From sideshow to core business imperative of the 21st century
Next to economic considerations, companies nowadays must also address sustainability issues. This includes ecological and social impacts of their operations and requires a comprehensive and systematic approach to ensure responsible and sustainable business practices.
The EU Taxonomy, the EU Corporate Sustainability Reporting Directive (CSRD) in conjunction with the European Sustainability Reporting Standards (ESRS) and the Corporate Sustainability Due Diligence Directive (CSDDD) form the framework for the new sustainability reporting process, which will put sustainability reporting in Europe on a new level of quality.
Delayed implementation of the CSRD and planned simplification of reporting obligations
The Corporate Sustainability Reporting Directive (CSRD) was not implemented into German law in 2024 as planned. This makes Germany part of a minority of countries that are breaching EU law. Accordingly, the EU Commission initiated infringement proceedings against Germany and 16 other member states in September last year. At the beginning of January, implementation is still pending in only 8 other countries in addition to Germany.
Possible infringements of competition law and the principle of legal certainty
When assessing further developments, it is important to note that there could be distortions of competition at the expense of companies in countries that have implemented the CSRD and which make considerable efforts to prepare sustainability reporting in accordance with the CSRD. Until the end of 2024, this was the majority of EU member states. In accordance with the principle of legal certainty, they should be able to rely on the fact that they will not suffer from any disadvantages for their law-abiding behavior and that the legal basis will not be significantly changed or repealed retroactively. This should also include a postponement of several years or a significant increase in the threshold values.
Political discussion in Germany
Leading German politicians from almost all parties, on the other hand, have called for significant relief for companies from the perceived “bureaucratic overload” caused by the CSRD and other EU regulations on sustainability, such as the German and European Supply Chain Duty of Care Act (LkSG) and CSDDD, the import regulations of the EU Deforestation Regulation (EUDR) and the Carbon Border Adjustment Mechanism (CBAM). This political discussion led to a letter from the German government to the EU Commission shortly before Christmas 2024, calling for a postponement of the introduction of the CSRD, an increase in the threshold values, a waiver of the introduction of further standards and a significant reduction in the data points.
ESG Omnibus Simplification Package of the EU Commission
In other EU countries such as France, which implemented the CSRD on time, there are also calls for simplification of the undeniably extensive and, in individual cases, uncoordinated sustainability regulations. Following a meeting with EU heads of state and government in Budapest on November 8, 2024, Commission President von der Leyen announced an ESG Omnibus Simplification Package (OSP) to strengthen the competitiveness of companies in the EU, which is intended to bundle and simplify existing and future ESG reporting obligations. This primarily concerns the CSRD, the CSDDD and the EU Taxonomy Regulation. The changes should lead to a reduction in reporting obligations of at least 25% and corresponding proposals should be available in the first half of 2025. The focus will be on disclosure requirements that the EU Commission considers to be redundant and overlapping. However, it was also emphasized that the core content of the directives and regulations should be retained. The planned content of the OSP is expected to be published at the end of February 2025.
Opportunities and the need for green transformation
The current focus is on regulatory developments for medium-sized corporations. Capital market-oriented companies should continue to prepare appropriate sustainability reporting. It should also be borne in mind that many business partners (have to) demand sustainability data, many customers expect sustainable business practices, and that sustainability and sustainability indicators play a major role, also for investors and financial institutions. The pressure is coming from all sides and not just from the regulatory authorities. In addition, it has become more than clear in the past year that the rising costs of fires, floods and droughts, which are intensified by climate change, must be weighed against the costs of climate protection. However, climate protection and adaptation to climate change also require a reliable database at company level to develop concepts, measures and targets.
The example of the automotive industry clearly demonstrates the opportunities that can arise when a company focuses on sustainable products at an early stage. This applies to the pioneer from the USA as well as to the increasingly successful Chinese suppliers. In any case, it is also necessary to think about possible strategic competitive advantages that could result from the green transformation and not to reduce the issue of sustainability to merely meeting regulatory requirements. Supply chain reporting to automotive companies, most of which are listed on the stock exchange, also plays an important role in addressing the issue. Sustainability is not just a temporary issue; it is here to stay.
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The specific circumstances of the individual case must of course always be taken into account.
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Previously, only a limited number of companies were obliged to disclose the following topics in their management report or a separate sustainability report in accordance with the CSR Directive Implementation Act (CSR-RUG):
- Environmental concerns
- Social concerns
- Employee concerns
- Human rights
- Combatting corruption and bribery
No specifications were made in terms of content beyond the above-mentioned requirements. Both national and European standards were used. In Germany mainly the reporting standards of the Global Reporting Initiative (GRI) and the German Sustainability Code (DNK) were applied.
The changes in sustainability reporting
With the new Corporate Sustainability Reporting Directive (CSRD), the obligation for sustainability reporting will be extended to around 50,000 companies across the EU. Previously only an estimated 12,000 companies were obliged to report on sustainability topics. The European Sustainability Reporting Standards (ESRS), linked to the CSRD, further define the content requirements of the CSRD and specify the information that must be included in a sustainability report. In Germany, the CSRD will be implemented by the CSRD Implementation Act, its draft legislation published by the Federal Ministry of Justice at the end of March 2024, and government draft available since the end of July.
Regardless of whether you speak about sustainability management, sustainability reporting, CSR management, CSR reporting, Corporate Social Responsibility (CSR) or sustainability reporting, shareholders and stakeholders are increasingly expecting actions to follow words.