The new EU sustainability reporting directive is coming – what should SMEs know about it?
The European Union is accelerating the green transition with various measures, a significant part of which relates to legislation and standards for sustainable finance. Directing capital towards sustainable projects and companies requires consistent information about the greenness and sustainability of companies in the fields of environmental and social responsibility, as well as good governance. Sustainability reporting is also often referred to as ESG, which stands for Environmental, Social and Governance.
The EU’s Corporate Sustainability Reporting Directive (CSRD), which comes into force at the beginning of 2024, will bring many new companies under mandatory reporting responsibility over the next couple of years. Previously, only large companies employing more than 500 people were required to report their sustainability activities under the Non-Financial Reporting Directive (NFRD). It is estimated that around 1200 Finnish companies will be affected by the new reporting obligations. To meet the reporting obligation, two of the following three criteria must be met; more than 250 employees, a turnover of more than €40 million. and a balance sheet of more than € 20 million.
The Sustainability Reporting Directive is a legislative guideline for EU Member States, complemented by the European Sustainability Reporting Standard (ESRS), which is currently under preparation. The standard defines what and how companies subject to the CSRD should report on their environmental, social and governance (ESG) performance. The aim is to improve transparency and comparability, especially for the financial markets but also for other stakeholders in the company.
ESRS requires companies to identify and report economically relevant ESG factors – i.e. variables that may affect the profit and loss account, balance sheet or cash flow projections for the company. This is called financial materiality. Companies must also report on the significant impacts of their activities on the environment and society, taking into account the views of stakeholders on materiality. This is called impact materiality. The starting point for ESRS reporting is therefore the preparation of a double materiality assessment and the selection of relevant ESG indicators.
Impact on SMEs
ESRS reporting will also increase the reporting requirements for small and medium-sized enterprises, even though they are not directly affected by the directive. Companies subject to the ESRS reporting will have an oblication to map and report the sustainability of their supply chain in accordance with essential criteria. Often the starting point is identifying factors related to climate change and setting targets for these factors. Sustainability reporting and related measures can initially seem very challenging for small and medium-sized enterprises due to their scarce resources. However, it also provides opportunities to stand out from competitors, manage climate-related risks, and discover new business opportunities. What is essential is not only reporting this valuable information to stakeholders, but also leveraging it in strategic decision-making.
esgResilience helps SMEs to map and analyse the climate risks of their business. The starting point is to measure and analyse emissions and “greenness” of business operations easily and quickly using industry-specific questionnaires in line with international standards. If you are an SME and need support in preparing for sustainability reporting and increasing your understanding of climate-related risks, please feel free to contact us!
