Corporate Gumbo: The Saga of the CSRD and the Never-Ending German Promise
Ah, the Corporate Sustainability Reporting Directive (CSRD)—an official document everyone seems to want to avoid as if it’s an old uncle who has shown up for Christmas dinner uninvited. It’s like trying to nail jelly to a wall; it seems there’s a lot of talk but very little action!
The Checkered Legislative History
According to Directive (EU) 2022/2464, this EU mandate should have been on the books in Germany by July 6, 2024. But instead, it’s playing hide-and-seek in a Federal Ministry of Justice draft bill that popped up like a bad penny back in March 2024. And here’s the kicker: the Federal Cabinet supposedly approved it on July 24, but the Bundestag is having a spat that could rival a soap opera. Disagreement is climbing fast, and you know what they say—when the going gets tough, the tough go for a beer!
The Current State of Affairs
Let’s fast forward—France decided to be the nerdy overachiever, implementing the CSRD back in December 2023. Other countries like Bulgaria, Denmark, and Italy jumped on the bandwagon too. Meanwhile, Germany is tangled up in red tape tighter than a cat in a yarn factory. Not to mention, the European Commission has kicked off infringement proceedings against Germany and 16 other member states—talk about a slap on the wrist! The last thing Germany needs is a school report saying, “Can do better, must try harder!”
The Consequences of Procrastination
So, what does this all mean for the businesses involved? It seems that for companies hoping to avoid a CSRD report under the current regulations, it’s a bit of a mixed bag. Without timely implementation, those companies are only bound by existing obligations. They can wade in the legal kiddie pool without fearing a dive into the deep end—yet! But keep your head on a swivel! The legal landscape is shifting faster than an influencer’s mood on social media.
Retroactive Woes
Now here comes the fun part! A retroactive application is off the table, thanks to the illustrious Article 20 of the Basic Law. According to the Federal Constitutional Court, no one is allowed to turn back time. Sorry, Cher! But… companies might still need to prepare a report cobbled together from the bits leftover once the implementing law finally sees the light of day. It’s like preparing an exam the night before without having even attended the class!
Are We Volunteering Yet?
Let’s not beat around the bush. If legislation doesn’t materialize and companies want to play nice, a voluntary report might be on the table. But hold your horses; making this leap means companies have to dance right into the EEA’s labyrinth of varying laws. Why? Because a company’s whereabouts in EU territory can lead them on a wild goose chase, and nobody wants that headache! Voluntary compliance is like paying for the meal you didn’t eat after your date ghosted you: noble, but ultimately unnecessary!
The Future: No Clear Crystal Ball in Sight
And if you think things are looking bleak for the immediate future, there’s more! A new implementation law isn’t expected until after the Bundestag elections—talk about playing the long game. But oh, joy! Ursula von der Leyen chimed in, promising a “streamlined” series of regulations to ease the pain of compliance. It’s like saying a diet soda will replace a greasy burger—it’s there, but will it really satisfy?
Final Thoughts
So, what now? Companies are left juggling the previous regulations while their future reporting obligations dangle over their heads like a ripe fruit ready to drop. The companies at this crossroads might consider voluntarily taking on CSRD standards just to save face or risk being the only ones not dancing at the sustainability party. In any case, it looks like we’re in for a wild ride!
Ultimately, navigating the waters of corporate sustainability reporting in Germany is like participating in an extreme sport: exhilarating, risky, and definitely something that requires the right safety gear—and perhaps a good luck charm!
If you want to chat more about the joys, pitfalls, or sheer absurdities of this topic, feel free to reach out! Because let’s be honest, we could all use a good laugh.
Directive (EU) 2022/2464, also known as the Corporate Sustainability Reporting Directive (CSRD), was established on December 14, 2022, and mandates that Germany’s legislature should have enacted the necessary legislation by July 6, 2024, to comply with this comprehensive sustainability framework.
The draft bill from the Federal Ministry of Justice has been publicly available since March 22, 2024. Despite the Federal Cabinet’s approval of the government draft on July 24, 2024, the likelihood of timely implementation remains low due to substantial disagreements within the Bundestag and a prevailing government crisis that complicates legislative progress.
Following a first reading that took place in October, which included discussions with various associations and companies, an amended version of the bill was agreed upon by the SPD and Alliance 90/The GREENS. However, further progress was again postponed last week. The CDU/CSU argues that the directive should be renegotiated at the European level, suggesting it imposes an undue burden on businesses and fosters excessive bureaucracy. The uncertainty surrounding the legislative process has surged since the dissolution of the traffic light coalition, with many believing that finalization will not take place by the expected deadline of December 21, 2024.
Significantly, the European Commission initiated infringement proceedings against Germany and 16 other EU member states on September 26, 2024, signaling serious implications for non-compliance, as they await a response from the German federal government.
CSRD implementation status
On December 6, 2023, France successfully became the first European nation to translate the new directive into its national legislation. For detailed information regarding the current status of CSRD implementation, interested parties can refer to the EU’s legal portal, EUR-Lex.
Countries such as Bulgaria, Croatia, Czech Republic, Denmark, Finland, France, Hungary, Ireland, Italy, Liechtenstein, Lithuania, Norway, Romania, Slovakia, and Sweden have already implemented the CSRD. However, the European Commission has initiated infringement proceedings against certain states, including Sweden and the Czech Republic, due to delays in full compliance.
