For financial years from January 1, 2025, around 16,000 companies in Germany and some 49,000 companies in the EU will be subject to the new reporting obligations for sustainability reporting in accordance with the Corporate Sustainability Reporting Directive (CSRD). From then on, all large companies with limited liability – regardless of whether they are capital market-oriented or not – will be obliged to report on sustainability in accordance with European law. For the majority of companies, this will be the first time that they will be required to prepare this kind of report.
Generally speaking, one would expect preparations for the new CSRD reporting obligations to already be in full swing at most companies in readiness for first-time reporting for the 2025 financial year. However, the practice of non-capital-market-oriented companies in particular shows that the implementation status of the new regulations is extremely heterogeneous. Although some companies are currently carrying out the materiality analysis for determining the topics and data points to be reported in accordance with the European Sustainability Reporting Standards (ESRS), other companies are already performing a GAP analysis for ESRS implementation, while others are working hard at identifying taxonomy-eligible and taxonomy-aligned economic activities in accordance with the Taxonomy Regulation. However, there is a not inconsiderable number of companies subject to reporting that are still putting off their preparations for the new reporting obligations.
Why you should press ahead with CSRD implementation in your company
Delaying this process poses a significant risk of becoming overwhelmed, when you have to deal in a short space of time – often in parallel – with the sometimes quite complex implementation issues that are scheduled for the coming months. Of course, companies that already produce a voluntary sustainability report, e.g. in accordance with the standards of the Global Reporting Initiative (GRI) or the German Sustainability Code (DNK), have an advantage here. In this case, processes already exist for certain reporting obligations that can be used as part of CSRD implementation. However, even in these cases, the effort involved in implementing the triad of CSRD, ESRS, and the Taxonomy Regulation should not be underestimated.
The purpose of the sustainability report
Sustainability reporting should be seen as an instrument for making the company's sustainability performance and efforts transparent and (as far as possible) comparable. However, the resilience of a company in the context of sustainability is based to a large extent on the structure of sustainability management within the company. In order to ensure long-term growth and secure access to capital in the long term, effective sustainability management requires the identification, assessment, and management of the impacts, risks, and opportunities arising from the company's activities on people and the environment, as well as transparency about these aspects of the company in the form of meaningful reporting. In this context, interaction with and communication to the company's key stakeholders is a link between sustainability management and sustainability reporting.
Company-wide collaboration for ESG report
In order to be able to prepare a structured sustainability report at regular intervals in the future, support from management is an important building block. This is a crucial aspect, not least because sustainability reporting affects many different facets of the company. For example, sustainability-related information is required in parts of the company's entire value chain, meaning that data must be supplied by a wide range of departments, from procurement and production, sales, and after-sales to administrative areas, such as human resources or accounting and controlling departments. In the absence of management support, the overarching involvement of different departments often only works to a limited extent. Efficient involvement can be achieved through a cross-departmental kick-off meeting, for example, in which the added value of sustainability reporting is conveyed to all those involved, and the distribution of tasks and schedules is discussed and agreed.
The materiality analysis as a starting point
The pivotal element of sustainability reporting in accordance with ESRS is a Materiality analysis according to the principle of double materiality. Under this principle, a sustainability report contains information that is required for an understanding of the company's business performance, results, and position (outside-in perspective), but also information that is required for an understanding of the impact of the company's activities on people and the environment (inside-out perspective). The scope of the report is therefore determined to a not insignificant extent by the results of the materiality analysis. In particular, the inside-out perspective described above is usually unfamiliar to companies that have not previously prepared a sustainability report and requires an examination of the company's business activities from an unfamiliar perspective. However, the view of the company's entire upstream and downstream value chain required for the materiality analysis is also likely to be demanding for many companies, especially as this does not only include Tier 1 suppliers. In addition, the possible inclusion of external stakeholders in the materiality analysis requires a high degree of coordination.
ESG reporting obligations and their challenges
However, the new reporting requirements, which are extremely extensive even after the materiality analysis has been carried out, are also likely to pose major challenges for many companies. In the future, for example, disclosures will also have to be made on sustainability targets, on the role of management/supervisory bodies in connection with sustainability aspects, on any links between the incentive system for board remuneration and sustainability aspects, or on a wide range of sustainability indicators. These reporting obligations are specified in twelve ESRS, which together codify over 1,000 data points in five environmental, four social, and one governance standard. Fulfilling the associated qualitative and quantitative reporting obligations requires standardized and automated processes to be implemented and effective control systems to be used for the collection of these sometimes very granular disclosure requirements – ideally with interfaces to the existing ERP systems. It is important to document the calculation methods and data sources for the various disclosures and to provide documentation. This is the only way to guarantee the data quality required for reporting in accordance with European law and to meet the auditor's requirements.
The role of the auditor in the context of sustainability reporting
Finally, it is also a good idea to include the auditor of the sustainability report in discussions about the key points of data generation and reporting at an early stage. In a first step, the sustainability report is only audited with limited assurance. However, the audit intensity is to be increased over time to a reasonable assurance audit.
Structured CSRD implementation as a competitive advantage
Overall, it should be noted that the earlier the first steps toward implementing CSRD are taken, the more efficiently staff and resources can be planned and, in the best case, costs saved. A carefully structured implementation process can lead to a competitive advantage in corporate sustainability reporting.
