Sustainability has long been an important issue for most companies. Word has not yet gotten around everywhere, however, about the EU Commission’s plans to combine the issue with very extensive additional reporting obligations. In Germany alone, 15,000 companies can expect new or expanded requirements for sustainability reporting. You are threatened by a wave of bureaucracy.
So far, only 500 German companies have been required to submit “non-financial reporting”. The number of future sustainability reporting will increase by a factor of 30. The Commission presented its proposal for a directive on sustainability reporting a few months ago. Legislative work in the European Council and the Strasbourg Parliament should be completed as early as the first half of 2022 – a record-breaking pace by EU standards.
According to the current schedule, the new mandatory reporting directive will be published in the EU’s Official Journal at the end of June. The national legislators then only have a few months to implement it in the member states. Because the data for the future reports should be collected from January 1, 2023. Many technical details are still unclear, and the guideline does not even attempt to clarify them.
That is what a body organized under private law should do, the European Financial Reporting Advisory Group. So far it has only appeared when the International Financial Reporting Standards were adopted. The new task of the advisory body is to develop the necessary technical standards, which would then be put into effect by the EU Commission in a simplified procedure.
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In future, it is no longer just capital market-oriented companies, i.e. usually listed groups, that should be subject to the directive. According to the plans, the extended reporting obligation applies to all companies that have more than 250 employees, total assets of at least 20 million euros or generate annual sales of more than 40 million euros. Typically, family businesses in particular will be obliged to submit sustainability reports.
Family businesses take the climate crisis seriously
The companies then have to answer a whole series of questions: How is the energy supply going? Are CO2 emissions falling? Which water resources are used and how? In addition to environmental factors, social factors such as equal opportunities, gender equality, equal pay and the compatibility of work and private life also play a role. There are also questions about the governance of companies, their products, business relationships and value chains.
To avoid misunderstandings: Family businesses in particular stand for sustainable business models. They take the climate crisis very seriously and know that not only consumers, but also business partners are increasingly demanding information about what suppliers, for example, are doing in terms of sustainability. Corresponding evidence is becoming more and more important in competition. Last but not least, sustainability is increasingly an issue in negotiations with banks and investors.
For this very reason, however, it is of crucial importance: The EU standards must be manageable in practice. From the point of view of family businesses, however, the EU is in the process of throwing out the baby with the bathwater. Because the planned new directive no longer creates climate protection, but above all costly bureaucracy and excessive disclosure requirements.
The sustainability report should become part of the management report and be checked by auditors. This means that not only are new documentation requirements introduced, companies also have to pay additional auditor fees. The Board of Management and the Supervisory Board are responsible for compliance with the new sustainability reporting requirements.
Considerable additional financial burden
The EU Commission itself assumes 49,000 affected companies across Europe. They should incur implementation costs of 1.2 billion euros and then annual costs of 3.6 billion euros. In fact, that should probably only be the lower limit of the additional financial burden. For the companies concerned, this means additional expenditure of around 100,000 euros on average. This is not a sticky stick!
A medium-sized family business has calculated what the plans would mean in practice: The company would have to create a new full-time position in order to be able to meet the reporting requirements. This once again confirms the European tendency towards overregulation. Instead, the aim must be to promote climate protection with as many technological innovations as possible. More documentation requirements are not an effective means of doing this. Because experience shows: Additional controllers do not bring any progress in terms of sustainability.
It is precisely because the climate-friendly restructuring of the economy is important to family businesses that they join the debates on environmental policy. The 500 largest family businesses in Germany are on average 100 years old. You can rightly claim to know how sustainable business practices work. It is also in their interest that politics promote future-oriented corporate management.
But this has to succeed without creating new paper tigers. If the EU’s plans remain, sustainability reporting will degenerate into an employment program for consultants. Auditors and communication agencies are already smelling big business. The company would have to foot the bill. They would rather invest the money in sensible measures to protect the environment. The need for this is huge.
Great potential in the circular economy
The Fraunhofer Institute has come to the conclusion: Family businesses are the “Greentech Champions” in important environmental sectors. The industrial transformation can only succeed if family businesses find competitive framework conditions. Germany is already one of the countries with a lot of bureaucracy. Relief is necessary here instead of new burdens.
There is undoubtedly great potential for environmental policy in the area of the circular economy, which the draft directive includes in the reporting obligation. Although the legislation in this area still leaves considerable room for maneuver, many family businesses have long been on their own initiative to reduce their waste and pay more attention to recycling. With uniform standards, Brussels can promote the conversion to a circular economy.
Overall, however, when implementing its Green Deal, the EU Commission should be more careful not to ignore operational reality. Otherwise the transformation to a climate-friendly economy will not succeed.
The author: Prof. Rainer Kirchdörfer is the director of the Family Business and Politics Foundation.
More: What sustainability really means.