Consequences for companies due to a lack of implementation
Failure to meet the implementation deadline does not impose an immediate obligation on companies to prepare or publish a CSRD report. Instead, affected businesses must currently operate under the existing legal framework, even if it does not align with CSRD standards.
Legal limits on the retroactive effect of a future implementing law
The prospect of retroactively applying an implementation law for 2024 is highly unlikely, as it conflicts with the constitutionally embedded prohibition of retroactivity stated in Article 20 of the Basic Law. This principle, upheld by the Federal Constitutional Court, generally prohibits any real retroactive effects, including for the implementation of EU directives. Exceptions may arise in cases of genuine retroactivity, but significant public interest reasons must be demonstrated.
Affected companies may find themselves required to draft and publish a report as early as 2025, despite an implementing law not being enacted until that year. According to established jurisprudence, if legal consequences are tied to unresolved matters from the current financial year and a law’s promulgation, there exists a “false” feedback that is not fundamentally inadmissible. However, this must be validated by public interest considerations and the principle of proportionality.
The previously applicable reporting obligation continues to apply
In the interim, until the implementing law becomes effective, existing regulations regarding non-financial reporting remain in place. Specifically, capital market-oriented companies, alongside large credit institutions and insurance companies employing an annual average of more than 500 individuals, are still required to submit a non-financial reporting declaration for the 2024 financial year, adhering to the German Commercial Code (HGB).
The draft bill proposed a reporting requirement for very large companies starting January 1, 2024; this is poised to be passed on November 8, 2024. Despite the unlikelihood of timely enactment, the constitutional admissibility of these provisions has not been notably challenged, a situation expected to persist into the following year.
Nonetheless, these reports do not undergo any mandatory external audits. Instead, auditors are responsible for formally verifying the report’s availability as per Section 317 Para. 2 HGB, while the supervisory board will oversee its content quality, although a thorough audit is not legally mandated.
Creation of a voluntary report?
If a law is not enacted by 2024, a pertinent discussion will arise regarding whether companies will opt to voluntarily submit comprehensive reports aligning with the European Sustainability Reporting Standards (ESRS)—a move that could potentially exempt their foreign subsidiaries from additional compliance burdens.
In the absence of a standard voluntary CSRD report, subsidiaries in nations where CSRD has already been implemented will still need to prepare their reports if they fall within the directive’s scope.
Furthermore, it’s noteworthy that the CSRD permits companies some leeway to deviate from certain disclosure requirements during initial reporting periods. However, should a fully compliant CSRD report be voluntarily prepared and published, it would have significant implications for calendar year reporting, potentially triggering transitional relief periods.
Effects with regard to reporting according to the LkSG
The government draft for the CSRD Implementation Act proposed an amendment to Section 10 LkSG, indicating that companies publishing a CSRD report—either voluntarily or mandatorily—would be exempt from preparing a separate LkSG report for submission to BAFA. This adjustment would signify a significant alleviation from current compliance burdens.
In the absence of CSRD implementation, companies bound by the LkSG nonetheless must proceed with compiling a report, as BAFA has indicated that they will first scrutinize LkSG reports post-reporting date of January 1, 2026. Thus, the LkSG report must still be prepared, with submission and publication by December 31, 2025, fulfilling the requirements.
It is vital to note that existing due diligence obligations under the LkSG remain uncompromised by this timeline, demanding that companies publish at least a Statement of Principles in accordance with Section 6 Paragraph 2 LkSG. BAFA has commenced outreach to companies based on risk assessments to address inquiries about their risk analysis and policy statements.
Future implementation law and reform plans of the EU Commission
Experts anticipate that a new CSRD implementation law will emerge only after the subsequent Bundestag elections, likely not before autumn 2025. Should this come to fruition, all large companies will be required to produce a sustainability report for 2025 in accordance with Section 267 of the German Commercial Code (HGB).
Meanwhile, Ursula von der Leyen, President of the EU Commission, announced initiatives to streamline existing regulations under the CSRD, CSDDD, and the EU taxonomy into a cohesive legislative framework known as the “Omnibus Regulation.” This initiative seeks to maintain the core obligations while addressing widespread concerns of excessive bureaucracy expressed by various economic stakeholders. Although the reporting process may become more manageable, companies will still be mandated to report on sustainability moving forward.
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How can companies ensure they are meeting both the CSRD and LkSG compliance obligations simultaneously?
Rent compliance obligations under the LkSG (Supply Chain Due Diligence Act). This means that if companies choose to comply with the CSRD by submitting a report, they might simultaneously fulfill their requirements under the LkSG, thus simplifying their compliance processes.
Conclusion: The Road Ahead
As we look towards the future, the road remains bumpy for businesses navigating the complex landscape of sustainability reporting. With the ongoing legislative deadlock and uncertainties around the implementation of the CSRD, companies must remain agile and proactive. Whether by adhering to existing reporting obligations or contemplating voluntary compliance, the choice will depend not only on legal stipulations but also on a company’s commitment to sustainable practices.
Ultimately, staying informed and prepared will be key in mitigating risks and capitalizing on opportunities as the regulatory environment evolves. Embracing transparency and sustainability is no longer just a regulatory checkbox; it is becoming integral to corporate reputation and long-term success in an increasingly eco-conscious marketplace.
