ESG reporting obligation Germany explained in an understandable way

The ESG reporting obligation in Germany is far more than just a new regulation – it marks a strategic turning point. Companies must now be transparent about their environmental, social and governance performance.

What the ESG reporting obligation means for your company

Think of the ESG reporting obligation as a future MOT for your business model. In the past, a glance at the balance sheet was enough. Today, investors, customers and business partners want to know how resilient your company really is – and they take a very close look at these sustainability aspects.

However, the whole thing is not an annoying bureaucratic hurdle, but a real strategic opportunity. Those who speak openly about their ESG services not only fulfill the legal requirements. Rather, you secure access to the market and gain a clear competitive advantage.

The big change: from NFRD to CSRD

The main driver behind the new ESG reporting obligation in Germany is the EU-wide Corporate Sustainability Reporting Directive, or CSRD for short. It replaces the previous Non-Financial Reporting Directive (NFRD) and provides for a massive expansion of reporting obligations.

The figures speak for themselves: while only around 500 German companies were affected under the old NFRD regulation, the CSRD has suddenly increased the number to around 15,000. This huge expansion primarily affects large corporations and listed companies that meet certain size criteria. Anyone wishing to delve deeper into the background of the new sustainability reporting can find valuable information at the DIHK.

Those who take a proactive approach to ESG reporting now will secure the trust of investors, customers and the best talent. This is no longer a “nice-to-have”, but a business necessity.

From NFRD to CSRD: an overview of the most important changes

The leap from the old NFRD to the new CSRD is huge. The new rules are not only more comprehensive, but also affect significantly more companies. The following table summarizes the key tightening and extensions for you.

Aspect	Old regulation (NFRD)	New regulation (CSRD)
Companies affected	Approx. 500 large, capital market-oriented companies in Germany	Approx. 15,000 companies, incl. large, non-listed GmbHs & listed SMEs
Contents	“Comply or explain” principle, focus on material non-financial aspects	Detailed, mandatory EU reporting standards (ESRS), principle of double materiality
Audit	No external audit obligation, only supervisory board audit	Mandatory external audit with initially limited assurance
Placement	Flexible: in the management report or separate report	Integral part of the management report, separate publication no longer possible
Digitization	No specification	Mandatory digital format (XHTML) and “tagging” of information

It is clear to see that the CSRD places much greater obligations on companies. The requirements for data quality, transparency and verifiability are many times higher than before.

Why proactive action counts now

The new rules have a clear objective: they are intended to direct capital flows towards more sustainable business models. Companies that present their ESG performance convincingly will become attractive partners and investment targets. Those who ignore the issue, on the other hand, risk tangible disadvantages.

Some of the most important strategic advantages at a glance:

• Better access to capital: banks and investors are taking ESG risks more and more seriously. Companies with a clear sustainability strategy are finding it easier to obtain loans and financing.
• Stronger customer loyalty: Whether in the B2C or B2B sector, customers demand transparency and prefer to work with partners who act responsibly.
• Plus point as an employer: good people, especially from the younger generations, want to work for companies whose values they share.
• Smarter risk management: Those who deal intensively with ESG uncover potential risks in the supply chain, in operations or for their own reputation much earlier.

Ultimately, it’s about making your company fit for the future. The ESG reporting obligation in Germany provides the perfect impetus to finally anchor sustainability firmly in your own strategy and forge a real competitive advantage from it. It is an invitation to tell your own story of responsibility and foresight.

Who exactly is affected by the new reporting obligation and when

The question “Are we affected?” is currently on the minds of many managers in Germany. However, the answer is not always a clear yes or no, as the ESG reporting obligation in Germany does not cover everyone at once. You can think of it like staggered boarding at the airport – not all passengers board at the same time.

The decisive factor here is a mix of company size, legal form and whether the company is listed on the stock exchange. The EU has defined clear criteria: Balance sheet total, net turnover and the average number of employees. A company must report as soon as it exceeds at least two of these three thresholds.

The timetable for the staggered introduction

The new rules will not come overnight, but will be introduced in several waves. This gives companies time to breathe and prepare. The really big ones will be first, then the circle will be gradually widened.

This is what the timetable looks like in concrete terms:

• From financial year 2024 (report due in 2025): The pioneers – or rather, those who have already practiced – will make the start. These are large, capital market-oriented companies with over 500 employees that already had to report in accordance with the old NFRD guidelines.

• From financial year 2025 (report due in 2026): Now things are getting serious for many. All other large companies that were previously relaxed must now follow suit. A company is considered “large” if it fulfills at least two of the following three criteria:

  • More than 250 employees on an annual average
  • A balance sheet total of over 25 million euros
  • Net sales of over 50 million euros

• From financial year 2026 (report due in 2027): In the third wave, the focus shifts to listed small and medium-sized enterprises (SMEs). However, they will be given a breather: They can postpone the obligation until 2028 (opt-out) in order to better prepare themselves.

