Sustainability reporting for municipal companies: Change in the scope of application is emerging

As part of the Corporate Sustainability Reporting Directive (CSRD) (EU 2022/2464 of December 14, 2022) and its implementation into national law (government draft of July 24, 2024), companies will in future be directly obliged to prepare comprehensive sustainability reports if they are large corporations or equivalent limited liability partnerships under the German Commercial Code (HGB).

Municipal companies must currently prepare a sustainability report

Irrespective of their actual size under accounting law, municipal companies in Baden-Württemberg and numerous other federal states are required by municipal law to prepare and have audited their annual financial statements and management reports in the same way as large corporations as defined by German HGB. This obligation is generally also incorporated in the articles of association due to the requirements of the respective municipal codes.

These municipal law requirements therefore result in a significantly broader group of addressees affected by the indirect sustainability reporting obligation compared to the European Directive. For municipal companies, this means that they will have to indirectly add a sustainability report to their management report in future. The majority of municipal companies will be affected by the reporting obligation for the first time in 2025.

Exemption from sustainability reporting: “group privilege” for municipal companies?

The Institute of Public Auditors in Germany (“IDW”) has recently taken a critical stance towards this extension. Most recently in September 2024, the IDW expressed the view that at least the envisaged group privilege in the preparation of sustainability reports can also be applied to municipal companies. Accordingly, municipal subsidiaries should also be exempt from preparing a sustainability report, provided the respective parent company prepares an exempting consolidated sustainability report.

So far, the federal states or the supervisory authorities have not explicitly stated whether municipal companies can also invoke the group privilege.

Application of HGB size-related criteria probably possible – municipal companies should nevertheless position themselves for the future

Current developments now indicate that the state government and the supervisory authorities in Baden-Württemberg also see the expansion of the scope of application for municipal companies as not being in line with the original CSRD regulation. Thus, at least for sustainability reporting, the actual size according to German HGB should also be taken into account for municipal companies.

However, until there is a clear legal regulation and, if necessary, a corresponding amendment to the respective articles of association, small and medium-sized municipal companies are currently not exempt from sustainability reporting. A possible amendment to the wording of the articles of association for small and medium-sized municipal companies may become necessary; however, this is dependent on the wording of a final uniform federal or state-specific regulation in the further legislative process.

Municipal companies should evaluate the possible scenarios now and check what implications they would have for their respective organization. This enables them to prepare themselves for possible future obligations regarding the preparation of a sustainability report and position themselves for the future.