Translation:

Although non-listed small and medium-sized enterprises (SMEs) and micro-enterprises are not subject to the mandatory regulatory requirements of the Corporate Sustainability Reporting Directive (CSRD), there are many compelling reasons why they should—or may need to—consider sustainability reporting. Sustainable practices are becoming increasingly important in the eyes of consumers, investors, and employees, making them a strategic differentiator. These and other reasons why sustainability reporting is worthwhile were discussed in our previous article.

An increasing number of SMEs are choosing to report on ESG matters, and the number of companies voluntarily preparing sustainability reports continues to grow. Although the European Sustainability Reporting Standards (ESRS) have already been adopted, they were primarily designed for large companies within the scope of the CSRD. This is where a challenge arises: SMEs fear the significant effort required to collect data, high costs, and financial strain.

Have these concerns been addressed?

The European Financial Reporting Advisory Group (EFRAG) is paving the way for SMEs and has developed two sets of sustainability reporting standards:

• European Sustainability Reporting Standards for Listed SMEs (LSME): These impose mandatory disclosure requirements for SMEs listed on stock exchanges. LSME ensures that such companies provide transparent information about their sustainability practices.

• Voluntary European Sustainability Reporting Standards for SMEs (VSME): These standards offer a framework for non-listed SMEs to voluntarily strengthen their sustainability reporting. Although not legally binding, they encourage companies to implement sustainable practices and communicate them effectively.

Both LSME and VSME have been designed in a simplified manner and tailored to the needs and capacities of SMEs. They emphasize the principle of proportionality, recognizing that SMEs operate differently from large corporations. EFRAG opened these standards for public consultation starting in January, with stakeholders able to submit feedback until 21 May 2024. These simplified standards address sustainability topics similar to those covered by the existing ESRS and are aligned with CSRD principles, ensuring relevance and comparability.

What are the benefits?

As explained by EFRAG, the simplified ESRS aim to standardize the currently widespread and often unsynchronized ESG data requests that can be burdensome for non-listed SMEs (Standardization). In addition, the Voluntary European Sustainability Reporting Standards for SMEs (VSME) aim to:

• Enable SMEs to participate in the transition to a low-carbon economy. Through sustainability reporting, SMEs contribute to broader environmental and social goals (Inclusion in the Transition).

• Facilitate SMEs’ access to sustainable finance channels. These frameworks are intended to ensure SMEs can access funding sources while limiting unfair competition with larger, listed companies (Access to Sustainable Finance).

• Avoid excessive financial burdens on SMEs during the transition process. They acknowledge the limited resources of smaller businesses and promote cost-effective reporting (Cost-Effective Transition).

• Ensure that SMEs meet proportional sustainability criteria expected by stakeholders. This approach takes into account SMEs’ varying capabilities and focuses on material sustainability aspects (Proportional Sustainability Criteria).

• Reduce negative spillover effects (the so-called domino effect). The VSME framework promotes responsible business practices across different types of enterprises (Limiting the Domino Effect).

How is the standard structured?

The VSME standard consists of three core modules: the Basic Module and two additional, optional modules—the Narrative Policy, Actions and Targets (PAT) Module and the Business Partners Module. These modules form the foundation of sustainability reporting.The Basic Module sets out relevant requirements and indicators focusing on environmental, social, and governance aspects of a non-listed SME’s activities. Comparative information with respect to the previous year is required starting from the second year of reporting. Importantly, a materiality assessment is not required to disclose this information. Below is a detailed list of disclosures and indicators required under the Basic Module.

How to implement the VSME ESRS standard?

• Assess applicability: Check whether your company falls within the scope of the VSME standard. If you are not legally required to report, consider voluntary adoption.

• Review the draft standard: As of April 2024, the VSME standard remains in the “Exposure Draft” consultation phase. Participate in the consultation period by submitting feedback via online forms.

• Select appropriate modules: The VSME standard is modular. Choose the modules that best fit your business profile and sustainability priorities.

• Start reporting: Begin collecting relevant data and reporting in line with the selected modules.

• Engage stakeholders: Involve relevant stakeholders (e.g., management, employees, suppliers) in the reporting process.

• Monitor progress: Regularly assess your sustainability performance and update reporting as needed.

Need support to start your sustainability reporting journey?

We are here to help. We will connect you with a network of external partners who offer:

• Expertise: Access to specialists familiar with sustainability reporting standards and practices.

• Solutions: Tools and frameworks tailored to your company’s size and sector.

• Support: Step-by-step assistance with data collection and report preparation.

Your journey toward sustainability matters—and we are here to help you navigate it effectively. Get in touch with us when you’re ready!

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