Increasing responsibility for non-financial reporting

The EU Directive on non-financial reporting must be transposed into German law by the end of 2016. Intended to give investors, business clients and consumers more transparency and a better basis for decision making, the Directive defines the topics that must be taken into account in reporting, while allowing for flexibility in the details. While this creates new compliance and preparation obligations for companies and their Supervisory Boards, the Directive also opens up new opportunities for the Boards to influence the reporting and thus the reputation of their companies.

I. EU developments as a basis for German legislative reform

The EU adopted the so-called CSR Directive (Corporate Social Responsibility Directive) on 22 October 2014.1 This Directive 2014/95/ EU of the European Parliament and of the Council amends Directive 2013/34/EU regarding the disclosure of non-financial and diversity information by certain companies and groups. While the 2013 directive (the Accounting Directive) already required companies to include information on financial and non-financial performance indicators in their management or group management reports, this amending Directive 2014/95/EU provides additional clarifying requirements regarding “appropriate” non-financial reporting, such as information concerning the environment or employees.

The EU member states must implement the contents of this Directive in national law by 6 December 2016 at the latest. In order to achieve this goal in Germany, the Federal Government (in accordance with the draft bill of 11 March 2016) presented a bill on 12 September 2016 containing extensive modifications to the German Commercial Code (HGB) to strengthen the non-financial reporting of companies in their management and group management reports.2 To this end, § 289b (1) HGB-E regulates who is affected by the reporting obligation: enterprises that are large according to § 267 (3) p. 1 HGB (i.e., exceed the relevant size criteria) and capital market-oriented according to § 264d HGB, and have an annual average of more than 500 employees.3 Companies defined by § 264a HGB (i.e., limited liability commercial partnerships such as the GmbH & Co. KG) are also subject to the reporting obligation if they meet the above requirements. According to § 340a HGB- E and § 341a HGB- E, credit institutions or insurance companies are also covered by the reporting obligation and the provisions must be applied accordingly to the European Companies (Societas Europaea SE). This means that larger listed companies, as well as banks and insurance companies with more than 500 employees and larger general partnerships and limited partnerships, are included in this mandate. Certain exceptions to the reporting obligation exist for companies that are included in a corresponding report at Group level.4

II. Planned regulations in Germany

1. What are the objectives of the German implementation law?

The government’s draft for a German law on the implementation of the CSR Directive (hereinafter also referred to as RegE on the implementation of the CSR Directive5) assumes that investors, large companies and consumers want to be more and better informed about the business activities of companies “in order to decide whether to invest, enter into supply relationships or acquire and use products.”6 Deeper and broader reporting is therefore considered a basis for successful entrepreneurial activity. This clarifies why the draft for the German implementation of the EU Directive, which is otherwise very much in line with EU, extends the reporting obligations to include consumer interests.7

2. What are the content requirements?

The draft of the German implementation law requires enterprises that meet the above-mentioned requirements add a non-financial statement to their management report. This should include a brief description of the business model of the enterprise and address environmental, labour and social issues, as well as human rights and the fight against corruption and bribery. For each of these predefined topics there are specific content elements to which the non-financial statement can refer.8 With regard to environmental issues, disclosures include greenhouse gas emissions, water consumption, air pollution, the use of renewable and non-renewable energies, and the protection of biodiversity.

For each of the above-mentioned topics, the non-financial statement must contain information that is “necessary to understand the business performance, business results, the situation of the enterprise and the effects of its activities”9 on the topics. This includes a description of the approaches and the adopted due diligence processes, the results of these approaches, the material risks arising from business activities and the risks associated with the business relationships of the enterprise as well as its products and services, the most significant non-financial performance indicators, and, “to the extent necessary to understand,”10 references to and explanations of figures in the financial statements.

If the enterprise does not follow this “comply or explain” approach to the above-mentioned topics, it must clearly justify this decision in the non-financial statement.

3. What is required in terms of publication and auditing?

The non-financial statement may be presented as a special section of the management report. Alternately, companies can prepare a separate non-financial report for the same business year in addition to the management report, provided that the report fulfils the same content requirements, is made publicly available concurrent with or within six months of the management report and is published on the company’s website for at least ten years.

The auditor must determine whether the non-financial statement or the separate non-financial report has been submitted. An examination of the content is not required.11 If an audit of the content is conducted, the audit opinion must be made publicly available in the same way as the non-financial statement or the separate non-financial report.

4. How does this relate to other reporting developments?

The phrases quoted above, such as “to the extent necessary to understand,” show a certain similarity with current international approaches to sustainability reporting, which has migrated away from a rigid catalogue of content. Instead, companies that report according to standards such as the Global Reporting Initiative (GRI) identify which specific topics are “material” or essential to their business and stakeholders and base their reporting on these. The requirement to present the business model is in line with broader developments in corporate reporting, such as the Integrated Reporting Framework developed by the International Integrated Reporting Council (IIRC). Including a description of the business model in the report ensures that financial and extra-financial information can be understood in context and in terms of its importance to the company’s ability to create value for shareholders, customers and others.

