization.
What is the content of the sustainability report?
The basic five reporting fields contained in the current CSR Directive remain in place. These are:
- Environmental concerns
- Employee matters
- Social issues
- Respect for human rights
- Combating corruption and bribery
However, these are to be geared more strongly toward anchoring sustainability aspects and indicators in the company's strategy and management system.
In contrast, corporate governance factors open up a new, not explicitly defined reporting field. We can assume that this reporting obligation is aimed at sustainable corporate governance.
Rather unexpectedly, the EU Commission also proposes the reports provide information on the company's intangible assets. These include information on the company's intellectual property, human capital, social capital, and relational capital.
The materiality understanding of sustainability reports
According to the proposals of the EU Commission, the new sustainability reporting follows a double materiality perspective.
Accordingly, sustainability-related information is to be disclosed in the future whenever it:
- helps to understand the course of business, the business result, and the situation of the company or
- describes the impact of the company's activities on the sustainability aspects defined in the guideline.
What are the Commission's plans regarding the audit of the sustainability report?
With its revision proposals, the EU Commission for the first time also provides for a mandatory review of the content of the sustainability report by the auditor or another independent provider of auditing services.
- Accordingly, in the future, the content of the sustainability report will initially be subject to an external audit requirement with limited assurance.
- In addition, however, the Commission also reserves the right to impose a reasonable assurance requirement linked to the adoption of international auditing standards under EU law by means of a delegated act.
What do the changes mean for the practice of preparing sustainability reports?
The implementation of the current Commission proposals would significantly increase the importance of sustainability reporting.
In practice, companies will face a number of challenges resulting primarily from the following factors:
- The expanded scope of application of ESG reporting
- Making the sustainability report digitally accessible
- The reorganization of the content of the sustainability report
- The external audit requirement for the sustainability report
Therefore, the EU Commission will hopefully listen to the various critical voices that have spoken out on both the design of the reporting framework and the timetable.