The EU is violating the principle of democracy

26 April 2022, Munich. The EU has chosen a procedure for adopting sustainability standards that violates EU treaties. At issue is the planned Corporate Sustainability Reporting Directive (CSRD).

The standards necessary for it actually ought to be discussed between the European Parliament and the European Council, but the task of lawmaking has been delegated to the EU Commission. Even the Commission has laid down only a few core points and is leaving the details to an external organisation – “Efrag”, the European Financial Reporting Advisory Group – which is a private consultancy under the influence of interest groups.

Privatisation of EU sovereignty

The procedure is therefore de facto a privatisation of EU sovereignty which is not covered by the EU treaties. This is the conclusion of an expert opinion commissioned by the Foundation for Family Businesses and authored by Martin Nettesheim, Professor of Constitutional, Administrative, European and International Law at the University of Tübingen. Nettesheim points out that this approach also violates the provisions of Germany’s Basic Law. “The decisions of EU lawmakers touch on the right to democracy and constitutional identity. They can therefore be challenged by all Germans in the form of a constitutional complaint.”

As of a certain size, European companies should, in future, not merely report on their business success, but also on their fulfilment of certain ecological and social criteria. This requirement has applied for some years to capital market-oriented companies and is now to be extended, and Efrag is to prepare its future standards. On this basis, the EU Commission plans to adopt “delegated acts” which thus become legal requirements for the affected companies.

Advancing climate action with technological innovations

“It is in line with the spirit of family businesses for politics to promote future-oriented company management”, says Professor Rainer Kirchdörfer, Executive Board member of the Foundation for Family Businesses. “But this must be undertaken with democratic legitimacy and in a legally watertight manner. We cannot have a constant stream of new paper tigers. If the EU’s plans prevail, sustainability reporting will degenerate into occupational therapy for consultants. Instead, the aim should be to drive climate action forward with technological innovation and powerful engineering.”

In his expert opinion, Professor Nettesheim reviews the delegation of European lawmaking to the EU Commission. This violates the materiality principle and the principle of legal certainty (see the Treaty on the Functioning of the European Union or TFEU, Article 290); the aspects regulated here are so material to companies that the determination of these standards in their planned scope cannot be left to the EU Commission. Moreover, the aim and content of the standards has not been laid down precisely enough.

Researcher questions Efrag’s privileged position

Nettesheim also questions Efrag’s privileged position, which he says violates EU constitutional law and contradicts the Treaty on the European Union (TEU) in several points. The CSRD procedure runs contrary to the years-long efforts of the EU Commission to reduce the influence of specific groups and ensure equal access to lawmaking processes.

Nettesheim’s study on EU law compliance of the CSRD standard-setting procedure when it comes to sustainability reporting also looks at other legislative procedures that likewise make use of delegated lawmaking, such as the planned EU supply chain legislation.