Corporate Sustainability Reporting Directive (CSRD) and the challenge for companies

In March 2018, the EU presented its strategy to create a financial system that promotes climate action and sustainable development. Given the increasingly evident effects of climate change and the growing scarcity of resources, it is crucial to make changes towards greater sustainability now.

Climate change is one of the greatest challenges of our time and it is of the utmost urgency to take action to prevent irreversible damage to our planet. This is where the European Green Deal comes in. Tackling climate change is one of the EU's top priorities. The EU Green Deal, together with the concept of sustainable (economic) development and its governance instruments, serves as a roadmap for a transition to a modern, resource-efficient and competitive economy. By 2050, economic growth should no longer be linked to resource use and net greenhouse gas emissions should be a problem of the past. The aim of the Green Deal is to achieve zero net greenhouse gas emissions by 2050. It pursues an integrative approach that combines and harmonizes climate and environmental protection, the preservation of biodiversity, social justice and economic growth.

The EU Green Deal aims to transform the EU

• into a fair and prosperous society with a modern, resource efficient and competitive economy
• with zero net greenhouse gas emissions by 2050
• and with economic growth decoupled from resource use.

A central component is a roadmap to enable the financial sector to promote a sustainable economy that pursues economic as well as environmental and socio-political goals (ESG - environmental, social, governance).

The roadmap actions are

• the introduction of a single EU classification (taxonomy) for sustainability
• the creation of an EU label for "green" financial products
• greater transparency of non-financial information in corporate reporting.

Until now, the Non-Financial Reporting Directive (NFRD) has regulated the disclosure of non-financial sustainability information. With the introduction of the Corporate Sustainability Reporting Directive (CSRD) in 2023, the number of companies affected by it has been significantly increased. Since 2017, around 500 large capital market-oriented companies in Germany are required to report on sustainability in accordance with the NFRD (2014/95/EU). This is based on the CSR Directive, which requires large capital market-oriented companies to disclose sustainability aspects that have an impact on their business situation. The adoption of the CSRD by the European Parliament in November 2022 not only changes the content framework for reporting, but also significantly expands the group of companies required to report. The CSRD replaces the previous NFRD and will serve as a guideline for sustainability reporting in Europe in future.

With the introduction of the CSRD, the number of companies subject to reporting requirements will increase from 500 to around 15,000. In future, these companies will have to prepare a sustainability report and have it audited by an external auditor.

Sustainability reporting

For the 2024 financial year, capital market-oriented companies that have already prepared a sustainability report under the NFRD must prepare a sustainability report in accordance with the CSRD Directive in 2025. From January 1, 2025, limited liability corporations and equivalent companies and groups that are considered “large” according to the size criteria of the German Commercial Code (Sections 267 et seq. HGB) will also be affected by the reporting obligation under the CSRD. Likewise, companies that prepare annual financial statements and a management report must fulfill the sustainability reporting obligations, even if they do not reach the size categories of Sections 267 et seq. HGB, but are subject to the special accounting regulations for large corporations due to their articles of association or partnership agreement. In 2026, these companies must prepare a sustainability report in accordance with the CSRD for the 2025 financial year as part of their management report, have it audited by an auditor and publish it. Small and medium-sized capital market-oriented companies (SMEs) must follow the regulation one year later, but there is initially an opt-out option for them. The opt-out option means that these SMEs are initially exempt from the sustainability reporting obligation under certain conditions.

From a chronological perspective, the reporting obligation applies to companies in the following periods

January 1, 2024: For entities already reporting in accordance with NFRD (reporting in 2025 based on 2024 data)

January 1, 2025: all large corporations and equivalent partnerships as well as companies required to prepare consolidated financial statements and

January 2026: all capital market-oriented companies except for micro-corporations with fewer than 250 employees.

At present, the CSRD Directive has yet to be transposed into national law in Germany. This was to be implemented by the German legislator by July 6, 2024. The original draft bill is now available as a government bill. The first reading in the Bundestag took place on October 16, 2024. Numerous comments on this draft were submitted by experts, including the IDW (Institute of Public Auditors in Germany) and environmental experts. However, due to the collapse of the coalition, it is no longer expected that the law will be implemented by the end of the year.

What will companies have to do?

The importance of sustainability reporting will continue to increase in the future. Companies that fall under the CSRD will in future be obliged to present financial and non-financial key figures in their management report. This must be done in accordance with the delegated acts for the EU-wide reporting standards, the so-called European Sustainability Reporting Standards (ESRS). These standards define the scope as well as extensive and detailed disclosure requirements in the areas of Environment, Social and Governance.

A central component of the ESRS is the principle of dual materiality, which obliges companies to report both on the impact of their activities on the environment and society (impact materiality (inside-out perspective)) and on the financial risks arising from ESG factors (financial materiality (outside-in perspective)). The aim of the ESRS is to use the principle of dual materiality to provide information along the entire value chain in the sustainability report that is both comprehensible and relevant as well as verifiable and comparable. This results in a comprehensive collection of data that shows both the company's impact on the environment and society as well as the potential financial impact of ESG factors.

