Accounting & Finance
10. Jan 2025
WP/StB Daniel Scheffbuch, WP/StB André Jänichen

ESG reporting - Process documentation is necessary

Many large companies will probably have to issue a sustainability report for the first time for 2025. In doing so, it will not be sufficient to merely prepare a report and to publish data on the environmental, social and governance (ESG) areas. In fact, the process for the selection of the data has to be documented in detail and, most notably, transparently.  It remains to be seen whether or not the request sent by the German Federal Government to the EU, on 17.12.2024, will help to weaken the requirements under the CSRD.

Request for a postponement of the reporting obligations

In its request, the German Federal Government called for the sustainability reporting obligation to be postponed by two years and, moreover, for the thresholds for obligated companies to be increased. It was a question of increasing the revenue threshold for large companies from currently €50m to €450m as well as to 1,000 employees. The reporting obligation would thus not apply to many companies.

Currently applicable thresholds

50 mio €
previous sales limit
250
Employees

Requested threshold values - result open

450 mio €
turnover limit applied for
1.000
Employees

However, the Government’s letter has - understandably - introduced a certain degree of uncertainty for companies that, according to the current status, would be subject to the obligations under the CSRD. By our editorial deadline, there was as yet no information available as to how the EU was going to deal with this request . As at 10.1.2025, there was still a specific requirement to transpose the CSRD Directive into national law. This should actually have taken place by 6.7.2024, at the very latest, and the EU Commission had already initiated infringement proceedings against Germany, on 26.9.2024, for its failure to transpose the Directive within the time limits specified. 16 EU Member States have already transposed the Directive (cf. Directive 2022/2464 - EN - EUR-Lex).

Recommendation

A sustainability reporting process that has already commenced should be continued. You should refrain from discontinuing, for a longer period, the activities that have begun so that no time is wasted in the event that the CSRD is transposed as planned. The retroactive application of the CSRD for the current 2025 financial year could be legally permissible. For entities that, in principle, would be subject to the reporting obligation and who, in any case, would only need to prepare a report for the first time for the 2025 financial year, a delayed transposition would accordingly not loom large. In view of the directly applicable European Sustainability Reporting Standards (ESRS) that already exist, no major changes could be expected to the report contents that would be required even if the transposition were to be delayed.

Process documentation as the subject of an audit

The extent to which the process for the development of company-specific ESG reporting has already been established can be determined by the level of awareness of the following 15(!) specialist terms and acronyms: IRO, DR, NFRD, AMB, EMT, SBM, DNSH, MDR, SFDR, DP, EFRAG, ESRS, CSRD, Double materiality assessment, and Scope 3 emissions. And that’s not all, because a sustainability report, as part of the management report and the subject of an audit of the annual financial statements, presupposes not just knowledge of this specialist vocabulary, but also having undergone a process that normally takes three to six months and that needs to be documented in a correspondingly comprehensive (audit-compliant) way.

Furthermore, there is the fact that the sustainability reporting by large corporations for 2025 will be the subject of the statutory audit in 2026. A Wirtschaftsprüfer [German public auditor] will still need to conduct an audit of the (consolidated) annual financial statements and the (group) management report and express a reasonable assurance opinion. With regard to the sustainability report, a limited assurance opinion will need to be expressed, even though this report will form part of the management report.  In particular, this means that the Wirtschaftsprüfer will check to see if the sustainability reporting process has been documented in a way that satisfies the requirements. There will be compromises when compared with a reasonable assurance audit engagement to the extent that, among other things, not every emission metric will need to be examined with respect to its characteristics. Instead, there will be a review of how the process for this has been designed so that exactly such a metric and not a different one is reported.

Please note

The absence of such process documentation could be associated with implications for the respective limited assurance report or auditor’s report.

Scope of the documentation

The documentation requirement in the context of sustainability reporting is a key element in the process of preparing the report and serves the purpose of  recording all the relevant data and information in a structured, transparent and verifiable way. In the following section we give an overview of the five key aspects and the related requirements for the documentation of the process of preparing the report.

1. Understanding of the business activities 
An overview of the company’s activities and business relationships needs to be provided. This has to be combined with a description of the strategic orientation and specific objectives (e.g., emission reduction targets) as well as a breakdown of the interest groups (stakeholders) concerned.

2. Identification of the actual and potential impacts, risks and opportunities
This includes documentation about the analysis of the risks and opportunities in the ESG areas (outside-in perspective) along with a description of the (potentially) positive as well as negative impacts of the company (inside-out perspective).

3. Assessment and identification  of the main impacts, risks and opportunities 
The preparation of process documentation that has to be incorporated here must include an analysis of the main issues, stakeholder interviews and the evaluation methods.

4. Narrative reporting
This addresses the creation of a framework for a comprehensive report that covers all the key aspects and complies with ESRS standards. Here, besides the above-mentioned documentation obligations, information about data collection methods and data sources as well as documentary evidence of internal controls that were carried out and the quality assurance measures that were applied need to be taken into account.

5. Quantitative reporting 
The framework created under (4) needs to be filled in using the data collected for the selected points.

Conclusion

The careful recording, evaluation and reporting of sustainability data is the key to conforming to the requirements under the ESG reporting standards. The documentation obligation requires companies to carefully record each process step and to design it comprehensibly. The aim is to make the information for stakeholders transparent and, in doing so, to comply with the guidelines of the Wirtschaftsprüfer for a reasonable assurance audit engagement.

Please note

Meeting the requirements of the EU’s Taxonomy Regulation, as an integral part of sustainability reporting, will likewise need to be tracked in the context of a procedural review.