ESG Reporting for SMEs: What to Expect and Main Challenges

For many large corporates in Europe, sustainability has already shifted from merely a response following societal pressure to a critical strategy concern, now deemed paramount by executives. A recent study from Verdantix showed that 33% of companies identified the CEO vision as the primary force propelling sustainability commitments.

Emerging ESG frameworks, such as the Corporate Sustainability Reporting Directive (CSRD) and EU Taxonomy aim to drive companies to increase the transparency and comparability of their ESG data. These standards go beyond simple compliance, as ESG performance is expected to have a big impact on accessing finance in the future.

Among SMEs, it is common for CEOs to wonder still why they should care about their sustainability performance. Indeed, only a small share of SMEs fall under the mandatory scope of Sustainable Finance, with standards such as the simplified ESRS, the Voluntary SME ESRS (VSME), or any simplified ESG reporting framework. As a result, small organisations tend to delay starting their reporting strategy and continue running their day-to-day business. Nevertheless, SMEs would greatly benefit from starting their ESG strategy and reporting today. Let's find out why.

In this article, we will cover:

• Small And Medium-Sized Enterprises (SME) and Sustainable Finance
• The Indirect Impact of CSRD on SMEs
• ESG Reporting: What Should SMEs Expect?
• The Challenge for SMEs
• When Sustainable Performance Meets Financial Performance

Small And Medium-Sized Enterprises (SME) and Sustainable Finance

Within the European Union, a small and medium-sized enterprise (SME) is defined based on its staff headcount, turnover, or balance sheet total. This type of company accounts for 99% of all enterprises in the EU, and with 25 million European SMEs employing almost 100 million people, they play a critical role in the economy and the environment.

In the context of the CSRD and the EU Taxonomy, an SME is defined based on specific criteria. From 2026, these frameworks will apply to SMEs that are listed on regulated European markets and meet at least two of the following conditions: a balance sheet total of EUR 5 million or above, a net turnover of EUR 10 million or above, or an average of 50 or more employees during the financial year.

The European Financial Reporting Advisory Group (EFRAG) is developing a set of proportionate European Sustainability Reporting Standards (ESRS) specifically for Listed SMEs, and a voluntary set of ESRS aimed at the rest of SMEs. Similarly, a non-binding light EU Taxonomy is also in development.

Read our dedicated article for more information on simplified ESRS for SMEs.

The Indirect Impact of CSRD on SMEs

While only listed SMEs under certain criteria are legally mandated to comply with the CSRD, it is worth noting that all organisations on the market face the repercussions of the biggest ESG reporting regulation implemented to this day.

Pushed by their own reporting obligations and ESG strategy, banks and investors are requesting ESG data from their portfolio companies, including smaller organisations, whilst large corporates are already asking their suppliers to provide insights on their ESG performance.

Trends show that consumers increasingly favour more sustainable companies. As a result, not only will banks or investors progressively refuse to finance unsustainable SMEs as they integrate ESG risks in their portfolio evaluations, but larger corporates will also select the most sustainable providers to improve their sustainability performance. For instance, more and more corporates are expected to exclude catering providers that do not have a zero-waste policy, ask suppliers to sign ESG codes of conduct or enquire about Bcorp scores.

ESG Reporting: What Should SMEs Expect?

ESG reporting is still in its early days. With multiple frameworks existing already and many more emerging, SMEs will find themselves receiving many conflicting or uncoordinated requests shortly.

Concretely, SMEs will receive multiple ESG questionnaires from various stakeholders asking for different information: banks, investors, customers, public bodies, etc. Each request could be different in terms of content and format.

Nevertheless, at a high level, SMEs will be asked to:

• Describe sustainability policies in place
• Declare the actual or potential Principal Adverse Impacts on sustainability matters (this is essentially how the SME activity can have a negative impact on the environment) and the actions in place to monitor, prevent, mitigate, or remediate such actual or potential adverse impacts
• List the main risks linked to ESG matters that are or could impact the SME and how those risks are managed
• Report specific KPIs related to the above matters

In the long run, the industry will mature, and reporting frameworks will standardise. As mentioned in our last section The EFRAG, advising the European Commission, is currently working on a "light CSRD" framework and a "light EU Taxonomy" dedicated to SMEs which are simplified versions of the existing frameworks that target larger corporates, all in order to delineate and limit the information SMEs may be required to disclose.  

Other new standards are emerging, offering simplified frameworks aimed at assisting SMEs in their sustainability reporting. One notable example is the impact scoring platform (ISP) a collaborative effort by Finance&Invest.Brussels and Greenomy to streamline ESG reporting for SMEs considering their resource constraints.

