Sometimes less is more – even in the sustainability sphere. The EU wants to force significantly more companies to report on measures that ensure greater sustainability. To ensure this, the EU is planning another comprehensive set of rules with the CSR Directive.
As good as it sounds on paper – in practice, the CSR Directive, with its many requirements formulated down to minute detail, stands to overburden most small and medium-sized companies. As a result, the only thing it will definitively ensure is a steady stream of gigsfor consultants.The VDMA, therefore, advocates in favor of a risk-based approach kicks in where companies still have influence in order to obtain qualified information.
The European Financial Reporting Advisory Group (EFRAG) has presented first drafts of the reporting requirements. These were available for public comment until last week. The final proposal will be submitted to the Commission before the end of the year. The standards set out in the document would then be adopted directly by the Commission as delegated acts. SMEs in particular can only hope that EFRAG will take the feedback from the consultation into account when revising the proposals. Unfortunately, this is not certain.
Reporting must add value
In any case, the “less is more” principle is nowhere to be found in EFRAG’s drafts. And this is problematic in several ways: The purposeof good reporting should be to add value for both the reporting organization and the report users.This means defining and prioritizing which information is and isn’t essential and really necessary. If the requirements are too stringent, there is a risk that reporting will focus on compliance rather than adding value to users and report owners The original goal of “preventing greenwashing” could be missed as a result.
Even for companies with many years of experience in the application of international ESG reporting standards, implementation will be accompanied by major challenges. Complicating matters further is the fact that this data should be collected for the entire value chain. For many companies, the supply chain includes thousands of suppliers. For the large number of medium-sized companies that are will be subject to the CSR reporting obligation for the first time, the requirements will not be feasible in this form. Not only do they not have the expertise, they will also not be able to find experts on the market to help them become compliant.
Standards primarily benefit consultants and auditors
Overall, the disclosure requirements should therefore be significantly limited in terms of content – especially for medium-sized companies. It should also be imperative that European sustainability reporting is aligned with the global minimum standards developed by the International Sustainability Standards Board (ISSB) -a diverging European approach would be counterproductive.
In the previous drafts, we saw a major risk that consulting companies and auditors will primarily profit from the new standards by being able to acquire new lucrative contracts. However, they will not be able to assess the accuracy of the sustainability disclosures, but only the audited process for collecting and monitoring the reporting disclosures.
That is why the VDMA – as the representative of around 3,500 companies in the capital goods industry – is emphatically in favor of streamlining the CSR reporting requirements. The mostly small and medium-sized companies in the mechanical and plant engineering sector often contribute to sustainability with their products, for example when waste is sorted or recycled at the plants. This has tocontinue to be their main task – not creating reports. The focus should be on adding value with CSR reports. Otherwise, John Naisbitt’s wisdom applies: “We are drowning in information and starving for knowledge.”