Attention, important change: The thresholds have only recently been raised! Originally, the thresholds were € 20 million in total assets and € 40 million in turnover. So anyone who thought they had got off lightly should now do the math again.

This gradual introduction is no coincidence, but the result of a longer process. The following infographic shows how regulation has developed.

It is clear to see that the CSRD is not a sudden idea, but consistently builds on existing rules and tightens the reins.

Do not underestimate the indirect impact

Even if your company falls within the aforementioned limits and therefore does not (yet) formally have a direct ESG reporting obligation in Germany, you should not take the issue lightly. This is because the large, reportable companies must examine their entire value chain.

In plain language, this means that they will come knocking and demand detailed ESG information from their suppliers and partners. Those who come up empty-handed will quickly become uninteresting and risk being dropped from the supply chain. The requirements therefore trickle down from the big players to the small ones – an effect that is often referred to as “trickle-down”. If you want to find out more about the general CSR reporting obligation and its background, you will find valuable information here.

It is therefore a smart move for every company, including SMEs, to address the issue at an early stage. Those who are prepared have a clear advantage.

ESG reporting in Germany: the three pillars decoded in a practical way

The abbreviation ESG sounds unwieldy and theoretical at first. However, there are very tangible issues behind it that affect every company at its core. In order to master the ESG reporting obligation in Germany, it is not enough to tick off the three pillars – environment, social and governance – as separate boxes. They must be understood for what they are: An interconnected whole.

Imagine it like a house: The foundations, the walls and the roof. Everything interlocks and ensures stability.

For each of these pillars, you need concrete key figures and the right story to go with them. The end result must be an honest picture of your corporate responsibility, backed up with facts.

E for Environment: ecological responsibility

The environmental pillar is so much more than just the carbon footprint. It really is about all the traces that your company leaves behind on our planet. It’s about using resources consciously, avoiding pollution and making a real contribution to climate protection.

Let’s take a medium-sized logistics company as an example. Of course, the fuel consumption of the truck fleet is an important point(Scope 1 emissions). But the new ESRS standards require us to dig much deeper.

• Water management: How much water does the truck wash use? Is there perhaps already a water treatment plant to reuse it?
• Circular economy: What happens to the packaging waste in the warehouses? Is it only recycled or even actively avoided? How high is the actual recycling rate?
• Biodiversity: When planning a new logistics center, do you also think about unsealing areas or enhancing them ecologically? With green roofs, for example?

The CSRD Directive is increasing the pressure to record precisely this type of data in full. Analyses show that the CO? price is becoming increasingly relevant and that investments in energy efficiency are no longer a “nice-to-have”, but a necessity. This is no longer just about climate data, but increasingly also about biodiversity and working conditions, as insights from LBBW Research show.

S for Social: The social dimension

The social pillar (S) focuses on people. And not just your own employees, but also the people in the supply chain, the customers and the society in which your company operates. It’s all about fairness, safety and diversity.

A good example is a retailer with its own brands. The ESG reporting obligation in Germany forces it to look far beyond its own nose – or rather, its own office door.

A safe and fair workplace in our own company is the absolute basis. However, true social responsibility is only demonstrated in the depths of the supply chain – where the products come from.

Specific questions that need to be answered here are:

1. Working conditions in the supply chain: Are human rights respected by suppliers in Asia or South America? Are there controls in place to rule out child or forced labor?
2. Employee retention and development: How high is staff turnover? What further training is available to make the team fit for the future?
3. Diversity and inclusion: How many women are in management positions? Are people with disabilities specifically promoted?

G for Governance: Good corporate governance

The governance pillar (G) is the backbone that holds everything together. It describes the internal rules, processes and controls that ensure that a company is managed ethically, transparently and responsibly. Good governance prevents scandals and creates one thing above all: trust.

Think of a technology start-up. The key governance issues here would be:

• Transparent decision-making processes: How is the Management Board structured? Is there an independent supervisory board that keeps an eye on the management?
• Effective risk management: Are ESG risks (such as climate risks or reputational damage due to problems in the supply chain) even on the radar and assessed?
• Ethical principles: Are there crystal-clear guidelines against corruption? Is there a whistleblower system that really works?

Strong governance ensures that environmental and social goals are not just nice-sounding phrases on the website. It firmly anchors these issues in the corporate strategy. Defining clear ESG goals within the company is the first step towards systematically addressing the requirements from all three pillars and making success measurable.

The ESRS: The new common language of sustainability

If the CSRD is the major set of rules for mandatory ESG reporting in Germany, then the European Sustainability Reporting Standards (ESRS) are the grammar that goes with it. You can think of them as a new, common business language that finally creates clarity.

