Germany pushes to exempt SMEs from green reporting rules

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Germany is seeking to exempt thousands of Mittelstand companies from EU green reporting rules, in a move officials say risks “gutting” the bloc’s efforts to hold companies accountable for their impact on the environment.

Berlin wants Brussels to expand the definition of small and medium-sized enterprises, raising the threshold from 250 to 500 employees in order to “restrict the [bureaucratic] burden on them to what is really necessary”, according to a government coalition document adopted at the end of August and seen by the Financial Times.

The proposal would spare between 7,500 and 8,000 companies from having to comply with recently adopted sustainability reporting rules, according to calculations by EU officials based on a study by the Centre for European Policy Studies think-tank for the European Commission.

Paris has also been consulted in this effort but has so far not endorsed the German proposal.

The effort is part of a broader push to ease red tape for the bloc’s companies as they battle high inflation, staff shortages and an increasingly protectionist global market, but EU lawmakers have railed against making late changes to the reporting rules, which were only adopted this year.

Pascal Durand, a French socialist MEP who led negotiations on the corporate sustainability reporting rules, said that reopening the debate “on one of the key elements” of the EU’s climate law would risk both “significantly reducing” the impact of the directive and “ultimately penalising thousands of companies that have begun to reorganise their activities to meet the new sustainability and reporting standards”.

An EU official said that the German proposal amounted to “gutting” the new rules.

The commission signalled last week that it planned to review the number of SMEs falling under the scope of financial regulations such as sustainability reporting and the bloc’s green taxonomy — a rule book that aims to guide investments to the most environmentally friendly activities.

The threshold that defines SMEs could be modified in accordance with inflation, according to a draft proposal published by the commission last week.

“I see the point for increasing the threshold to reflect inflation but why should the employee threshold be changed and on top of that so much?” said Aleksandra Palinska, executive director at Eurosif, the European Sustainable Investment Forum. “Such a change would have implications across the board for a wide range of EU rules, and changing the threshold so drastically without considering full implications of this would be unwise.”

Under current rules, only listed SMEs are included and they will not have to report on their environmental and social impacts until 2026.

The OECD definition of an SME is one with 250 or fewer employees. The EU’s current threshold involves a company meeting benchmarks in two of three areas: number of employees, net turnover and total balance sheet.

The French finance ministry said it was “absolutely in favour” of the EU effort to cut bureaucratic burden but that it had only just started discussing the legal technicalities of such a move.

Bruno Le Maire and Christian Lindner, the French and German finance ministers, said in a joint article in the Financial Times last week “we should further improve” the EU’s sustainable finance framework and that “we need to make sure that requirements are manageable”.

The call comes amid fears that the bloc’s industries are losing their competitive edge as a result of all the new regulations brought in as part of the EU’s Green Deal climate law, which aims to push the bloc to reach net zero emissions by 2050.

Further rules that will oblige companies to ensure that their supply chains are free from ESG risks are being negotiated.

The Conference Board, a not-for-profit business group, said that companies it had surveyed estimated that direct costs linked to complying with the due diligence rules would range between €250,000 and €500,000.