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"Bureaucratic stumbling blocks" - New EU directive becomes a burden for medium-sized companies

The document, entitled "ESRS", some 400 closely printed pages, was conceived in the heart of Brussels, on the fifth floor of a gray office building.

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"Bureaucratic stumbling blocks" - New EU directive becomes a burden for medium-sized companies

The document, entitled "ESRS", some 400 closely printed pages, was conceived in the heart of Brussels, on the fifth floor of a gray office building. It is, some say, Europe's newest weapon against climate change, a tool to save the world. For the others, all the paragraphs, tables and footnotes in the document are a nightmare. They fear the work will overwhelm tens of thousands of companies across the continent. Or at least costs a lot of money.

This year, that much is certain, managers, lawyers and accountants all over Europe will be dealing with the 400 pages. The EU uses them to describe new rules for so-called sustainability reporting. The Brussels officials speak in English of “European Sustainability Reporting Standards”, ESRS for short. There are four letters against which lobbyists from the member states are up in arms.

The new rules are part of a policy that went into effect a few days ago. It stipulates that significantly more companies than before must disclose in their annual reports how their actions affect the environment and society. But that's not all. The companies should also disclose how sustainable their suppliers are. Across the entire value chain. From the raw material to the finished product. Does a business partner from India dump toxic chemicals in the Ganges? How is the “work-life balance” there – the word is in the document – ​​ordered? Europe's managers must have answers to such questions in the future.

So far, only large corporations have had to provide information on sustainability. From 2026, companies with at least 250 employees should do the same. And also all those who have fewer employees when they are on the stock exchange. The number of reporting companies is increasing dramatically. In Germany alone from 500 to 15,000. The new directive will affect almost 50,000 companies across Europe.

The legal act has been passed, so the direction is clear, but companies and associations still want to fight for changes in the details. Small adjustments here and there that could have a big impact. For example, EFRAG - the office in the gray Brussels office building that worked out the package for the EU Commission - requires the collection of 1144 data points, as an unpublished analysis by the Confederation of German Employers' Associations (BDA) shows. If this number could be reduced, a lot would have been gained from the point of view of the economy.

"Politics must pave the way for sustainable business," says BDA CEO Steffen Kampeter to WELT AM SONNTAG, "but don't spread any bureaucratic stumbling blocks." The introduction of complicated EU reporting standards is going in the wrong direction. "Soon," says Kampeter, "every medium-sized company with 250 or more employees will have to wade through hundreds of pages of specifications and write complicated reports." Kampeter describes this as "overregulation." for additional EU bureaucracy.”

For the Commission, it is about the really big problems of mankind. About the prevention of exploitation, about gender equality, about the fight against global warming. The new rules are part of the so-called Green Deal. They should help with the restructuring of the European economy. Away from oil, gas and coal towards wind and sun. The EU wants to be climate neutral by 2050. To do this, officials say, companies have to put up with a few chores.

But ESRS is just the beginning. The European Supply Chain Directive is expected to come later this year. It was proposed by the Commission in February 2022. The draft comes from the Directorate-General for Justice and Consumers and obliges companies to prevent their suppliers from violating environmental regulations and human rights. And the Directorate-General for the Internal Market is planning a regulation against forced labour. There is also the so-called taxonomy, an EU set of rules that defines whether companies operate ecologically. It originated in the Directorate-General for Financial Stability, as did the Sustainability Reporting Policy.

Four instruments from three departments of the European Commission. All with similar goals. Does this make sense?

“There is a lot of unnecessary overlap,” says Axel Voss from the Christian Democratic EPP Group in the European Parliament. "This is not a healthy development." Voss believes that the concerns of the German economy are justified. "Climate protection is important," he says, "but the new rules on sustainability reporting could overwhelm some companies." According to Voss, writing pages of analysis is not the solution. "It would probably help the environment more if companies were asked to have concrete concepts for reducing their emissions."

Many companies lack the capacity to collect all the data. Especially along the entire supply chain. And at a time when they are already struggling with inflation and shortages of raw materials. Most will have to have the reports written by chartered accountants, at high hourly rates.

The rules lack "proportionality and practicability," says Peter Adrian, President of the German Chamber of Industry and Commerce, WELT AM SONNTAG. It must be taken more into account that many affected companies are medium-sized and have little experience in sustainability reporting. "For them," says Adrian, "the transformation towards a more sustainable economy will now be made even more difficult."

How exactly is the new directive intended to help deal with climate change? The Commission's logic is as follows: Investors will increasingly invest their money in sustainable business models. Companies that meet environmental goals get more capital. Those who write in their reports about toxic chemicals in the Indian river Ganges, less so. In the end, that's the hope, the market will sort things out.

"The new reporting requirements are intended to inform investors on the capital market about the sustainability of the company," says Adrian. "This should make it easier to finance investments for the transformation of the economy via the capital market." However, only large corporations would get money in this way. "For most medium-sized companies," says Adrian, "the new standards lead above all to considerable additional workloads."

Image counts when it comes to sustainability reporting. But one of the other major projects of the Commission goes much further: the draft of the supply chain law stipulates that European companies are liable for violations by their business partners in distant parts of the world. The idea is that victims of environmental damage or human rights violations can claim damages in courts in the EU. A nightmare for many German managers. And possibly a reason to withdraw from emerging markets.

These rules are initially only planned for large corporations with more than 1000 employees. They apply to smaller companies if they are active in so-called risk sectors. Clothing, mining, farming for example.

All the new directives and regulations are the result of a tough debate. The EU has been considering how companies should take responsibility along their supply chains for ten years. The issue came up after a garment factory fire in Pakistan killed more than 250 people. Most of them women who sewed for the German discounter KiK. That was in September 2012. Brussels is now acting. But not in the way the economy imagines.

"Everything on shares" is the daily stock exchange shot from the WELT business editorial team. Every morning from 5 a.m. with the financial journalists from WELT. For stock market experts and beginners. Subscribe to the podcast on Spotify, Apple Podcast, Amazon Music and Deezer. Or directly via RSS feed.

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