Uncertainty abounds over German government’s backtracking on EU’s sustainability reporting rules

As the year 2024 was ending and policymakers across Europe prepared to take their Christmas break, the outgoing German government sent a letter to the European Commission to halt a key policy pillar of the EU Green Deal, which was supposed to take effect also in Germany only days later. On 1 January 2025, the expanded Corporate Sustainability Reporting Directive (CSRD) introduced new sustainable finance rules for thousands of companies across the EU.

Signed by chancellor Olaf Scholz and his ministers for the labour, finance, the economy, and justice, the letter called for the postponement of the CSRD’s expansion by two years and exempt smaller and medium-sized enterprises (SMEs) from the new reporting duties altogether. EU directives are legislative acts that set out goals that EU countries must achieve, but they must be translated into national law by each member state. They were given until mid-2024 to do so, but Germany’s outgoing coalition government failed to meet this deadline.

Scholz and his ministers, fellow Social Democrats (SPD) Hubertus Heil and Jörg Kukies, the Green Party’s Robert Habeck and non-affiliated former Free Democrat (FDP) Volker Wissing instead argued that the new set of regulations would come at an inopportune time given Germany’s economic challenges. The last-minute intervention was therefore meant to “avoid unnecessary burden for businesses” that must ensure compliance, news agency Bloomberg reported.

The move comes at a critical moment for Europe's sustainable finance efforts, which are poised to face a tough test under the incoming U.S. administration and economic challenges in the EU's largest economy. Like many other key energy and climate policy projects, the reporting directive's implementation became a victim of the coalition government's collapse and has been sidelined by campaigns for the upcoming snap elections on 23 February.

The expanded CSRD, which has already been in place for larger companies since last year, would gradually increase the number of companies in the EU subject to mandatory sustainability reporting from less than 12,000 to nearly 50,000 in the coming years until 2028, according to figures released by Germany’s labour ministry. In Germany alone, some 13,000 companies would be obliged to adopt the rules as a prerequisite for accessing capital markets, the ministry of justice said.

The first reports by major companies are due in 2025, while all other large companies operating in the EU would become included in the scheme as well in the same year. In 2026, the CSRD is supposed to start to apply also for small- and medium-sized enterprises (SMEs) that are active on the equity market, meaning most will have to start gathering data in advance.

In its letter, the German government said mandatory reporting should apply by 2027 and exemptions for SMEs apply to companies with up to 1,000 employees, rather than with a maximum of 250 employees as originally planned.

Many of Germany's SME fear efforts to ensure timely compliance were made in vain

For environmental NGO WWF, election campaigning tactics are the most likely reason for the German government’s last-minute change of heart. “Parties are trying to outdo each other with promises to reduce bureaucracy,” WWF finance expert Laura Niederdrenk told Clean Energy Wire. This could be seen in the uncoordinated way Scholz’s chancellery, and the ministries had communicated their step, as well as the efforts to blame Germany’s current economic woes on excessive regulation.

But what could be possible economic benefits of Germany’s call to the EU Commssion? Given that the wellbeing of SMEs were cited as one of the main reasons for the government’s step-back from the policy that had been in the making for years, the reaction of Germany’s Federal Association of Small and Medium-Sized Enterprises (BVMW) to the delay has been lukewarm. Uncertainty over the course of action currently was the overriding sentiment for most company leaders, said BVMW sustainability expert Marie-Theres Husken.

“Many affected SMEs have prepared as much as possible,” Husken told Clean Energy Wire. “Softening the rules at the EU level certainly would provide some relief to SMEs already struggling with bureaucracy and other hurdles. However, it would also mean that companies who already prepared themselves and have explored the topic did all this in vain.”

Many companies indeed appear to be less worried about the reporting duties than the German government’s warning call might suggest. A 2024 survey on CSRD preparedness among companies from nearly 40 countries, including 65 businesses registered in Germany, by consultancy PwC found that most of them were optimistic about their ability to navigate the new regulatory framework and had taken steps to prepare. In Germany, nearly two thirds of the surveyed companies said they are well prepared for the CSRD’s expansion – especially regarding the data they are already reporting on in other contexts.

Like many other consultancies, PwC stands to greatly benefit from new regulation on climate action that leads companies to seek counsel for ensuring compliance and avoiding fines. However, a majority also said the regulation comes with challenging staffing requirements, poses technical hurdles regarding data aggregation, and requires a difficult breakdown of supply chains.

In a position paper submitted to parliament in late 2024, the industry lobby group Association of German Chambers of Industry and Commerce (DIHK) had called for an “urgent reform” of the CSRD and other European frameworks to ensure “practicable” rules and avoid “excessive regulation” that would be “out of proportion” especially for small and medium-sized companies. The DIHK said the CSRD’s introduction would come at an inopportune time given the Germany’s current economic woes.

