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.
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.