CSRD under attack as EU gears up for elections

Attempts to weaken sustainable finance reporting are growing as centre-right politicians position themselves as business-friendly ahead of the 2024 European elections

The Corporate Sustainability Reporting Directive is in the firing line in Brussels as the European Commission announced plans to postpone CSRD sector-specific standards and to change the definition of a small and medium enterprise, while members of the European parliament rejected a call by the centre-right European People’s party to weaken the European Sustainability Reporting Standards. 

“Simplification” is at the heart of the EU executive’s work programme for 2024, published on Tuesday afternoon. “The envisaged simplifications will streamline reporting requirements that are of limited use, for example by consolidating overlapping obligations, reducing the number of businesses concerned and increasing digitalisation,” the commission said in the document.

One “simplification” is the postponement of the deadline to adopt sector-specific ESRS.

The work programme also references the “second notice on taxonomy reporting”, which guides how disclosures are interpreted under the taxonomy. The commission said it will “clarify that no assessment is needed from undertakings for activities that are not material to their business and where they lack evidence or data to prove compliance with the technical screening criteria of the EU taxonomy”.

Sebastien Godinot, an economist at the WWF European Policy Office in Brussels, tells Sustainable Views that the decision to delay sector-specific standards was “problematic”. The standards “are likely the best way to enable strategic comparisons of the sustainable performance of peer companies in critical sectors. This is what investors and banks need”, he says.

“Overall, there are many initiatives in the 2024 work programme that look sensible and promising, such as a 2040 climate target and the pledge to keep the EU on course towards climate neutrality by 2050,” European Sustainable Investment Forum executive director Aleksandra Palinska tells Sustainable Views.

“But with regards to corporate reporting, it seems the commission is backtracking on its initial ambition,” she says, highlighting that the ambition for the first set of ESRS had already been “reduced significantly” from what experts had recommended.

As regards the EU executive’s intentions around the EU taxonomy, Palinska says she agrees that “solutions” are needed for situations where activities are not material to their business or where companies lack evidence or data to prove compliance with technical screening criteria.

She warns, however, that if the commission fails to implement the “necessary safeguards”, the permission to omit such activities from EU taxonomy disclosures “may open the door to reduced comparability and reliability of the disclosures, very much undermining its usefulness”.

SME changes

Part of the European Commission’s “simplification” plans include a proposal to adjust the definition of SMEs. It justifies the change by citing current high rates of inflation and suggests a 25 per cent amendment to the size criteria for different companies under the EU Accounting Directive.

“The proposal to increase thresholds for SMEs to reflect the inflation may seem reasonable,” says Palinska, “but an increase of 25 per cent seems a lot”.

She also mentions proposals from France and Germany that had suggested changing the headcount threshold for SMEs from 250 to 500 employees. “This could have reduced the number of companies reporting against CSRD and ESRS by around 80 per cent,” she says.

The Franco-German idea “goes against the very of objective of the CSRD, which is to improve the availability, quality, comparability and reliability of corporate sustainability-related disclosures”, Palinska says. “We need to keep in mind that ESG data is the cornerstone of the entire EU sustainable finance agenda.”

She wants the commission to publish a proper impact assessment and a “full overview” of all the EU rules the SME proposal would affect and in what way.

Election mode

The EPP’s call in the EU parliament on Wednesday to further weaken the ESRS by demanding “simple reporting standards” instead of “overburdening companies” is “beyond understanding and would have thrown the whole CSRD into question”, Palinska says.

“Even if they have not succeeded, this sends a bad signal. We have spend the last five years putting sustainable finance rules in place in the EU and now, as we near the end, we are seeing a reduction in ambition. 

“The EU is trying to have its cake and eat it,” she continues. “If we are to get to net zero, companies will need to take certain steps. There will be costs, but they are to prevent a future disaster, including for businesses.”

Palinska says the reduced ambition around reporting is a general tendency from centre-right politicians as they move into election mode ahead of the 2024 European elections.

Godinot is of a similar opinion. “The EPP is in pre-election mode, positioning itself against anything perceived as red tape for companies in a very dogmatic and aggressive way,” he says. “They claim that ESRS is burdening SMEs, although SMEs are not in the scope [of the ESRS] — only 2,000 are listed out of a total of 24mn SMEs in the EU [are included].”

Any change to the ESRS “could indirectly heavily damage the Green Deal, which critically needs sustainability data at the company level as an enabling condition to meaningfully accelerate the transition of EU companies and reach the 2030 targets”, Godinot adds.