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Using the Sustainability Code to comply with the CSR Reporting Obligation

Companies can use the Sustainability Code to meet the requirements of the CSR Directive Implementation Act (CSR-RUG) regarding non-financial information. In April 2021, the EU also published its proposal to revise the Non-Financial Reporting Directive (NFRD), which has so far been applied in Germany in the form of the CSR-RUG.

The CSR reporting obligation::

  • Passed by the Bundestag on 9 March 2017 on the basis of Directive 2014/95/EU (Sect. 289b ff. German Commercial Code [HGB]).
  • Applies to companies oriented toward the capital market , financial institutions and insurance companies with more than 500 employees.
  • Content: policies, results, risks and key performance indicators regarding environmental, labour and social matters, the upholding of human rights and the prevention of corruption and bribery.
  • The Code can be used to comply with the reporting obligation. The Code Office checks a declaration for formal completeness.

To provide companies with pragmatic guidance on content requirements and the process for preparing non-financial declarations and reports, the RNE has incorporated the legally stipulated content into the Code. To submit a legally valid declaration, a company selects the desired application level within the database and reports on the policies and risks of the individual issues, going above and beyond the Code requirements if it wishes. The Code Office then checks this information for formal completeness. Upon publication, the preparers are awarded a Code signet attesting to the review level.


Background

The “Act to strengthen non-financial reporting by companies in their management reports and group management reports” was ratified by the Bundestag on 9 March 2017 in order to implement the corresponding EU Directive 2014/95/EU. The German Council for Sustainable Development got involved in the legislative process with a recommendation to Germany’s Federal Ministry of Justice and Consumer Protection (BMJV) in which it advocated integration of the relevant sustainability aspects into annual reports. When the Act was adopted, the Sustainability Code was revised and can now be used to comply with the reporting obligation.
 

In accordance with the CSR Directive Implementation Act, stock corporations (Sect. 289b Para. 1 HGB), comparable limited-liability registered partnerships and cooperatives are required to publish a non-financial declaration or report insofar as they

(1) are classified as large within the meaning of Sect. 267 Para. 3 Sentence 1 HGB,
(2) are oriented towards the capital market within the meaning of Sect. 264d HGB and
(3) have more than 500 employees on average in the course of a year.
Sect. 267 Paras. 4 and 5 HGB apply accordingly.

The same applies to financial institutions (Sect. 340a HGB) and insurers (Sect. 341a HGB) that fulfil criteria 1 and 3.
A corresponding obligation to publish a non-financial consolidated declaration or non-financial consolidated report applies to parent companies with the legal form of a stock corporation (Sect. 325b HGB), a comparable limited-liability registered partnership or cooperative insofar as
(1) they are oriented towards the capital market within the meaning of Sect. 264d HGB,
(2) the companies to be included in the consolidated financial statements do not meet the requirements for a size-related exemption as per Sect. 293 Para. 1 Sentence 1 No. 1 or No. 2 HGB and
(3) the companies to be included in the consolidated financial statements together have an average employee headcount for the year of more than die 500.
Sect. 267 Paras. 4 and 5 and Sect. 298 Para. 2 HGB apply accordingly.

The same obligation applies to parent companies that are financial institutions (Sect. 340i Para. 5 HGB) or insurers (Sect. 341j Para. 4 HGB) and which fulfil criteria 2 and 3. For subsidiaries that would generally be subject to the reporting obligation, the corresponding exemption stipulations apply insofar as they are included in non-financial declarations or non-financial reports of the parent (Sect. 289b Paras. 2 and 3 HGB; Sect. 315b Paras. 2 and 3 HGB).
The CSR Directive Implementation Act requires the disclosure of information on non-financial issues, at least on environmental, labour and social affairs, the upholding of human rights and the prevention of corruption and bribery (Sect. 289c HGB). As regards the individual non-financial components, those disclosures are to be made which are necessary for gaining an understanding of the course of business, the business result and position of the company as well as of the effects of its operations on the non-financial components (see also definition of “materiality” in the Glossary). In accordance with Sect. 289c Para. 3 Nos. 1 to 6 HGB, material information regarding the individual non-financial aspects includes the following:
  • Description of the policy in question, including the due diligence processes applied, as well as the results of the policy (see also definition of “policies” in the Glossary).
  • Presentation of the material risks linked to business operations and which are highly likely to have significant negative impacts on the components as well as how these risks are dealt with (see definition of “risks” in the Glossary).
  • Presentation of the material risks (see Glossary “risks”) linked with business partnerships, products and services and which are highly likely to have negative impacts on the components – insofar as the information is relevant and reporting on these risks is possible with commensurable effort – as well as how these risks are dealt with.
  • Presentation of the most significant non-financial performance indicators that are relevant for the company’s business operations, and
  • insofar as is necessary for understanding, references to the figures mentioned in the management report as well as supplementary explanations of these.

