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On the pathway to sustainability reporting – Part I: Current regulatory initiatives at the EU level will be implemented shortly

The EU Commission’s current proposal for a Directive has fleshed out sustainability reporting by 2023 with standards and extended the scope of application by 2026 to SMEs. The following explanations relating to the background and the legislative acts that already exist bring to light the requirements that will have to be observed here and how they will have to be complied with.


The first initiatives to develop environmental and social targets were launched at a global level already in 1999. In 2015, the key topics in this respect were defined in the UN 2030 Agenda and in the Sustainable Development Goals that were included in it. Since then, the key topics have continued to be developed further – most recently in November 2021 at COP 21, in Glasgow. Building on the UN 2030 Agenda and other global agreements, the EU Commission drew up a number of action plans, e.g., the ‘EU Green Deal’, which gave rise to, in particular, the following legislative acts: the Disclosure Regulation, the Taxonomy Regulation and the Non-Financial Reporting Directive.

Disclosure Regulation and Taxonomy Regulation

The Disclosure Regulation, which came into force in December 2019, promotes the establishment of consistent disclosure requirements in the context of sustainability. This Regulation covers all financial market participants and its objective is to ensure that ESG factors (cf. figure) are taken into account in advisory and investment decision-making processes.

Here, this concerns predetermined information – such as for example, the strategy for integrating sustainability risks and a statement on compliance with due diligence obligations in the event of adverse impacts on sustainability factors for investment decisions – that has to be published on the website. Currently, this obligation covers all financial market participants with more than 500 employees. In addition to taking ESG factors into account in decision-making processes, the actual business operations also matter. With the Taxonomy Regulation, the EU Commission created a legislative act to enable economic activities to be classified as being environmentally sustainable and to assess them according to their degree of environmental sustainability. In so doing, a distinction is made between three types of financial products:

  • dark green – have a sustainability aspiration, 
  • light green – environmental and social criteria are taken into account in the investment decision, and 
  • other, that do not satisfy the requirements of the EU criteria. 

In this way, private investments in green and sustainable projects, in particular, should thus also be facilitated. The Taxonomy Regulation came into force in July 2020.

Both regulations are being implemented in several phases. They also provide the basis for sustainability reporting that, with new adjustments and additions, will assume an important role in accounting in the next few years.

Non-financial reporting

Since 2014 already, non-financial reporting has been a requirement for companies with more than 500 employees. Information on ESG factors has to be published in the management report or in a separate non-financial report. Up to now, there have been no specific standards for the reporting; as a consequence, at present it is frequently not possible to make a comparison between companies and their reports. Furthermore, the information contained in these reports is not included in the audit of financial statements. For this reason, non-financial reporting is currently being enhanced. Building on the previous Directive and using different terminology, the EU Commission has presented a proposal for a Corporate Sustainability Reporting Directive (CSRD).

Sustainability reporting

At present, the Corporate Sustainability Reporting Directive (CSRD) is still a proposal, which was presented in April 2021. It essentially addresses the widening of the scope of application and the points that have remained open as regards
non-financial reporting. A key aspect of expanding the scope of application is the distinction between large undertakings, on the one hand, and small and medium sized enterprises (SMEs), on the other hand. 

From now on, the following companies, which satisfy at least two of the following three criteria, will have to comply with the requirements. 

Large undertakings, from 2023: 

  • balance sheet assets €20m  
  • net turnover €40m  
  • 250 employees/annual average

SMEs, if listed, from 2026: 

  • balance sheet assets: € 350k  
  • net turnover: € 700k  
  • 10 employees/annual average

Please note: Furthermore, the Directive includes proposals for voluntary reporting by non-listed SMEs. 

The new proposed directive also provides for significant changes as regards the contents and format. For one thing, it will now be mandatory for sustainability information to be included in the management report and a separate report will no longer be permitted. In this connection, a requirement will be introduced for this information to be verified by the external auditor. Moreover, the information will be specified through the definition of standards and a clear qualitative and quantitative basis for the audit will be created. Currently, the Directive is in the phase of being negotiated in the European Council and in the European Parliament.

Standard-setting developments

The setting of reporting standards is a key aspect of the new CSR Directive. For some time now, there have been initiatives and proposals for setting these standards, however, these have not yet developed into ones that have been globally implemented. For the planned implementation by 31.10.2023, the EU Commission assigned the role of developing the standards for the CSR Directive to the European Financial Reporting Advisory Group (EFRAG), a private organisation that is funded by the EU. Moreover, the IFRS Foundation is currently focusing on global standards with the International Sustainability Standards Board, which was set up in November 2021.


Sustainability is increasingly gaining importance at the global as well as European and national levels. The objectives and legislative acts are becoming more specific and are already being applied to some extent. The proposed Directive will close the gaps that have shown up in sustainability reporting and widen its application areas. Nevertheless, at this juncture, there is still no clear idea what form a standardised qualitative and quantitative sustainability reporting should take. As a result, we still have to wait for the further developments before its application commences in October 2023.

Outlook: For medium-sized enterprises, sustainability reporting will entail not just the costs that result from the widening of reporting obligations but also great opportunities. These consist in the possibility of increasingly taking into account social and environmental aspects in the decision-making of the stakeholders (capital providers, employees and customers). In this respect, sustainability reporting will play a role in maintaining competitiveness and safeguarding the business model in the long term. What this means specifically will be the subject of Part II of this series of articles. In Part III, we plan to publish a case study based on a sustainability report that has already been prepared for an SME.

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