BVMW expert Husken stressed that the relevance of SMEs for the economy is much higher in Germany than in many other EU states, “As a result, EU laws are often modelled on big companies and fail to consider the conditions for smaller ones,” who usually operate on a much smaller budget and with fewer people to take on additional duties, the SME association expert said. This could also be one reason why many SMEs are oblivious to their sustainability reporting duties, as a recent survey in Germany showed.

Legal limbo could damage smooth transition towards more sustainable investments

The most valuable contribution policymakers could make would be planning security, Husken concluded. “It’s important that the CSRD’s implementation does not come as a surprise.” However, the outgoing German government had neither implemented the EU regulation nor secured an official postponement or reform, leaving businesses in a state of limbo over sustainability reporting duties.

The Institute of Public Auditors in Germany (IDW) at the end of last year anticipated that companies could be left in the dark over their immediate duties in 2025. “It was clear that there would be legal uncertainty” because of the coalition government’s collapse, IDW board member Melanie Sack commented in November. The IDW therefore released a legal opinion on what companies would have to expect in case the government failed to agree on the CSRD’s implementation.

It found that earlier legislation would still apply and the CSRD would remain void in Germany due to having no legal foundation and ruled out a retroactive application to bygone business years. In another announcement at the end of the year, IDW said companies would be free to choose to what extent they apply the new regulation.

For Matthias Hübner, head of the Green and Sustainable Finance Cluster Germany (GSFC), the government’s U-turn on ESG disclosure therefore provides an “example for creating unnecessary uncertainty” that is “harmful at a time when companies are already dealing with a lot of ambiguity.” Postponing long-agreed deadlines would not be beneficial for any company, the head of the finance-industry sponsored initiative told Clean Energy Wire. Since most of Germany’s SMEs have subsidiaries in other EU countries, they would at least to some extent be affected by the expanded CSRD in 2025 anyway, Hübner argued.

While Hübner added that is worth debating the  about the effectiveness and efficiency of regulation, he said suggesting that the general outline of sustainable finance rules is still up for debate would only complicate companies’ transition efforts further. “The main question financial market actors need answered is ’which investments will be future-proof and which won’t be’.” Planning security cannot be achieved if sustainable finance instruments such as the CSRD or the EU taxonomy are reopened and go through EU’s legislative process another time. “This might blur expectations and open the door for lobby groups to water down certain parts.”

However, beyond the German’ government’s intervention, also the European Commission under Ursula von der Leyen is likely to announce changes to its sustainable finance framework – and Germany is not alone in seeking to influence the outcome of these reforms. The so-called ‘omnibus’ legislation that von der Leyen plans to introduce later this year is likely to touch upon the EU taxonomy and related policies, such as the Corporate Sustainability Due Diligence Directive (CSDDD) that is meant to ensure environmental and social standards in supply chains.

Even the European Investment Bank (EIB) voiced concerns over a “reputational disaster” if the new and stricter ESG classification is applied. According to internal emails seen by the Financial Times, the EIB’s head of operations, Jean-Christophe Laloux, warned that the new so-called Green Asset Ratio would trim the EU development bank’s ratio of climate-friendly investments from currently 50 percent under its own EIB standard to about 1 percent. However, the EIB's internal standards have been criticised for lacking transparency.

Germany's wavering course undermining ESG efforts at critical moment - NGO

The German calls for slowing the integration of ESG criteria also preceded a backlash to sustainable finance across the Atlantic: Six of the country’s largest banks in early January all left the U.S. version of the Net Zero Banking Alliance, following Trump’s re-election as president who is a longstanding critic of the concept. The banks’ example then was swiftly followed by world’s biggest investment firm BlackRock which quit the Net Zero Asset Managers Initiative.

Back in Europe, several large companies from France warned against efforts to water down the EU’s sustainable finance push in a direct response to Germany’s call to delay the new sustainability reporting standards. The companies, including energy company EDF, urged lawmakers to stick with agreed milestones for the integration of ESG criteria, Bloomberg reported.

WWF sustainable finance expert Laura Niederdrenk criticised the German government’s approach at a difficult time for strengthening ESG criteria globally. Instead of tinkering with the agreed regulation, Germany should work towards strengthening the law as it stands, especially given the EU Commission’s own plans to cut down and bundle regulation in its “omnibus” proposal. “This course of action undermines established European decision procedures and thus weakens the EU’s ability to act,” Niederdrenk argued.

Many countries in the EU, including Germany, have received warnings over failure to apply the CSRD regulation on time. The WWF finance expert said the German government was lacked a clear stance on the matter, given that the deadline for reply to the EU’s infringement procedure is due in early 2025.

The government might use SMEs as a mere pretext for watering down reporting duties, whereby larger companies would be subjected to weaker requirements and smaller ones be allowed to participate on a voluntary basis, Niederdrenk said. “But especially SMEs will need investments in the transformation to make their business model fit for the future,” she added. This would become much easier to obtain thanks to reporting duties and associated company transition plans, which come with an inbuilt risk-assessment effect that benefits future-proof business models.