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On 22 March 2024, the Federal Ministry of Justice published the draft bill for the implementation of the Corporate Social Responsibility Directive (CSRD). The CSRD replaces the previous EU Non-Financial Reporting Directive (NFRD) and brings far-reaching changes for companies as well as an expansion of the scope of application.

The amending provisions of the CSRD have adapted the Accounting Directive, the Transparency Directive and the Auditing Directive. These European requirements are to be implemented in Germany with the present draft law.

According to the draft bill, the existing legal framework is also to be reviewed and amended in certain areas as part of the implementation of the CSRD. In addition to far-reaching changes to the German Commercial Code, corresponding amendments are also proposed in other affected laws, such as the German Stock Corporation Act, the Cooperative Societies Act, the Securities Trading Act, the Auditors' Code and the Supply Chain Due Diligence Act.

Scope of application of sustainability reporting under commercial law

The sustainability reporting obligation extends to both individual companies and (sub-)groups. In addition to capital market-oriented companies and issuers from a third country, large corporations and commercial partnerships with limited liability are also obliged to report.

The draft also provides for capital market-oriented co-operatives with more than 500 employees to be included in the scope of application. The provisions on sustainability reporting are not to apply to companies that fall under the Public Disclosure Act.

The size of the company or (sub)group is determined in accordance with the financial reporting criteria set out in Section 267 HGB. Companies are considered large if they fulfil two of the following criteria: They have a balance sheet total of more than 25 million euros, more than 50 million euros in sales revenue or more than 250 employees.

Exemption options from the reporting obligation

Companies and subgroups can be exempted from the sustainability reporting obligation if they are included in the consolidated sustainability report of a higher-level parent company. Inclusion in the consolidated sustainability report of a parent company in a third country can also enable exemption under certain conditions.

However, the group exemption cannot be utilised by companies that are both capital market-oriented and large within the meaning of Section 267 HGB.

Parent companies that prepare a consolidated sustainability report do not also have to prepare a sustainability report at company level.

In addition, under certain conditions, the reporting obligation under the Supply Chain Sustainability Obligations Act is to be waived if the company has expanded its management report to include a sustainability report or is exempt from the sustainability reporting obligation by including it in such a management report.

Preparation and review of sustainability reports within the framework of legal requirements The scope and content of sustainability reporting are specified by the European Sustainability Reporting Standards (ESRS). The report must be published as part of the management report, prepared in digital XHTML format and labelled in accordance with the requirements of the ESEF Regulation. This also applies to non-capital-market-orientated companies.

The Executive Board or management is responsible for preparing the sustainability report; the Supervisory Board is responsible for monitoring it. The draft bill provides for corresponding additions to the AktG, the GmbHG and the GenG. In the event of incorrect representations in the sustainability report, the same sanctions apply as for the annual financial statements and management report. Fines can be imposed on the company and its legal representatives.

The balance sheet and management report oath are combined and expanded to include a statement on sustainability reporting.

Sustainability reporting is subject to an audit by an auditor, initially with limited assurance. The EU Commission is also to develop standards for an audit with reasonable assurance, which are to be applied in the future.

As the legal regulation according to which the shareholders are to choose the auditor for sustainability reporting is not expected to come into force until after the end of this year's Annual General Meeting season, the law also contains a transitional provision for financial years beginning before 1 January 2025. If companies have not yet decided on an auditor for their ESG reports, the so-called statutory presumption of conformity will apply. This means that the statutory auditor is also the auditor of the sustainability information as long as no other decision has been made.

These are the next steps for companies

The draft bill serves as the basis for the government bill, which is being discussed in the Bundestag. The CSRD must be transposed into national law by 6 July 2024.

Despite the existing legal uncertainties and possible amendments or additions with regard to the CSRD Implementation Act, we recommend that all companies subject to sustainability reporting obligations - including those for which first-time application is not planned until the 2025 financial year - deal with the legal obligations and the complex content requirements in a timely manner.

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