CSRD – avoid excessive red tape and make family businesses more competitive and innovative!

Most of the companies affected by the CSRD are family businesses. This is because around 90 per cent of all German companies are family-owned. In the EU, family businesses account for approximately 70 to 80 percent of all enterprises across all sectors and legal forms. (3) They are known for having lean organisational structures with direct decision-making processes. The very extensive and detailed reporting obligations under the CSRD will not only erode the competitive advantages for these companies that such factors afford, but the red tape generated by the CSRD could even cause setbacks in their sustainable development as a whole.

Additional, complex reporting requirements for enterprises will impact on their commitment to sustainability. The CSRD will impose a much bigger burden on smaller companies than large public-interest entities had to endure under the EU Non-Financial Reporting Directive, which imposed fewer requirements. This means that many family businesses will now have to dedicate additional resources to reporting which could otherwise be allocated to sustainable projects. The European Commission itself estimates that the initial CSRD proposal will lead to average costs of around 100,000 euros per company for the first year alone – considerably more than the cost of a full-time position. (4) However, reporting alone does not contribute to sustainable development, which mainly requires scientists and engineers to develop sustainable cutting-edge technologies. This impressive feat is achieved through the unique commitment of family businesses and their willingness to invest in innovation. (5) After all, due to their long-term strategic orientation and their commitment to the next generation, sustainable economic action is part of their DNA.

European lawmakers should recognise, preserve and encourage this commitment as well as possible. Only by promoting and developing innovation can effective, urgently needed climate action and environmental protection succeed. Such an approach would be preferable to constantly coming up with new reporting requirements that serve only to place a burden on companies without doing anything to protect the environment or mitigate climate change. The CSRD and the European sustainability reporting standards currently being developed within its framework, together with the Taxonomy Regulation and other sustainability reporting regulations such as the proposed directive on supply chain due diligence currently being negotiated, could create considerable additional bureaucracy for family businesses. Overlaps, for instance between the directives on sustainability reporting and supply chain obligations, are also evident, resulting in substantial duplication. The ever-increasing reporting obligations facing companies are set to hinder further investment in European production facilities, which in turn would be a setback for European business and prosperity throughout Europe. 

3.1 Complex reporting requirements must not overburden family businesses

In future, companies will have to report in much greater detail than before on their sustainability goals and activities as well as on their sustainability policy and strategy, applying the principle of double materiality. Under this principle, companies will report both on how sustainability issues affect their performance, position and development (the ‘outside-in’ perspective) and on their impact on people and the environment (the ‘inside-out’ perspective). Setting European sustainability reporting standards and tying the CSRD in with other EU regulations on sustainability, particularly the Taxonomy Regulation and the delegated acts to be observed within this framework, will add another layer of complexity.

It is vital to create a link between additional reporting requirements and proven added value. Given the time frame and the complexity of the content, but also the fact that many family businesses have already been reporting on their sustainability activities for some time, it is doubtful that this will happen for the CSRD.

3.2 Define the framework for European sustainability reporting standards; ensure compatibility between European and international standards

The CSRD empowers the European Commission to adopt European sustainability reporting standards through delegated acts. However, the CSRD lacks a necessary and clear definition of the framework that the Commission is required to observe in this regard. The content of the reporting standard is currently being determined by the European Financial Reporting Advisory Group (EFRAG) and the European Commission in the form of delegated acts. As a study by the Foundation for Family Businesses has noted with criticism, this is happening without the appropriate and timely involvement of the European Parliament or member states. To prevent the European legislative procedure from being circumvented and essential content of the CSRD from being effectively decided solely by the Commission, the framework for delegated acts needs to be defined in the CSRD itself.

Irrespective of this, from the viewpoint of family businesses the European standards currently being developed need to be compatible with the established international sustainability reporting frameworks (e.g. GRI Standards or the UN Global Compact). Any deviation from these frameworks, with the consequence that in a worst-case scenario companies would have to duplicate their reporting, must be avoided at all costs.

The CSRD creates further costly red tape for family businesses without adding commensurate value for them. New reporting requirements will not add anything to sustainability and will erode the competitiveness of family businesses. Instead, the EU should concentrate on promoting companies’ actual commitment to sustainability. Family businesses are pioneers in this respect because they, in particular, invest in the development of cutting-edge technologies in keeping with their long-term strategy focused on generations to come. Such technologies will be urgently required given the rapid advance of climate change. Additional bureaucracy, on the other hand, is something they can do without.

1 The European Commission’s proposal for the CSRD provides for extending the scope to SMEs from 1 January 2026.

2 See the German Accounting Standards Committee’s (DRSC) statement on the CSRD submitted to the German Federal Ministry of Justice dated 26 May 2021.

3 The Economic Importance of Family Businesses, 5th ed., published by the Foundation for Family Businesses, compiled by the Centre for European Economic Research (ZEW), Mannheim, and the Institute for SME Research, Munich, 2019, www.familienunternehmen.de.

4 See p. 13 of the European Commission’s proposal for a Corporate Sustainability Reporting Directive published on 21 April 2021, 2021/0104 (COD).

5 See Technologieatlas Nachhaltigkeit – Familienunternehmen als Entwickler und Anwender von Umwelttechnologien, published by the Foundation for Family Businesses, compiled by the Fraunhofer Institute for Environmental, Safety and Energy Technology UMSICHT, Munich 2021 (German only).