The ABC of sustainability reporting – what you need to know
A big change is coming: Companies are being urged to become greener, more sustainable, and socially equitable and document all this in the form of sustainability reports. That will also apply to many medium-sized companies as of 2025.
But exactly which companies will be affected? What should a sustainability report cover? What are the precise timings of it all? What are the exact implications for companies, especially their finance departments?
Our blog article has all the key facts on the topic of sustainability reporting.
Table of contents
- What is sustainability reporting meant to achieve?
- What do CSRD and ESG mean?
- How does the CSRD tie in with the EU taxonomy and the SFDR?
- Sustainability reporting to date
- Does ESG reporting concern my company?
- What does the new sustainability reporting entail?
- What can my company expect? What challenges will I face?
What is sustainability reporting meant to achieve?
In 2019, the European Commission initiated the European Green Deal: an ambitious manifesto aiming to make the EU climate neutral by 2050 and promote sustainable business. An important element of this is the transparency of companies with regard to sustainability aspects. Capital flows should be increasingly channeled into sustainable business models, and incentives are to be created for investing in sustainable projects.
What do CSRD and ESG mean?
If you're delving into the topic of sustainability reporting, you're bound to come across a lot of acronyms. Whether CSRD, NFRD, ESG, or SFDR, you're probably asking what they mean and why they're important. Let us enlighten you:
The CSRD is the new EU directive on sustainability reporting. With it, the EU aims to contribute to a more sustainable economy and society in Europe.
Legal regulations on sustainability reporting have been in place in the EU ever since 2017. Until now, the focus has been on the Non-Financial Reporting Directive (NFRD), which is now being refreshed and expanded by the CSRD. We explore the differences between the old and new directive later in this article.
ESG reporting refers to how a company performs from an Environmental, Social, and Governance perspective and, in turn, discloses such information.
How does the CSRD tie in with the EU taxonomy and the SFDR?
The three key EU regulations for establishing a more sustainable economy are the CSRD as already mentioned, the EU taxonomy for environmentally sustainable activities, and the Sustainable Finance Disclosure Regulation (SFDR) tailored to financial companies.
Together, they form an important part of the EU's plan to embed sustainability factors at various levels of the economy.
Sustainability reporting to date
As touched upon earlier, some companies in the EU have already been subject to sustainability reporting since 2017 as part of the NFRD, namely:
- Listed companies with more than 500 employees
- Banks, insurance firms, and investment companies
- Their turnover must exceed 40 million euros or their balance sheet total must be greater than 20 million euros
However, this wasn't without its problems. For one thing, gaps became apparent in the disclosure of sustainability information. And for another, a lack of standardization and quality made it impossible to adequately assess the impact that companies were having on the environment and society and compare sustainability performance.
Does ESG reporting concern my company?
With effect from 2025, the following companies will fall under the reporting obligation:
- All large listed companies
- Limited liability partnerships
- Banks and insurance firms (regardless of their legal form)
Provided that they meet two of the following three criteria:
- Balance sheet total of at least 20 million euros
- Net turnover of at least 40 million euros
- At least 250 employees
SMEs with ten or more employees will also be required to publish sustainability reports as of 2026 if they are listed.
Listed micro-enterprises and all unlisted SMEs shall remain exempt from the reporting obligation.
In Germany alone, it is estimated that the number of companies that will have to report on sustainability aspects going forward will increase from around 500 to more than 15,000. EU-wide, the European Commission expects the number to increase from 11,000 to around 49,000.
What does the new sustainability reporting entail?
The planned changes are intended to not only ensure greater transparency on sustainability aspects, but also promote standardization, comparability, and digitalization. Sustainability reporting is thus gaining the same importance as traditional financial reporting.
Here are the most important updates:
Content: Companies falling under the reporting obligation will have to demonstrate how and to what extent their activities are environmentally sustainable with regard to sales, investments, and operating expenses.
EU standards: The report content and structure should comply with the binding EU sustainability reporting standards developed by the European Financial Reporting Advisory Group (EFRAG).
Format: The management report is compulsory. There will no longer be the possibility to separately publish the sustainability report.
Digitalization: To make it easier to evaluate information, sustainability information should be published together with financial information in the European Single Electronic Format (ESEF).
Auditing: The sustainability information is to be presented to the auditor or an independent service provider to "obtain limited assurance".
Accountability: Management should assume accountability for sustainability reporting. In this context, the balance sheet oath, which has only been applicable to the financial report up until now, is to be extended to the sustainability report.
What can my company expect? What challenges will I face?
Without a doubt, the new sustainability reporting will be extremely challenging for many companies, with their financial teams being confronted with new tasks. Two examples:
- New KPIs will enter the picture: Non-financial ESG KPIs covering aspects such as the environment, society, diversity, human rights, and anti-corruption will need to be measured and reported.
- Green finances: Companies will have to ascertain the percentage share of their sales, capital expenditures (CAPEX), and operating expenses (OPEX) that can be classified as environmentally friendly and sustainable in line with the EU taxonomy.
ESG reporting using LucaNet's FPM solution
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