Concretisation of the CSRD contents

Reporting must therefore be transparent, consistent, comparable and highly standardised. In future, standardisation will result in a binding disclosure format, the European Single Electronic Format (ESEF). This format specifies certain disclosure requirements for disclosures contained in the appendices and for disclosures in the sustainability report. As the ESEF has not yet been finally adopted, we would like to provide details on this in a later newsletter. The contents and reporting formats are intended to enable analysis across companies and sectors, which is why it is very important to work with predefined key performance indicators. The indicators are defined in the ESRS and must be applied uniformly by all companies subject to reporting requirements. The new sustainability report is a mandatory component of management reporting for German companies.

Previously, companies already had the option of voluntarily reporting on sustainability topics in their management report. However, as corresponding studies show, this option was only utilised to a very limited extent. Consequently, for the majority of companies obliged to report from 2024, 2025 or 2026 (please refer to the table at the end of this newsletter for the specific application periods), the sustainability topics are new to them. Even companies that previously provided voluntary disclosures often limited themselves to verbal explanations and rarely backed these up with specific key performance indicators. As a result, the vast majority of companies do not have systems in place, or not yet in the required form, that compile the necessary information and enable the required key performance indicators to be determined. Corresponding systems must therefore be set up in the immediate short term.

The European Union has commissioned a group of experts (EFRAG - European Financial Reporting Advisory Group) to develop the ESRS. This group is tasked with drafting standards to specify the reporting obligations - both across sectors and for specific sectors and organisations. The general standards were published with the draft in spring 2022 and sent to specialist bodies for consultation. After the comment period expired at the end of August 2022, EFRAG revised the standards due to considerable criticism, particularly with regard to the enormous scope of the planned disclosures and key performance indicators.

The revision led to a certain reduction in the information and key performance indicators planned as mandatory disclosures. The standards nevertheless contain a considerable level of detail and provide for a large number of key performance indicators. The twelve general standards submitted to the EU Commission on 21 November 2022 contain 84 mandatory disclosures with 1,144 separate key performance indicators. This scope of reporting continues to be criticised. It remains to be seen whether the consultation to be carried out by the EU Commission among the member states will lead to a further reduction in the scope of the report. As things stand, this is not expected, but it would be desirable. One positive aspect of the revision is the introduction of a transitional period of up to three years for individual disclosure obligations. This relates, for example, to information on the value chain.

The scope of reporting provided for in the standards should generally be regarded as a minimum. However, both the CSRD itself and the standards stipulate that companies only have to report on the ESG aspects that they consider to be material. Companies themselves determine which aspects are material for them. Fortunately, the revision of the draft standards gives companies a little more leeway in this regard. The ESG aspects to be reported are determined as part of a materiality analysis to be carried out by the company. The materiality analysis process, including the selection of ESG aspects that are considered to be material, must be described in the sustainability report and thus made externally transparent.

The core of the materiality analysis is the decision as to which ESG aspects are material from the company's perspective and/or from the perspective of stakeholders. For this purpose, the stakeholders (e.g. customers, suppliers, employees, investors, local authorities, but also shareholders) must also be defined accordingly. An aspect is material in terms of sustainability if it either has a significant influence on the company's business activities (so-called outside-in perspective or financial materiality) or if its business activities have a significant impact on the environment or society (inside-out perspective or impact materiality). The CSRD thus introduces a new definition of the term "materiality", which is significantly more comprehensive than the definition in the NFRD (Non-Financial Reporting Directive) currently applicable to capital market-oriented companies. Whereas in the case of the latter the "both/and" condition applies to the reporting obligation of an ESG aspect (i.e. an aspect must have an internal as well as external impact), in future the "either/or" condition will suffice. This definition is somewhat misleadingly referred to as "dual materiality". The result of the materiality analysis is a company's material ESG aspects, which must be assigned to the three pillars of the CSRD (environmental, social and governance). Explanations must be provided in accordance with the standards and the corresponding key performance indicators must be reported.