Many companies are already preparing intensively for their new sustainability reporting obligations under the Corporate Sustainability Reporting Directive (EU) 2022/2464; “CSRD”). The CSRD came into force on 5 January 2023. Since then, national legislators have been called upon to transpose it into national law with a deadline of 6 July 2024. According to the EU website, 15 of the 27 EU countries (Bulgaria, Croatia, the Czech Republic, Denmark, Finland, France, Hungary, Ireland, Italy, Latvia, Lithuania, Romania, Slovakia, Slovenia and Sweden) have implemented the Directive to date, while the remaining 12 EU countries - including Germany - have yet to do so. This prompted the EU Commission to initiate infringement proceedings against a number of EU countries, including Germany, on 26 September 2024.
In Germany, there is currently a government draft for the implementation of the CSRD dated 24 July 2024, which provides for a 1:1 implementation of the Directive. This is to be implemented by amending Sections 289b et seq. and Sections 315b et seq. HGB (German Commercial Code). The Legal Affairs Committee discussed the government draft in a public hearing on 16 October 2024 and implementation was planned for this year.
However, the collapse of the coalition government has made this timetable questionable, if not impossible. Although the new Federal Minister of Justice, Volker Wissing, stated in the Legal Affairs Committee on 13 November 2024 that it would be desirable to implement the CSRD in the remaining legislative period, this would require the necessary majority in the Bundestag, which currently seems a long way off. This is particularly true given that the CDU/CSU parliamentary group has stated that it will not vote in favour of the government’s draft in its current, form but believes that improvements are required at EU level. Whether this can be achieved is doubtful.
Nevertheless, many of the approximately 15,000 companies that will have to report in the future are now wondering what will happen if the EU Directive is not implemented this year. This will be analysed in more detail below:
Scope of the CSRD
To illustrate the possible effects of non-implementation, it should first be clarified for whom and when the CSRD is actually applicable. The obligations arising from the CSRD are introduced in four stages:
- From 2025, those companies that are already required to report under the predecessor regulation, the Non-Financial Reporting Directive (“NFRD”), will have to publish a sustainability report for their 2024 financial year (“Level 1”). This applies to “large” listed companies, financial service providers and insurance companies with total assets of more than EUR 25 million or net sales of more than EUR 50 million and with more than 500 employees.
- From 2026, large companies - or, from a consolidated perspective, companies in large groups - must publish a sustainability report for their 2025 financial year (“Level 2”). A “large” company or a “large group” exists as soon as two of the following three characteristics are exceeded (1) Balance sheet total: EUR 25 million, (2) Net sales: EUR 50 million, (3) Employees: 250.
- From 2027, companies that are classified as “small” or “medium-sized” and are also listed on the stock exchange (“Level 3”) must publish a sustainability report for their 2026 financial year.
- From 2029, companies based in a third country (non-EU) must publish a sustainability report for their 2028 financial year (“Level 4”). The prerequisite is that this non-EU company generates a turnover of more than EUR 150 million in the EU and either has an EU subsidiary that fulfils the requirements of levels 1 to 3 or has an EU branch with a turnover of more than EUR 40 million.
In particular, the companies covered by the first and second levels are already preparing their first sustainability report under the CSRD.
No direct applicability of the CSRD
Firstly, it should be noted that the CSRD cannot be applied directly to companies, as onerous EU directives only become legally binding on a company once they have been transposed into national law. Therefore, if the Directive has not been transposed, the regulations provided do not apply to the companies concerned, even if this is not EU-compliant.
Implementation of the CSRD in 2024
If the original timetable is maintained to and implementation takes place in 2024, it has never been questioned whether listed companies, financial service providers and insurance companies will have to submit a report in accordance with the CSRD and the European Sustainability Reporting Standards (ESRS) in 2025 for the 2024 financial year (Level 1). This would mean that a law and the associated reporting obligation would apply to a financial year that is at least partially in the past. However, the BVerfG considers such a ‘non-genuine retroactive effect’, which refers to circumstances that began in the past and had not yet been finalised at the time the law was enacted, to be permissible in principle. When deciding on the permissibility of a non-genuine retroactive effect, a balance must be struck between the extent of the damage to legitimate expectations (i.e. the damage caused by the trust in the continuation of the more favourable legal situation) on the one hand and the significance of the legislative concern for the public good on the other. It also depends on whether those affected have been able to prepare for the legal situation. The answer is yes, because the CSRD has been on everyone’s lips since or even before it came into force at the beginning of 2023, so that there has been plenty of time to prepare. This is also the conclusion of a legal opinion commissioned by the IDW, which assumes the permissibility of non-genuine retroactivity.
For the subsequent Levels 2 to 4, the transposition of the CSRD into national law in 2024 would mean that the gradual introduction of the sustainability reporting obligation would take place in accordance with the planned regulations, as the transposition into national law would take place before the first reporting obligation.
