ESG reporting for SMEs according to EFRAG recommendations

VSME

The "Voluntary ESRS for non-listed small- and medium sized enterprises" (VSME) is aimed at non-listed SMEs and provides a guide for preparing sustainability reports. The voluntary application of the VSME offers a valuable option for the thousands of SMEs that already have to provide sustainability information to banks or large corporate customers, for example when granting loans or initiating contracts.

In January 2024, EFRAG published a first English-language draft.[1]  This standard consists of three modules tailored to the different needs and capacities of SMEs.

1) That basic module (Basic Module) is aimed at micro-enterprises within the meaning of the Accounting Directive, according to the VSME draft[2] and contains the least requirements. The content of the basic module contains a total of around 30 data points and includes, for example, information on greenhouse gases and energy consumption, employee remuneration or activities aimed at a transition to a more sustainable economy. In addition, an explanatory guide is available that contains calculation examples, formulas, etc.

2) That Narrative Policies, Actions and Targets Module (PAT modules) supplements the basic module and is intended for companies that have already defined formalized corporate guidelines, measures and goals with regard to sustainability. If you choose this module, key sustainability aspects must be identified and the strategy and business model must be described in more detail.

3) That business partner module (BP modules) should be able to be used in conjunction with the basic module but also with the basic and PAT modules. It contains additional data that is often required by lenders, investors or business partners of the company. This includes, among other things, the indication of sales in certain sectors, gender diversity ratios or GHG emission reduction targets.

The selection of modules can be flexibly adapted to the needs and requirements of SMEs. While the basic module can be used alone or in conjunction with the PAT and/or BP module, every company can adequately document its sustainability efforts. The VSME draft was available for consultation until May 21, 2024 - a final version is announced for the end of 2024.

LSME

The mandatory "ESRS for listed small- and medium-sized enterprises" (LSME) was developed for small and medium-sized enterprises of public interest. Like the VSME, the draft of the LSME was published by EFRAG in January 2024 and is expected to come into force on January 1, 2026 with an additional two-year exemption.[3]

According to EFRAG, this reporting obligation affects around 140 SMEs in Germany, as well as around 1000 so-called small and non-complex institutions, captive insurance companies and captive reinsurance companies.[4]

This LSME sets out specific reporting requirements to reflect the scale and complexity of smaller companies. It is therefore a smaller and simplified version of the ESRS with approximately 50% fewer data points.

This standard is composed of three general sections: “general requirements”, “general information” and “policies, measures and objectives” as well as three sections dealing with key performance indicators: “environment”, “social” and “business conduct”.

The LSMEs have a value chain cap function. This means that larger companies that collect information along the value chain from smaller companies as part of the CSRD reporting requirements cannot request additional information from companies that already report according to the LSMEs. The LSME therefore represents the upper limit for information along the value chain.

However, EFRAG assumes that in the future, once the standard has achieved a high level of market acceptance, the VSME will also have a “de facto value chain cap function”.[5]

Challenges and opportunities for SMEs

The drafts were open for consultation until 21 May 2024, after which the DRSC, among others, submitted its opinions to EFRAG on its proposals for standards for sustainability reporting by SMEs.

The cover letter can be accessed here.[6]  In summary, it shows that the modular VSME, especially the basic module, is a good starting point for SMEs and their interested parties, but there is still a need to simplify the LSME. It is proposed to design it similarly to the VSME and to include the EU data points (e.g. PAI of the SFDR) in addition to the three modules. This would meet both the specific requirements of the users and the information needs. In addition, the LSME should be applicable at group level.[7]

It remains to be seen in what form the drafts will be adopted. However, it is already clear that sustainability reporting can involve additional effort for SMEs, but also offers great opportunities. By transparently reporting on sustainability efforts, SMEs can strengthen the trust of their stakeholders and position themselves as responsible actors. In addition, they can benefit from improved access to finance and new business opportunities.

Conclusion

Sustainability reporting is no longer an issue that only concerns large companies and corporations. Small and medium-sized companies also increasingly have to deal with the issue of sustainability in order to meet the expectations of their stakeholders and be successful in the long term. The development of specific standards and support from the EU help SMEs to achieve their sustainability goals by adapting to market requirements and regulatory requirements.