SMEs and ESG Reporting : Navigating the new CSRD draft for voluntary compliance

december 2023
5 min read

SMEs have an important role to play in the European Union's sustainable transition. EFRAG (European Financial Reporting Advisory Group) seeks to be part of this movement with the publication of the draft ESRS indicators for SMEs. This organization is responsible within the European Union for recommending accounting standards and, a fortiori, for producing and developing ESRS, the non-financial reporting standards. With this draft, they have taken the first step in the CSRD for SMEs, which is to reshape their approach to sustainable practices.

The Role of SMEs in Europe's Ecological Transition

According to the Eurobarometer, “the EU counts 23 million SMEs, employing around 100 million people and accounting for more than half of Europe's GDP. However, their collective share in total emissions is high, at 63% of all CO2 emissions by companies”.

Thus, they are not just economic engines but also vital contributors to environmental sustainability. Their agility puts them in a unique position to implement sustainable practices and innovations. The potential of SMEs to lead the way in green technologies and sustainable business practices is immense. They are becoming key players in Europe's environmental transition, setting new standards in sustainability and inspiring a wider movement towards a greener economy.

EFRAG, which develops European accounting standards, including those related to the CSRD

CSRD as a Lever for Transparency for SMEs

The introduction of the CSRD marks a significant milestone in the sustainability journey of European SMEs. It requires these companies to report transparently on their environmental impacts and sustainability efforts at three different levels.

First, the lightest reporting requirement, called the Basic Module, includes 11 basic metrics and is broadly consistent with the framework of 11 of the 12 ESRS building blocks - 2 cross-cutting, 5 environmental, 3 social and 1 governance.

Secondly, the Narrative-PAT Module focuses on dual materiality issues through the publication of your Policies, Actions and Targets (PAT). It requires companies to carry out a materiality assessment to determine the significance of sustainability issues and to report on both the impact on people and the environment (impact materiality) and how sustainability issues create financial risks and opportunities (financial materiality). They must present their actions - the concrete steps and initiatives the company is taking to implement its sustainability policy - and targets - the specific goals and objectives the company has set to measure the effectiveness of its sustainability actions over time.

Third, the Business Partners Module provides additional data points needed by business partners, investors and lenders. This module also requires a materiality analysis.

Next Steps for SMEs Wishing to Report

This move towards greater transparency not only ensures compliance, but also significantly enhances the market standing and reputation of SMEs. It creates a framework in which companies are encouraged to reflect on their operational practices and align them with the broader goals of environmental protection and sustainability. For example, the CSRD, which applies to larger companies, emphasises comprehensive sustainability reporting, indirectly influencing SMEs to adopt similar practices for consistency and competitiveness in the marketplace.

They have until 31 July 2024 to submit comments to EFRAG on the draft CSRD. Finally, they can start preparing for the entry into force of the CSRD. The path to compliance with the CSRD can be informed and inspired by case studies of SMEs that have successfully followed this path, demonstrating the tangible benefits of integrating sustainable practices into their business models.‍

SMEs are at the forefront of Europe's environmental transition, and the CSRD serves as a key tool to promote sustainability and transparency. The Directive is not just a regulatory requirement, but an opportunity for SMEs to consolidate their commitment to sustainable practices and position themselves as leaders in the ecological transition. As we look to the future, the role of SMEs in shaping a sustainable and environmentally conscious landscape is undeniable and critical.

December 2023
5 min read