Sustainability yes, bureaucratic monster no

One of the reasons family businesses are successful is because they have always adopted sustainable business practices. On average, the 500 largest family enterprises are 100 years old. Their long-term focus is what has enabled them to survive for several generations. This includes taking climate action seriously, a path many companies set out on long ago. Law-makers should support this approach rather than making it more difficult with red tape. The European Commission’s plans to combine sustainable business practices with new, far-reaching reporting obligations are not yet widely known. In Germany alone, 15,000 enterprises can expect to be subject to new or more extensive sustainability reporting requirements. Up to now, only 500 German companies were required to prepare a non-financial report. Not only will sustainability reporting affect 30 times more companies in the future, but it will also be significantly broader and deeper. A few months ago, the European Commission presented a proposal for a directive on corporate sustainability reporting.

In the future, public-interest entities, i.e. especially publicly traded companies, will not be the only ones that will have to comply with these extended reporting requirements. They will apply to all undertakings with more than 250 employees, net turnover of more than €40 million or total assets greater than €20 million. This means that family businesses in particular will typically also be required to submit a sustainability report.

The enterprises will then have to answer questions such as:

How does the company get the energy it uses? Are CO2 emissions being reduced? Which water resources are used and how? In addition to environmental factors, the Commission’s proposal incorporates social factors such as equal opportunities, gender equality, equal pay for equal work, and questions of governance such as work-life balance, payment practices, role of a company’s administrative, management and supervisory bodies, and much more. The enterprises must also make disclosures about their value chain and thus about their own activities, products and services, as well as their business relationships and supply chains.

Family businesses in particular espouse sustainable business models and are serious about combating climate change. Yet, they feel that the EU is now throwing the baby out with the bathwater, because instead of fostering climate action the proposed directive will primarily lead to costly bureaucracy and excessive disclosure requirements.

The sustainability report will become part of the management report and will be reviewed by statutory auditors. This means that not only will new documentation requirements be introduced but the companies in question will also have to pay the auditor’s fees.

The Commission itself expects that these regulations will affect 49,000 companies across Europe, which will incur overall implementation costs of €1.2 billion and annual costs of €3.6 billion. In practice, this estimate is probably on the low side. The companies concerned will incur additional costs averaging around €100,000, which shows the magnitude of the issue.  

Family entrepreneurs have no qualms about disclosing their sustainability activities. However, this needs to be a cost-effective process with an adequate lead time and avoid excessive bureaucracy. The Foundation for Family Businesses is lobbying for this in Brussels. A new bureaucratic monster will not help anyone. In implementing the Green Deal, the EU should take care to incorporate its citizens and businesses. This is the only way we will succeed in transitioning to climate-friendly business practices.