A highly complex simplification: What companies need to know now

By Dr. Wilhelm Mirow, Senior Consultant ESG/Sustainability at Kirchhoff Consult

Declarations of intent are rarely a good omen in the political arena. Those who deliberately seek to "simplify," "reduce bureaucracy," or "create clarity" often signal that everything is being called into question again. This leaves the way forward uncertain for a long time until, at some point, a degree of clarity returns. Last week, anyone dealing with the CSRD in Germany was able to experience this pattern firsthand. At least the chaos is gradually coming to an end. Those who set the right course now will be able to benefit. Let's take a look at the big picture:

Three areas of work, one goal: making the CSRD more manageable

The latest developments surrounding EU sustainability reporting show that regulators at the EU and national levels are making strong efforts to simplify the process – albeit with different time frames and measures.

At the beginning of the year, the European Commission announced that it wanted to use the omnibus procedure to permanently simplify the European Sustainability Reporting Standards (ESRS), among other things. A first official draft of the simplified ESRS is expected from EFRAG at the end of July. However, EFRAG already presented a first draft last Thursday – somewhat hidden as an accompanying document in online meeting minutes. Initial analysis: The basic structure of the ESRS will remain unchanged, but several parts will be significantly streamlined. However, it may still take a year before the new ESRS come into force.

Just one day after the "EFRAG leak" and in the shadow of the omnibus discussions, the Commission has acted surprisingly quickly to adopt the transitional simplifications announced as a "quick fix". The "quick fixes" are therefore effective immediately until the final omnibus simplifications come into force. This provides companies in the first wave with short-term legal certainty and concrete relief — provided they are based in an EU country where the CSRD has already been transposed into national law.

As is well known, Germany is not one of them. At the end of last year, we suddenly found ourselves without a government that could have replaced the CSR-RUG in time for reporting on the 2024 fiscal year by implementing the CSRD. In the wake of the omnibus announcements, things went quiet on the CSRD transposure front in Germany. It seemed as if the federal government wanted to wait until the omnibus procedure had been completed.

So it came as a big for many surprise when, on the same Thursday, the Federal Ministry of Justice published a new draft bill for the CSRD Implementation Act, i.e., the transposition of the CSRD into the German Commercial Code (HGB). The aim is for the CSRD regulations to apply to reports for the 2025 financial year. The government will thus not await the outcome of the Omnibus Act.

What the quick fixes mean in concrete terms

Companies in the first wave, i.e., primarily capital market-oriented companies with more than 1,000 employees, should now focus their attention on the quick fixes. Many initially aligned their reporting with the ESRS last year, but then decided not to conduct a full review due to the lack of an implementation law. Now the review process is imminent again.

However, the quick fixes are a real lever for relief. They allow companies to temporarily delete or simplify the following ESRS content:

• Exceptions for first-time application now also apply to subsequent years. This applies, for example, to disclosures on expected financial impacts (E1-9, E2-6, E3-5, and E5-6).
• Companies can completely omit standards E4 (biodiversity), S2 (workers in the value chain), S3 (affected communities), and S4 (consumers and end users).
• Individual disclosures under the S1 standard (own workforce), such as those relating to health and safety and other S1 aspects, may also be omitted.
• If an entire standard is omitted but is material to the company, basic information is still required:
  • Which IROs and sub-topics of this standard are material to the company?
  • Which policies, actions, and targets exist?
  • Which key metrics are available and what is the status of target achievement?

Initial simplifications have also been decided for taxonomy disclosures. These are not yet fully in force, but foreseeable.

What does this mean in practice?

For companies in the first wave, it is advisable to take advantage of the simplifications that are currently available with legal certainty. This saves time and resources. It is also worth keeping an eye on the drafts of the ESRS, which will be permanently simplified once the omnibus procedure has been completed. Companies can use these drafts, for example, to align the minimum disclosures required under the quick fix simplifications for standards that have been completely omitted. This will ensure that they are optimally prepared for the permanent simplifications.

One uncertainty remains: Although the Federal Ministry of Justice states that the draft bill should ensure "that the Federal Republic of Germany fulfills its obligation under EU law to introduce sustainability reporting for companies as quickly as possible," the government has not yet announced a date for the implementation of the CSRD. The federal government is therefore declaring its intention to finally transpose the CSRD. After all, the EU’s infringement proceedings are already underway. The longer it takes, the more expensive it will be for taxpayers. However, this declaration of intent does not mean that it will actually be achieved by 2025. Perhaps the pre-Christmas period has another surprise in store for us this year. Companies will then be free to use the ESRS as a framework to comply with the applicable provisions of the CSR-RUG. With the quick fixes, the framework will be even more user-friendly, and companies will be able to prepare for the mandatory application of the ESRS in a protected environment. This will also contribute to greater transparency and comparability in ESG matters.