ECJ EUROPEAN Cleaning Journal

Brussels is rowing back on environmental legislation that is threatening to undermine the client-supplier relationship. The intervention is part of a wider purge of red tape stifling business innovation, investment and growth across the bloc, writes Hartley Milner. 

Business leaders need no telling about the competitive advantages of having strong green credentials in this day and age. But nor do they need the hassle of being diverted from their core activities to deal with endless sustainability data requests from large corporations and financial institutions.

Yet that has become an almost daily distraction for SMEs since the European Corporate Sustainability Reporting Directive (CSRD) came into force in early 2023. The legislation requires companies with more than 1,000 employees to annually disclose, track and measure their sustainability performance, including energy use and greenhouse gas emissions.

Non-listed SMEs – those not publicly traded on a stock exchange – are exempted from mandatory reporting but are encouraged to cooperate with companies that do have to comply. However, to meet their CSRD obligations, reporting corporations have been putting pressure on businesses of all sizes within their value chains to not only disclose their sustainability policies but also align them with their own.

Climate-heating emissions are the most challenging impacts for small businesses to measure accurately. Emissions can come from ‘capital assets’, such as buildings, machinery, computers and equipment, or from the transportation and distribution of goods, raw materials and other supply chain inputs.

Caught off-guard by the complexity of reporting requests, SMEs may not be in a position to respond, which risks giving the impression they are not fully onside with sustainability, or are being uncooperative. Clearly, this perceived ‘can’t do’ attitude can have damaging reputational and customer retention implications.

“SMEs are drowning under different requests and questionnaires from different business partners,” says employer group SMEunited. “Most of the time, the questions they receive are impossible to answer because they simply do not have the data they need to respond.”

As well as sustainability policies and processes, SMEs are being asked about their labour practices, ethics standards, governance framework and the potential for future environmental impacts. Plus they may be requested to produce authenticated information such as hard copies of policy documents, certifications of environmental management systems, specific data on environmental metrics and information about their own supply chain. Any sustainability reports posted on global performance measuring platforms may also be requested.

Formidable hurdles

Implementing a sustainability reporting regime can throw up formidable hurdles, including the cost. Businesses may need to update their technology, buying in tech systems to collate, manage and analyse sustainability data. Limited human resources can make it challenging to allocate staff and budgets to the development and maintenance of reporting practices. Smaller companies may find the reporting process itself intimidating due to their lack of experience and expertise in the area.

“With sustainability reporting, we have focused on the measurement of actions before giving entrepreneurs time to look at what actions to take and how to take actions,” said Sophia Zakari, SMEunited’s director of enterprise policy and legal affairs. “SMEs are facing excessive demands for sustainability disclosures when they were never legally required to provide them. Micro companies, being the majority of European SMEs, are not ready to face this growing demand and it negatively impacts their businesses.”

Solution to dilemma

In July, the European Commission adopted recommendations for a solution to the SME reporting dilemma. Devised by the commission’s technical advisory group, EFRAG, the voluntary standard for SMEs (VSME) sets out to make responding to information requests easier and less time-consuming. The standard is designed for companies of varying sizes, from micro-size (fewer than 10 employees) to small and midsize with up to 250 employees.

The VSME standard comprises a simplified disclosure structure based on two modules:
• Basic: disclosure requirements focusing on key sustainability topics such as greenhouse gas emissions, environmental impacts, workforce and anti-corruption. This module does not include disclosure requirements about company value chains.
• Comprehensive: nine datapoint disclosures likely to be requested by banks, investors and corporate clients. These include a short description of sustainability practices or future initiatives, greenhouse gas reduction targets and sustainability transition plans, as well as value chain disruptions and any exclusions from established EU reference benchmarks.

EFRAG has also provided practical guidance to help SMEs implement the standard.

The European Commission urges large companies and financial institutions to not overload small businesses with information requests but base them on the simplified VSME standard “as far as possible”. SMEs may wish to voluntarily report information to improve their access to sustainable finance and better understand and monitor their sustainability performance, “thereby improving their resilience and competitiveness”.

