‘SME Relief Package’: European Commission should not undermine own sustainability reporting standards by exempting large companies through the back door

The relief package should not exempt certain large companies from providing any sustainability data, including on climate or own workers. “While Europe is witnessing the enormous costs of climate-related impacts, the EU Commission proposes to cut back on its own framework that is intended to guide the transition of companies and investors to a more sustainable economy”, says Filip Gregor, Head of Responsible Companies at Frank Bold, “this is pure electioneering bluster and takes away the compass for mid-sized companies to transition”.

The EU has to structure the green transition

After the hottest summer on record, the EU has no time to stall its own initiatives and laws.  The absence of a solid sustainability framework could become even more burdensome for companies because it will affect them disproportionately and could result in even higher adaptation costs and disruptions on the markets. The European Central Bank itself just called for “more decisive policies to ensure a speedier transition towards a net-zero economy in line with the goals of the Paris Agreement” last week. In fact, the EU Commission should assess the potential implications of this exemption on the credibility of democratic policy-making processes. It may risk undermining it and hinder future consensus-building efforts.

So, is this really about smaller companies?

Despite being named ‘SME-relief package’, Action 9 of this recent plan seems to be less about the challenges small and medium-sized enterprises face, but reads like an attempt to curtail the ambition of the EU sustainability framework as a whole and exempt certain large enterprises from its scope. Business associations representing large companies have been trying to make the EU cut back on its ambition during the policy making processes previously.

1. To recall, first, the CSRD and the EU Taxonomy already only target a very small portion of EU companies, 0.2 percent of the whole (according to Eurostat).
2. Second, for the implementation of the new sustainability reporting standards, the EU already provided companies with less than 750 employees with a longer timeframe to disclose the data. 
3. Thirdly, many factors can make it difficult for companies to comply with the laws, such as a lack of digitalisation of government services and complex corporate structures, but the mere costs of providing transparency about companies’ sustainability are low. According to a study from CEPS, the implementation cost of the draft EU sustainability reporting standards was estimated to be between 0.017% and 0.034% of turnover, for one-off and recurring costs respectively for the companies who have not been subject to the previous EU sustainability reporting requirements, including all internal and external administrative costs as well as limited assurance. These costs seem reasonable with regards to much higher costs of adaptation to climate change-related impacts.

Standardisation and clear guidance on sustainability action are the key

The main goal of the new EU sustainability reporting system is standardisation, and through it simplification and cost saving. EU politicians who support this curtailing of ambition via  the relief package seem to ignore the fact that the demand for sustainability data is already a business reality. Companies, large and small, are already dealing with increasing and diverging requests and forms from banks and their business partners on a daily basis. If the EU now introduces more and more carve-outs to the application of the standards, they will cease to be fit for purpose.

Furthermore, the standards play an invaluable role by providing companies with a clear framework for key ESG data as well as human rights due diligence and climate targets and transition plans. This is extremely helpful in building and understanding on how to approach sustainability in disclosures as well as in their business considerations and planning.

With concrete proposals to reduce reporting obligations and enlarge the legal definition of SMEs set to be announced by the end of the year, the European Commission sends a clear message to larger companies: “Sustainability does not matter to you, and there is no reason why you should be paying attention”. The problem is that when reality hits them, they will have to implement it anyway, but at much higher cost to their business.