The European Financial Reporting Advisory Group (EFRAG) has introduced a set of voluntary sustainability reporting standards tailored specifically for non-listed small and medium-sized enterprises (SMEs). These standards aim to bridge the gap between sustainability objectives and the operational capacities of smaller businesses, aligning with the European Union’s broader sustainability goals. Unlike mandatory standards for larger companies, EFRAG's voluntary approach for SMEs recognizes the resource constraints and diverse nature of smaller enterprises while encouraging them to integrate sustainability into their business models.
In a world deeply impacted by climate change, businesses can take the lead in sustainable development by creating great change. This change in today’s business practices is paired with sustainability reporting, which enhances transparency and accountability, ensuring that businesses are aligned with their goals and with global sustainable development plans. While sustainable development is heavily dependent on large enterprises and governments, SMEs can still take part in this global initiative.
Sustainability reporting is crucial for SMEs as it enables them to assess and communicate their ESG impacts. By adopting sustainability reporting, SMEs can identify resource efficiencies, reduce costs, and enhance their resilience to environmental and market risks. Additionally, it helps them meet the growing demands of consumers, investors, and business partners for transparency and accountability.
Reporting not only strengthens their competitive edge in increasingly sustainability-conscious markets but also opens doors to green financing and partnerships, fostering long-term growth and positive societal contributions.
SMEs play a pivotal role in the global economy, contributing significantly to employment and GDP. However, their sustainability efforts often go unrecognized due to a lack of standardized frameworks tailored to their scale. Many face challenges such as limited financial and human resources, making compliance with comprehensive reporting frameworks like the Corporate Sustainability Reporting Directive (CSRD) burdensome.
EFRAG’s voluntary standards provide SMEs with an accessible entry point to sustainability reporting, enabling them to demonstrate their commitment to ESG goals without the pressure of regulatory compliance. These standards are essential for promoting inclusivity in the EU's sustainability transition, driving sustainable growth across all businesses.
EFRAG’s new voluntary reporting standard is specifically catered to non-listed small and medium-sized enterprises (SMEs) in the EU. These businesses are defined based on their balance sheet total, net turnover, and average number of employees during the reporting year.
Micro enterprises are businesses that do not exceed two of the following thresholds:
Small businesses do not exceed two of the following thresholds:
Lastly, companies are medium-sized if they do not exceed two of the following thresholds:
The Voluntary Sustainability Reporting Standard for non-listed SMEs (VSME) is structured with two modules businesses can use to report their annual sustainability performance. The Basic Module consists of the minimum requirements for reporting. This is ideal for micro enterprises and acts as a starting point for reporting for SMEs. On the other hand, the Comprehensive Module adds more details and data points to the Basic Module. This also contains additional requirements that key stakeholders such as banks, investors, and corporate clients may be looking for. When selecting to opt for the Basic Module or both modules, it is important for businesses to consider their company needs, capabilities, and their key stakeholders.
The Basic Module kickstarts sustainability reporting for SMEs by covering valuable and essential company information and ESG metrics. The module includes 11 sections, with the first two covering the basis for preparing the report and the company’s strategies and initiatives focused on transitioning towards a sustainable economy. Reporting companies have to disclose their practices, policies, future plans, and targets related to sustainability. In addition, strategies to reduce the negative impact they have towards people and the planet are also discussed in the report.
Sections B3-B7 of the module then cover the basic environment metrics in the report. This includes metrics and details on energy consumption, greenhouse gas emissions, land, water and air pollution, biodiversity, water, and resource use, circular economy and waste management.
For social metrics, the Basic Module details on general characteristics of the company’s workforce, along with data on employee health and safety, and remuneration, collective bargaining and training. Lastly, the Basic Module also covers governance metrics such as reports and fines for corruption and bribery.
Some businesses may wish to further amplify their reporting strategy by making it more robust and comprehensive, catering to specific needs that may be asked from key stakeholders. The Comprehensive Module builds on the Basic Module by adding more datapoints to consider when reporting.
Here, general information becomes more specific. In the module, businesses add more description and detail to their business model, sustainability-related initiatives, and their practices and policies related to a sustainable transition.
ESG metrics also have more details in the report. The module now also includes reporting on Scope 3 emissions, GHG reduction targets and climate transition plans, and climate-related risks the business may have. As for social metrics, the report will also contain additional workforce characteristics, human rights policies and practices, and reports on severe negative human rights incidents. Lastly, the governance metrics will also include revenues from certain sectors and exclusion from EU reference benchmarks, and the gender diversity ratio in the governance body.
For SMEs planning to use the VSME Standard, it is important to evaluate its use based on business goals, capacity, and future plans to enhance sustainability in the business.
EFRAG’s Voluntary Sustainability Reporting Standards for SMEs represents a significant step toward inclusive sustainability practices. This practical and scalable framework empowers SMEs to contribute meaningfully to global ESG goals.
For SMEs, adopting these standards is not just an opportunity to align with regulatory trends but also a strategic move to enhance competitiveness, resilience, and trust. As the sustainability landscape evolves, the widespread adoption of these standards could position SMEs as important drivers of sustainable economic growth in the EU and beyond.
At Keslio, we are deeply passionate about sustainability reporting, having the expertise and extensive network needed to guide clients through their sustainability journey effectively and efficiently. Our expertise is particularly valuable for companies looking to embed sustainability practices into their businesses and investors looking to integrate ESG and impact into investment portfolios.
To learn more about how Keslio can assist your organization in its sustainability journey, reach out to us here or through hello@keslio.com