SMEunited strongly welcomes the voluntary reporting concessions, which it says must become “the unique questionnaire on the market”. However, it flags up that companies would still find compliance with datapoints set out in the VSME standard demanding and would need support with the reporting process. “Member states must work with business organisations at national level to reach out to a large number of SMEs and provide them with the training they need,” the employer group asserts.

The commission stresses that the adoption of the VSME recommendations should be seen as a “stopgap” to satisfy market demand, as the standard may need to be amended following a consultation which will include scrutiny by the European Parliament and Council. Until then, the measures at least provide a safeguard against excessive pressures on SMEs, helping them, the commission says, to “stay competitive while aligning with environmental, social and governance transparency and reporting”.

Also in July, EFRAG published revised drafts of its all-embracing European Sustainability Reporting Standards (ESRS) framework, which it claimed would result in a significant reduction and simplification of reporting obligations set out in the Corporate Sustainability Reporting Directive.
The makeover was undertaken in tandem with the release of the European Commission’s Omnibus initiative, a regulatory package adopted earlier this year with its primary focus on sustainability-related law reforms.

EFRAG had been tasked with delivering a “critical simplification” of the 2023 reporting standards framework while preserving its relevance and alignment with the European Green Deal ambition to become the first climate-neutral continent by 2050.

More accessible

Feedback from companies already reporting, as well as those preparing to do so, helped EFRAG devise a sustainability reporting process that is more manageable and accessible. Key revisions include a streamlining of double materiality assessment requirements and disclosures, reduced overlaps across reporting standards and greater clarity in their wording, plus the removal of all voluntary disclosures. More specifically, the headline changes are: 
• Simplified double materiality assessment: the process for determining what is ‘material’ for reporting purposes. This now follows a clarified top-down approach starting with an analysis of the reporting organisation’s business model. Information requests need to be reasonable and proportionate, in line with more specific guidance on materiality thresholds.
•Improved readability and format: enabling companies to better understand what is required of them and to report with greater clarity. They also have the option to publish an executive summary at the start of their sustainability statement making it easier for stakeholders to grasp key information.
• Voluntary reporting category deleted: only mandatory disclosures are retained in the main ESRS framework. Some of the voluntary requirements have been moved to a document called Non-mandatory Illustrative Guidance, which is designed to help companies understand and apply their reporting requirements.
• Relief mechanisms: new exemptions for situations where reporting would be excessively costly or difficult. These draw on inspiration from international standards such as ISSBs IFRS S1 and S2 which provide a baseline guide for sustainability-related disclosures.
Focused and usable
• Materiality and financial effects: clarification addresses what EFRAG describes as the “gross versus net” issue in impact materiality (a company’s positive and negative effects). When assessing impact materiality, companies can now take into account “outcomes of any mitigation or prevention measures implemented before the impact occurred”, providing they were effective and would likely be in the future.

In total, mandatory datapoints have been cut by 57 per cent, and the full set of disclosures - both mandatory and voluntary - are reduced by 68 per cent. The overall length of the standards has been shortened by more than 55 per cent, making ESRS more accessible and implementable, especially for companies yet to be brought into the scope of the sustainability reporting directive.

“EFRAG is fully aligned with the strategic vision set out by the European Commission,” said Patrick de Cambourg, chair of EFRAG Sustainability Reporting Board. “These revisions aim to deliver what Europe needs at this moment … a more focused, more usable sustainability reporting system that remains ambitious but does not overburden companies. Capitalising on effective experience, this is about making ESRS a more workable reality so that sustainability reporting supports, rather than hinders, resilience, investment and long-term value creation.”

EFRAG is due to present any further ESRS changes to the commission by November 30 following its assessment of feedback from recent consultations. An implementation date is yet to be confirmed, but the commission has indicated that the ESRS will likely be finalised in mid-2026.