German Financial Regulator Calls For Reduction Of EU Sustainability Reporting

Following calls to reduce the regulatory burden imposed on businesses, the European Union is poised to reform a series of laws passed under the EU Green Deal that required businesses to address climate change. With a goal of reducing reporting requirements by 25% for all businesses and 45% for small to medium-sized enterprises, the Omnibus Simplification Package will look at the EU Taxonomy, Corporate Sustainability Reporting Directive, and the Corporate Sustainability Due Diligence Directive. The result could reshape the international landscape for sustainability reporting. In response to a request for feedback, the Accounting Standards Committee of Germany proposed four amendments to the CSRD and CSDDD, including reductions in reporting requirements and an indefinite delay for sector specific standards.

As part of the European Green Deal, a series of directives were passed by the EU to force businesses to address climate change and report carbon emissions. The goal is to comply with the climate initiates of the Paris Agreement, an international treaty signed in 2015 to prevent climate change. The agreement included a goal of reducing greenhouse gas emissions to net zero by 2050. The EU addressed this through three key legislative actions.

In 2020, the EU adopted the EU Taxonomy for Sustainable Activities. The Taxonomy created a classification system for business and investors to know what activities are considered green or climate friendly.

Then followed the Corporate Sustainability Reporting Directive in 2023. The CSRD created requirements for businesses to report GHG emissions and other environmental, social, and governance actions. For large companies, general reporting begins in 2025 for fiscal year 2024. Small and medium sized companies, non-EU based companies, and companies in high emission sectors will see reporting requirements being drafted and released over the next year.

The final piece, the Corporate Sustainability Due Diligence Directive, was adopted in May 2024. The CSDDD, or CS3D, created additional reporting requirements, as well as legal liability, for companies in relation to their supply chain. The intent is to not only regulate the direct actions of a company, but also assure their suppliers comply with climate and human rights goals. However, the CSDDD faced significant pushback during the final stages. Only finding approval after significant changes that reduced the scope.

Following an informal meeting of Council leadership in mid-November, Ursula von der Leyen, President of the European Commission, announced her intention to revamp sustainability regulations to reduce the burden on businesses. She stated the Council and Commission will have an omnibus bill that will take “a huge approach to reduce in one step, in all the different fields, what is agreed is too much today. We will look at the triangle Taxonomy, CSRD, CSDDD.”

Governments, businesses interests, and climate activists have weighed in on the debate. Now, the top financial reporting organization in Germany has released a position paper with their recommendations.

The Deutsches Rechnunglegungs Standards Committee, known in English as Accounting Standards Committee of Germany sets national standards for financial reporting in Germany. On January 30, the DRSC (also abbreviated ASCG in English) released a position paper in German, that included the following four proposals for the CSRD.

1. Introduction of graduated requirements for mid-cap companies in the CSRD; harmonization of the thresholds with the scope of the CSDDD
2. Voluntary application of the VSME by “smaller” large limited liability companies and their exclusion from the mandatory scope of the CSRD
3. Clear mandate for EFRAG, formulated as a priority in the CSRD, to reduce bureaucratic burdens in Set 1 of the ESRS
4. Suspension of CSRD timelines for the development of sector standards; fundamental revision of the regulatory approach to sector standards (translated).

These generally align with the presumed direction of the Omnibus. The addition of mid-cap companies was included in the Competitive Compass for the EU released in late January. It creates a new level of businesses between SMEs and large companies, eliminating the significant reporting requirement increase businesses will face if they grow above the SME levels.

The European Financial Reporting Advisory Group, the equivalent of DRSC for the EU, has been charged with the duty of drafting the implementation language of the CSRD. The standards are known as the European Sustainability Reporting Standards As part of their directive, EFRAG also drafted voluntary ESRS for SMEs, known as the VSME. While not mandated, concerns have risen that the VSMEs will become a de facto requirement as larger companies need the information to complete their CSRD required reports.

Additionally, EFRAG was tasked with drafting ESRS for business sectors that have high greenhouse gas emissions or are considered a higher risk. These sector specific ESRS have not been drafted yet, and were delayed to allow for the initial, Set 1, of ESRS to be implemented.

The final draft of the Omnibus Simplification Package will be released on February 26. In the interim, expect a high level of lobbying and a lot of speculation as to what steps should be taken to reach the 25% and 35% reduction goals.