The Corporate Sustainability Reporting Directive (CSRD) framework marks a transformative shift in the European Union’s (EU) reporting landscape, compelling large companies and Small and Medium Enterprises (SMEs) to disclose their environmental and social impact activities. By aligning with global initiatives like the Paris Climate Agreement and the EU Green Deal, the CSRD framework enhances transparency and sustainability integration in the Environmental, Social, and Governance (ESG) landscape.
The European Financial Reporting Advisory Group (EFRAG) has developed European Sustainability Reporting Standards (ESRS) for all companies subject to CSRD. Following these standards enables accuracy, consistency, and comparability of ESG reporting for both large and small firms in the EU.
Background & History of CSRD:
The CSRD is a new European Union (EU) directive/regulation mandating both large companies and SMEs to regularly disclose reports on their environmental and social impact activities, such as climate change adaptation & mitigation, circular economy, equal opportunity for all and human rights, among others.
The CSRD expands upon the existing Non-Financial Reporting Directive (NFRD) that exclusively focuses on evaluating the non-financial performance (specifically environmental and social performance) of large public companies in the EU.
The EU initiated the CSRD in April 2021 and implemented it in January 2023 by replacing the NFRD. The CSRD directive aligns with the EU’s commitment to foster a sustainable economy and achieve carbon neutrality as outlined in the Paris Climate Agreement and the EU Green Deal. Companies are required to follow ESRS reporting requirements to adhere to this directive.
While the EFRAG has developed comprehensive and mandatory ESRS for large companies and simplified standards (listed SMEs ESRS) for listed SMEs in the EU, it has further developed a “Voluntary ESRS framework for non-listed SMEs (VSME ESRS)” for non-listed SMEs within the scope of the CSRD.
While the CSRD reporting is argued to be an additional burden for companies by certain stakeholders including, regulators, others view that this directive holds untouched advantages for companies, investors, and society at large to foster a new era of transparent, accountable, and comprehensive sustainability reporting for companies in the EU.
Benefits of company reporting CSRD:
- Improved Reporting Transparency: The CSRD enhances the transparency of sustainability information, providing investors with data required to make informed decisions. Greater transparency means greater investor confidence, which further helps firms gain customer trust, increase sales, and improve market reputation.
- Improved Stakeholder Confidence: CSRD enhances stakeholders’ in-depth understanding of a company’s sustainability practices and risks, potentially leading to increased stakeholder confidence and favorable market valuation for firms operating in the EU.
- Integration of Sustainability Practices within Corporate Strategy: The directive’s emphasis on detailed ESG disclosures facilitates deeper integration of a company’s sustainability practices with corporate strategies, leading to the development of a resilient and adaptable business model.
- Making Sustainable Investments: Mandating companies to disclose their management of ESG risks and opportunities helps investors identify organizations that are better positioned to address future sustainability challenges. Such companies can seek bigger strategic investments and take bold operational decisions to enhance long-term sustainability.
- Developing a Sustainable Business Strategy: The CSRD’s mandate for reporting on business models and strategy gives an opportunity for companies to design their sustainability vision and integrate this vision within their business strategy.
- Promoting Innovation: The CSRD creates an opportunity for companies to promote innovation and accountability in their business operations, showcasing their impact on long-term value creation. This can help companies increase opportunities for sustainable growth.
Voluntary ESRS framework for non-listed SMEs (VSME):
Non-listed SMEs, although not directly subject to CSRD reporting, face increasing demand for sustainability data from business partners and investors. The simplified VSME ESRS framework enhances the sustainability/ESG reporting efforts of non-listed SMEs by ensuring their unique disclosure needs are met alongside the rising needs of the stakeholders.
The VSME ESRS encompasses three modules: the Basic module, the Narrative-Policies, Action, and Target (PAT) module and the Business Partner module. These modules are strategically designed to uphold relevance, faithfulness, comparability, understandability, and verifiability in the SMEs’ reporting of non-financial information.
Why should non-listed SMEs consider VSME reporting?