The ESRS comprise a total of 12 reporting standards, which cover the following aspects, among others:

• 5 environmental standards (ESRS E) on the topics of climate change, pollution, water and marine resources, biodiversity and ecosystems, resource use and circular economy
• 4 social standards (ESRS S) on the topics of the company's own workforce, workers in the value chain, affected communities, consumers and end users
• 1 governance standard (ESRS G) on the topic of corporate policy  
• 2 overarching standards of ESRS 1 on general requirements and ESRS 2 on general disclosures on the organization, sustainability strategy, governance and materiality analysis.

As part of sustainability reporting in accordance with the CSRD and the ESRS, companies must identify and disclose a large number of data points. The ESRS include detailed disclosure requirements and contain around 1,400 data points. The exact number of data points depends on the respective reporting standards, as different areas of sustainability (ESG) are affected. The CSRD and ESRS require companies to thoroughly collect and report a wide range of data points. Companies must ensure that they have appropriate data management and reporting systems in place to meet these requirements.

In addition, as part of the sustainability report, companies are required to provide information on the EU Taxonomy in accordance with Article 8 of the EU Taxonomy Regulation and disclose the following three metrics related to environmentally sustainable economic activities.

• Capital expenditure (CAPEX)
• Operating expenditure (OPEX) and
• Turnover

The EU taxonomy is a standardized classification system for sustainable and economic activities at EU level. The group of companies that are obliged to report in accordance with the EU Taxonomy is bound by the CSRD. As part of the action plan for sustainable finance, the taxonomy aims to steer companies' capital flows towards “sustainable and inclusive” investments and to make their financial and economic activities more transparent and long-term.

Companies must classify their economic activities as sustainable activities based on clearly defined criteria in accordance with the Delegated Acts. Taxonomy compliance goes beyond taxonomy capability. Taxonomy capability refers to the ability of an economic activity to generally fulfill the criteria of the EU taxonomy for sustainable activities. Taxonomy compliance means that an economic activity meets the criteria of the EU taxonomy for sustainable activities. This taxonomy defines which activities are considered environmentally friendly and sustainable in that they make a positive contribution to environmental objectives, do not cause significant harm to other objectives and comply with minimum social standards.

For companies, this means that they must disclose the proportion of their “sustainable” revenue, capital expenditure (CAPEX) and operating expenditure (OPEX) in the real economy.

Until now, sustainability reporting has been published separately from financial reporting in a stand-alone report on company websites. In future, reporting is to be standardized: The CSRD requires sustainability reporting to be integrated into a separate section of the management report and disclosed in a standardized electronic format in accordance with the ESEF Regulation. In addition, the CSRD provides for a mandatory audit of the sustainability report by an auditor, which will initially be carried out with limited assurance.

The Challenge for companies

The pressure on companies to meet ESG requirements is constantly increasing. Regulatory requirements such as the Corporate Sustainability Reporting Directive (CSRD) and growing expectations from investors, customers and society make it essential to firmly integrate sustainability and social responsibility into business strategies. However, while many companies are struggling to implement ESG strategies, they are overlooking a crucial opportunity: securing qualified specialists at an early stage who can actively shape and drive change.

The extensive reporting requirements are forcing companies to realign their existing processes and structures. In many cases, it may even be necessary to develop and implement these completely. In order to determine the required reporting content, due diligence processes must either be carried out from scratch or existing processes must be adapted, as the content of sustainability reporting is largely dependent on these. The CSRD defines these processes as methods used to identify, monitor, prevent, mitigate, remediate or eliminate material actual and potential adverse impacts and to determine how the company deals with these impacts.

This requires detailed personnel and resource planning. Implementing this to the required extent with the staff currently available is a considerable challenge for many companies. Employees in departments such as finance, controlling, human resources or management are already entrusted with numerous tasks. For companies that were not previously required to report, this could also necessitate new employee profiles. As a result, the challenge arises that either not enough staff are available or there is a lack of specialist knowledge and experts to ensure successful implementation.

The new requirements call for people with entrepreneurial courage, a sense of responsibility and, above all, vision. In this context, the role of the sustainability manager will become increasingly important. This position not only includes the preparation of management reports that provide a review and outlook for the company, but also the responsibility to act as a driver of organizational development during the transformation phase.

Sustainability is no longer a “nice-to-have” - it is an economic imperative. Companies that want to be successful in ESG reporting and implementation need experts with interdisciplinary skills. They must not only be able to collect and analyze sustainability indicators, but also have regulatory knowledge, strategic skills and change management expertise. In short: ESG requires the collaboration of specialists from the fields of environmental sciences, finance, communication and technology.

Despite this, many companies fail to set up the necessary teams. Either the topic is delegated - often to overburdened compliance departments - or there is a lack of strategic focus to invest in the development and recruitment of ESG talent in good time.

The demand for ESG experts is growing rapidly, but the supply of qualified specialists remains limited. Many companies underestimate how difficult it is to attract talent with specific expertise and an understanding of sustainability reporting, supply chain management or carbon accounting. Studies show that ESG professionals are now among the most competitive profiles on the job market. Companies that fail to act now run the risk of being left behind. They will face an increasing shortage of qualified staff as regulatory requirements tighten and reporting obligations become more extensive. This could not only result in financial penalties, but also cause considerable reputational damage.

