Joint statement – European Parliament leaves SMEs out of CSRD scope

16 March 2022

Joint statement

In the joint statement below, Finance Watch raises the alarm on the European Parliament JURI committee’s intention to leave SMEs out of the scope of the Corporate Sustainability Reporting Directive (CSRD).

Finance Watch recognises certain improvements compared to the Commission’s proposal with regards to the contents of the disclosures. Strong concerns mount, however, over leaving SMEs out of the scope of the mandatory sustainability reporting. With regards to the scope, the Parliament’s position is even less ambitious than the Commission’s proposal or the General Approach adopted by the Council, both of which include SMEs with securities listed on the EU Regulated Markets.

SMEs from high-risk sectors can deliver a profound and wide-reaching impact on the environment and society. Investors need access to corporate sustainability-related information not only because of their sustainability preferences, but also to understand financial implications of sustainability risks businesses face. Moreover, financial intermediaries and institutional investors need such information to prepare their own sustainability-related disclosure obligations legally required.

Joint statement: EU Parliament clarifies obligations for companies sustainability reporting but leaves all SMEs out of the mandatory framework

The European Parliament’s JURI committee has approved its position on the EU Corporate Sustainability Reporting Directive (CSRD) with a wide and cross-party majority. Following this vote, the CSRD proposal will move to the final stage of the legislative process and enter trilogue negotiations between the EU Commission, European Parliament and the Council (the latter adopted its initial position in February).

While it is positive to see that the legislation is overwhelmingly supported by Members of the European Parliament, their position on scope takes an alarming step backwards:

  • Listed SMEs are taken out of the scope of mandatory reporting. Initially included in the proposal via a simplified framework with an application delay of 3 years (compared to large companies), the European Parliament has only proposed a new review clause (Article 5a) including a request for the EU Commission to assess the “possible extension” of the scope to listed SMEs.
  • Additionally, a new Article (7a) requests the EU Commission to identify and develop a list of high-risk sectors. However, the inclusion of SMEs in such high-risk sectors (whether listed or not) remains tied to the review clause (and subject to an assessment to be delivered before the end of 2026).This creates a clear risk of a funding gap at a critical time for the EU economy. Investors, banks and asset managers have repeatedly called for sustainability information from SMEs to carry out risk assessments and fulfil their own reporting and due diligence obligations (see recent letter addressed to MEPs). From the SME perspective, sustainability reporting will be key to build business resilience, gain competitive advantage, keep up with supply chain demands and policy regulation, and meet consumer expectations.Leaving listed SMEs out of scope poses investor protection and financial stability concerns. From the investor perspective, sustainability-related information is essential to assess a risk profile of companies they invest in, whether they are large, medium-sized or small.Furthermore, EU supervisors such as the European Central Bank and ESMA, as well as the EU Commission and the Council have supported a simplified mandatory standard for SMEs. It is also relevant to note that multiple committees in the EU Parliament, including ENVI, EMPL, ECON, DEVE or AFET, voted for the inclusion of medium-sized companies operating in high risk sectors as well as all listed SMEs, in their opinions on the Commission’s CSRD proposal. These proposals are backed by the results of a study by the German Sustainable Finance Research Platform indicating that hundreds of thousands of companies contributing to the majority of negative environmental impact in their respective sectors are currently not covered by the CSRD. Co-legislators must address these shortcomings during the trilogue negotiations to ensure SMEs are adequately incorporated in the legal framework. Co-legislators must address these shortcomings during the trilogue negotiations to ensure SMEs are adequately incorporated in the legal framework.

On a positive note, the European Parliament has included notable improvements, specifically:

  • Further specification of the disclosure of sustainability targets and transition plans in line with the Paris climate agreement, additional guidance for the development of mandatory EU standards on climate matters, as well as the alignment of due diligence related disclosures with the recent proposal for the EU Corporate Sustainability Due Diligence Directive and the prioritisation of specific high-risk industries for the development of sector-specific standards.As shown by the research of the Alliance for Corporate Transparency, most companies failed to disclose relevant, material and comparable sustainability information pursuant to the current legislation (i.e only 36% out of 1000 EU companies were reporting in 2019 on their climate targets at all and less than 1 out of 4 was providing information on its human rights due diligence process). Ensuring that companies’ sustainability reporting focuses on the right data is critical for addressing systemic sustainability issues, in particular climate change and human rights abuses in European companies’ value chains. It is also key to enabling a sustainable finance system to succeed, and businesses’ ability to make informed decisions and successfully adapt to a fast-changing world.
  • Removal of the exemption for large companies that are subsidiaries of groups to report sustainability data. The initial proposal from the EU Commission included a full exemption for subsidiaries, which would undermine the level playing field and create a major gap in transparency, especially in highly concentrated sectors or in smaller EU Member States where the market is mostly dominated by large subsidiaries of foreign groups. The EU Parliament’s position (both in JURI as well as in other committees) will enable key stakeholders, in particular investors, to get access to information on parent companies as well as individual subsidiaries in their portfolios, and contribute to mobilise much needed resources for the transformation of national economies.