All in all, while the beginning of sustainability reporting by SMEs may take time to disrupt the market, it is anticipated that investors will soon prioritise sustainable companies, leading to a flow of capital in these businesses. Likewise, corporates will favour the most sustainable suppliers to improve their sustainability scores.

In other words, good ESG performance will be a prerequisite to access (more affordable) financing and most importantly win and keep customers. Sustainability is becoming a fundamental competitive advantage.

The Challenge for SMEs

But ESG reporting, just like for larger corporates, is also bringing its own set of challenges for SMEs. When trying to provide the requested data for their ESG reporting, SMEs are facing key issues:

• Financial constraints: As reporting requirements grow, the amount of resources SMEs can dedicate to reporting does not necessarily grow with them. This inability to allocate increasing resources to ESG reporting differentiates SMEs from Large companies and creates a divide in the data that can be delivered, both in quality and quantity.  In addition, SMEs are less likely to possess the resources that larger companies can use to invest in “bypasses” such as consultants or tools to improve their reporting capabilities.
• Lack of expertise: As smaller and sometimes younger enterprises SMEs may lack the skill and knowledge to understand, collect, and share the requested data, in a way that meets EU standards. This is considering that without additional funds for training or hiring, the burden of reporting may fall only on the existing human resources of the enterprise.
• Absence of existing data: Setting up robust data collection processes is complex and expensive for smaller companies. This process may be further complicated by the possibility of that data not being there at all. The issue of ESG reporting does not fall only on the inability to report but the inability to have the information needed.
• Lack of incentive: There is a lack of clear incentives to comply with the requests. SMEs are still trying to understand what is the benefit for them to comply with these new ESG frameworks. For the moment, it is seen as a new cost centre, and they don’t perceive the related opportunity that could accelerate their business. This is coupled with the fact that for most SMEs, reporting is a voluntary process. Although this voluntary reporting may become an important tool for SMEs to attract investment later on, some SMEs simply cannot afford to report without a clear goal or simply do not know what to prioritise to make reporting feasible in the future.

How can SMEs get Started?

This fundamental shift of business-to-business (B2B) buyers and financial players prioritising sustainable projects can be seen as a threat, but it represents a considerable opportunity. It is critical for SMEs to immediately start working on a plan not only to report but also to improve their ESG performance.

Depending on the size and priorities of your organisation, you may have one or several individuals in your ESG reporting team. Regardless, initiating the reporting journey will require identifying an 'ESG Reporting Lead' or any designated title, who will typically follow these steps to get started.

1. Assess your ESG goals: This step should include the decision-makers of your company to make sure that your sustainability objectives are aligned with the business goals. Base your targets on what “sustainability” means for your organisation. Among others: What is material? What affects/is affected by climate change, biodiversity, and social equity?
2. Define the needs for reaching these goals: Identify what you need to achieve compliance considering human resources, necessary software, training needs, etc. Then set realistic timelines for your ESG goals.
3. Create your ESG reporting team: Regardless of the size of your organisation, Sustainable Frameworks will require input from various departments. This step is important to identify the individuals who will need to be involved, assess the roles and responsibilities for the ESG projects, pinpoint the potential candidates responsible for each of them, and train them. Training should include information on climate risks and opportunities for your business, details about the relevant ESG frameworks for your organisation as well as soft skills to facilitate a seamless reporting process.
4. Start your reporting: Once your plan is set and your team’s roles and responsibilities are clearly defined, it is time to get started on the reporting. The first step is to collect and integrate the data from the various sources and formats. You will likely need a Data Expert within your team, or from an external company, and robust software to manage these inputs. Get in touch with us to discuss Greenomy’s API & Integration Services to streamline your ESG reporting.
5. Improve your sustainability: Define a plan to offer more sustainable services and/or products in the near future: How will you be in a position to benefit from the transition to a decarbonised economy? Also, consider sustainability initiatives that will enhance your ESG performance outside of your core business, such as installing solar panels on your building. Keep in mind to begin acting with small steps.

By following these steps to structure your ESG reporting strategy, you will bring organisation and thoroughness to your ESG reporting process, ensuring a seamless compliance journey.

When Sustainable Performance Meets Financial Performance

While only listed SMEs under certain criteria will be legally bound to report on their ESG performance in the coming years, smaller organisations are increasingly finding themselves pressured to disclose this information. Whether requested by investors, suppliers, or customers, transparency regarding ESG performance is becoming indispensable for SMEs. This is why staying ahead of this trend is essential.

Are you eager to kickstart your green transition? Greenomy provides a comprehensive solution, guiding businesses of all sizes through every phase of your sustainability journey. From automated ESG data collection to AI-driven tailored recommendations, we ensure a seamless and effective process to generate ESG reports.

‍Get in touch with our team of experts to discuss the Greenomy Company Portal, helping smaller and bigger businesses report and improve their Sustainability.