New ESG Standards for Small and Medium Businesses (SMEs) from EFRAG

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The European Financial Reporting Advisory Group (EFRAG) unveiled its latest initiative: two pioneering exposure drafts outlining proposed sustainability reporting standards for small and medium enterprises (SMEs).

This development signals a transformative shift in the landscape of sustainability reporting, particularly under the umbrella of the EU’s Corporate Sustainability Reporting Directive (CSRD).

These drafts are designed to establish new sustainability reporting standards specifically tailored for small and medium enterprises (SMEs).

This initiative marks a critical turning point in the sustainability reporting landscape, aligning with the ambitious goals set by the EU’s Corporate Sustainability Reporting Directive (CSRD).

These drafts are a response to the evolving demands for greater transparency and accountability in business operations, particularly in the context of environmental, social, and governance (ESG) factors.

By focusing on SMEs, EFRAG acknowledges the pivotal role these businesses play in the European economy and their potential impact on sustainable development.

The New ESG Standards for SMEs: ESRS LSME ED and VSME ED

The first draft, the ESRS for Listed SMEs (ESRS LSME ED), targets SMEs classified as public-interest entities. These include entities with securities traded in the EU, smaller financial institutions, and certain insurers.

Scheduled to take effect from January 2026, with an optional two-year deferral, this standard aims to balance reporting requirements with these SMEs' unique scale and complexity.

It's structured to encompass aspects such as general requirements, disclosures, and targeted sections on environmental, social, and business conduct metrics.

Complementing this, the Voluntary Reporting Standard for Non-Listed SMEs (VSME ED) emerges as a tool for non-listed micro, small, and medium-sized enterprises.

It’s designed to streamline the process of responding to sustainability information requests from various stakeholders, aiming to reduce the administrative burden and facilitate their role in the sustainable economic transition.

Related Article: ESRS LSME ED: Sustainability Reporting for Listed Small and Medium Enterprises (SMEs)

The Consultation Process: A Collaborative Approach

The current public consultation process initiated by the European Financial Reporting Advisory Group (EFRAG) is a critical component in the development of the new ESG standards for SMEs, encompassing the ESRS LSME ED and the VSME ED.

This consultation is meticulously crafted to solicit comprehensive feedback on several key aspects of the Exposure Drafts (EDs). The focal points of this feedback include the overall structure and design of the proposed standards (the proposed architecture), how these standards align with the requirements set forth by the Corporate Sustainability Reporting Directive (CSRD), particularly for the ESRS LSME ED, and the role of the LSME ED in establishing a value chain cap for reporting by larger entities.

Additionally, EFRAG seeks insights on the relevance and practicality of the proposed disclosures, the effectiveness of the simplifications made in the drafts, and the market acceptance, especially concerning the VSME ED.

To facilitate a structured and comprehensive feedback process, EFRAG has designed online questionnaires accessible through their website. The LSME questionnaire can be accessed here and for the VSME here.

This bifurcation ensures that feedback is both broad in scope and specific in detail, allowing EFRAG to gauge the standards' effectiveness and applicability accurately.

However, recognizing that certain aspects may not be fully covered by the questionnaire, EFRAG allows respondents the flexibility to attach supplementary documents or letters to their online submissions, providing an avenue for additional comments or insights that might not fit within the questionnaire's structure.

Through this well-organized and inclusive consultation process, EFRAG demonstrates its commitment to developing ESG standards that are not only in line with regulatory requirements but also practically applicable and beneficial for SMEs across Europe.

The Field Test: A Practical Assessment

EFRAG's announcement of the field test for the ESRS LSME ED and VSME ED is a notable step in its journey towards refining ESG standards for SMEs. This field test, as outlined in the press release dated 20 December 2023, offers a unique and practical platform for various stakeholders to actively engage in the standard-setting process.

The deadline for expressing interest in this field test is set for 31 January 2024, marking a crucial opportunity for both preparers and users, including business counterparts, civil society representatives, and academics, to contribute to the shaping of these future standards.

The field test is designed to rigorously assess various dimensions of the proposed standards. Its primary focus lies in evaluating the feasibility, costs, challenges, benefits, and overall utility of the individual disclosures outlined in the Exposure Drafts (EDs).

Additionally, it seeks to gather insights on potential improvements to the EDs, ensuring that the final standards are both effective and practical.

For preparers, the field test involves the preparation and submission of selected disclosures from the EDs by 21 April 2024. This hands-on approach allows preparers to experience firsthand the process of compiling and reporting under the new standards, providing invaluable feedback based on actual application.

It is noteworthy that the field test does not necessitate the testing of the entire standard; participants have the flexibility to select specific disclosures to test, catering to their capabilities and interests. This approach ensures broader participation and diverse feedback.

Following the preparation phase, participants will be invited to participate in workshops or one-on-one interviews. These sessions are designed to facilitate a deeper discussion on their experiences and to collect detailed feedback.

Additionally, those unable to commit to the full preparation of disclosures are still encouraged to partake in these workshops, basing their contributions on their analysis of the EDs.

For users, including lenders, investors, and corporates (both listed and non-listed) with SMEs in their supply chains, the field test offers a separate avenue of participation.

Moreover, organizations that operate platforms or mechanisms for collecting sustainability information from SMEs – used in supply chain management or standardizing data requests – are also invited to participate. Their involvement is crucial in evaluating how these standards integrate with existing data collection and reporting systems.

Interested parties are urged to confirm their participation by contacting VSME@EFRAG.org and LSME@EFRAG.org, contributing to a collaborative effort in shaping the future of sustainability reporting for SMEs.

The Role of SMEs in Sustainable Development

The introduction of these standards marks a pivotal moment in ESG reporting. SMEs, often regarded as the backbone of the European economy, now have a clearer path to integrating sustainability into their operations.

These standards are more than mere compliance tools; they represent a commitment to a sustainable future, where every business, regardless of size, contributes meaningfully to the global sustainability agenda.

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