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Sustainability reporting - A step-by-step guide

Part I - Legal development, overview of requirements and ESRS 1

The EU passed the so-called Corporate Sustainability Reporting Directive (CSRD) with a view to improving and further developing sustainability reporting in the EU. One of the most important requirements in this EU Directive is compliance with the European Sustainability Reporting Standards (ESRS). Starting from this year already, the first companies will be obliged to write their reports in accordance with these guidelines. In a multi-part series of articles we will provide a systematic presentation of the sustainability reporting guidelines. The focus here will initially be on the non-listed large companies that will be subject to this reporting requirement from the 2025 financial year. However, given that large companies and capital providers will pass on the respective requirements to smaller companies (keywords: supply chain, ESG ratings), we would strongly recommend that even small and medium-sized enterprises that are not directly affected should nevertheless make appropriate preparations.

Please note: In this issue of our newsletter we begin with a compact overview and analysis of ESRS 1. We then plan to provide step-by-step considerations of other guidelines and measures; for example, in the next issue of our newsletter we will have a report on the materiality assessment - this is of fundamental importance for all the further steps.

Temporal scope of application and embedding in the overall financial reporting

The reporting requirements will be phased in over time as follows:

  • 2024 - All the large capital market-oriented companies will be affected by the new reporting in accordance with the CSRD already from the 2024 reporting year. 
  • 2025 - Moreover, non-capital-market-oriented companies with limited liability will have to comply with the new reporting requirements under the CSRD from the 2025 reporting year if these companies fulfil at least two of the following three criteria on two consecutive reporting dates:
    • more than 250 employees and/or   
    • net revenue of more than €50m and/or  
    • total assets of more than €25m
  • 2026 - Furthermore, listed SMEs will then be subject to the reporting requirement from the 2026 reporting year (they have the option to postpone this for 3 years). 
  • 2028 - From the 2028 reporting year, non-European companies that generate net revenues of more than €150m in the EU and have at least one subsidiary or branch office in the EU will likewise have to carry out the relevant ESG reporting. 

The transposition of the CSRD into German law is expected to take place in the second quarter of 2024. 

It is already clear that, in future, the sustainability report will appear solely in a separate section of the management report. This report will thus be published jointly with the annual financial statements (so it will not be a special report!). Consequently, as the sustainability report will form part of the management report it will be subject to the external audit requirement. 

In terms of presentation, the EU Directive has taken into account the unstoppable trend towards digitalisation. Electronic labels will thus have to be assigned to the individual datapoints that have to be disclosed (the ESRS that have so far been published on their own mention more than 1,000) - this is referred to as digital tagging. This needs to be carried out in a single electronic reporting format (ESEF). 

Please note: In order to make it possible for the sustainability report to be audited for an entire financial year, in each case, companies will have to create the organisational conditions by the end of the end of the respective previous financial year. 

This means that, in 2024, large non-listed companies should already put themselves in a position that will enable them to comply with the extensive sustainability reporting requirements from 1.1.2025. 

Overview of the report content requirements

Specific information about a report’s contents has been provided by the ESRS, which were essentially developed by the European Financial Reporting Advisory Group (EFRAG). These standards aim to ensure the relevance and, in particular, the quality of the information that is to be disclosed.

The ESRS thus specify the contents about which companies have to provide information in their sustainability reports in accordance with the CSRD. The goal is to ensure 

  • the understandability, 
  • the relevance (avoiding information overload) as well as 
  • the verifiability and comparability

of the sustainability information. The ESRS currently consist of Set 1 with the first 12 ESRS. This first group of ESRS comprises non-sector-specific standards divided into four sections - these are depicted in Fig. 1. In the next section we provide a closer examination of the general ESRS 1 which comprise standards that cut across topics. 

Please note: The introduction of sector-specific ESRS will follow, however, this has currently been postponed in order to avoid placing excessive demands on those involved.

The ESG context

ESG stands for environmental, social and governance activities of companies in individual sectors. From now on, companies will have to disclose relevant company data that relate to the above-mentioned areas.

  • Environmental refers to impacts on the natural environment. The aim here is to achieve a reduction of the ecological footprint and to minimise environmental pollution (in particular, via energy consumption, greenhouse gas emissions or the product life cycle across the entire supply chain). 
  • Social covers the social aspects of a business, such as among other things, the impacts on employees, suppliers or customers. Topics such as diversity and inclusion, human rights, occupational health and safety as well as social engagement are included in this area.
  • The governance area essentially relates to the responsible management of companies in the areas of corporate culture, risk management and corruption.

In order to operate as a sustainable business it is precisely those impacts on the environment, society and corporate governance (ESG) that have to be identified and it is necessary to ensure that your own business model is future-proof. In the meanwhile, many studies have demonstrated that, in the future, stakeholders such as customers or investors will increasingly align their decisions with these ESG factors. 

Up to now, companies have generally been able to freely select a framework for their sustainability reporting. The standards of the Global Reporting Initiative (GRI) have been the most commonly used framework internationally as well as in Germany. Moreover, the German Sustainability Code (that also uses the GRI) has also been widely applied in Germany. Now, under the CSRD, the ESRS will constitute the mandatory framework. 

General requirements under ESRS 1 

The overarching norms contained in the ESRS 1 (general requirements) and ESRS 2 (general disclosures) deal with the general principles that have to be observed when preparing ESG reports.  

The subject matter of the ESRS 1 comprises, first of all, the general principles that have to be observed when preparing sustainability reports. Thus, there is a description of how the ESRS are structured, an explanation of the conventions used for their development and of the underlying concepts as well as the general requirements that have been specified for the preparation and presentation of sustainability-related information.

Moreover, ESRS 1 prescribes the minimum content of reports (cf. Table 1). As a consequence, a company’s impacts, risks and opportunities (IRO) in respect of the environmental, social and governance aspects should become transparent. In particular, there is a requirement to make disclosures concerning corporate governance, the strategy or business model and how risks, opportunities and objectives are managed in the company. Furthermore, the standard covers, among other things, the information that will not yet necessarily have to be reported in the initial years and what should be understood by the reporting principle of double materiality (cf. Table 2, row 5).

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