Corporate Sustainability Reporting Directive: New reporting obligations for many companies.

 ESG and labor law (3): HR needs to be prepared for more detailed information requests.

Corporate Sustainability Reporting Directive: New reporting obligations for many companies.

At the end of June, EU legislation defined the regulatory content of the Corporate Sustainability Reporting Directive (CSRD). We describe why HR managers need to bear in mind the new reporting obligations.

Reporting on aspects of a company’s sustainability will be greatly expanded in coming years. In future, the planned Corporate Sustainability Reporting Directive will also force many SMEs to report on non-financial risks relating to environment, social and governance (ESG) aspects. At least the agreement reached between the European Council and the EU Parliament on June 21 permits successive periods of application. This is primarily intended to simplify the situation for those companies that have no previous experience with sustainability reporting.

Who is affected?

  • As of January 1, 2024, the extended reporting requirements will apply to both large and listed companies which are already subject to the Non-Financial Reporting Directive.
  • As of January 1, 2025, large companies which are not currently required to report non-financial information, and which fulfill two of the following three size criteria, will be affected: Balance sheet total amounting to at least 20 million euros, a net sales revenue amounting to at least 40 million euros or at least 250 employees.
  • As of January 1, 2026, small and medium-sized enterprises listed on the stock exchange (SMEs) will also be subject to these new rules if they fulfill two of the following three criteria: More than ten employees, total assets of more than 350,000 euros or a net sale revenue amounting to more than 700,000 euros.
  • SMEs listed on the stock exchange can take advantage of an exemption until 2028 and will be exempted from the reporting obligation.
  • The CSRD also requires non-EU companies to report: If they generate a net sales revenue of 150 million euros and have at least one subsidiary or branch in the EU, they are obliged to provide information regarding the environmental, social and governance aspects as defined by the directive.

Complex environmental, social rights and governance issues

The new regulation aims to achieve greater transparency for investors, business partners and consumers. The sustainability report is intended to become part of the management report and be reviewed by auditors. The questions that have to be answered include the following: How does the company ensure that its business model and strategy comply with the 1.5 degrees Celsius target of the Paris Agreement? What are the company’s goals with regard to sustainability aspects? What progress is the company making toward achieving its goals? Social factors are also a focal issue and concern gender equality, equal pay and work-life balance. Governance aspects are also covered and consist of good corporate management concerning the company and its products themselves, but also in relation to its business partners and the supply chain. Article 19a (5) of the Directive simplifies various aspects of the reporting for SMEs.

Relevance for HR

Given the social factors that companies will be required to report on in the future, HR departments have to prepare for new information requests. Alongside the aspects mentioned above, these also include:

  • Training and qualification, as well as employment and the inclusion of people with disabilities,
  • Diversity issues, including in terms of corporate governance,
  • Occupational health and safety,
  • Employee participation,
  • Compliance with human rights and international standards – also throughout the supply chain,
  • Combating corruption and bribery,
  • Targets for social factors and measurement methods.

Against this background, HR managers need to take proactive action and preemptively assess the following issues in collaboration with the legal department: To what extent do the new reporting requirements affect the company? What data does HR need to generate to fulfill these requirements? What digital and organizational infrastructure does this requires? Companies are now forced to consider the future: Given the double materiality, information has to be provided regarding every aspect which is either material to the success of the enterprise or material from an ecological or social standpoint. For example, the analysis needs to consider the outside-in perspective, for example: How does poor diversity in the management influence recruiting, and how may it affect future business success as a consequence? The inside-out perspective examines questions such as: How does the entrepreneurial activity affect people and society?

Take into consideration co-determination

HR managers need to bear in mind any co-determination rights of the works council. These may concern data on diversity, fair wage structuring or the introduction of social ethics standards and codes of conduct, for example.

More reporting does not necessarily result in greater climate protection or compliance with human rights. In particular, medium-sized companies require competitive conditions to achieve the green transformation. Accordingly, the planned Corporate Sustainability Reporting Directive may primarily end up creating more bureaucracy rather than improving sustainability. Instead of rules from Brussels, global standards above all can create greater transparency regarding sustainability for investors. Nevertheless, HR managers need to be proactive and analyze whether the new regulations require any action to be taken. In order to avoid duplication of work and additional expenses, these issues need to be considered and addressed both when implementing the German Supply Chain Act and with regard to the plans for the EU supply chain law. One positive side effect is that information such as the proportion of women on supervisory and management boards, in the talent pool or on the shortlist for promotion processes can also be used for an employer to stand out in the recruiting process. In addition, corporate buyers, investors, rating agencies and banks are increasingly giving weight to whether a people strategy considers ESG criteria, such as non-discriminatory remuneration, diversity and human rights.