1) The European Union has adopted within a few years an extensive regulation on sustainable finance
The European Union has adopted an extensive regulation on sustainable finance, to oblige large companies to publish many ESG (Environment -including climate-, Social and Governance) data and information: SFDR (Sustainable Finance Disclosure Regulation, for financial investors, which applies since March 2021), the “green” taxonomy (since 2023), CSRD (Corporate Sustainability Reporting Directive, which will apply from 2025 for the 2024 accounts and will be based on ESRS (European Sustainability Reporting Standards).
The adoption of this legislation has sometimes raised objections, particularly in the final straight line of finalisation of the ESRS, which led the Commission, in its delegated regulation, to make the EFRAG proposals more flexible, the Advisory Group on proposals in this area. The Commission has introduced the concept of materiality, which means that companies are only obliged to publish information and data that are significant. It is the application of the old European rule inspired by the Roman adage “De minimis non curat praetor” (“the government should not worry about the smallest things”).
The maximum number of data to be published is impressive: 1,600, but most large companies have to publish much less: 500-600 for a conventional industrial company, 200-300 for a service company. And most of these companies already publish some of this data, in application of a previous NFRD (Non-Financial Reporting Directive) directive, but also as part of an ESG approach to inform their staff, their clients, their financiers etc.
2) For several months, some companies and politicians allied against CSRD and called for its simplification, even postponement.
There was a grumble from companies, including SMEs (although not directly concerned for the moment, I will come back to this), then this theme emerged during the European elections campaign, supported by the extreme right, but also by the PPE, who had voted on the various laws. Several governments, but also employers' representatives, have asked for the simplification of this legislation, or even the postponement of the application of CSRD.
The Draghi report contains the following criticism : “the EU’s sustainability information and due diligence framework is a major source of regulatory burden, Accentuated by a lack of guidance to facilitate the application of complex rules and clarify the interaction between different pieces of legislation.
3) However, the postponement of CSRD would be a major political mistake: we do not change horses in midstream !
CSRD and the application of ESRS is indeed a significant burden for large companies, but postponement would be the worst solution for 3 reasons:
- First, the large companies have already done the majority of the work,
and the financial sector as well (which has been applying SFDR for 3 years);
- Then, it is obvious that nobody expects all publications to be complete and perfect at the first try! There are real problems with the availability of comparable and high-quality data, especially from suppliers and customers of large companies, which can only be improved gradually. But to progress, we must start : the publications of 2025 will be a test that will better assess what works and what is problematic, so that so that the ones in 2026 are better etc.,
- Finally, the 2025 test could also simplify and clarify, given the evaluation that can be done!
4) How can SMEs be helped? By intelligently and progressively inserting them into the process and providing technical assistance.
SMEs are not directly affected by CSRD at this time. Only listed SMEs will have to publish sustainable information from 2027 for the 2026 accounts, unless they decide to postpone this obligation until 2029. A proposal of standards for listed SMEs, fewer and simpler than for large companies, was the subject of consultation. Publications of other SMEs can only be made on a voluntary basis without obligation to date.
But SMEs are an important part of the European economy, many of them in carbon-intensive sectors and as such they must be part of the EU’s energy transition process.
To do this, they must collect and publish ESG information and data as soon as possible, which will be used to establish transition plans and inform their employees and partners (large companies, banks, customers). Because of their limited resources and the already numerous priorities to which SME managers must respond, this approach can only be gradual over several years and will have to be supported by their natural partners: accountants, banks, trade federations, chambers of commerce and even public authorities. There are many successful and inexpensive experiments in this direction[1].
It is also in the interest of SMEs to have specific legislation, with a reduced number of information and data to be provided, based on EFRAG’s recent proposals on listed SMEs on the one hand and other SMEs on a voluntary basis on the other (this last set of standards contains only 30 data to be provided).
It will also protect them from the possible pressure of large companies and the financial sector to ask for more information and data.
Conclusion
The implementation of the important EU legislation on sustainable transparency is at a turning point. It is a real burden for large companies, but they have already done the bulk of the work. The CSRD’s planned 2025 publications on the 2024 accounts should serve as a test to assess progress and challenges, and on this basis, simplify and clarify, and make further progress.
For SMEs, which are not yet affected by this reform, it is desirable that those in carbon-intensive sectors start a gradual process of collecting and publishing ESG data as soon as possible. They should be assisted in this process by their usual partners and should be able to rely on a specific legal framework of few and simple standards.
[1] "We need to help SMEs to collect and publish their main ESG data", J.-F. Pons, Europe Jacques Delors, November 2022