Until now, sustainability reporting has resembled a wild jumble of different dialects – hardly anyone really understood the others and a real comparison was simply impossible. The ESRS puts an end to this. They are effectively the “sustainability dictionary” that applies to all reporting companies and ensures uniform, transparent and comparable communication.

How the ESRS standards are structured

The ESRS set of rules is not a confusing jumble, but follows a clear logic. There are a total of twelve standards that interlock like cogwheels. They can be divided into three main categories.

Two overarching standards lay the foundation:

• ESRS 1 (General Requirements): The rules of the game are explained here – i.e. the basic principles such as double materiality and the general requirements for the report.
• ESRS 2 (General Disclosures): This standard is mandatory for every reporting company. It specifies which general information on strategy, governance and materiality analysis must be disclosed.

Building on this, there are ten topic-specific standards that cover the three pillars of ESG in detail: five for environment (E), four for social (S) and one for governance (G). But don’t worry, you don’t have to report on everything. Only the topics that are really material to your company need to be included in the report.

Don’t think of the ESRS as a rigid corset, but rather as a modular construction kit. The double materiality analysis is your tool for selecting exactly the building blocks that really count for your business model.

Structure of the European Sustainability Reporting Standards (ESRS)

To make this structure even more tangible, we have summarized the structure of the standards in a table. It is easy to see how the overarching principles are linked to the specific environmental, social and governance topics.

Structure of the European Sustainability Reporting Standards (ESRS)

Category	Standard abbreviation	Focus of the standard
Comprehensive	ESRS 1	General requirements & principles
	ESRS 2	General information mandatory for all
Environment (E)	ESRS E1	Climate change
	ESRS E2	Environmental pollution
	ESRS E3	Water and marine resources
	ESRS E4	Biodiversity and ecosystems
	ESRS E5	Resource utilization and circular economy
Social (S)	ESRS S1	Own workforce
	ESRS S2	Workforce in the value chain
	ESRS S3	Communities concerned
	ESRS S4	Consumers and end users
Governance (G)	ESRS G1	Corporate governance, risk management & internal control

However, this list is not yet complete. Sector-specific ESRS will be added in the future. These will then take a closer look at the special circumstances of industries such as oil and gas, agriculture or the textile sector.

More than just dry figures

The ESRS require much more than a mere stringing together of key figures. It is about putting the figures into context and telling a story. Companies must not only report what they do, but also why they do it.

In concrete terms, this means that you need to describe your strategies, the goals you have set yourself and the measures you are taking in detail. A key point here is the disclosure of the so-called IROs – the impacts, risks and opportunities associated with each material topic.

The ESG reporting obligation in Germany therefore forces companies to develop a strategic and forward-looking view through the ESRS. Ultimately, the aim is to create a coherent narrative that is underpinned by valid data and shows how deeply sustainability is really anchored in the core business.

How to implement your ESG report in your company step by step

Understanding the theory behind the ESG reporting obligation in Germany is one thing. Practical implementation in your own company is quite another. Don’t just see it as a compulsory exercise, but as a strategic project that needs to be firmly anchored throughout the entire company.

Think of it like building a house: Without a clear plan, the right team and robust materials, the building will end up shaky.

This roadmap guides you through the five key phases. It shows you how to avoid the typical stumbling blocks and put your ESG reporting on a solid footing right from the start.

1. build a powerful ESG team

One thing is clear: ESG reporting is not a one-man show. The very first and most important step is to put together a team that comes from different corners of the company. The leadership should be at the very top, i.e. with the management or the board. This is the only way to give the topic the weight it deserves.

These departments absolutely belong at the table:

• Finance/Controlling: Provide the hard figures and build the bridge to financial reporting.
• Human Resources (HR): Takes care of everything social – from employee satisfaction and diversity to further training.
• Purchasing/Supply Chain: Irreplaceable when it comes to data from the supply chain (keyword Scope 3 emissions or labor standards at suppliers).
• Legal/Compliance: Ensures that you are on the safe side with CSRD and ESRS.
• Production/Operations: Knows the data on energy consumption, waste and resource efficiency like no other.

Define crystal-clear responsibilities. Who delivers what data by when? A project manager or ESG officer who pulls all the strings is worth its weight in gold here.

2. perform the double materiality analysis

This is the strategic heart of your entire ESG process. Before you collect even a single key figure, you need to know Which sustainability issues are relevant to us at all? The double materiality forces you to take a double perspective.

1. The “inside-out” perspective (impact materiality): What impact does our business model have on the environment and society?
2. The “outside-in” perspective (financial materiality): What external sustainability risks and opportunities are impacting our business success?

A topic becomes reportable if it is classified as material from at least one of these two perspectives. This step is the switch that decides what you have to report on later – and what not.

3. close data gaps and create clean processes

After the materiality analysis, you know what you need to report. Now comes the often tricky question: where do we get the data from? In this phase, you are guaranteed to come across gaps in your existing data collection. This is completely normal.