On the whole, the extension of (group) management reporting to include a non-financial statement for certain companies is part of the dynamic change in accounting and reporting that has been observed in recent years.12 Aspects of modernization have also played a role in this process. Against this background, the introduction of non-financial reporting should seen as a reflection of stakeholder requirements: more emphasis is being placed on topics that go beyond “mere” figures and a sober explanation of the balance sheet or income statement.

III. What is the responsibility of the Supervisory Board?

As stated in the introduction, the RegE for the implementation of the CSR Directive of the EU assumes that the published information will provide a basis for decision-making for investors, business clients and consumers regarding the reporting company. In line with the economic significance of non-financial information, the Supervisory Board is held accountable for these reporting obligations by the proposed amendment to § 171 (1) AktG-E.

In accordance with the draft of the German implementation law, the Supervisory Board is also required to examine whether the non-financial management report and non-financial group management report have been prepared dutifully. This significantly enhances the liability and significance of this new reporting element.

The significance of the reporting obligation, and thus the importance of the Supervisory Board’s auditing function, is also evident from the scope of the penalty and fine regulations in the event of non-compliance with the requirements. Both § 331 HGB (misrepresentation) and § 334 HGB (fine regulations) are supplemented by a reference to the non-financial statement in the individual company accounts or consolidated accounts, so that this reporting is also covered by the HGB sanction regulations. At the same time, the CSR Directive implementation law increases the fine limit in § 334 (3) HGB-E for capital market-oriented companies. In the future, these companies will be subject to sanctions for violations against the content regulations of the (consolidated) financial statements or (group) management report—and this includes non-financial reporting—comparable to those imposed for violations in the area of disclosure. The maximum fine is the higher of these two amounts:13 € 2 million or twice the economic benefit generated by the offence. In the case of a fine pursuant to § 30 OWiG, the amounts can be even significantly higher (max. € 10 million).

In the course of the audit, the Supervisory Board must not only examine the completeness and accuracy of the reporting and assess it in the overall context of the business activities of the company or group, it should also become involved in the handling of the increasingly important non-financial aspects throughout the financial year. A regular exchange with the company management—for example on the approaches to be applied—is recommended.

This tool should be used purposefully. If non-financial reporting is undertaken as not simply a fulfilment of duty but also an instrument for the positive representation of the enterprise14, it can have a valuable impact on public perception. By addressing the topic in detail, the Supervisory Board can thus influence the qualitative corporate reporting and thus the reputation of the company.

IV. Conclusion

The EU CSR Directive and its planned implementation in Germany are a purposeful continuation of other regulatory developments and voluntary initiatives in the market. The overall aim is to provide shareholders and other stakeholders with more comprehensive information to enable them to assess a company and decide whether or not to engage with it. While the Supervisory Board has a duty to review the relevant reporting, it also has an opportunity to positively influence the positioning and reputation of the company.

1 ABI. L 330 from 15.11.2014, p. 1, ABI. L 369 from 24.12.2014, p. 79

2 The government draft is available online at

3 The explicit reference to § 267 (3) sentence 1 HGB makes it clear that these are the capital market-oriented companies that also exceed the criteria mentioned there. Such companies, which are only large due to the fiction in § 267 (3) sentence 2 HGB, are not subject to the reporting obligation. All group-related regulations can be found in § § 315b ff. HGB.

4 See also Boecker/Zwirner, SteuK 2016, in preparation; see also Wolf/Niemöller, IRZ 2016, p. 245.

5 Draft law to strengthen non-financial reporting by companies in their management and group management reports. Draft law of the Federal Government of 21.9.2016.

6 RegE of 21.9.2016, p. 1

7 Cf. Bortenlänger/von Altenbockum, BOARD 3/2016, p. 129 f.

8 §289c (2) HGB-E

9 §289c (3) HGB-E

10 §289c (3) Nr. 6 HGB-E

11 Cf. Boecker/Zwirner, SteuK 2016, under development.

12 Cf. on developments in recent years see Zwirner, in: Zwirner /Edition), BilRUG, 2016, p. 375 ff.

13 RegE from 21.9.2016, p. 68 f.

14 Suggestions for the strategic and communicative use of the reporting obligation under the CSR Directive can be found, for example, at

The original text entitled “Increasing responsibility for non-financial reporting” by Dr. Bernd Kasemir and Dr. Corinna Boecker was published in issue 5/2016 of BOARD, the journal for Supervisory Boards in Germany.

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