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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 () 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鈥檚 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鈥檚 outgoing coalition government failed to meet this deadline.

Scholz and his ministers, fellow Social Democrats (SPD) Hubertus Heil and J枚rg Kukies, the Green Party鈥檚 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鈥檚 economic challenges. The last-minute intervention was therefore meant to 鈥渁void unnecessary burden for businesses鈥� that must ensure compliance, news agency Bloomberg聽.

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,聽聽figures released by Germany鈥檚 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聽.

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鈥檚 last-minute change of heart. 鈥淧arties are trying to outdo each other with promises to reduce bureaucracy,鈥� WWF finance expert Laura Niederdrenk told 麻豆无码版. This could be seen in the uncoordinated way Scholz鈥檚 chancellery, and the ministries had communicated their step, as well as the efforts to blame Germany鈥檚 current economic woes on excessive regulation.

But what could be possible economic benefits of Germany鈥檚 call to the EU Commssion? Given that the wellbeing of SMEs were cited as one of the main reasons for the government鈥檚 step-back from the policy that had been in the making for years,聽the reaction of Germany鈥檚 Federal Association of Small and Medium-Sized Enterprises () 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.

鈥�Many affected SMEs have prepared as much as possible,鈥� Husken聽told 麻豆无码版. 鈥淪oftening 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.鈥�

Many companies indeed appear to be less worried about the reporting duties than the German government鈥檚 warning call might suggest. A 2024聽聽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鈥檚 expansion 鈥� especially regarding the data they are already reporting on in other contexts.

Like many other consultancies, PwC聽stands to greatly benefit from new regulation聽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聽聽submitted to parliament in late 2024, the industry lobby group Association of German Chambers of Industry and Commerce (DIHK) had called for an 鈥渦rgent reform鈥� of the CSRD and other European frameworks to ensure 鈥減racticable鈥� rules and avoid 鈥渆xcessive regulation鈥� that would be 鈥渙ut of proportion鈥� especially for small and medium-sized companies. The DIHK said the CSRD鈥檚 introduction would come at an inopportune time given the Germany鈥檚 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, 鈥淎s a result, EU laws are often modelled on big companies and fail to consider the conditions for smaller ones,鈥� 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聽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. 鈥淚t鈥檚 important that the CSRD鈥檚 implementation does not come as a surprise.鈥� 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. 鈥淚t was clear that there would be legal uncertainty鈥� because of the coalition government鈥檚 collapse, IDW board member Melanie Sack commented in November. The IDW therefore released a聽聽on what companies would have to expect in case the government failed to agree on the CSRD鈥檚 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聽聽at the end of the year, IDW said companies would be free to choose to what extent they apply the new regulation.

For Matthias H眉bner, head of the Green and Sustainable Finance Cluster Germany (GSFC), the government鈥檚 U-turn on ESG disclosure therefore provides an 鈥渆xample for creating unnecessary uncertainty鈥� that is 鈥渉armful at a time when companies are already dealing with a lot of ambiguity.鈥� Postponing long-agreed deadlines would not be beneficial for any company, the head of the finance-industry sponsored initiative聽told 麻豆无码版. Since most of Germany鈥檚 SMEs have subsidiaries in other EU countries, they would at least to some extent be affected by the expanded CSRD in 2025 anyway, H眉bner argued.

While H眉bner added that is worth debating the 聽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鈥� transition efforts further. 鈥淭he main question financial market actors need answered is 鈥�which investments will be future-proof and which won鈥檛 be鈥�.鈥� Planning security cannot be achieved if sustainable finance instruments such as the CSRD or the EU taxonomy are reopened and go through EU鈥檚 legislative process another time. 鈥淭his might blur expectations and open the door for lobby groups to water down certain parts.鈥�

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

Even the European Investment Bank (EIB) voiced if the new and stricter ESG classification is applied.聽聽internal emails seen by the Financial Times, the EIB鈥檚 head of operations, Jean-Christophe Laloux, warned that the new so-called Green Asset Ratio would trim the EU development bank鈥檚 ratio of climate-friendly investments from currently 50 percent under its own EIB standard to about 1 percent. However, the 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鈥檚 largest banks in early January聽, following Trump鈥檚 re-election as president who is聽. The banks鈥� example then was swiftly followed by world鈥檚 biggest investment firm BlackRock which .

Back in Europe, several large companies from France warned against efforts to water down the EU鈥檚 sustainable finance push in a direct response to Germany鈥檚 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聽.

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

Many countries in the EU, including Germany, have received . 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鈥檚 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. 鈥淏ut especially SMEs will need investments in the transformation to make their business model fit for the future,鈥� 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.