The Corporate Sustainability Reporting Directive (CSRD) requires undertakings to report their sustainability performance. However, the directive also recognises that large undertakings and small and medium-sized enterprises (SMEs) may not have the same resources or capabilities to comply with these requirements.
The CSRD relies on the European Sustainability Reporting Standards (ESRS) for companies to report consistent, comparable, and transparent sustainability data. In order for this to be an accessible goal for SMEs, the European Financial Reporting Advisory Group (EFRAG) introduced a simplified version of the ESRS for SMEs. These standards are designed to be proportionate to the size and complexity of SMEs, and to take into account their specific needs and circumstances.
EFRAG expects to publish the ESRS LSME Exposure Draft for public consultation in January 2024 and to issue its technical advice ESRS LSME in November 2024.
Recap on the ESRS: CSRD’s Disclosure Standards
The European Sustainability Reporting Standards (ESRS) were introduced under the Corporate Sustainability Reporting Directive (CSRD) by the EFRAG as a set of disclosure standards to standardise ESG reporting. Officially adopted at the end of July 2023, the ESRS are designed to provide a common framework for companies to report on their sustainability performance, making it easier for investors and other stakeholders to compare and assess the sustainability of different companies.
In practice, the ESRS cover 12 ESG areas, grouped into four categories. Firstly, the Cross-cutting standards establish general requirements applicable to all subjects covered by the CSRD. Then, the sector-agnostic or topical standards, also known as the ESG standards, encompass the Environmental, Social, and Governance matters. Collectively, these standards incorporate around 1,200 data points for reporting. Besides the sector-agnostic standards, the ESRS will have a set of sector-specific standards, which were recently delayed for two years, until 2026.
Why the Need for Simplified ESRS?
The simplified ESRS are a welcome development for SMEs, given the increasing importance of ESG reporting for smaller businesses. Financial institutions and stakeholders actively seek to collect standardised data for informed, sustainable investments. ESG reporting then serves as a strategic move for SMEs, allowing them to stay competitive, gain trust, and align with the growing global trend towards sustainable business practices. However, SMEs, often constrained by limited resources, face challenges in meeting these demands. This is precisely this issue that simplified ESRS aim to address.
Beyond facilitating informed decisions, simplifying reporting for smaller businesses constitutes a significant stride for global sustainability. SMEs represent 90% of businesses worldwide and 99% of the EU’s economy, wielding substantial economic influence. Their active involvement in ESG reporting holds the potential to substantially impact sustainable practices on a broader scale.
All in all, making ESG reporting accessible to SMEs through simplified ESRS allows a considerable market share to engage in the initial step towards sustainability – diagnosis. From there, small companies can formulate actionable strategies to actively contribute to the transition.
Who is Subject to the Simplified ESRS?
SMEs Required to Report
The simplified ESRS are designed for listed SMEs, sometimes referred as LSMEs, that are within the scope of the CSRD, as a derogation to the ESRS for large undertakings.
It is worth mentioning that the European Commission amended the thresholds for companies in October 2023, as the criteria, corresponding to the thresholds found in the Accounting Directive, remained unchanged since 2013. The inflation-based adjustment of the size criteria is by 25%, and the new criteria will apply for financial years beginning on or after 1 January 2024.
Considering these new thresholds, listed SMEs are now eligible if they exceed at most two of these criteria:
- Average number of employees < 50
- Balance Sheet < €5 million
- Net Turnover < €10 million
Nonetheless, listed micro-enterprises are exempt from the scope of the CSRD.
No official numbers are currently available based on the new size thresholds, however, prior to the update, the SMEs in scope were estimated by EFRAG to be about:
- 700 listed SMEs*
- 2,300 Small and Non-Complex Credit Institutions (SNCI)
- 300 Captive insurances and reinsurances
*Listed SMEs from the third country should be added to this number as they fall within the scope of the CSRD. However, the exact number of these SMEs has not yet been estimated by the EFRAG secretariat.
Among these, Germany lead the pack with over 20% of the listed SMEs and 50% of the SNCI in scope. This drove Germany to seek a redefinition of SMEs, a move aiming to protect their “Mittelstand”. Based on the previous size criteria, this update would result in an 8,000-organisation reduction in the scope of the CSRD since SMEs are only obligated to report under CSRD if they are publicly listed. This scenario would consequently exempt 16% of these encompassed SMEs from reporting under CSRD.
While these numbers do not account for the recent amendments to the Accounting Directive thresholds, the number of employees, one of the key points in the “Mittelstand” debate, remained unchanged.
The second most represented country was Poland with 17% of the eligible listed SMEs and 20% of the SNCI.
