Thousands of companies in member states across the EU are in the process of implementing new sustainability reporting regulations. The rules from the Corporate Sustainability Reporting Directive (CSRD), which came into force at the beginning of 2023, are being phased in according to company size.

The first large listed companies will have to submit sustainability reports in accordance with the new EU standards in 2025, for the 2024 financial year. According to estimates from the German Sustainability Code, this will affect around 550 companies in Germany. By 2027, smaller listed companies will gradually be added – totalling around 15,000 in the German market.

In Germany, as in many other European countries, the CSRD has not yet been transposed into national law. The EU Commission has initiated 17 infringement proceedings against countries that are late. The deadline would have been 6 July 2024. With the break-up of the German „traffic light“ coalition, it is uncertain whether the legislative process can be finalised before the Bundestag elections. According to a press release from the Bundestag, Volker Wissing, who was appointed Minister of Justice following the collapse of the coalition, has spoken out in favour of completing the legislative project to implement sustainability reporting in the near future.

Auditors and legal experts point out that implementation will be delayed at best by a year. It is currently being discussed whether companies should voluntarily prepare a complete report in accordance with the CSRD requirements and also have it audited, explains Mansur Pour Rafsendjani, partner at the law firm Noerr. This decision must take into account the fact that some EU countries, including France and Italy, have already implemented the CSRD. Pour Rafsendjani points out that subsidiaries of German companies in these countries would therefore have to prepare a sustainability report anyway if they fall within the scope of the directive.

The law firm also points out that EU Commission President Ursula von der Leyen, in response to ongoing complaints about overregulation, has announced that the CSRD rules will be streamlined, but without cancelling the basic obligations. This may make it easier to prepare sustainability reports, although companies will still be obliged to provide ESG reporting in the future, warns Noerr lawyer Pour Rafsendjani

There is still little focus on how companies outside the EU are affected by the CSRD, and how they are preparing. According to the EU requirements, non-EU companies will be included from 2029 for the 2028 financial statements, if their business in the member states reaches a certain minimum level. Parent companies from non-EU countries will be required to report if they have a net turnover of 150 million euros across the EU. The EU business does not necessarily have to be conducted via an EU subsidiary; the regulation also applies if a branch office in the EU generates more than 40 million euros. Sustainability reporting runs with minimum requirements at group level.

By extending ESG reporting to third countries, Brussels wants to ensure that the same competitive conditions apply to all companies operating in the internal market. Brussels is thus deliberately allowing the CSRD rules to spill over into other jurisdictions – this is the declared aim of the EU Green Deal. Third-country companies must fulfil the requirements in order to secure access to the internal market and EU capital markets. It is estimated that more than 10,000 companies are affected by the third-country regulations on sustainability reports.

According to consultants, third-country companies are taking a proactive approach to EU sustainability reporting and are using ESG reporting specifically as a marketing tool. Maximilian Tucher, partner and sustainability expert at auditing and consulting firm Deloitte, reports a positive response from Japanese and Korean firms. „Companies with a larger footprint in terms of turnover, and employees in the EU, are thinking about how they can fulfil the CSRD requirements,“ says Tucher, who heads up sustainability in Deloitte's Financial Advisory division.

In Tucher's view, many third-country companies active in the EU pursue the same goals as issuers based in the member states of the EU. „There is a certain common understanding of sustainability as such within the EU. Companies have discovered for themselves that ESG can be an absolute differentiating factor in the market vis-à-vis customers, but also in employee retention,“ says Tucher. Accordingly, there is „very positive momentum“ on the topic in the EU. A lot is being invested in sustainable business. ‘Standardised sustainability reporting has been received positively in the EU in most cases – especially in light of the fact that the large number of regulations have been standardised via the European Sustainability Reporting Standards.

Outside the EU, the picture is certainly even more diverse, the consultant admits: „Especially if you look at the USA. Sustainability is viewed differently there. If the issue of mandatory reporting becomes virulent, there could still be one or two hurdles to overcome in certain countries.“

In principle, the EU has taken on a „leading role“ worldwide with the CSRD, Tucher explains. There are certainly still a few gaps here and there in the reporting standards, and some points need to be readjusted, including sector standards. But the fundamental issue is clear: „No matter how they think about sustainability in the USA, in Europe you don't want to go back,“ says Tucher.

In Korea and Japan, the consultant met companies that were very open to the topic of sustainability. „Some companies are endeavouring to be the first to voluntarily implement a sustainability report in accordance with EU regulations, in order to set themselves apart from their competitors in the market, even though the disclosure obligation for companies from third countries is not expected to take effect until 2028.“

Tucher mentions a Japanese client that he supports in implementing sustainability reporting at European level, as well as the topic of EU taxonomy. The group is active in many EU member states. „The Japanese owner has an ambition – he wants to be the frontrunner in sustainability reporting outside the EU.“ The move is aimed at other Asian countries, but also at the USA, although the topic is relatively complex for the Japanese company to implement. „For me, this is an example of how the whole issue can also have very positive effects, apart from the criticism of all the regulation,“ he says.

The consultant assumes that the CSRD obligations will not deter foreign companies from investing in Europe. „Sure, it's an effort. But it's not so costly that the European market is no longer attractive for foreign companies just because of the ESG reporting obligations.“ With the taxonomy, CSRD and the European Supply Chain Act, there is a lot of regulation, but it provides a standardised framework: „This creates clarity. Many companies share this view,“ says Tucher.