Now is the right time to act

Companies that proactively recruit ESG talent position themselves as attractive employers with a vision for the future. This not only attracts qualified professionals, but also strengthens the company's brand. ESG is a complex field that requires continuous learning and hands-on experience. The earlier companies hire suitable employees, the faster they can build up the necessary expertise and transform the organization sustainably. All business areas, from product development to risk management, are affected by ESG. A dedicated ESG team can help to integrate sustainability into the entire value chain.

Many companies are currently in “reaction mode”. They only act when external requirements or pressure from investors and consumers force them to do so. This attitude is risky, as the ESG transformation requires time, careful planning and competent specialists. Those who do not act now are putting their future competitiveness at risk.

Investing in people, not just concepts

Companies that recognize ESG (Environmental, Social, Governance) as a strategic priority need to take action now to secure the best talent. The transformation to a sustainable and responsible economy is both a challenge and a great opportunity. It requires not only clear goals and plans, but above all the right professionals to make this vision a reality. The competition for ESG talent has long since begun - those who hesitate risk losing out in the long term.

The importance of sustainability management in companies is growing continuously. The recruitment of specialized experts is becoming increasingly relevant, especially due to increasing regulatory requirements. Laws such as the CSRD oblige companies to prepare comprehensive and verifiable sustainability reports. These reports go beyond environmental aspects such as CO₂ emissions and also include social issues and governance issues as part of the ESG criteria. Sustainability experts are indispensable for meeting these complex requirements in a legally compliant manner.

However, sustainability is more than just a regulatory issue. It affects all areas of a company - from production and the supply chain to corporate culture. A sustainable corporate strategy therefore requires specific expertise in areas such as environmental management, social responsibility and governance. Experts help not only to integrate sustainable practices into operational processes, but also to embed them in the long-term corporate strategy. This goes beyond mere compliance with regulations and helps companies to ensure sustainable success.

In addition, strategic sustainability management promotes innovation and competitiveness. Companies that specifically develop sustainable business models and environmentally friendly solutions can gain a competitive edge and strengthen their market position. Specialists play a key role here, as they have the necessary knowledge to drive forward innovations that make both ecological and economic sense. At the same time, the reputation of companies that are clearly committed to sustainability is enhanced. Consumers, investors and other stakeholders are increasingly paying attention to transparency and sustainable action. A credible sustainability strategy strengthens trust in the brand and improves the external perception of the company.

Another crucial aspect is risk management. The challenges posed by environmental changes, social imbalances or problems in corporate governance can harbor considerable financial and reputational risks. Sustainability management specialists help to identify and minimize such risks at an early stage. They help to increase the company's resilience and prepare it for future challenges. At the same time, a strong ESG performance facilitates access to capital. Investors and financial institutions increasingly value sustainable corporate governance, and the hiring of sustainability experts signals a sense of responsibility and future orientation.

Ultimately, sustainability is an essential component of the long-term future viability of companies. It ensures that companies not only remain profitable in the short term, but can also survive in a sustainability-oriented economy in the long term. The introduction of sustainability reporting and management therefore not only offers a response to legal requirements, but also opens up opportunities for innovation, competitiveness and a stronger position in the market. Companies that invest in qualified specialists at an early stage secure clear advantages in an increasingly challenging economic environment.

Conclusion

The introduction of the Corporate Sustainability Reporting Directive marks a significant turning point in corporate reporting. The expansion of reporting obligations and the integration of detailed sustainability data into annual reports presents companies with major challenges, but also opens up considerable opportunities.

On the one hand, the CSRD is forcing companies to rethink and adapt their processes, structures and data management systems. The implementation of the extensive requirements, in particular the European Sustainability Reporting Standards, not only requires considerable investment in technology, but also in personnel. The shortage of specialists in the field of sustainability management is one of the biggest hurdles, as it is becoming increasingly difficult to recruit qualified ESG experts who can meet the complex requirements.

On the other hand, CSRD offers the opportunity to anchor sustainability as an integral part of the corporate strategy. Companies that set the course early on can realize competitive advantages, build trust with stakeholders and strengthen their own resilience in an increasingly sustainability-oriented economy. In the long term, CSRD can thus serve as a catalyst for innovation, sustainable business models and future-proof economic activity.

Sustainability reporting is not a chore, but a strategic opportunity. Companies that act proactively, invest in expertise and integrate sustainability holistically into their organization position themselves to be future-proof and competitive. The shift towards greater sustainability is not a “nice-to-have” - it is an unavoidable imperative for long-term success.

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About our guest authors: Ruchika Mandru-Meyer B.A. and business graduate Jochen Ball

Ruchika Mandru-Meyer B.A. and business graduate Jochen Ball are tax consultants, auditors and managing partners at DORNBACH, a group of companies operating nationwide in the fields of auditing, tax consultancy, legal advice and management consultancy.