Introduction:

In an era marked by growing environmental consciousness and social responsibility, sustainability reporting has become a critical aspect of corporate transparency. While the CSRD, mandates comprehensive sustainability reporting for large public-interest companies, and listed Small and Medium-sized Enterprises (SMEs), non-listed SMEs fall outside the direct scope of this directive and find themselves at a crossroads.

The CSRD and Non-Listed SMEs

The Corporate Sustainability Reporting Directive (CSRD), effective since January 2023 does not mandate non-listed SMEs to report. Yet, their business partners and investors might do so and here is why:

• Being a part of the Supply Chain: Non-listed SMEs often serve as suppliers to large companies. These companies, bound by the CSRD, seek comprehensive sustainability information from their value chain partners. Non-listed SMEs, therefore, face indirect pressure to report sustainability data. Imagine a clothing manufacturer sourcing fabrics from a family-owned textile workshop. The manufacturer’s clients, major retail chains, inquire about the workshop’s labour conditions and environmental impact. The non-listed SME, although not legally obliged to do so, recognises that transparency will ensure continued cooperation. By voluntarily reporting on fair labour, water usage, waste disposal, emissions and other sustainability practices, it secures its place in the supply chain.
• Attractiveness to Investors: Investors are increasingly considering environmental, social, and governance (ESG) factors when evaluating companies. Non-listed SMEs seeking capital need to align with investor expectations. ESG factors affect creditworthiness. An SME with a solid sustainability track record appears less risky, signals a commitment to responsible practices, enhances trust, attracts investment and/or improves access to credit.

The Strategic significance

While not legally binding, voluntary sustainability reporting for non-listed SMEs holds strategic significance:

• Reputation and Trust: Voluntarily reporting on ESG practices enhances an SME’s reputation. Trustworthy businesses attract clients, suppliers, and investors who value responsible conduct. When an SME voluntarily discloses its environmental initiatives, social impact efforts, and governance practices, it signals a commitment that goes beyond mere compliance.
• Competitive Edge: Sustainability is a differentiator. SMEs that proactively report demonstrate forward-thinking. This competitive edge can sway potential clients and partners. Imagine a non-listed SME competing for a contract with a multinational corporation. Both offer similar products, but one has a transparent sustainability report highlighting its efforts to reduce carbon emissions, promote diversity, and engage in ethical supply chain practices. The choice becomes clear—the responsible SME gains a competitive advantage. Sustainable practices are resonating with more and more consumers. As awareness grows, consumers are increasingly seeking products and services from companies that align with their values. Non-listed SMEs that report on their sustainability efforts position themselves as a responsible and ethical choice. This can open doors to new customer segments and markets.

The de facto obligation?

Conclusion

Non-listed SMEs stand at the intersection of voluntary choice and practical necessity. While not directly bound by the CSRD, their strategic interests align with sustainability reporting. Whether voluntary or de facto mandatory, embracing transparency ensures their relevance in an evolving business landscape. To strike a balance between proportionality and transparency, allowing SMEs to provide relevant information without undue burden, European Financial Reporting Advisory Group (EFRAG) is developing voluntary sustainability reporting standards specifically tailored for non-listed SMEs. In our next article, we’ll delve into this topic. Stay tuned for insights and practical guidance!

Are you a non-listed SME looking to embark on your sustainability reporting journey?

Reach out to us. We can support your path towards ESG excellence by linking you with a network of external partners who provide diverse expertise, solutions, and tools tailored to your business needs.