On 5 January 2023, the Corporate Sustainability Reporting Directive (CSRD) entered into force. The objective of the CSRD is to improve the existing requirements of the EU’s Non-Financial Reporting Directive (NFRD) in accordance with the EU Green Deal and the UN Sustainable Development Goals. A broader set of large companies, as well as listed SMEs, will now be required to report on sustainability – approximately 42.5k companies in total.
Key highlights of the CSRD include the introduction of Double Materiality, standardised reporting formats, and integration and interoperability as a key aspect of the European Sustainability Reporting Standards (ESRS). The CSRD emphasises clarity and comparability, making it easier for stakeholders to assess corporate sustainability performance. EU Member States must transpose the CSRD into national law by July 2024 with a phased-in approach to implementation. By April 2029, the EU Commission must assess the directive’s implementation including its impact on SMEs and third-country companies.
Determining if your company is in scope for CSRD depends on several factors such as the type of company, turnover, assets and number of employees. These factors will also help determine when CSRD will need to be addressed by your organisation if you are in scope.
In the first instance, compliance under CSRD is mandated for organisations already mandated to comply with the NFRD (Non-Financial Reporting Directive) and/or large undertaking is a company that fulfils at least 2 of the following criteria:
- at least €25 million in total assets
- at least €50 million in net turnover
- at least 250 employees (average) during the year
The second wave of mandated compliance falls on small and medium-sized undertakings (SMEs) listed on an EU-regulated market. So only SMEs that are listed on an EU stock exchange (excluding listed micro enterprises). Compliance is also mandated for certain third-country undertakings. This is most likely to be any limited company that is not mentioned above in the other categories.
The majority of SMEs in Ireland or no listed, so what is the difference between listed and non-listed?
Listed SMEs are regulated, public interest small and medium enterprises. They do not meet the scope of large entities as defined by CSRD and will therefore apply the LSME or “Listed SME” reporting standards developed by EFRAG from FY 2026. The LSME standard mirrors the framework of the ESRS but is proportionate and within one ESRS exposure draft. There is a two year opt-out available for listed SMEs during a transitional period, meaning that they will be able exempted from reporting until FY 2028. Users of LSME information will include investors, asset managers, banks, value chain (customers and suppliers), and civil society.
Non-listed SMEs include Micro-, Small- and Medium (MSM) sized Undertakings who are not listed on any stock exchange and can choose to voluntarily prepare sustainability statements. For this voluntary reporting they will consult the “VSME” or “Voluntary SME” reporting standard developed by EFRAG, which provides a framework for sustainability disclosures.
The VSME is a simple reporting tool used by MSM-sized enterprises to monitor their sustainability performance and to face the growing demand for ESG data from their business counterparts. Applicable to all sectors to inform key stakeholders on relevant sustainability matters. Users of VSME information include lenders and investors who collect data from SMEs as part of their own business decisions / ESRS requirements, large corporates collecting data from SMEs as part of meeting their own ESRS requirements, data aggregates or platforms that support the provision of data, as well as customer, suppliers and stakeholders.
SMEs may not already have a sustainability strategy in place, so what do they need to think about?
- Business Model and Sustainability Strategy Development: What are your core activities, products and services, business strategy, and sustainability ambition?
- Stakeholders: Who are the key stakeholders linked to those core activities, products and services? Internal and external – customers, suppliers, etc.
- Value Chain: Where does your business fit into the value chain of business counterparts?
- Impacts: The impacts generated by core activities, products and services. Which stakeholders are affected (inc. nature as a stakeholder)?
- Risks: The key risks associated with core activities, products and services? Which stakeholders are affected (inc. nature as a stakeholder)?
- Opportunities: What are the opportunities to change, develop and move to a more sustainable business model knowing now your core activities, products, services, stakeholders and relevant impacts and risks?”
- Ownership: Who will drive this forward? Who owns sustainability within your organisation? What education and / or skills development and awareness is needed to get buy in?
If you would like more information on CSRD for SMEs or get started on your organisations Sustainability Reporting journey, please get in touch with one of our experts via www.pragmatica.com