The VSME framework provides non-listed SMEs with the flexibility to customize their sustainability reporting based on data availability and stakeholders’ requests. For example, if water disclosure is considered for reporting under VSME standards and if the pertinent data is available and accessible to the firm for this specific disclosure, companies can include it in their reports. However, if the data is unavailable, companies have the option to exclude it, providing transparent documentation of the reasons for non-disclosure.
By adopting these standards, non-listed SMEs demonstrate their commitment to sustainability and stand a chance to potentially increase their market access across investors, business partners, and consumers.
SMEs can gain the following advantages by adopting VSME ESRS:
- Secure funding by building trust with investors.
- Achieve a competitive edge by appealing to socially conscious consumers, thereby boosting sales.
- Identify and manage potential ESG risks.
- Foster open communication with stakeholders, enhancing trust.
- Improved access to supply chains and establishing transparency and trust with suppliers.
- Innovation, efficiency, and long-term sustainability within their operations meeting stakeholder expectations.
Developing customized ESG standards and instilling a sustainability culture are crucial for helping SMEs achieve impactful transformation. The EFRAG makes this process easy by developing simplified guidelines for non-listed SMEs through VSME ESRS.
Summary
The CSRD marks a paradigm shift in sustainability reporting for both large and small-sized companies in the EU, presenting a valuable opportunity for them to boost transparency, integrate ESG into core business strategies, manage risks effectively, and articulate a clear and sustainable business model.
For non-listed SMEs, VSME standards offer them with improved access to funding, a competitive edge in terms of attracting socially conscious consumers, effective ESG risk management practices, enhanced stakeholder communication, better access to supply chains, and the ability to innovate.
Embracing VSME ESRS demonstrates a commitment to sustainability, which is closely monitored by consumers, investors, and partners for potentially expanding market access for SMEs.
The customized approach of VSME ESRS facilitates meaningful sustainability reporting for non-listed SMEs, helping them align with the broader trend towards sustainability reporting as a regulatory requirement and an opportunity to build trust, enhance transparency, accountability and contribute to a more sustainable future. Incorporation of VSME ESRS reporting in non-listed SMEs can lead to long-term benefits for enterprises, business partners, investors, and society at large.
How NeoImpact can help:
Complying with the CSRD standards and developing the right approach for sustainability reporting is a major challenge for many companies in the EU as they lack the right implementation tools for success. When it comes to SMEs, this becomes more challenging due to the limited availability of data and the highly customized reporting requirements, particularly under CSRD.
Neo Impact specializes in crafting tailored sustainability reports that adhere to the criteria outlined in CSRD and VSME standards. We offer comprehensive support to organizations seeking to meet their sustainability reporting obligations by leveraging our proficiency in data collection, powered by collective intelligence. Our approach offers seamless transition and compliance with CSRD reporting requirements. Neo Impact offers the following services:
- CSRD Gap Analysis/Risk & Impact Assessment: We conduct thorough evaluations to identify gaps between current ESG reporting standards and CSRD requirements. Our assessments delve into potential risks and opportunities within business operations while analyzing their impacts.
- Double Materiality Assessment: We navigate the double materiality process meticulously based on EFRAG guidelines. This includes comprehensive ESG materiality mapping, identification of relevant reporting frameworks, and thorough regulatory studies across industry sectors and global regulatory landscapes.
- Compliance Strategy Development: We collaborate with clients to devise customized ESG strategies aimed at achieving CSRD compliance. This involves establishing clear timelines, planning for resource allocation, and creating & delivering effective communication strategies.
- CSRD Training and Capacity Building: Our team conducts targeted training sessions on CSRD aimed at raising awareness about CSRD and its related practices and ensuring accurate collection of company-wide ESG information.
- Stakeholder Engagement Facilitation: We facilitate stakeholder engagement processes to gather valuable input and feedback from key stakeholders such as investors, customers, employees, and communities.
Furthermore, our expertise extends beyond large and listed companies to encompass non-listed firms. We maintain a comprehensive repository of taxonomy designed to help both listed and non-listed companies fulfill their CSRD reporting requirements.
At Neo Impact, we’re committed to navigating the complexities of CSRD, enhancing transparency in ESG disclosures, and showcasing companies’ dedication to sustainable practices.
