CSRD – german government draft bill: What companies need to know now!

published on 3 September 2024 | Reading time approx. 4 minutes

Following the publication of the draft bill (RefE) of the Corporate Sustainability Reporting Directive (CSRD) by the Federal Ministry of Justice (BMJ) on 22 March 2024, the Federal Cabinet adopted the government draft (RegE) on 24 July 2024. In the next steps, the Federal Government's official draft bill on CSRD implementation still needs to be passed by the german Bundestag and then promulgated, which should theoretically happen on schedule by the end of the year. In the following, we answer the most important questions about the CSRD-RegE and address important aspects of CSRD implementation.

What content requirements must be met in accordance with the CSRD-RegE?

The CSRD was essentially adopted 1:1.

In accordance with § 289c HGB “Contents of a non-financial statement”, all information on the impact of a company's activities on sustainability aspects, as well as the impact of sustainability aspects on the company's business performance, business results and position must be disclosed in the sense of dual materiality. The required information must be clearly identifiable within the management report in a specially designated section.

According to § 289c, the information to be disclosed includes:

brief description of the business model and corporate strategy regarding sustainability aspects
description of the sustainability goals
description of the roles and functions of the administrative, management and supervisory bodies regarding sustainability aspects
description of the corporate policy regarding sustainability
information on incentive systems relating to sustainability for members of the administrative, management and supervisory bodies
description of the most important actual or potential negative impacts of the company in connection with its own business activities and value chain
description of the most important risks and dependencies to which the company is exposed in relation to sustainability aspects
indicators which are relevant to the information to be disclosed

If, in the first three years of application of the CSRD-RegE, not all required information on the value chain is available, the company must justify its efforts to obtain this information on its value chain and the reasons why this information could not be obtained, as well as the company's plans to obtain this information in the future.

What consequences can companies expect if they fail to implement the requirements of the CSRD-RegE on time or incorrectly?
Reporting companies that do not fulfill the requirements of the CSRD-RegE adequately or on time can be subject to penalties and sanctions under national law. By integrating the sustainability report as a separate section in the management report, the same sanctions are provided as for the management report. These include for non-disclosure: mandatory penalties, for inaccurate disclosures: imprisonment, for incorrect assurance: imprisonment and for administrative offenses in the preparation: fines.

Which companies are affected by the CSRD-RegE?

large capital market-oriented companies (≥ 500 employees) must report on the current financial year 2024 for the first time in 2025
large companies, regardless of capital market orientation, are required to report for the first time in 2026 for the financial year 2025
small and medium-sized capital market-oriented companies must report in 2027 for the financial year 2026 (with the option of postponing this by 2 years)

Who may audit the sustainability report in accordance with the CSRD-RegE?

The European legislator grants the option of having the sustainability report audited by an independent third party (someone different than the auditor of the annual financial statements or consolidated financial statements). No use was made of this option in the government draft. Accordingly, the audit can only be carried out by an auditor or auditing firm in Germany. The auditor of the sustainability report does not necessarily have to be the same as the auditor of the annual or consolidated financial statements.

What changes have been made compared to the RefE?

Compared to the RefE, the RegE has made several changes that simplify the implementation of the legal requirements for companies. These includes:

cancellation of the obligation to prepare an audit report
changes to the LkSG substitution right to avoid double reporting obligations
extension of the submission deadline for LkSG reports for the financial year 2023 to 31 December 2025
ESEF format (“tagging”) planned for the first time in the financial year 2026

How are overlaps between CSRD and LkSG reporting be eliminated?

The CRSD reporting obligations overlap with those under the German Supply Chain Due Diligence Act (LkSG). In addition to extending the submission deadline for LkSG reports, the German government has announced substantial steps in supply chain regulation to reduce the burden on companies and has presented a draft bill. This is intended to harmonise and consolidate certain reporting requirements.

What happens next and what are the consequences of not implementing the CSRD on time?

It is difficult to estimate if there will be further significant changes in the further legislative process. Until the final promulgation of the CSRD in the German Bundestag, adjustments to the content are still conceivable.

Member states that do not implement the directive on time could face the risk of infringement. This is at the discretion of the European Commission. The report on the financial year 2024 is to be reported in 2025 and it is hoped that the legislation will have been implemented by then.