Why there is (no) need for mandatory sustainability reporting by public companies


published on 19 May 2023 | Reading time approx. 4 minutes

Sustainability reporting has become one of, if not the, key issues affecting both public and private sector companies. New laws and regulations, such as the Corporate Sustainability Reporting Directive (CSRD) and its accompanying draft standards, are increasing the requirements for transparency of sustainability information.  
This regulatory pressure means that companies are increasingly required to disclose their environmental, social, and economic impacts. Public companies and companies in the municipal economy must therefore actively address their role and responsibility with regard to sustainability.

Compulsory or optional for public companies?

The Corporate Sustainability Reporting Directive (CSRD) provides, among other things, for the expansion of the group of obligated parties for sustainability reporting to include all large legal entities with limited liability. Since state law regulations, articles of association or partnership agreements regularly require public compa­nies to report like large corporations, regardless of their actual size, the CSRD (indirectly) basically takes effect immediately upon implementation of the directive.

The regulations will be applied in three stages: 
  • on January 1, 2024 for companies already subject to the Directive on the disclosure of non-financial information; 
  • on January 1, 2025 for large companies that are not currently subject to the Directive on the disclosure of non-financial information; 
  • on January 1, 2026 for listed SMEs and for small and non-complex credit institutions and captive insurance companies.  
The moment a public company is directly obligated to develop sustainability reporting in accordance with the CSRD, the EU taxonomy automatically applies. In the case of a non-direct obligation, the EU taxonomy does not automatically apply.
It is questionable at this point whether institutions under public law (AÖR), municipal undertakings and other public undertakings and/or state-owned enterprises already fall under an obligation according to CSRD. 
Under the applicable state law provisions, most public owner-operated companies generally have to stipulate in their articles of incorporation or bylaws that annual financial statements and management reports must be prepared in accordance with the provisions applicable to large corporations. For other public companies, this reporting is partly based on the provisions of state law. 
For example, for an AÖR from North Rhine-Westphalia, the references from § 22 KUV apply in principle (“Annual financial statements must be prepared for the end of each financial year, consisting of the balance sheet, the profit and loss account and the notes. The general provisions, the provisions on recognition, the balance sheet, the income statement, the valuation and on the notes, which apply to the annual financial statements of large corporations in accordance with the third book of the German Commercial Code (1st and 2nd sections), shall apply mutatis mutandis, unless otherwise specified in this Regulation.”) and the reference from Section 26 KUV (“The management report must deal with the matters specified in Section 289 (1) and (2) HGB. The management report shall also address matters that may be the subject of reporting pursuant to Section 27 (2) as part of the audit pursuant to Section 53 of the Budgetary Principles Act.”).

If one follows the opinion of the Institute of Public Auditors in Germany (IDW), a reference to Section 289 HGB in connection with the management report in the respective state regulations is already sufficient to assume an obligation to report as of January 1, 2025. This view is also shared in principle by the Bundesvereinigung der kommunalen Spitzenverbände. It writes in its statement of 09.01.2023 on this: “Up to now, the regulation in the federal states applies that SMEs with municipal participation or municipal participations have to include in their articles of association or statutes the obligation to prepare and audit the annual financial statements and management report in accordance with the provisions of the Third Book of the German Commercial Code for large corporations. In future, this reference will result in an obligation to prepare a sustainability report. This would expand the scope of application for the reporting obligation under the CSRD and affect a large number of small and medium-sized municipal companies that, according to the directive's objective, should not be covered by it.”
At the same time, however, the leading municipal associations are pushing for the various municipal ordinances to be amended accordingly. “We therefore call on the federal government to lobby the states to ensure that appropriate amendments are made to the municipal codes in the states in good time. For example, SMEs with municipal participation or for municipal participations can be exempted from the reporting obligation under the CSRD. Under current law, they are already subject to the reporting obligation to the council and the district council.”
From Rödl & Partner's perspective, it would be too narrow to hope for a legal clarification, which must be implemented in Germany by mid-2024. It can be assumed that in the short term, all municipal companies and also municipalities should implement sustainability reporting, simply for compliance reasons and also against the background of supply chains and their public role model function. In addition, this offers a lot of other benefits for their internal and external addressees. 
In addition, there are already some federal states (e.g. Berlin) that have obliged their large state enterprises to prepare a sustainability report.