In addition to the information on non-financial disclosures, for companies or corporations subject to the reporting obligation, the business model must also be described.
If the company subject to reporting obligation has not implemented a specific policy with respect to individual aspects of sustainability, in place of a presentation of the policy and its results, the company must provide an explanation for this (“comply or explain” as per Sect. 289c Para. 4 HGB). Furthermore, the company may omit information the disclosure of which it deems to be to its own detriment, provided the requirements of Sect. 289e HGB are met. This is the case if, based on the prudent business assessment of the members of the authorised representative body of the stock corporation, the information could cause the company a considerable disadvantage and the non-disclosure of the information does not stand in the way of an accurate and balanced understanding of the course of business, the business result, the position of the company and the effects of its operations.

 
In line with its responsibility for financial reporting, the management board is responsible for the preparation of the non-financial declaration or report and must present it to the supervisory board as per Sect. 170 Para. 1 Sentence 2 of the German Stock Corporation Act (AktG).

Pursuant to Sect. 171 AktG, a content level review of the non-financial declaration or non-financial report is the duty of the supervisory board. The supervisory board must present the results of this review to the general meeting of shareholders in written form (Sect. 171 Para. 2 AktG). As per Sect. 111 Para. 2 Sentence 4 AktG, the supervisory board may also commission an external audit of the declaration’s content. In accordance with Sect. 317 Para. 2 Sentence 4 HGB, the auditor generally only reviews if the non-financial (consolidated) declaration or the separate non-financial (consolidated) report was presented.

In this context, it is important to note that the offer of a review of the declaration of conformity by the Sustainability Code Office relates exclusively to a review with respect to the formal transparency requirements of the Code and serves primarily to provide the reporting user with procedural support. It does not comprise a review of fulfilment of the statutory requirements for non-financial (consolidated) declarations or non-financial (consolidated) reports and therefore does not constitute a legal review. The Code Office will continue to offer this formal review for conformity with the Code. However, it does not assume any liability for the quality, completeness, currentness or correctness of the information contained in the declarations of conformity or for fulfilment of the legal requirements of a reporting obligation as per the CSR Directive. Responsibility for the correctness and quality of the non-financial declarations and reports as well as the fulfilment of the legal requirements as per the CSR Directive Implementation Act lie exclusively with the respective reporting company.
A non-financial (consolidated) declaration or non-financial (consolidated) report must be published for every financial year. Companies with a reporting obligation can choose between three possible publication forms described in Sect. 289b HGB for their non-financial disclosures:
  • The company with a reporting obligation may include the non-financial (consolidated) declaration as part of its management report.
  • The company with a reporting obligation may prepare a separate non-financial (consolidated) report and publish this at the same time as the (consolidated) management report in the Federal Gazette pursuant to Sect. 325 HGB.
  • The company with a reporting obligation may prepare a separate non-financial (consolidated) report and publish this on its website, insofar as reference is made to it in the (consolidated) management report. In this case, the company must adhere to a publication deadline of four months from the balance sheet date and keep the report published on the website for at least ten years.

 
The Sustainability Code team recommends that users factor in sufficient time for the review stage. 
The Code Office generally provides preparers with initial feedback within two to three weeks. In some cases, however, the company may need to make content corrections. In the case of a company with a reporting obligation that has to have its non-financial declaration/report reviewed by its supervisory board, there is a period of a good six weeks between submission of its Code declaration and conclusion of the formal review by the Code Office. Only then should the supervisory board perform its content review.

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