CSRD Implementation Act Debated in the Bundestag

The European Corporate Sustainability Reporting Directive (CSRD) requires companies to prepare a sustainability report. The directive is now set to be transposed into German law. The German federal government’s cabinet presented a draft bill to that effect at the end of July. This CSRD Implementation Act was recently debated in the Bundestag. Read this article to learn about the key provisions of the draft bill and how they will affect your company.

A Summary of the EU’s CSRD Directive

The EU’s Corporate Sustainability Reporting Directive (CSRD) requires companies to provide more comprehensive and standardized reporting on their sustainability performance. It extends the reporting requirements of its predecessor, the NFRD, to a wider range of companies and mandates detailed information on environmental, social, and governance factors (ESG). The goal is to increase transparency and enable investors, consumers, and other stakeholders to better understand companies’ sustainability practices. The CSRD will take effect starting with the 2024 fiscal year and will gradually apply to larger companies and publicly traded SMEs as well. Among other things, this phased implementation will be regulated in more detail in the national implementation. Overall, the CSRD Directive leaves relatively little room for national adjustments. The German draft therefore largely implements the requirements of the EU directive. The ESRS reporting standard included in the draft can also be adopted directly from the EU. A first German version of the standards was published in August.

Key Points of the CSRD Implementation Act

• Audit of Sustainability Reports
  In the future, sustainability reports will be subject to a mandatory content audit. This audit may only be conducted by certified public accountants who must first register. The auditor of the sustainability report may also be the auditor of the annual or consolidated financial statements. The audit will initially be conducted with limited assurance. Standards for an audit with reasonable assurance—which are still to be developed—may not be applied until 2028. A separate audit report is not required.
• Placement of the Sustainability Report
  Previously, companies could choose whether to publish the sustainability report separately or as part of the (consolidated) management report. This option is no longer available. Going forward, the sustainability report must be included in a clearly identifiable section within the (consolidated) management report.
• Scope of Application
  The sustainability reporting requirement applies to both sole proprietorships and (sub)groups of companies. In addition to capital market-oriented companies and issuers from third countries, large corporations and limited-liability partnerships are also required to report. The Implementation Act also contains several exceptions. More on this in the next section.
• Phased Implementation of the CSRD
  The initial implementation of the CSRD will be phased and will begin for the first companies with fiscal years starting on or after January 1, 2024. The phased implementation is explained in more detail in the following section

Who is subject to the CSRD, and when does it take effect?

The CSRD applies to certain companies for the first time for fiscal years beginning on or after January 1, 2024. Depending on factors such as the size of the company, the scope of application will be gradually expanded. Size is determined in accordance with Section 267 of the German Commercial Code (HGB). According to this provision, a company is considered large if it meets two of the following criteria: total assets exceeding 25 million euros, revenue exceeding 50 million euros, or more than 250 employees.

• Effective January 1, 2024: Large companies and parent companies of large public-interest groups with more than 500 employees—these companies have been required to publish a non-financial statement since 2017.
• Effective January 1, 2025: Other large companies and parent companies of large corporate groups.
• Effective January 1, 2026: Capital market-oriented SMEs, as well as small and non-complex credit institutions and in-house insurance companies.
• Effective January 1, 2028: Non-EU companies, provided that their securities are traded on an organized market in Germany or that they have had net revenue in the EU of at least 150 million and have at least one large or capital-market-oriented subsidiary or branch with net revenue in the EU of at least 40 million euros.

Exceptions: The Implementation Act provides for a number of exceptions: Under the so-called “parent company self-exemption,” parent companies may fulfill the reporting requirement for the individual company through consolidated reporting. Companies and subgroups may be exempted from the reporting requirement if they are included in the parent company’s consolidated management report (this does not apply to companies that are both capital market-oriented and large). Companies subject to the Public Disclosure Act are exempt from the application of these provisions.

The CSRD Implementation Act in the Bundestag

After the Ministry of Justice published a draft bill for the law in March 2024, the Federal Cabinet approved the government’s draft in July. It contains far-reaching amendments to the German Commercial Code as well as adjustments to other relevant laws, such as the Supply Chain Due Diligence Act. On September 26, the bill was debated for the first time in the Bundestag, and on September 27 in the Bundesrat. This means the federal government is behind schedule, as the transposition into German law was actually supposed to be completed by July 6, 2024, at the latest. As a result, the EU has already initiated infringement proceedings against Germany and 16 other countries. The discussion of the CSRD Implementation Act in the Bundestag focused less on specific provisions of the bill and more on criticizing the legislation as a whole for being too bureaucratic. However, the federal government has no leeway here and must implement the EU requirements. The draft was therefore referred to the Legal Affairs Committee and other committees, where the bill is now being debated.

What’s Next for the CSRD Implementation Act

The legislative process may drag on for a few more weeks. However, few changes are expected at this point, as the federal government has relatively little leeway. It is therefore certain that the reporting requirement will have an immediate impact on companies —and for some companies, even as early as the current fiscal year. CONSUST can assist your company in preparing for sustainability reporting and throughout the reporting process. Please feel free to contact us for a no-obligation consultation.