Sustainability Reporting for Non-Listed SMEs: A Comprehensive Guide to VSME ESRS

VSME: a Framework to Standardise ESG Reporting for SMEs

The Corporate Sustainability Reporting Directive (CSRD), represents a transformative leap of the EU Green Deal and Sustainable Finance Initiative. Its adoption by the EU parliament in November 2022 and officially implemented in January 2023 marked a significant legislative advancement with substantial impacts on companies falling under its scope, making it the cornerstone of ESG reporting within the EU.

In the sustainability reporting landscape of the European Union, the European Commission tasked the European Financial Reporting Advisory Group (EFRAG) with developing the sustainability reporting standards for the CSRD, known as the ESRS. Among these standards, EFRAG is shaping disclosures for small and medium-sized enterprises (SMEs) with two distinct sets of simplified ESRS. These standards aim to address the reporting needs of listed and non-listed SMEs through proportionate disclosure requirements. 

The ESRS for Listed SMEs (LSME) present a mandatory set of disclosure requirements. However, the Voluntary ESRS for SMEs (VSME) offer a comprehensive framework for non-listed SMEs to enhance their sustainability reporting practices, especially with data demands, as a part of the value chain of larger entities that need to report sustainability information or lenders, credit providers, and investors.

EFRAG's primary objective is to streamline sustainability reporting for SMEs, fulfil the growing number of requests for sustainability data from large entities to SMEs, alleviate burdens, and enhance transparency, all while considering their resources and capabilities.

EFRAG adopted the final version of the VSME on November 13, 2024, and should have been adopted by the European Commission by December 20th, but there have been no updates on the matter. 

This article delves into the background and objectives of the VSME, provides a brief overview of the Corporate Sustainability Reporting Directive (CSRD) and the European Sustainability Reporting Standards (ESRS), and explores the applicability of these standards to various types of undertakings. 

Understanding the Building Blocks of the VSME Framework

The VSME standard is a voluntary framework tailored to undertakings whose securities are not traded on regulated markets within the European Union (remaining unlisted). The CSRD defines and categorises enterprises into groups based on their balance sheet total, net turnover, and average employee count throughout the financial year. Non-listed SMEs fall outside the regulatory scope of the CSRD. Nevertheless, they are actively encouraged to adopt the VSME standard. 

Covering similar sustainability issues to those of the ESRS designed for larger enterprises, the VSME standard operates on the principle of proportionality. This approach ensures alignment with the fundamental characteristics of each undertaking, offering an adjusted path to sustainable reporting that takes into account undertakings’ fundamental characteristics. 

Much like the CSRD, the VSME standard outlines requirements enabling non-listed SMEs to disclose relevant information about the negative impact of their business on people and the environment, as well as how environmental and social issues might affect their financial status, performance, and cash flows. 

The standard is built around two modules: The Basic module and the Comprehensive module. In addition to the disclosure requirements of the modules, it may be appropriate to add additional information to address common sector-specific issues. In the end, the sustainability report should offer information that is relevant, faithful, comparable, understandable, and verifiable. 

Basic Module in the VSME Standard

The basic module outlines relevant requirements and metrics that focus on environmental, social and business conduct aspects of the non-listed SME business. The module also defines narrative disclosures about Policies, Actions and Targets (PAT). Comparative information concerning the previous year will begin from the second year of reporting. Below you’ll find a detailed list of disclosures and metrics mandated by the Basic Module.

Disclosures for the Basic Module 

• Disclosure B 1 – Basis for Preparation
• Disclosure B 2 – Practices, policies and future initiatives for transitioning towards a more sustainable economy
  ‍

Basic Metrics - Environment 

• B 3 – Energy and greenhouse gas emissions 
• B 4 – Pollution of air, water and soil 
• B 5 – Biodiversity
• B 6 – Water 
• B 7 – Resource use, circular economy, and waste management
   

Basic Metrics – Social matters 

• B 8 – Workforce – General characteristics 
• B 9 – Workforce - Health and Safety 
• B 10 – Workforce – Remuneration, collective bargaining, and training
   

Basic Metrics - Business Conduct 

• B 11 – Convictions and fines for corruption and bribery
  ‍

Comprehensive Module in the VSME Standard

This module sets data points to be reported in addition to disclosures in the basic module, that are likely to be included in data requests from lenders, investors, and corporate clients. A Materiality analysis, once introduced as the VSME’s version of the Double Materiality Assessment, is not required to disclose which of the sustainability matters are relevant for the undertaking’s business and organisation. The Materiality Analysis was removed from the standard as a whole. 

Disclosures for the Comprehensive Module

• Entity-specific consideration when reporting on GHG emissions under B 3 (Basic Module) 
• Disclosure CXX – Description of practices, policies and future initiatives for transitioning towards a more sustainable economy.
   

Comprehensive Module - Governance Metrics 

• Disclosure C1 – Revenues from certain sectors and exclusion from EU reference benchmarks
• Disclosure C 2 – Gender diversity ratio in governance body
  ‍

Comprehensive Module - Environmental Metrics 

• Disclosure C 3 – GHG reduction targets and climate transition 
• Disclosure C 4 – Climate risks
  ‍

Comprehensive Module - Social Metrics 

• Disclosure C 5 – Workforce (General) Additional characteristics 
• Disclosure C 6 – Additional own workforce metric - Human rights policies and processes 
• Disclosure C 7 – Severe negative human rights incidents
   

Customisation of VSME Modules

Non-listed SMEs are given the ability to shape their sustainability reporting under the VSME standard by choosing specific modules aligned with their strategic objectives. Two options unfold for these enterprises:

• Option A: This streamlined choice centres on the Basic Module, delving into foundational topics and policies, actions, and targets
• Option B: Focused on cultivating transparent business relationships, this option includes the Basic Module with the Comprehensive Module.
  
  

Additionally, under the VSME, non-listed SMEs must also specify if their sustainability report includes information from subsidiaries (consolidated) or if it is prepared individually.

VSME Framework: Go One Step Further

Curious about delving deeper into the intricacies of VSME? Uncover the secrets of this framework by enrolling in our VSME e-course available on the Greenomy Academy. This free educational platform is designed specifically for professionals seeking to gain a deep understanding of ESG reporting and related disclosures. Sign up today and earn your Greenomy Academy certificate to showcase your expertise.

‍