Messsage from the CEO, Nina Schindler
The Corporate Sustainability Reporting Directive (CSRD) will fundamentally change European companies’ reporting land-scape, as it will require numerous organisations across all sectors, including banks, to disclose their sustainability risks and opportunities based on the European Sustainability Reporting Standards (ESRS). Sustainability Reporting will be elevated to the same level as Financial Reporting.
As non-listed SMEs are not directly in scope of the CSRD, the aspects of how these smaller companies can contribute to advancing sustainable practices and how other companies, especially banks, can assess the sustainability of their SME business partners become paramount.
Recognising the importance of SMEs to its member banks, the EACB actively contributes to the European Financial Reporting Advisory Group's (EFRAG) work developing a voluntary sustainability standard for the application by micro-undertakings and other non-listed SMEs (VSME ESRS).
Guided by the new standard, SMEs shall have the opportunity to voluntarily report on their material sustainability data, thereby demonstrating their sustainability credentials. At the same time, on the basis of the data provided, banks could get a more comprehensive understanding of their customers' sustainability performance.
The EACB emphasises the need for VSME standard to be simple and accessible for widespread market acceptance, believing that voluntary reporting by SMEs could dynamise local economic development and contribute to their sustainability journey.
3 Questions to Mr Patrick de CAMBOURG, Chair, EFRAG Sustainability Reporting Board (SRB)
Mr Patrick de Cambourg is the Chair of the EFRAG SRB since November 2022. Before that he was President of the Autorité des normes comptables (ANC), the French accounting standard-setting Public Authority. From September 2020 to April 2022 he chaired the EFRAG Project Task Force on preparatory work for the elaboration of possible EU non-financial reporting standards. Patrick, a graduate from Sciences Po Paris, holds degrees in public and business law and has a Bachelor of Arts.
_____________________________
- What is the objective of EFRAG's draft voluntary sustainability reporting standard for SMEs, and who are its primary addressees? Why is the VSME ESRS so important? What is the expected timeline for the adoption of the VSME ESRS and what will be the way forward when adopted?
The objective of VSME ESRS is to provide non-listed micro-, small- and medium-sized undertakings (SMEs) with a simple reporting tool to start their sustainability journey and monitor their sustainability performance while responding to the growing request of sustainability data from business partners that are either triggered by ESRS reporting obligations or necessary to manage their sustainability risks and pledges in the lending and investment portfolios or in the supply chain. VSME has the ambition to become a common point of reference for lenders, investors, and corporate counterparts in value chain when they define their ESG data requests to SMEs. Concretely, this means replacing the current multitude of ESG questionnaires that represent an important burden for the smaller undertakings. In terms of timeline, EFRAG is currently finalising VSME ESRS, the approval at SRB is planned at the end of November. A four-month public consultation will be launched early January 2024. In parallel to this, outreach events and field tests will be organised. Following the re-deliberations, EFRAG plans to submit VSME to the European Commission in autumn 2024.
- What are the specific data requirements in EFRAG's draft standard for sustainability reporting by non-listed SMEs? How many data points are typically necessary for SMEs to effectively convey their sustainability progress? Considering the limited resources of many non-listed SMEs, especially micro-undertakings, can SMEs independently prepare these reports without the assistance of external consultants?
With a view to responding to the needs and capabilities of very different types of non-listed companies from the micro (less than 10 employees) to the medium-sized undertakings (between 50 and 250 employees), VSME ESRS has been designed as a modular standard. It is composed of 3 modules:
a) Basic module: it is the entry level and has a highly simplified language. It includes 11 metric disclosures. Ideally, the company should be able to produce it without the help of a consultant. No materiality assessment is required. This module is the target approach for micro-SMEs.
b) Narrative- Policies, Actions and Targets (PAT) Module: it includes the definition of financial and impact materiality and requires performing a simple materiality analysis in order to disclose which of the sustainability matters listed in AR 16 of ESRS 1 are material to the undertaking. This module only requires reporting the PAT that the company has in place and no information is required when no PAT is in place for a material matter. It is expected to be used by SMEs that have already started or wish to start their sustainability journey and have PAT to describe.
c) Business Partners Module: it includes 10 metric disclosures required from lenders, investors or heads of supply chain from their SMEs counterparts. An in-depth analysis of current questionnaires has confirmed that those coincide largely with datapoints connected to SFDR PAIs Table 1, EBA Pillar 3 and Climate Benchmark. This module requires to perform a materiality analysis in order to disclose only the material KPIs. The SME is expected to consider applying this module only when it receives or is likely to receive requests from its banks or other corporates; these metrics are expected to match the data needed for banks and corporates to manage the sustainability profile of their SMEs clients and suppliers. The assumption will be tested in the consultation.
