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CSR Reporting Obligations – New Challenges for Corporate Reporting

On Sep­tem­ber 21, 2016, the Fe­deral Go­vern­ment ad­op­ted the draft of a law sub­mit­ted by the Fe­deral Mi­nis­try for Justice and Con­su­mer Pro­tec­tion to strengt­hen non­fi­nan­cial re­por­ting by com­pa­nies in their Ma­nage­ment Re­ports and Group Ma­nage­ment Re­ports (the CSR Di­rec­tive Trans­po­si­tion Act). Th­rough this draft law, the Fe­deral Go­vern­ment will trans­pose Di­rec­tive 2014/95/EU of the Eu­ro­pean Par­lia­ment (the "CSR Di­rec­tive") into do­mestic law, as this must oc­cur by De­cem­ber 6, 2016.

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The new Act ap­plies to cer­tain large com­pa­nies (par­ti­cu­larly lis­ted ones), fi­nan­cial in­sti­tu­ti­ons and in­surance com­pa­nies that em­ploy more than 500 peo­ple and have re­ve­nues in ex­cess of €40 mil­lion or to­tal as­sets in ex­cess of €20 mil­lion. CSR stands for Cor­po­rate So­cial Re­spon­si­bi­lity, i.e., com­pa­nies' re­spon­si­bi­lity with re­spect to the ef­fects of their ac­tivi­ties on so­ciety. The Act in­di­ca­tes what non­fi­nan­cial in­for­ma­tion com­pa­nies must re­port. The first re­qui­re­ment is that com­pa­nies must give share­hol­ders and sta­ke­hol­ders in­sights into their ma­nage­ment stra­tegy. Com­pa­nies are also re­qui­red to pro­vide in­for­ma­tion about eco­lo­gi­cal, so­cial and em­ployee-re­la­ted risks and con­se­quen­ces, as well as con­firm their com­mit­ment to hu­man rights. Fi­nally, they must also dis­close in­for­ma­tion on their po­si­tion on cor­rup­tion and bri­bery and their ef­forts to fight these il­li­cit prac­tices.

There are not many si­gni­fi­cant sur­pri­ses in com­pa­ri­son with the prior draft, as was to be ex­pec­ted. But two chan­ges are worth poin­ting out: First, an au­dit of the dis­clo­sures in the non­fi­nan­cial de­cla­ra­tion or se­pa­rate non­fi­nan­cial re­port by the ex­ter­nal au­di­tors is still not re­qui­red but can be per­for­med volun­ta­rily. If a volun­tary au­dit is con­duc­ted, the cur­rent ver­sion of the draft law re­qui­res the com­pany sim­ply to publish the au­dit re­port. The prior draft had re­qui­red pu­bli­ca­tion of the ent­ire au­dit re­port, but this led to cri­ti­cism in view of the pu­bli­ca­tion re­qui­re­ments in con­nec­tion fi­nan­cial state­ment au­dits. Se­cond, the new draft pro­vi­des the pos­si­bi­lity in § 289 b (1) HGB-E of re­fer­ring to non­fi­nan­cial dis­clo­sures at ano­ther place in the Ma­nage­ment Re­port if the non­fi­nan­cial de­cla­ra­tion is a se­pa­rate chap­ter in the Ma­nage­ment Re­port. This is in or­der to avoid dou­ble re­por­ting ob­li­ga­ti­ons, par­ti­cu­larly with re­spect to non­fi­nan­cial per­for­mance in­di­ca­tors.

This in­for­ma­tion is va­luable not only for share­hol­ders and sta­ke­hol­ders, but also for the com­pa­nies them­sel­ves. Howe­ver, cri­tics still point out that gathe­ring and eva­lua­ting this in­for­ma­tion is enor­mously time-con­su­ming and also ex­tre­mely ex­pen­sive.

Un­for­tuna­tely, the vast ma­jo­rity of com­pa­nies are not pre­pa­red for the fu­ture in­for­ma­tion gathe­ring and in­ter­nal re­por­ting re­qui­re­ments. Some com­pa­nies are now in the pre­pa­ra­tion phase, while others do not even have the to­pic on their agenda.

But there is not much time left, be­cause the new re­gu­la­ti­ons will ap­ply star­ting in Ja­nu­ary 2017. Ma­nage­ment should the­re­fore make ar­ran­ge­ments right away so that they can com­ply with the re­por­ting re­qui­re­ments in the com­ing year. Crea­ting the re­por­ting struc­tures in the com­pany is very time con­su­ming and should the­re­fore be com­men­ced as soon as pos­si­ble be­cause much of the in­for­ma­tion that will have to be re­por­ted be­gin­ning in 2017 is not even being col­lec­ted yet. Mo­re­over, in some areas it is still un­clear how best to meet the re­por­ting ob­li­ga­ti­ons (e.g., in the fields of cor­rup­tion and mo­ney laun­de­ring). And for com­pa­nies with many for­eign sub­si­dia­ries, the crea­tion of the ne­cessary re­por­ting struc­tures may re­quire si­gni­fi­cant ad­just­ments be­cause many fi­gu­res that are not yet col­lec­ted by the in­di­vi­dual com­pa­nies will now have to be ob­tai­ned.

Com­pa­nies must also de­ve­lops plans for how they want to pro­gress in the areas that must be re­por­ted. For ex­am­ple, com­pa­nies that re­port on their en­ergy con­sump­tion must also de­scribe their stra­te­gic goals in this area. They must ex­plain how much they want to de­crease their en­ergy con­sump­tion by, how long it will take them to do so, and how they in­tend to meet this goal.

These com­pa­nies do not have much time left to pre­pare for the re­por­ting ob­li­ga­ti­ons. There is no tran­si­tio­nal pe­riod: in other words, com­pa­nies that don't take ad­van­tage of the time now could have a hard time wri­ting the re­port at the end of 2017. The mo­ral of the story is that the so­oner com­pa­nies ad­dress this is­sue, the fe­wer pro­blems they will have when it co­mes time to write the re­port.

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