Acting instead of reacting

Despite the increasing requirements, sustainability reporting should not be seen as a burden. Rather, it offers opportunities for companies to improve their reputation, strengthen public and stakeholder trust, and establish a stronger connection with the community. In addition, transparent reporting can help promote understanding and awareness of sustainability issues.
Sustainability reporting includes, but is not limited to:
  • Environmental concerns, e.g., greenhouse gas emissions, water consumption, air pollution, use of renewable energy, biodiversity protection
  • Employee issues, e.g. measures to ensure gender equality, working conditions, respect for employee rights, respect for trade union rights, health protection, safety at work
  • Social concerns, respect for human rights, instruments to combat corruption and bribery
The reporting requirements are further supplemented by the EU Taxonomy Regulation with reporting on the environmentally sustainable share of sales revenues, capital expenditures and operating expenses.
In addition to the legal requirements, there are also a number of standards and frameworks that can support companies in sustainability reporting. These include the German Sustainability Code (DNK), the Global Reporting Initiative (GRI) and, of course, the European Sustainability Reporting Standards (ESRS).
However, implementing sustainability reporting also requires resources and competencies. Companies need to ensure they have the necessary expertise, whether through training employees, engaging sustainability experts, or improving data collection and analysis.
But while some might see this new obligation as a burden, there are already many internal and external factors pushing public companies and municipalities to act and report more sustainably. Therefore, the new obligation could be seen as essentially irrelevant, as it is more of a formalized confirmation of what is already happening.

Push- and Pull-Factors 

If we take a closer look, there are already plenty of external “push” and “pull” factors that leave little room for maneuver for public companies and municipalities. 
Driving or “push” factors are those aspects that push public companies and municipalities to take certain measures or make changes. They can stem from external conditions, such as legal requirements and market conditions, or from internal challenges, such as organizational needs and goals. Specific examples include political resolutions and agendas such as the German Sustainability Strategy, Agenda 2030, the Corporate Sustainability Reporting Directive (CSRD), and the Federal Constitutional Court ruling of March 24, 2021. In addition, there are the environmental changes that are now being felt by all of us, such as extreme weather events and droughts, as well as demographic change. Finally, Sustainable Finance is also becoming increasingly important, as investment loans and subsidies are increasingly linked to evidence of sustainability-compliant investment activity. 
Attraction or “pull” factors, on the other hand, are elements that motivate public companies and municipalities to move in a certain direction or make certain decisions. They represent the benefits or positive outcomes that a public company or municipality can achieve if it takes certain actions or implements changes. The main factors here are an increasingly sustainability-conscious public, consisting of citizens, political actors, associations and NGOs, who are increasingly calling for sustainable action. In addition, reputation plays a major role, as cities and regions want to be seen as livable communities, attractive business locations and tourist destinations. Finally, the availability of scientific offerings and accompanying research, including indicators, data and best practice examples, promotes sustainability efforts.


Overall, it is therefore essential that public companies transparently present and report on their sustainability measures. However, it is important to emphasize that the latest legal obligations are only part of the motivation and that there are numerous other factors that bring the issue of sustainability to the fore.
Thus, sustainability reporting represents both a challenge and an opportunity for companies. By reporting transparently and effectively, they can demonstrate their role and responsibility with regard to sustainability and thus strengthen the trust of the public and stakeholders. It is therefore essential that public companies see this development not only as a regulatory requirement, but also as an opportunity to improve their sustaina­bility performance and contribution to society.

We of Rödl & Partner have been working intensively on this topic for a long time and also support our public clients in the preparation of sustainability reports, sustainability budgets and in the implementation of a holistic sustainability strategy. Please feel free to contact us and we will find a solution that is optimally scaled to your needs in order to meet the challenges of the future.

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