Focus on SMEs: EFRAG publishes new consultation drafts

published on 26 February 2024 | Reading time approx. 2 minutes

Why SMEs voluntary reporting can be beneficial

On January 22, 2024, EFRAG published consultation drafts for two new sustainability standards for SMEs. The standards are to be applied for the first time in the financial year 2026 (deferral until the financial year 2028 is possible). However, this grace period for SMEs until 2026/2028 only applies to a limited extent, as large enterprises already demand complete and transparent sustainability information from their smaller business partners to demonstrate their own sustainable practices. This poses significant challenges for many SMEs. EFRAG's solution is to further develop sustainability standards for SMEs to improve the availability of sustainability data and create a standardized data set.

Background

 Since this financial year, companies that were already subject to the Non-Financial Reporting Directive (NFRD) are now subject to the Corporate Sustainability Reporting Directive (CSRD). The CSRD reporting obligation will be gradually expanded in the coming years. Starting from the financial year 2026, in addition to all legally large enterprises, all listed small and medium-sized enterprises (SMEs) - excluding micro-enterprises - must publish sustainability-related information in their management report. The reporting obligation can be postponed until the 2028 financial year.

Requirements for SMEs

According to Article 19a (6) CSRD, the sustainability reporting requirements for SMEs are lower than for large companies. These requirements are issued by the European Financial Reporting Advisory Group (EFRAG).

On January 22, 2024, EFRAG published consultation drafts for two new sustainability standards for SMEs:

the ESRS LSME (ESRS for listed small- and medium-sized enterprises),which is aimed at listed SMEs
the ESRS VSME (Voluntary ESRS for non-listed small- and medium-sized enterprises), which is aimed at non-listed SMEs.

Both published drafts can be commented online until May 21 2024 and may be modified at a later date.

Standards for SMEs of Public Interest: ESRS LSME ED

The ESRS LSME sets a standard tailored to the complexity and capacities of SMEs. It defines information that companies must disclose to explain their material impacts and risks related to environmental, social, and governance sustainability aspects.

The following entities fall within the scope of the ESRS LSME:

Small and medium-sized enterprises that are of public interest and do not qualify as micro-enterprises
Small and non-complex institutions
Company-owned insurance companies
Company-owned reinsurance companies

The ESRS LSME is structured into six sections. The first two sections are cross-cutting and cover general requirements and disclosures. Section three covers policies, actions, and targets and is to be applied with section two and the thematic sections. Thematic sections four, five, and six list the areas of Environment, Social, and Business Conduct. Both the cross-cutting and thematic sections apply across industries.

Standards for non-listed SMEs: ESRS VSME ED

In the future, the ESRS VSME can be voluntarily adopted by non-listed micro, small, and medium-sized enterprises. The aim is to assist companies in improving their sustainability management and to facilitate the response to requests for sustainability information that SMEs receive from business partners.

The standard consists of the following three modules:

Basic Module
Narrative – Policies, Actions and Targets (PAT) Module
Business Partner Module

Non-listed SMEs have various options for preparing a sustainability report by selecting one or more of the mentioned modules.

The Basic Module represents the target approach for micro-enterprises and establishes the minimum requirements for other companies. The module on narrative strategies, actions and targets is recommended for companies that have already formalized and implemented them. The module on business partners defines data points that are likely to be included in the data requirements of lenders, investors, and corporate customers of the company. A materiality analysis is required to complete the modules, with the exception of the basic module.

Outlook

After the public consultation period for the drafts ends, they might still be modified. The final version of the standards for SMEs will be adopted by the Commission as a delegated act by June 30, 2024.