Implementation of the CSRD in 2025
If implementation does not take place until 2025, as is now expected, the situation could be different.
Listed companies, financial service providers and insurance companies could then take the position that their reporting obligation in 2025 in relation to the 2024 financial year does not have to be carried out in accordance with the CSRD Implementation Act, but only in accordance with the previous regulations in the German Commercial Code (HGB) based on the NFRD. This would be supported by the fact that the Implementation Act would only come into force after the 2024 financial year, which is decisive for the reporting obligation, has fully expired. The Implementation Act and the resulting obligation would therefore relate to a situation that was fully finalised in the past. The BVerfG considers such a “genuine retroactive effect” to be inadmissible in principle. Trust in the continuation of the legal situation relating to the facts of the case is generally considered more worthy of protection. However, exceptions to the principle of the prohibition of genuine retroactivity are also permissible within narrow limits according to established case law of the BVerfG. In the present case, however, a genuine retroactive effect is predominantly rejected. The legal opinion commissioned by the IDW also comes to this conclusion. In our opinion, however, there is a certain degree of legal uncertainty in this respect, as there could also be arguments based on the case law of the BVerfG that could consider a genuine retroactive effect to be permissible in exceptional cases, because there is already a government draft that provides for a 1:1 implementation of the long-known CSRD. However, if one follows the currently prevailing view that there is no CSRD reporting obligation, the existing reporting obligation anchored in the HGB, which is based on the NFRD, would remain in place for the 2024 financial year. As in previous years, this also includes the disclosures in accordance with Article 8 of the Taxonomy Regulation. However, the ESRS would not be applicable in this case, as they would not be anchored in the HGB by a reference provision. There would then also be no obligation to audit this report - due to the lack of corresponding implementation of the relevant provisions from the CSRD. In this case, the auditors must only check whether the non-financial report is available in accordance with Section 317 (2) HGB. However, to avoid legal uncertainties in this respect, it would at least be desirable for the German government to issue a statement on this if the CSRD is not implemented until 2025.
For large companies or companies in a large group that would be required to report for the 2025 financial year from 2026 onwards, the same applies to the implementation of the CSRD in 2025 as stated under point 3 regarding non-retroactivity. These companies would then already have to submit a CSRD sustainability report for the 2025 financial year in 2026, unless otherwise stipulated in the Implementation Act.
Continuation of sustainability reporting efforts
Despite all the legal uncertainty, we recommend continuing or taking up efforts and endeavours in sustainability reporting to be prepared when the first sustainability report becomes mandatory.
The existence of international group structures could also be an argument for preparing a voluntary group sustainability report in accordance with the requirements of the CSRD at an early stage. If, for example, a German company that will be required to report in the future is the parent company of an EU-wide group with one or more subsidiaries in an EU country that has already implemented the CSRD 1:1, and the group intends to make use of the option to prepare only a single group sustainability report (in the future), we believe it would be worth considering starting when the first subsidiary becomes subject to reporting requirements, in order to efficiently set up the necessary structures for reporting structures from the outset. If this first voluntary group sustainability report is prepared in accordance with the requirements of the CSRD, it could possibly exempt the subsidiary from its own reporting obligation, provided that the national provisions of the implementing law do not preclude this. In this respect, however, a case-by-case assessment is always required.
In addition, listed companies, financial service providers and insurance companies that are already preparing or have already prepared for the CSRD are also well advised to continue their efforts to prepare a CSRD sustainability report, even if the CSRD will not be implemented in Germany until 2025 and a genuine retroactive effect is deemed inadmissible. This would mean that these companies would still be required to report in accordance with the provisions of the HGB based on the NFRD for the 2024 financial year but would have the option of voluntarily implementing the requirements of the CSRD and the ESRS. In this respect, there is currently no apparent reason why such a voluntarily prepared CSRD-compliant report should not fulfil the requirements of the NFRD. A possible disadvantage currently under discussion is that first-time voluntary reporting may reduce the time-limited relief by one year if the voluntary reporting year is already counted. However, EFRAG clarified in the FAQs published on 6 December 2024 (Question #1090) that a voluntary sustainability report has no impact on the first mandatory reporting, meaning that the relief measures apply only to the first mandatory reporting year. Nevertheless, we recommend that the sustainability report explicitly states that it is still based on the applicable law on sustainability reporting, but it already complies with the requirements of the CSRD.
At the same time, all other large companies and companies within a large group should not refrain from preparation, as it remains likely that corresponding implementing legislation will be introduced in 2025. As such, it is unlikely that the sustainability reporting obligation will be abandoned in its entirety and the CSRD withdrawn. Following the announcement by EU Commission President Ursula von der Leyen, adjustments and further simplifications are to be expected at best, particularly to harmonise the regulations of the CSRD, EU taxonomy and CSDDD. There is therefore no reason for companies subject to reporting requirements in the future to slacken their efforts towards CSRD sustainability reporting.