Last but not least, the European Parliament is proposing a one year delay compared to the original proposal, therefore asking all large companies to disclose according to the new rules and standards as of 2024 (reports published in 2025). Multiple stakeholders, including leading investors, asset managers and civil society organisations published a statement earlier this year warning against any further delays and outlining the urgent need for all users of sustainability data to get this information. Russia’s military attack on Ukraine has accentuated the issue of energy security for the EU as well as the urgent need to become independent from fossil fuels (see REPowerEU: Joint European action for more affordable, secure and sustainable energy communication). The CSRD and the accompanying EU standards are one of the main tools to ensure the successful implementation of the EU Green Deal and Sustainable Finance agenda – the roadmap that needs to be accelerated to transition away from the production and import of fossil energy resources.

Susanna Arus, Communications and EU Public Affairs at Frank Bold states: “An ambitious agreement needs to be reached before summer between co-legislators to avoid further delays. The final CSRD text should incorporate changes proposed by the Parliament that aim to strengthen the quality and relevance of corporate transparency on sustainability matters and dismiss counterproductive proposals that reduce the scope of companies or delay the implementation of a reform key to the transition and resilience of the EU economy.”

Caroline Avan, Publish What You Pay France coordinator said: “Giving special attention to  the most polluting and harmful industry – oil, gas and mining companies – is the bare minimum. Exposing their real impacts has never been more urgent. As the current situation in Ukraine demonstrates, the European Union needs to accelerate the transition away from fossil fuels – this is also key for the success of the Green Deal. The trilogue now gives a last chance for MEPs to be clearer on what they expect from extractive companies: information on their projects’ social and environmental impacts. This can only be ensured by the publication of project contracts with host governments – which too often still remain secret. The trilogues now give MEPs one last opportunity to raise the bar.”

Julia Linares Sabater, Senior Sustainable Finance Policy Officer at WWF European Policy Office, says: “We are glad to see the Parliament could raise the ambition on the content of the reporting requirements, as quality and comparability are currently missing around sustainability information. However, we deeply regret to see the European Parliament is less ambitious scope-wise than the Commission and the Council, leaving out SMEs from the scope of the Directive (99.8% of the economy). The Parliament introduces a delegated act to identify high-risk sectors, a new key concept introduced by the Parliament,but it is unfortunately not properly connected to the scope of the file.”

Aleksandra Palinska, Senior Research and Advocacy Officer at Finance Watch, said: “Sustainability risks may lead to widespread and profound financial impact on companies and their operations. Neglecting sustainability risks, whether by large, medium-sized or small companies, has knock-on effects that can lead to economic disruption and financial instability.”

Giorgia Ranzato, Sustainable Finance Officer, Transport & Environment: “We highly welcome the European Parliament’s intention to increase the ambition on the content of the disclosure requirements. However, we remain quite worried about the restriction of the scope that leaves out all SMEs, even listed ones.”

Martin Rich, Co-founder & Executive Director of Future-Fit Foundation says: “We greatly welcome the fact that the CSRD is so widely supported across the European Parliament and that many of the proposed improvements have been approved. However, it is clear that much work remains to be done during the final negotiations. Exempting SMEs from the scope eliminates a huge part of the economic system and risks relegating the Directive to being a burden for large companies rather than the catalyst for positive change that it could and should be. We also cannot afford to delay implementation – the environmental, social and geopolitical costs are simply too high.

Richard Gardiner, Senior Campaigner on Corporate Accountability, Global Witness: “It is encouraging to see that the Parliament has put climate reporting at the forefront of their position and we expect this to be carried forward by co-legislators as a key part of the future agreement. To make this reporting meaningful and create a clear process for climate due diligence, the final agreement must also link to the recently proposed Corporate Sustainable Due Diligence Directive.

Mirjam Wolfrum, Director Policy Engagement, Europe at CDP Europe says: “CDP Europe welcomes the European Parliament’s inclusion of more detailed requirements for transition plans – specifying sustainability reporting under the climate mitigation standard – to require disclosures on all scopes of GHG emissions and alignment of business models with the requirements of the Paris agreement – we however stress the need for transition planning requirements that are in line with the latest science. CDP particularly welcomes the introduction of requirements for time-bound and measurable science-based targets in the reporting for a companies’ strategy. CDP regrets the exclusion of listed SMEs from the scope – SMEs need to take climate action to build business resilience, gain competitive advantage, keep up with supply chain demands and policy regulation, and meet consumer expectations. Larger companies already cascade climate action down the supply chain to their suppliers –many of which listed SMEs; their elimination puts SMEs at risk as their lack of disclosure may make it more difficult to attract investments and expand business.”

Claudia Saller, Director, European Coalition for Corporate Justice: “The wide support for the CSRD is a much needed step forward for the sustainability of the European economy, however, the exclusion of SMEs in the vote of the European Parliament is a massive obstacle for access to information on sustainability risks and on actual or potential negative impacts of a large amount of European companies. Linking the final agreement to the ambitions of the Corporate Sustainability Due Diligence Directive will be crucial to ensure that the EU’s leadership on corporate transparency translates into a resilient and fair global economy.”

Finance Watch Joint statement – European Parliament leaves SMEs out of CSRD scope

More information on the Alliance for Corporate Transparency page.