In the annual State of the Union address, European Commission President Ursula von der Leyen decried the overregulation of small and medium businesses and called for a 25% reduction in reporting obligations of SMEs. This comes just months before new sustainability reporting obligations are set to go into effect in the EU, raising concerns by environmental groups that the reporting standards could be reduced.
On July 31, the European Commission adopted the European Sustainability Reporting Standards. The ESRS will standardize how companies within the European Union report climate change and other ESG related actions. They are set to go into effect on January 1, 2024.
Initially, the ESRS will apply only to publicly traded companies and large privately held companies. The goal is to eventually apply the reporting standards to small to medium size enterprises as well. However, the timeline for that action has been delayed as they focus on bringing depth to the first round of standards. Environmental advocates were already wary that the delay would reduce the likelihood reporting standards would be applied to SMEs.
Von der Leyen’s speech included three notable priorities for the regulation of SMEs. First, she pledged to appoint an EU SME envoy reporting directly to her. The envoy be composed of SME owners and executives sharing information on the everyday challenges of running a small business. Second, she announced that legislation will be introduced in October to reduce the reporting obligations at the European level by 25%. Third, she will push to enact a similar 25% reduction at the national level.
This alarmed environmental activists who question the timing of pledge to reduce reporting requirements, while simultaneously implementing programs to increase sustainability reporting. It is unclear what areas of reporting von der Leyen intends on reducing, and what impact it will have on the ESRS long-term implementation goals.
At this point, concerns are speculative until the legislation is introduced. Expect a vigorous effort by environmental groups to protect the ESRS requirements for SMEs. The timing of the introduction of the legislation may also draw additional focus, 2023 United Nations Climate Change Conference, commonly called COP28, will take place in late November. If it does impact the ESRS, expect it to be addressed in some form at the conference.