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Days after European Commission President Ursula von der Leyen called for a 25% reduction in reporting obligations of small and medium-sized enterprises, Germany released a proposal to double the employee threshold for European Sustainability Reporting Standards. The result will significantly reduce the number of SMEs that fall under the ESRS. Expect more push back to follow as the cost to small businesses is realized.
On July 31, the European Commission adopted the ESRS, a framework of reporting ESG standards set to go into effect on January 1, 2024. The first round of reporting requirements applies to publicly traded companies and large privately held companies. SMEs will not be required to report until 2026.
The development of ESRS for SMEs was delayed as additional focus was places on the publicly traded and large business standards. For now, SMEs will have to comply with the ESRS if they meet two of three metrics. SMEs must have over 20 million EUR in total assets, a net turnover of 40 million EUR and/or 250+ employees.
One proposed modification, that will likely be adopted, ties the asset and net turnover figures with inflation. This will establish an automatic annual increase on the minimum thresholds, without annual approval by the commission.
As first reported by Financial Times, Germany is proposing a redefinition of SMEs from 250 employees to 500 employees. This increase would not only apply to the ESRS, but to all SME regulation within the EU. While the proposal is still early stages, and has yet to be signed on by any other member states, I suspect there is a strong likelihood of success as it fits with broader priorities.
On Sep 10, President von der Leyen delivered the annual State of the Union address to the European Commission, in which she focused on the burden of small business, stating: “small companies do not have the capacity to cope with complex administration, or they are held back by lengthy processes.”
To “make business easier in Europe”, she made three legislative proposals. 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.
At the time, environmental activists expressed concerns the 25% reduction would adversely impact the ESRS. It appears those concerns were justified.