- What are EFRAG's expectations regarding the acceptance of this standard by non-listed SMEs and micro-undertakings? Could you tell us about transitional measures or support mechanisms in place to facilitate the smooth transition for SMEs seeking to implement the VSME ESRS? How does EFRAG seek to encourage these SMEs to voluntarily engage in reporting on sustainability matters? Who are the key stakeholders actively involved in shaping and developing the VSME ESRS? What can cooperative banks do to support the implementation?
VSME ESRS is the result of numerous contacts and of a wide stakeholder engagement process. EFRAG VSME community and EFRAG SMEs expert working group have been consulted in the design of the modules in conjunction with the technical advice of the EFRAG TEG. A thorough internal consultation was performed in the summer 2023 to gather feedback from EFRAG SR TEG and EFRAG SRB members. Both the SME and banking representatives in EFRAG bodies have provided detailed feedback in this context.
The simplification of language and concepts introduced in VSME is a key aspect to lower the entry barriers of micro and small companies and encourage the uptake of the standard. The guidance in calculation tools and presentation of information is also expected to facilitate and encourage SMEs to report.
In addition, EFRAG secretariat has held several workshops with representative of SMEs, large corporates, banks (including EACB) and data providers. In the outreaches, the three modules of VSME have been recognised by business partners as relevant. The extent of market acceptance of VSME will be specifically tested in the upcoming public consultation.
It seems also important to underline the view of the European Commission that in its SME Relief Package of September 2023 refers to VSME as a measure to support SMEs in accessing sustainable finance.
We are cognisant of the important role cooperative banks play in the local economy and financing SMEs. Furthermore, their unique structure positions them well to support and accompany their SMEs clients in taking the first steps in sustainability reporting as a tool towards the management of their sustainable transitions. As such, we value EACB’s and cooperative banks contributions to the public debate and encourage them to take part both in the public consultation and the upcoming field test.
Second Opinion from Mr Volker HARTKE, Chair, EACB Sustainability Reporting and Audit Working Group
Mr Volker Hartke is chairman of the EACB Sustainability Reporting and Audit Working Group. He was nominated to the Working Group by BVR. He holds an LL.M. in sustainability law and, as an auditor and tax consultant at a regional Member Association (Genossenschaftsverband - Verband der Regionen e.V.), he has in-depth knowledge of the capabilities and special features of SMEs and small and non-complex institutions (SNCI).
_____________________________
The CSRD mandates companies within its scope to report not only on their own business activities, but also on those in their value chains. This results in a trickle-down effect on companies not obligated to report, impacting them through additional value chain disclosure requirements imposed by CSRD-reporting entities. This situation poses a threat to SMEs with limited financial and/or human resources, potentially harming diversity and resilience of the economy. Recognising this, the European legislator acknowledges the possibility of non-listed SMEs to voluntarily adopt the sustainability standard for listed SMEs (LSME) in recital 21 of the CSRD and Member States’ measures to support SMEs and micro-undertakings in applying sustainability reporting in recital 22.
In response to multiple stakeholder requests, EFRAG is going beyond these legal requirements by developing the VSME, a standard that defines voluntary reporting requirements for non-listed SMEs and micro-undertakings and takes into account the capabilities and special characteristics of SMEs. As Mr de Cambourg explained, the VSME consists of three parts: the Basic Module, the Narrative Policies, Actions and Targets (PAT) Module, and the Business Partner Module.
The Basic Module would represent the baseline disclosure standard for non-listed SMEs and does not require a materiality assessment to determine material information about all impacts, risks and opportunities (IROs) across environmental, social and governance matters to be reported on in its sustainability statement, as all data points are to be reported. This module is actually aimed at micro-undertakings. The additional modules for non-listed SMEs incorporate a materiality assessment. The Narrative-PAT module would enable stakeholders’ reporting on existing policies, actions and targets in relation to material sustainability issues. The Business Partner Module is tailored to fulfil the data needs of banks and larger non-financial companies.
Voluntary reporting by SMEs can therefore be beneficial to banks, provided the sustainability report contains relevant information, is presented in simple language, and is easy to handle. Additionally, a sustainability report should be of high quality and contain reliable information for effective communication with customers, suppliers and banks. However, it is imperative to recognise that a sustainability report cannot disclose all data, especially confidential or business-sensitive information.
As part of the upcoming consultation process, the draft VSME standard will be presented to the general public for feedback. It is crucial for a wide range of potential reporters, interest groups, and the addressees of the report to capitalise on this opportunity and actively participate in the consultation. In this regard, banks are encouraged to review the proposed content and suggest adjustments in the direction of further simplifying the standard. In particular, the Business Partners Module should aim at providing information that is appropriate and useful for banks’ own data requirements and that limits additional individual reporting to the confidential minimum. The Sustainability Reporting & Audit Working Group will be engaged at all stages of the public consultation process to help shape a sustainability reporting framework that enables cooperative banks and SME’s active role in building a green and resilient economy.