Small and Non-Complex Credit Institutions in the EU were estimated to be over 2.300 organisations, with almost 50% represented by Germany, 20% by Poland, and 16% by Austria.
SMEs Not Legally Required to Report
On top of companies mandated by the CSRD, other SMEs have the option to voluntarily disclose their sustainability initiatives or be requested to do so by banks, investors, and stakeholders. To incentivise this, the EFRAG is developing a voluntary, simple, and standardised methodology to report on ESG matters, which will be known as the Voluntary SME ESRS or VSME ESRS.
As a result, SMEs have several options for their voluntary ESG reporting. They can align with the CSRD framework, utilising the Simplified ESRS, opt for the forthcoming SME Relief Package, or explore emerging frameworks continuously enhancing reporting processes. One noteworthy framework is the Impact Scoring Platform (ISP), a collaborative effort by Finance&Invest.Brussels and Greenomy to streamline ESG reporting for SMEs.
This non-financial criteria-based platform identifies company risks and opportunities, enhancing investment success rates. Developed to revolutionise investment standards in Belgium and globally, SMEs and investors embrace the platform alike for generating comparable ESG data and sustainability assessments.
What Needs to be Reported under the Simplified ESRS?
Diving into the drafting of the simplified standards, the diversity of target groups included in the scope of the LSME has required to adopt a two-layer approach:
- a sector-agnostic layer has been designed for the listed SMEs,
- a sector-specific layer was set for smaller banks and captive insurance and reinsurances.
As a consequence, SMEs do not have any sector-specific standards.
The EFRAG is designing the simplified ESRS as a standalone document, based on the first set of ESRS for large undertakings and amended as appropriate. This is a key simplification for LSMEs which can rely on a dedicated standalone framework, and also for the regulator who can ensure full reconciliation between the first set of ESRS and LSME ESRS (building-block approach), thus facilitating the maintenance and future upgrade of the LSME ESRS.
Furthermore, based on the premise that the users of LSME ESRS are the same as the users of the reporting of larger undertakings, the General Principles of LSME ESRS have been kept the same as that of the first set of ESRS, with differences deriving only from the requirements of CSRD.
Given the specificities of SMEs and in particular, the need to develop requirements that are proportionate to their organisation and resources, user tests and outreaches are particularly important in the development of the LSME ESRS. In this light, the drafting approach also included questionnaires addressed to key stakeholders, users, and relevant expert groups, which have the chance to contribute widely to the development of the LSME ESRS.
When Do SMEs Need to Report?
Recognising the need for adequate preparation, EFRAG is offering extended time for SMEs to accommodate CSRD requirements. Listed SMEs are mandated to report on the calendar year 2027, using data from the financial year 2026. However, SMEs have the option to postpone reporting for two years under the CSRD. Their compliance requirement is thus deferred to 2029, necessitating reporting for the financial year 2028. This derogation does not apply to SNCI and captives.
Key Characteristics of the Simplified ESRS
As for the official ESRS, the simplified ESRS require listed SMEs to report on environmental (E), social (S), and governance (G) matters, both qualitatively and quantitatively. The reporting should cover material impacts and risks, while opportunities remain voluntary.
It is worth noting that the LSME ESRS focuses on individual reporting, without provisions for consolidated group reports. However, listed SMEs may be exempted from individual sustainability reporting if included in the consolidated management report of a parent company conducting consolidated sustainability reporting, subject to specific conditions.
The simplified ESRS are still under development, but, to ensure proportionality, they are expected to include the following key features:
- A focus on materiality: The simplified ESRS will only require SMEs to report on sustainability matters that are material to their business.
- A simplified materiality assessment process: The simplified ESRS will provide guidance on how SMEs can conduct a simplified materiality assessment.
- A reduced number of reporting topics: The simplified ESRS will cover a reduced number of reporting topics compared to the ESRS for large undertakings.
- A simplified reporting format: The simplified ESRS will use a simplified reporting format that is easier for SMEs to follow.
The development of LSME-ESRS follows a "building-blocks" approach, building upon the first set of ESRS for large undertakings with necessary adjustments. The goal is the simultaneous availability of standards for both listed and non-listed SMEs. Currently, the simplified standards contain information taken from ESRS 2, S1, G1, and E1. Additionally, LSME ESRS also aims for alignment with ISSB. The standards are largely aligned with IFRS S1 and S2, prioritising simplifications for LSME.
Getting Started with ESG Reporting as an SME
Whether the simplified ESRS, the Impact Scoring Platform, or other simplified ESG reporting frameworks, these resources serve as invaluable tools for SMEs to assess and enhance their sustainability performance. Facilitating ESG reporting is a crucial stride towards SMEs' active involvement in the transition to a sustainable economy.
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.
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