With its Commission Work Programme 2024, adopted on October 17, 2023, the European Commission emphasized its commitment to reduce reporting requirements by 25 per cent. While the Commission promises to cut bureaucracy, the Corporate Sustainability Reporting Directive (CSRD) is looming.

The CSRD imposes substantial new disclosure and compliance requirements on companies. Under the widened scope, companies will be required to report sustainability information on par with financial information and to have their reports externally audited – many companies, including some small and medium enterprises, for the first time.

The expected impact of the CSRD on companies is substantial. There is no EU-wide estimate of the administrative burden. However, the individual member states’ assessments serve as a clear indication. The German federal government estimates that under a 1:1 transposition of the directive, companies will incur a one-time cost of 846 million euros and ongoing annual compliance costs of 1.58 billion euros. The Danish Ministry of Business estimates 10.75 billion kroner (1.44 billion euros) once and 7.55 billion kroner (1.01 billion euros) annually, reflecting a 16 per cent increase in the overall annual compliance costs since 2022. The total European and global impact will be this many times over.

As the CSRD is just one among an ever-increasing volume of rules, criticism grows louder. Particularly critical are German companies. For 95 per cent of those surveyed, cutting red tape is by far the most pressing economic policy issue in the EU.  Bureaucracy has become so prominent in the EU that, for the vast majority of its citizens, the most accurate descriptor for the EU is ‘bureaucratic’.

Systematic Problem…

But why is ‘bureaucratic’ the most common descriptor for the EU? The propensity for bureaucracy is rooted in the EU’s structure, decision-making process and the nature of its mandate.

The EU must consider the individual interests as well as the political and legal traditions of the member states, and sometimes detailed and comprehensive regulations bridge those differences more easily. By consolidating regulatory frameworks, the bureaucratic burden overall is reduced.

However, because these regulations are often highly visible and perceived as imposed from above, the perception of the EU as overly bureaucratic is amplified, with the remaining burden frequently attributed to the EU alone. National governments sometimes exploit this perception. They have blamed the EU for regulations, even when they supported them at the EU level. Often, when member states add to the burden by exceeding the EU’s requirements, the extra strain is misattributed to the EU.

… or Strategic Solution?

In some respects, the EU is a victim of its circumstances, but there is more to it. The CSRD is a prime example of how the European Commission uses bureaucracy to further its goals.

With the European Green Deal, the Commission strives to make Europe the first climate-neutral continent and to transform its economy into a sustainable one. The CSRD is a key component of the Sustainable Finance Agenda, which seeks to redirect capital flows towards sustainable investments taking into account environmental, social and governance (ESG) considerations. The Commission is anticipating well-informed market actors shifting their behaviour towards sustainability. It is counting on investors, business partners and civil society actors, ‘which wish to better hold undertakings to account for their impacts on people and the environment’. (CSRD recital 9)

The Commission also hopes that the reporting helps companies ‘to identify and manage their own risks and opportunities related to sustainability matters’ and to help ‘improve their reputation’. (CSRD recital 12) Thus, it is counting on companies to self-regulate.

The EU also leverages its market power to extend its influence. EU standards often become de facto global standards as companies adopt them for practical reasons as such and pass them on to international business partners. (See Policy Paper Green-Taping: The Single Market – Walling-Off or Gates to Sustainable Globalization)

Therefore, bureaucratic regulations are not necessarily an expression of a lack of understanding for companies and the economy. Instead, they represent a strategic effort to harness companies and the economy to advance public policy, to push for consumer rights, human rights and climate action.

And Promise of Cutting Red Tape?

Naturally, there is broad consensus that unnecessary bureaucracy should be reduced. Unnecessary bureaucracy is, after all, unnecessary. As to what bureaucracy is unnecessary, not so much. The mounting criticism and the fast-approaching deadline of 6 July 2024 compelled the EU to postpone the adoption of standards for two years.

Nevertheless, the Commission maintains that “[s]ustainability reporting is critical for the green transition and for transparency towards investors. In the medium- and long-term standardised reporting requirements means less burden on companies – not more.“

This bureaucracy, the Commission deems necessary.

Will the Commission be proven right? Determining the efficacy of sustainability reporting is difficult. While the negative impact of the regulation is obvious and immediate, its positive impact is intangible. Will companies and other market actors make use of the reports? How much of an impact on environmental and social issues will they have? Danish business and employers’ organizations, at least, are optimistic. One organization even suggests that it could become a competitive advantage for Danish companies, as they are ahead of their competitors in terms of sustainability.

It Is Not Just about Money

Cutting red tape is, however, not only about efficacy or net positives. It is also about whether this is how we want the EU to govern and to engage with companies, citizens and global partners. The EU coming off as a heavy-handed regulator that prioritizes its agenda over the concerns of the regulatee and over international relations, damages its standing, ultimately undermining public support.

But what if the EU decides to hold course? Then it needs to ensure that its policies promote not just compliance but genuine progress. If the EU believes that well-informed market actors shift their behaviour towards sustainability, it needs to make its regulatory impact, both positive and negative, more visible. Getting on board is easier with a clear sense of the journey ahead.

Written by Charlotte Zeller

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