Although many companies already have ESG data, they tend to use it strategically. A study by Key-ESG shows that around 90% of listed companies in Germany produce sustainability reports to boost investor confidence. And 70% use ESG data to optimize their supply chains. At the same time, many are unsure about data quality. You can find out more in the latest ESG statistics at keyesg.com.

So create robust and comprehensible processes. Excel lists can be a start, but there is often no way around specialized software for audit-proof reporting.

4. create the sustainability report

Now is the time to put all the pieces of the puzzle together. Your sustainability report must be clearly structured according to the ESRS guidelines. It needs both the hard, quantitative data and qualitative explanations of your strategies, goals and measures.

Very important: The sustainability report is no longer a glossy marketing document that exists somewhere separately. It must be integrated into the management report and published in electronic XHTML format. Clear, understandable language is just as important as the correct presentation of facts. Our comprehensive guide shows you step by step how to create a convincing sustainability report that meets all requirements.

5. prepare for the external examination

The last step before the finish line: the audit by an auditor. They will look at your information and initially confirm with “limited assurance” whether everything is plausible and comprehensible.

The best preparation is complete documentation. Record how you collected data, what methodology you used for the materiality analysis and what assumptions you made. A clean “audit trail” is the be-all and end-all for getting through the audit smoothly and cementing the credibility of your report.

Frequently asked questions about the ESG reporting obligation

Everyone is talking about CSRD, but the same pressing questions keep cropping up in day-to-day business. This is understandable, as the new obligations are complex. We shed some light on the subject and answer the questions we encounter most frequently in practice. After all, clear answers are the first step towards tackling the challenges of the ESG reporting obligation in Germany with confidence.

What happens if you ignore the ESG reporting obligation?

Honestly? The consequences go far beyond a simple fine. Of course, there are severe penalties that can hurt, depending on the size of the company and the severity of the violation. But the real risks lurk in the operational business and are often much more painful than any fine.

Anyone who ignores the reporting obligation risks very tangible disadvantages:

• Poorer financing conditions: Banks and investors are now looking very closely at ESG risks. A lack of transparency can quickly lead to higher interest rates – or the loan application is rejected outright.
• Loss of business partners: Large customers who have to report themselves will cut cooperation with suppliers who cannot provide clean ESG data. It’s as simple as that.
• Reputational damage: Sustainability is no longer a niche topic. Those who ignore the reporting obligation risk a massive loss of image, which will deter good customers and sought-after talent.
• Exclusion from public contracts: More and more often, the fulfillment of sustainability criteria is a tough requirement in order to be allowed to bid for public tenders at all.

Non-compliance is therefore anything but a trivial offense. It is a direct risk to the long-term success of your company.

Are small and medium-sized enterprises really not affected?

Even though most SMEs (small and medium-sized enterprises) are not directly subject to Germany’s ESG reporting obligation, it would be a big mistake to take the issue lightly. The effects hit them indirectly, but with full force. This is known as the “trickle-down effect”.

Large corporations must examine their entire value chain and report on it. This means that they knock on the door of their smaller suppliers and service providers and demand ESG data. Suddenly, issues such as the carbon footprint of a component, fair working conditions or recycled materials become decisive criteria when awarding contracts.

An SME that cannot provide ESG data becomes virtually invisible or simply uninteresting for large customers. Getting to grips with ESG at an early stage is therefore not a luxury, but ensures your own competitiveness.

For capital market-oriented SMEs, things will get serious from the 2026 financial year anyway – that’s when they will have to report directly. Although there is a deferral option until 2028 (the so-called opt-out), time is running out if you wait that long.

What exactly does “double materiality” mean?

Dual materiality is the absolute centerpiece and the biggest innovation of the CSRD. It forces companies to radically change their perspective. Until now, companies have mainly asked themselves one question: How do sustainability issues affect our business success? This was the classic financial perspective, also known as “outside-in”.

However, CSRD now requires a second, absolutely equal perspective: what impact does our company have on the environment and society? This “inside-out” perspective looks at the real footprint that the business model leaves behind in the world.

A topic is therefore relevant and reportable if it is classified as material from at least one of these two perspectives. This principle ensures that companies finally have to paint an honest and complete picture of their responsibility.

How does the external audit of the ESG report work?

The CSRD puts an end to mere self-declarations and colorful brochures. The sustainability report must be externally audited in order to underpin its credibility. The first step is an audit with “limited assurance”.

Initially, the level is therefore somewhat lower than that of the tough financial audit. In the long term, however, a “reasonable assurance” audit is planned, which corresponds to the strict standard of the annual audit.

For companies, this means that they must establish clean, comprehensible and auditable processes for their ESG data collection from day one. Incomplete documentation or vague calculation methods will fail the audit without mercy.

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