Public Consultation on Sustainability Reporting Standards for SMEs Launched

EFRAG, the group tasked with preparing initial drafts of the European sustainability reporting standards, recently launched two consultations seeking feedback on sustainability reporting standards to be used by SMEs.

The first consultation relates to standards for listed SMEs (LSMEs) prescribed by the Corporate Sustainability Reporting Directive (CSRD). These standards are a sub-set of the European Sustainability Reporting Standards (ESRS) introduced by CSRD. As part of this consultation, EFRAG is seeking input on the Exposure Draft ESRS for LSMEs (ESRS LSME ED). 

The second consultation relates to standards for non-listed SMEs. The preparation of these standards has not been mandated by CSRD and is driven instead by a market need for sustainability reporting standards for non-listed SMEs that align with the ESRS which large companies and LSMEs are required to report against. As part of this consultation, EFRAG is seeking input on the Exposure Draft for the voluntary reporting standards for non-listed SMEs (VSME ED).

On 20 February 2024, EFRAG held a Public Consultation Outreach event for SMEs. This follows on from the launch of their public consultations on 22 January 2024, which we covered in our February update.

ESRS LSME exposure draft

The purpose of the ESRS LSME ED is to set reporting requirements that are proportionate and relevant to the scale and complexity of the activities and to the capacities and characteristics of LSMEs. This is expected to support LSMEs getting better access to finance as it will result in the availability of standardised sustainability information. The ESRS LSME ED applies not only to listed SMEs (i.e. those SMEs whose securities are admitted to trading on an EU regulated market) but also to small and non-complex institutions and captive insurance and reinsurance undertakings as such entities are defined in CSRD.

The LSME ED consists of one standard composed of six general sections and is based on reporting being undertaken on an individual company basis. While EFRAG stated that the LSME reporting standards may also be a useful tool for non-listed SMEs, it was stated that the level of simplification in the voluntary SME standards was not compatible with the minimum disclosures that were needed by investors from LSMEs i.e. the information to be disclosed in line with the VSME ED and the ESRS LSME ED is not comparable.

VSME exposure draft

Non-listed SMEs fall outside of the scope of the sustainability reporting obligations introduced by the CSRD. Recognising that such companies may wish to voluntarily report on sustainability matters that are material to their businesses, EFRAG has published the VSME ED and seeks input on the establishment of separate voluntary sustainability reporting standards for non-listed SMEs.

While adherence to these standards will be voluntary, it can offer several advantages for SMEs. For example, reporting against these standards will be beneficial to those non-listed SMEs that do business with companies that are required to report under CSRD as it should assist with responding to requests for sustainability information from such companies. Reporting against these standards may also help non-listed SMEs understand and anticipate sustainability opportunities and challenges for their businesses.

Taking a proportionate approach to the preparation of these standards, EFRAG have developed a ‘modular’ framework for these standards relating to sustainability reporting for non-listed SMEs. The structure and format of these modules has been primarily based on reoccurring questions received by business partners of SMEs in their CSRD reporting. It was acknowledged that guidance provided to non-listed SMEs may also be useful for non-EU SMEs where a company within their group structure falls within scope of the sustainability reporting obligations under CSRD.

This proposed modular approach consists of a basic module, which may be used on its own, or with either the business partner module (the BPM) or narrative module. While there was positive feedback provided on the VSME ED during the recent outreach event EFRAG emphasised that the usefulness of these standards will entirely depend on market acceptance of them.

The basic module

The proposed basic module is intended to be the base layer of reporting for those reporting on a voluntary basis.

This module consists of 12 disclosures, split across the E, S and G topics, and also relates to transition practices a company may take towards a more sustainable economy. As a means to simplify and reduce the burden on SMEs, the concept of ‘double materiality’ set out in the ESRS is replaced with an ‘if applicable’ concept.

To further demonstrate a degree of flexibility, EFRAG have stated that SMEs may choose to comply with the basic module (in its entirety), and some elements of either the BPM or the narrative modules. This ensures non-listed SMEs have the flexibility to adhere to standards which suits their own needs and the needs of those in their value-chain.

The business partner module

The BPM consists of 11 disclosures. These 11 disclosures are based on information that may be requested by lenders, investors and business partners; and are inspired by the principal adverse impacts’ information sought under the Sustainable Financial Disclosures Reporting (the SFDR).

While the sustainability matters set out in the BPM are consistent with that for large companies in-scope of the CSRD, the materiality assessment guidance has been simplified, and the language is consistent with the SFDR.

The narrative module

The proposed narrative module is intended for use by those non-listed SMEs that have an advanced system in place to manage sustainability matters, with policies, actions and targets in place that they use to report on; a double materiality assessment will be required under this module. This module will consist of five disclosures on the following topics:

  • Disclosure N 1 – Strategy: business model and sustainability related initiatives.
  • Disclosure N 2 – Material sustainability matters.
  • Disclosure N 3 – Management of material sustainability matters.
  • Disclosure N 4 – Key stakeholders.
  • Disclosure N 5 – Governance: responsibilities in relation to sustainability matters.

Next steps

The public consultations on these Exposure Drafts are open until 21 May 2024 and respondents have been asked to provide their responses by using online questionnaires, one questionnaire for the ESRS LSME ED and another for the VSME ED.

Separately, EFRAG are currently running a field test on the ESRS LSME ED and VSME ED which focuses on feasibility, costs, challenges, benefits and usefulness of the individual disclosures and suggested improvements to the EDs. However, it was recently highlighted by EFRAG that they are facing difficulties in securing non-complex credit institutions and reinsurers to participate in the field test.

As the LSME standards are mandated by CSRD, there is a set timeframe for these standards to be in place by. The European Commission is required to adopt these standards by 30 June 2026, and they will take the form of a Delegated Act under CSRD.

As the preparation of non-listed SMEs standards is not mandated by CSRD, there is no specific timeline for the finalisation of these standards and the preparation of reports by non-listed SMEs in line with these standards. However, it is worth flagging the VSME ED may be amended slightly depending on stakeholder feedback to the consultation.

For more information in relation to this topic, please contact Jill Shaw, ESG & Sustainability Lead. With thanks to Meadhbh Jones for her assistance in the preparation of this article.

Date published: 27 March 2024