CSRD Reporting Requirements

Bauer interviewed by VMM Business Publishing.

Dr. Bauer, what is the current situation with regards to the CSRD in Germany?

The topic of CSRD (Corporate Sustainability Reporting Directive) is currently causing headaches for many medium-sized companies.

From the financial year 2024, large companies will be required to integrate a sustainability report into their management report. In subsequent years, this requirement will be extended to other company sizes. From conversations, I know many medium-sized business owners are wondering what this regulation means for them and what actions they need to take. There are, of course, differences: Companies that need to report from the 2024 financial year have, in our experience, already taken a closer look at CSRD and are either in the midst of implementation or nearing completion.

Who is currently affected by the regulation?

Large publicly traded companies with more than 500 employees must already report on the current 2024 financial year under CSRD. Gradually, more companies will be included.

What are the deadlines?

The CSRD sets out the following timeline:

• From 1 January 2024: Large companies that are already subject to the NFRD (Non-Financial Reporting Directive).

• From 1 January 2025: Other large companies currently not covered by the NFRD.

• From 1 January 2026: Publicly listed SMEs, small and non-complex credit institutions, as well as their own insurance companies.

The first reports meeting the new CSRD requirements must, therefore, be prepared for the 2024 financial year and published in 2025, provided the company is subject to reporting obligations from 2024.

What does CSRD entail?

The Corporate Sustainability Reporting Directive (CSRD) is an EU directive aimed at improving and standardising corporate sustainability reporting. The CSRD expands and replaces the previous Non-Financial Reporting Directive (NFRD) and aims to enhance the transparency and comparability of sustainability information, benefiting both investors and other stakeholders. Solely the auditor examines the sustainability report. Subsequently, BaFin reviews the sustainability reporting as part of the management report of publicly traded companies under financial statement control. It is important to know that the sustainability report will hold the same significance as traditional financial reporting.

Why do companies need a consultancy for CSRD, isn't it sufficient to seek external advice from an auditor?

I don't see it that way. Of course, there's nothing wrong with seeking the opinion and support of your auditor. That's even recommended. However, in this case, it's advisable to clearly separate advisory services from subsequent auditing. Your auditor would agree with this as well.

Why is that, can you explain it to us?

To understand that, it is necessary to know what the main component of the CSRD report is. Simply put, the core of sustainability reporting is information on the significant impacts of a company’s activities on people and the environment (“Inside-Out Perspective”) and conversely, the impact of the environment on the company itself (“Outside-In Perspective”). For example, climate change can significantly affect the performance and economic condition of a food manufacturer. Since substantial impacts are considered in both directions, it is referred to as the “double materiality principle”. This is where we come into play. As ESG experts, my team and I guide the entire process from analysis to the implementation of double materiality. Auditors traditionally focus on checking the outcome. Therefore, my recommendation is to separate audit and advisory services and focus on specific experience and knowledge in the area of double materiality analysis. Nevertheless, we coordinate with the auditors to consider their perspectives and requirements.

What recommendations can you give to companies?

Firstly, it is important for companies to understand what the new sustainability reporting entails, what it means for the individual company, and “where they currently stand”. We know how engaged companies are in their daily operations, so it makes sense for them to seek competent advice from a certified CSRD expert. Generally, we recommend a cross-departmental approach. ESG is not simply a classic controlling or HR issue. It should also be assessed what possibilities digital solutions could offer to simplify data collection and processing, as well as support the process. While a professional software solution is not always strictly necessary, it can be helpful depending on the requirement profile. It is important to acknowledge that sustainability reporting is here to stay and will likely be expanded further. Therefore, we advise you to consider sustainability management now with a view to the future to act in good time and use potential competitive advantages.

How do you support this process, what are your initial steps?

At Blue Advisory, we typically start with an “ESG briefing”, often in the form of a compact workshop or quick check, which first creates a basic understanding of CSRD and secondly identifies necessary and possible actions. From our perspective, it is always helpful and important to make an unfamiliar and complex topic simple and understandable in the initial step. We are usually very effective at this. At the same time, we conduct a fit-gap analysis to see if there are already existing approaches within the company related to sustainability (such as a sustainability brochure or NFRD report) to determine the ESG maturity level. The goal of the workshop is to set priorities and identify action areas. The following steps typically involve the double materiality analysis, deriving the sustainability strategy, goals, and measures, implementation planning, and possibly the selection and introduction of ESG software and tools.

What exactly is involved in the double materiality analysis?

The double materiality analysis is the central element of CSRD reporting. It is, so to speak, the key to it. Given the multitude of individual topics in the areas of environment, social, and governance, companies face the challenge of focusing their reporting on the topics that are material to them. The double materiality analysis uses a standardised catalogue and process to determine the key topics that must be covered in your sustainability report. As previously mentioned, there is a distinction between the Inside-Out perspective, also known as Impact Materiality, and the Outside-In perspective, known as Financial Materiality.

The Inside-Out perspective helps companies identify the actual and potential positive and negative effects of their activities on the environment and society. The Outside-In perspective focuses on the opportunities and risks from the environment and society for the financial condition of a company and the future viability of the business model. When determining key topics, companies must always consider both perspectives in accordance with CSRD and decide which topics are relevant to them.

Many companies are not affected by CSRD by 2024, plus there are transition periods. Does this mean the issue doesn't have to be top of the agenda yet?

I would still recommend that all companies – even those not immediately affected today – start engaging with CSRD now. There are three main reasons for this:

Firstly, even smaller companies will soon be indirectly affected, as their customers will check the sustainability of the entire supply chain.

Secondly, understanding the new requirements and preparing for them requires some time: responsibilities need to be defined and data gathered. It's more manageable to do this gradually than later in a last-minute rush.

Thirdly, early engagement with CSRD can provide a competitive advantage (e.g., quicker adaptation of a business model).

Will there be more obligations in the ESG context for companies?

This is to be expected. Particularly the industry will have to prepare for further regulatory steps, as shown, for example, by CO2 taxation or the EU taxonomy. Again, it offers significant advantages if companies address these in a timely manner and identify key levers. This can lead to substantial savings (e.g., avoidable CO2 costs).

Given the challenge of implementing CSRD, why should companies rely on support from Blue Advisory?

We see ourselves as an independent, certified companion, offering comprehensive support to companies in sustainability reporting and beyond from an impartial perspective with entrepreneurial acumen. Additionally, having completed and ongoing projects, we have the experience and are at the “cutting edge” of this dynamically evolving topic. By comprehensive, I mean that in our consultation approach we consider all aspects (e.g., processes, organisation, data, technology, knowledge, etc.). Thus, companies receive the complete package in an understandable manner from one source and do not need to take additional training or webinars. Furthermore, we conduct a workshop or ESG briefing (including quick check) prior to the project start to determine which actions are necessary, ensuring the effort remains reasonable.

What would you like to convey to our readers in conclusion?

If you have many questions about the topic or haven't addressed it yet, I would be happy to discuss your potential action needs with you in an initial, no-obligation conversation and explain our proven approach in detail.

Background about the interviewee:

Dr. Mathias Bauer is the Managing Director of Blue Advisory GmbH in Augsburg. He advises and supports companies, among other things, in implementing CSRD reporting requirements and is responsible for sustainability management at Blue Advisory. His doctorate focused heavily on economic sustainability. He is an ESG expert and a member of the ESG Expert Alliance.