The draft represents the next step in transposing the CSRD into national law.
On 24 July 2024, the German Federal Government adopted the governmental draft of the Act implementing the EU Directive on Sustainability Reporting (Directive (EU) 2022/2464 – CSRD) into German law (the Government Draft). The adoption of the Government Draft constitutes the next significant step in the legislative process after the German Ministry of Finance published the first draft implementing law on 22 March 2024 (the Ministerial Draft).
What is the background to the Government Draft?
The CSRD sets out minimum rules concerning the social and environmental information that certain companies have to report. The rules seek to ensure access for investors and other stakeholders to the information they need to assess companies’ impact on people and the environment and for investors to assess financial risks and opportunities arising from climate change and other sustainability issues.
EU Member States and EEA countries are required to implement the CSRD into national law. The Ministerial Draft intended to implement the CSRD on a 1:1 basis without any so-called “gold plating”, i.e., without imposing additional requirements beyond those included in the CSRD. In line with the CSRD, the Ministerial Draft introduced an obligation for large companies and capital market-oriented companies to complement the management report with certain sustainability information. In addition, it introduced a sustainability reporting obligation for certain German subsidiaries and branches of third-country entities.
What are the similarities and differences between the Government Draft and the Ministerial Draft?
The Government Draft is largely consistent with the Ministerial Draft, with the exception of certain changes.
No gold plating
In line with the Ministerial Draft, the Government Draft is not intended to introduce additional requirements that go beyond the minimum requirements included in the CSRD.
Deletion of the obligation to prepare a report on the audit of the sustainability report
Unlike the Ministerial Draft, the Government Draft does not provide for an obligation to prepare a report on the audit of the sustainability report. The German Federal Government argues that an obligation to prepare such report is not provided for in the CSRD.
Amendment of the German Supply Chain Due Diligence Act to avoid duplicate reporting obligations
In the Government Draft, the option to substitute the report under the German Supply Chain Due Diligence Act with the CSRD sustainability report has been amended to increase practicability (in particular, for groups of companies). Furthermore, the Government Draft proposes an extension to the deadline for submitting reports for the 2023 fiscal year under the German Supply Chain Due Diligence Act until 31 December 2025.
No admission of independent assurance service providers for the audit of sustainability reports
The requirement in the preceding Ministerial Draft — according to which audits of CSRD sustainability reports must be conducted by auditors and cannot be conducted by independent assurance service providers (IASPs) — has been left unchanged in the Government Draft. In a statement accompanying the publication of the Government Draft, the Ministry of Justice commented that Germany does not have the legal framework to ensure that IASPs are subject to requirements that are “equivalent” to the requirements for auditors, which the CSRD stipulates as a precondition.
What are the next steps?
The next step in the legislative process will be the discussion and adoption in the German parliament. Given that the deadline for the implementation already lapsed on 6 July 2024, the German Federal Minister of Justice recommended a timely commencement and conclusion of the parliamentary discussions. However, due to the summer break, the parliament will not be in session until the week starting 9 September 2024.
Regarding a potential infringement proceeding by the EU due to the late implementation, the Ministry of Justice noted that other Member States are also still implementing the CSRD.
Latham & Watkins will continue to monitor developments in sustainability reporting alongside global regulatory developments in this area.
