CSRD implementation – EU Commission launches infringement procedure

On 26 September 2024, the European Commission launched an infringement procedure against Germany for failing to transpose the Corporate Sustainability Reporting Directive (CSRD, Directive (EU) 2022/2464) into national law within the deadline. The pending transposition of the CSRD raises the question for those companies that are already required under the CSRD to prepare a sustainability report for the 2024 financial year, as to which reporting requirements will apply to them if the CSRD is not transposed by the end of the year.

The CSRD required the Member States to introduce comprehensive sustainability reporting requirements for companies by 6 July 2024. We reported on the CSRD reporting requirement: Sustainability reporting under the CSRD: Changes to the size criteria for companies and European Sustainability Reporting Standards (ESRS). The CSRD Implementation Act is currently in the parliamentary legislative process in Germany.

Current status of the legislative process in Germany

In March 2024, the Federal Ministry of Justice (Bundesministerium der Justiz – BMJ) published the ministerial draft of the CSRD Implementation Act. In July 2024, the German government approved the government draft of the CSRD Implementation Act. The government draft was then forwarded to the Bundestag and Bundesrat. At the end of September 2024, the government draft was debated in the Bundestag in its first reading and forwarded to selected committees. The Legal Affairs Committee was to take the lead. Shortly afterwards, the Bundesrat followed suit in the first reading, in which the Bundesrat’s opinion on the government draft was adopted. In particular, the Bundesrat criticised the significant additional burden on companies due to the reporting requirements and expressed the fear that the extensive reporting requirements may have a negative impact on the desired transformation of the economy. The Bundesrat also asked for some provisions of the CSRD Implementation Act to be reviewed again. The federal government confirmed it would work at the EU level to reduce the extensive requirements for sustainability reporting. Most recently, on 16 October 2024, the Legal Affairs Committee held a meeting on the CSRD Implementation Act. During the public hearing, representatives from industry associations, economy and trade unions called for improvements to the government draft.

Faster implementation as a result of the infringement procedure?

As the European Commission’s letter of formal notice was delivered on 26 September 2024, Germany now has two months to explain why the CSRD has not yet been implemented and to finish implementing the law. Otherwise, the European Commission may issue a reasoned opinion setting a deadline for the infringement to be remedied. If the infringement is not remedied within the deadline, the European Commission may bring an action before the European Court of Justice. The Court may order the Member State to remedy the infringement. If the convicted Member State does not remedy the infringement, it may be fined.

The failure to implement the CSRD will result in considerable legal uncertainty especially for companies that are already required to prepare a sustainability report for the 2024 financial year under the CSRD:

• In principle, a directive that is not implemented in time does not impose any obligations on private actors. Accordingly, if the CSRD is not implemented by the end of 2024, reporting would in principle be based on the applicable legal situation at the time. Companies would therefore be obliged to prepare a non-financial statement in accordance with the current provisions of the German Commercial Code (Handelsgesetzbuch – HGB) (section 289b onwards and section 315 onwards).
• In exceptional cases, however, the legislators can order the retroactive effect of laws. Companies could then be retrospectively obliged to report on sustainability, even if the CSRD Implementation Act were only enacted in 2025. The possibility of laws having a retroactive effect depends largely on the degree to which trust in the previously applicable legal situation is worthy of protection. To date, it has not been conclusively clarified to what extent a directive that requires implementation may eliminate trust in the continued existence of the previous legal situation and therefore would allow a retroactive effect of an implementing law. A retroactive effect is not entirely off the table considering the widely debated CSRD.

Outlook

The CSRD is still in the process of being implemented in Germany. It remains to be seen whether the CSRD will be implemented by the end of 2024. However, in view of the infringement procedure initiated and a potential retroactive effect of the CSRD Implementation Act, companies should continue to be prepared for the upcoming reporting requirements.

 

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