Growing pressure on sustainability reporting for SMEs in EU

Krista Leppänen’s blog text on the circular economy in sustainability reporting.

The emergence of the European Union’s Corporate Sustainability Reporting Directive (CSRD) has sparked discussions about its impact on small and medium-sized enterprises (SMEs). While direct impacts on SMEs are waiting in the future, some indirect requirements might be surprisingly close. Set to take effect from 2024, the CSRD mandates first that large listed companies gather information according to the new European sustainability reporting standards (ESRS) and publish their first reports in 2025. One of the CSRD’s key changes is its expanded scope of required information, which extends deep into the value chain. Large companies, in their efforts to meet these new reporting standards, will likely start demanding more detailed sustainability data from their suppliers and partners—many of whom are SMEs.

Trickle-down impact on non-listed SMEs

For SMEs, this indirect “trickle-down” impact of reporting requirements (Ahern, 2023) could mean a significant change in procedures. Through large companies subject to CSRD, many SME’s might find themselves needing to adopt new practices, collect detailed data, and improve their overall transparency regarding sustainability, to satisfy the information needs. The results are estimated to be costly for SMEs and stir competition as producers subject to CSRD might prefer more transparent suppliers with more active voluntary ESG reporting activities (Ahern, 2023). While this may seem overwhelming in the scale of SMEs, it can also offer an opportunity for SMEs to participate in larger sustainability goals and potentially gain a competitive advantage.

Recognizing that sustainability reporting can be an added burden for SMEs, especially those not listed, the SME Relief Package proposed by European Commission (2023a) limits the information large companies can request from them. To ease the burden, a simplified set of standards is proposed to be tailored for non-listed SMEs (Voluntary ESRS for non-listed small- and medium sized enterprises, VSME), acting also as voluntary guidelines that companies can adopt to satisfy both CSRD requirements and the expectations of their own stakeholders, such as customers and financers. Another relief to non-listed SMEs is the transition period for larger companies on reporting information from their value chains. This three-year transition time lets large companies to adjust to the new reporting requirements in their own functions, and for non-listed SMEs in the value chain to prepare for the information inquiries they will receive.

CSRD and listed SMEs

Listed SMEs have their turn in 2026 when they start gathering information for reports released in 2027. In the EU, about 1000 SMEs are in scope. However, these companies can opt to postpone their reporting for two years until 2029. The upcoming simplified reporting standards for listed SMEs (LSME ESRS) are designed to optimize the reporting process, making it more manageable for smaller businesses to comply with sustainability reporting requirements.

Arguments for broader obligations to reach all SMEs

While the burden for non-listed SMEs has been a subject to worry, some argue that the exclusion of non-listed SMEs from the direct impact of CSRD has been a disappointment, as SMEs cover substantial economic activity and are responsible for negative environmental impacts (Bossutt et al., 2021). The substantial contribution of SMEs in Europe, representing 99 % of businesses in EU (European Commission, 2023b), contributing to at least 50 % of EU economy and employing of over 100 million people, have raised questions whether the scope should extend beyond listed and large companies, as sustainability matters beyond fund-raising (Chiu, 2022). One recommendation states that CSRD should cover either all SMEs, all SMEs above a certain size, or all SMEs in a high impact sector (Bossutt et al., 2021). As discussions continue, the key challenge lies in finding a balance between regulatory burden and promoting environmental responsibility across different sectors and sizes of companies.

First steps for SMEs

To prepare for upcoming information requirements, SMEs may consider taking small actions already. As for now, the draft of the voluntary ESRS for non-listed SMEs (VSME) has been published for comments but is not yet finalized. This proposed voluntary standard includes proportioned disclosures on environment, social matters and business conduct. In my master’s thesis (2024), I studied SMEs that already publish sustainability reports. These SMEs advised other SMEs to identify what is relevant for the company and then to take small steps to gather information. They also noted that some required information might already be at hand, and that external assistance is often available. Since the upcoming simplified standard calls for metrics such as energy usage, waste management, greenhouse gas emissions, and workforce well-being, SMEs can proactively prepare by establishing procedures for data collection or by assembling and articulating of existing information in these areas.

Krista Leppänen (krista.leppanen@uef.fi)

References

Ahern, D. (2023). The Sustainability Reporting Ripple: Direct and Indirect Implications of the EU Corporate Sustainability Reporting Directive for SME Actors. Forthcoming chapter in: Bartolacelli, A. (Eds.) The Prism of Sustainability. Macerata, Italy: University of Macerata.

Bossut, M., Jüergens, I., Pioch, T., Schiemann, F., Spandel, T. & Tietmeyer, R. (2021). Why it would be important to expand the scope of the Corporate Sustainability Reporting Directive and make it work for SMEs. Sustainable Finance Research Platform, Policy Brief, 8/2021. https://wpsf.de/wp-content/uploads/2021/09/WPSF_PolicyBrief_8-2021_Scope.pdf

Chiu, I. H.-Y. (2022). The EU Sustainable Finance Agenda: Developing Governance for Double Materiality in Sustainability Metrics. European Business Organization Law Review, 23(1), 87–123. https://doi.org/10.1007/s40804-021-00229-9

European Commission (2023a). SME Relief Package. 12 September 2023, COM(2023)535.

European Commission (2023b). Annual report on European SMEs 2022/2023. Luxembourg: Publications Office of the European Union, 2023.

Leppänen, K. (2024) EU:n kestävyysraportointidirektiivin laajentuminen ja pk-yritysten kestävyyssiirtymä. Master’s thesis, University of Eastern Finland. http://urn.fi/urn:nbn:fi:uef-20240266