In recent years, the topics of sustainability and social responsibility have become increasingly important in the business world. The discussion about environmental, social and governance (ESG) criteria has become a central topic in corporate governance. In 2024, a significant new ESG law came into force, requiring companies in the European Union to be more transparent about their ESG practices and to publish corresponding reports. In this blog post, we take a closer look at this law, its implications and what companies need to consider.
What is the ESG law?
The ESG law, officially known as the EU Corporate Sustainability Reporting Directive (CSRD), replaces the previous Non-Financial Reporting Directive (NFRD). The aim of this directive is to increase the transparency and accountability of companies with regard to their environmental and social practices and thus promote sustainable development in the EU. ESG reporting therefore contributes directly to the implementation of the Green Deal.
The most important points of the ESG Act
Extended reporting obligations
Companies must provide detailed information on their ESG practices. This includes not only environmental and social aspects, but also corporate governance issues. The reports must provide a comprehensive overview of the material risks and opportunities associated with ESG issues.
Standardized reporting requirements
In order to ensure comparability and consistency in reporting, the law introduces standardized reporting requirements. Companies must now follow certain frameworks developed by the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA).
Extended scope of application
The law applies to a broader group of companies, including large companies and listed SMEs. Small and medium-sized enterprises (SMEs) are also affected if they exceed certain thresholds or operate in certain sectors.
Mandatory audits
The reporting must be verified by independent third parties to ensure that the information is correct and reliable. This is intended to increase the credibility of ESG reports and strengthen the confidence of investors and consumers.
Integration into the annual financial statements
In future, ESG reporting must be an integral part of the annual financial statements. This means that companies will no longer have to deal with ESG issues in isolation, but rather present them in the context of their financial situation and performance.
Application in accordance with Art. 5 CSRD is provided for as follows
- The new reporting requirements will have to be applied as early as 2024 by large capital market-oriented companies with an annual average of more than 500 employees that are already required to comply with Sections 289b and 315b HGB.
- From the 2025 financial year, all large corporations and commercial partnerships in the EU with equivalent status under Section 264a of the German Commercial Code (HGB) must disclose data on the impact of their activities on people and the planet and all sustainability risks to which they are exposed. This also applies to all parent companies subject to group accounting requirements for the group management report.
- From 2026, small and medium-sized capital market-oriented companies will also be obliged to do so.
Effects on companies
The new ESG law brings both challenges and opportunities for companies:
Challenges:
Implementing the new requirements requires considerable effort in terms of data collection, analysis and reporting. Companies may have to introduce new systems and processes and adapt their internal control mechanisms. The increased audit effort may also result in additional costs.
Opportunities:
By complying with ESG legislation, companies can strengthen their sustainability strategy and position themselves as responsible players. This can lead to a competitive advantage as more and more investors and consumers look for sustainable and socially responsible companies. In addition, a proactive ESG strategy can minimize the risk of reputational damage and regulatory penalties.
What should companies do?
Analysis of the requirements
Companies should familiarize themselves in detail with the new requirements of the ESG Act and assess their impact on their specific situation.
Improve data management
The quality and transparency of ESG data is crucial. Companies should review their data collection and management systems and improve them where necessary.
Adapt reporting systems
It is important to adapt reporting systems to the new regulations and ensure that all relevant information is recorded correctly and completely.
Training and awareness-raising
Training for employees and managers on ESG topics can help to create a better understanding of the requirements and their implementation.
External consulting and auditing
The support of external consultants and auditors can help to bring reporting up to date and ensure that all requirements are met.
Conclusion
The new ESG law presents companies with new challenges, but also offers significant opportunities to strengthen their own sustainability strategy. By adapting to the new requirements in good time and integrating ESG criteria into the corporate strategy, not only can regulatory requirements be met, but long-term success can also be ensured. The path to greater transparency and responsibility is not only a legal obligation, but also a step into the future of sustainable corporate governance.
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