The new European Corporate Sustainability Directive (CSRD) makes the preparation of sustainability reports mandatory for large companies. Though this may not affect American companies, it will affect larger global companies. In the following, we will give you an insight into the legal context and explain what changes are in store for affected companies.

The Corporate Sustainability Directive (CSRD) will soon replace the Non Financial Reporting Directive (NFRD) from 2014. The legislation on sustainability reporting is undergoing a fundamental update as a result of the new directive.

What is the political context of the CSRD?

The CSRD is part of the European Green Deal, a package of policy initiatives designed to lay the foundations for making a green transition in the EU and making the association of states climate neutral by 2050. A political priority for the EU, this target is ambitious and time-sensitive, which explains the short transition periods faced by businesses.

In terms of content, the Green Deal is designed to channel capital flows specifically into sustainable investments. To this end, the EU has launched the following initiatives:

  • The Sustainable Finance Disclosure Regulation (SFRD), which requires financial product manufacturing companies and financial advisors to disclose sustainability information.
  • The Green Bonds Standards (GBS), which identifies sustainable investments on the capital market.
  • The Environmental Taxonomy, which defines "green" economic activities.
  • The Corporate Sustainability Due Diligence Directive (CSDD) which requires companies operating in the EU to respect human rights and the environment in global value chains.
  • And the Corporate Sustainability Directive (CSRD), which makes sustainability information from large companies inside and outside the EU transparent and comparable.

The NFRD/CSRD sets the rules for general sustainability reporting. It is a directive that member states must transpose into national law.

Is my company affected by the CSRD?

Here you can find out which thresholds determine whether companies are affected and what the timetable is.

Find out more

How will the CSR reporting obligation change?

Germany had implemented the EU Directive NFRD into national law with the CSR Directive Implementation Act (CSR-RUG) in 2014. In Germany, only around 550 capital market-oriented companies fall within the scope of the CSR-RUG. Within the EU, only around 11,700 companies are required to disclose non-financial information.

Moreover, the reporting obligation under CSR-RUG only applies if the corporate activities have a negative impact on both the business result and on people and the environment. This so-called dual materiality has a clear investor focus, namely to combine long-term profitability with social justice and environmental protection. The NFRD does not contain comprehensive reporting requirements. Although the Commission had published guidelines for non-financial reporting in 2017, these are very concise and abstract. Much more comprehensive and concrete are voluntary reporting standards such as those of the Global Reporting Initiative.

In order to bring non-financial reporting closer to financial reporting and to close the gaps in the previous system, the EU Commission not only presented the draft for a new sustainability reporting in April 2021, but also initiated the development of European standards for sustainability reporting as a further central reform measure. These are intended to concretize and expand the report content. They are currently being developed by the European Financial Reporting Advisory Group (EFRAG). The binding European reporting standards, the so-called EU Sustainability Reporting Standards (ESRS), are to be adopted by June 30, 2023 or 2024.

ESRS: What requirements will affected companies have to meet?

The new standards contain requirements for:

  • Environmental aspects (climate, water, circular economy, pollution and biodiversity).
  • Social aspects (equal treatment, working conditions and respect for human rights)
  • Governance aspects (corporate bodies, internal control and risk management systems, anti-corruption, political influence and payment practices).

The sector-specific standards specify the requirements for areas whose economic activity is associated with high risks and/or impacts. Accordingly, they include, among others, agriculture and forestry, mining, manufacturing, energy and water supply, construction, trade, transport and storage, real estate and housing.

Using these sector-specific standards, companies are expected to describe their business model and strategy and demonstrate how resilient both are with respect to sustainability issues.

An important change brought about by the CSRD is the clarification of the principle of the dual materiality perspective: Accordingly, matters are to be classified as material if they are material either for business success or from an environmental or social point of view. Previously, issues were material only if both were true, which, if strictly interpreted, means that only a few issues are reportable.

The directive also requires companies to "disclose their plans to ensure that their business model and strategy are consistent with the transition to a sustainable economy and with the goals of limiting global warming to 1.5°C, in line with the Paris Agreement and achieving climate neutrality by 2050."

Similarly, companies will be required to provide qualitative, quantitative, forward-looking and past-oriented information, across the value chain, over short, medium and long-term time horizons. In this context, the value chain includes the company's own business, the products and services created, and the company's business relationships within and outside the Union territory.

Companies can only deviate from this very comprehensive reporting on the value chain within the first three years of the Directive's application if they explain why this information is not available and how they will obtain this information in the future.

Ultimately, the expanded and qualified scope of reporting should put an end to greenwashing.

Where and how should the sustainability report be published?

In order to communicate this increased information content effectively and to underline its future significance, reporting under the directive is to take place in a separate section of the management report in the future. Up to now, the companies concerned have been able to decide for themselves whether to provide information on sustainability in the management report, at different points in the management report, or in a separate sustainability report.

In addition, the group management report must in future be prepared in machine-readable XHTML format in order to improve the comparability of reporting with other companies for investors and other stakeholders.

How will implementation be monitored? - Audit and sanctions

Unlike the CSR Directive, the Sustainability Reporting Directive provides for a mandatory external audit. Initially, this will only be carried out with limited assurance (auditor's review or "limited assurance"). However, by October 2028 at the latest, the EU Commission intends to decide whether the audit depth will be increased so that a reasonable assurance audit is specified for the reporting. This will make the assurance level for sustainability reporting comparable to that for financial reporting.

Who needs to be involved in sustainability reporting?

In the future, reporting should not only take into account the information needs of investors, but it should also improve the dialog between the company and other stakeholders, such as non-governmental organizations, trade unions, and employee representatives.

Therefore, companies should also describe how they take into account the concerns of these stakeholders and the sustainability-relevant impacts of their activities in their business models and strategies.

At the company level, management is to exchange views with employee representatives on sustainability reporting and information gathering and verification, and is also to pass on the views of employee representatives to the relevant management and supervisory bodies.

In this way, the directive follows regulations in other areas of corporate social responsibility, for example the Supply Chain Duty of Care Act, which also calls for the involvement of other stakeholders.

Therefore, companies should prepare as soon as possible not only for the procurement of additional information and for the development of sustainability reporting, but also for the discourse with other stakeholders.

How DQS can support you

DQS is your partner in the external verification of sustainability reports. After the CSRD comes into force, we will conduct external audits of sustainability reports prepared according to the ESRS standards from 2025. We can also offer training or gap assessments for the ESRS standards.

Feel free to contact us with any questions or to discuss future projects.

Constanze Illner

Constanze Illner (she/her) is Research and Communications Officer in the area of sustainability and food safety. In this position, she keeps an eye on all important developments in this context and informs our clientele in a monthly newsletter. She also moderates the annual Sustainability Heroes conference.