Sustainability Reporting for Non-Listed SMEs: A Comprehensive Guide to VSME ESRS

The Voluntary European Sustainability Reporting Standards (VSME) are a pioneering initiative tailored for non-listed SMEs within the EU’s larger sustainability initiative. This voluntary set of standards currently in development aims to empower SMEs to enhance their sustainability reporting practices, especially when they are a part of the value chain of larger, regulated entities that need to report on their sustainability requirements. Unlike mandatory counterparts, the VSME framework provides flexibility for non-listed SMEs to engage in sustainability reporting at their discretion while creating a dynamic avenue for sustainable business practices across diverse enterprises. This article aligns with the most recent information on EFRAG’s LSME (for Listed SMEs) and VSME standards. However, as the standards evolve readers are encouraged to stay tuned for the latest developments.

Sustainability Reporting for Non-Listed SMEs: A Comprehensive Guide to VSME ESRS

In the realm of sustainability reporting, the European Financial Reporting Advisory Group (EFRAG) is paving the way for small and medium-sized enterprises (SMEs) with two distinct sets of simplified standards. The standards complement the existing framework for the European Sustainability Reporting Standards (ESRS), primarily tailored for large companies under the scope of CSRD. These sets of standards aim to address the reporting needs of Listed SMEs and non-listed SMEs through proportionate disclosure requirements.

The ESRS for Listed SMEs (LSME) present a mandatory set of disclosure requirements. However, the Voluntary ESRS for SMEs (VSME) offer a comprehensive framework for non-listed SMEs to enhance their sustainability reporting practices.

EFRAG's primary objective is to streamline sustainability reporting for SMEs, to fulfill the increase in requests for sustainability data from large entities to SMEs, alleviating burdens and enhancing transparency, all while considering their resources and capabilities.

Key objectives include:

  • Inclusion in the Transition: Enabling SMEs to participate in the journey towards a low-carbon economy actively.
  • Access to Sustainable Finance: Facilitating SMEs' entry into sustainable finance channels, all while mitigating the risk of unfair competition with larger, listed corporations.
  • Cost-Effective Transition: Preventing a financial burden on SMEs by avoiding an increase in the cost of their sustainability transition.
  • Proportionate Sustainability Criteria: Ensuring that SMEs meet proportionate sustainability criteria as required by stakeholders.
  • Mitigation of Trickle-Down Effects: Actively working to mitigate any adverse consequences arising from the so-called trickle-down effect.

SME Sustainability reporting: EFRAG's key objectives

EFRAG is actively seeking input on these standards and plans to initiate a 120-day public consultation from January 2024, fostering engagement and refinement over the following four months.

This article delves into the background and objectives of the VSME, provides a brief overview of the Corporate Sustainability Reporting Directive (CSRD) and the European Sustainability Reporting Standards (ESRS), and explores the applicability of these standards to various types of undertakings.

The CSRD and EFRAG’s ESRS Recap

Understanding the VSME requires a brief overview of its foundational pillars - The Corporate Sustainability Reporting Directive (CSRD) and the European Sustainability Reporting Standards (ESRS).

CSRD: The Catalyst for Sustainable Finance

The CSRD, launched by the European Commission in April 2021 as a cornerstone of the EU Green Deal and Sustainable Finance Initiative, represents a transformative leap in corporate reporting. Its adoption by the EU parliament in November 2022 and officially implemented in January 2023 marked a significant legislative advancement with substantial impacts on companies falling under its scope.

This directive represents an improvement and expansion on the preexisting Non-Financial Reporting Directive (NFRD). Its jurisdiction now extends to cover 49,000 companies, demanding a more comprehensive approach to sustainability reporting.

For instance, the incorporation of the Double Materiality Assessment, demanding that companies not only report on how sustainability issues might pose financial risks but also identify and communicate their own impact on people and the environment. Furthermore, the CSRD introduces a mandatory framework for assurance and auditing processes, ensuring a heightened level of accountability in the reporting landscape.

ESRS: Guiding the Path to Sustainability Reporting

To facilitate the execution of the CSRD’s ambitious objectives, EFRAG assumed the role of technical adviser to the European Commission and developed detailed guidelines and metrics essential for implementing sustainable reporting practices. The ESRS were designed as a roadmap for companies navigating the complexities of sustainability reporting offering a structured approach to guiding entities through reporting their environmental, social and governance (ESG) impacts.

Read more about the adoption of the final ESRS in our dedicated article.

LSME and VSME: A Response to the Call for SME Sustainability Reporting

The 2022 Flash Eurobarometer unveils intriguing insights at the EU level regarding SME initiatives in sustainability, sourced from a survey conducted in November-December 2021:

  • Nearly 20% of SMEs are strategically working towards climate neutrality, with 4% claiming to have already achieved this milestone. Additionally, a substantial 31.6% of SMEs are actively offering green products and services.
  • A considerable 89% of SMEs are implementing actions to enhance resource efficiency, with almost one-third facing minimal obstacles in initiating such measures. Approximately 26.6% perceive the costs associated with these efforts as a hindrance.
  • When it comes to financing green initiatives, 62% of SMEs rely on their internal financial resources. External support sees a balanced reliance, with 20% turning to public funding and an equal percentage seeking private funding from banks, investment companies, or venture capital funds. Notably, non-financial assistance, such as advice, is predominantly sought from supply chain partners (35%), business associations, and clusters (23%), along with private consulting and audit companies (21%).

SMEunited and Eurochambres have also recently conducted a brief survey in June-August 2023 in light of the changing sustainability reporting regulations. The findings reveal a compelling narrative: almost 60% of the surveyed small and medium-sized enterprises (SMEs) are actively investing in their sustainable transition.

Yet, the journey is not without its financial challenges, with a significant 65% of these ventures relying on internal funding. The struggle to secure sufficient external funding remains evident, as only 35% of SMEs' sustainable investments find support from external sources.

In the realm of ESG reporting, a noteworthy 12% of the surveyed SMEs are already voluntarily producing sustainability reports and actively seeking external ESG ratings. This indicates a growing eagerness among SMEs to embrace and leverage the power of ESG reporting for a more sustainable and transparent business landscape.

However, the massive effort involved in data collection is identified as a primary concern for SMEs. The associated costs and efforts are deemed significant and are considered to be one of the main drivers behind the initiative.

Even though these results should be taken with caution as they are self-declaration by the nature of the survey, it is important to note the expressed commitment to climate neutrality, resource efficiency, and the provision of green products and services by SMEs.

Understanding the Building Blocks of the VSME Framework

The VSME standard is a voluntary framework tailored for undertakings whose securities are not traded on regulated markets within the European Union (remaining unlisted), defines and categorises small and medium-sized enterprises into three groups based on their balance sheet total, net turnover, and average employee count throughout the financial year.

While non-listed SMEs fall outside the regulatory scope of the CSRD, they are actively encouraged to adopt the VSME standard. Covering similar sustainability issues as the ESRS designed for larger enterprises, the VSME standard operates on the principle of proportionality.

This approach ensures alignment with the fundamental characteristics of each undertaking, offering an adjusted path to sustainable reporting that takes into account undertakings’ fundamental characteristics.

Who is subject to CSRD: reporting thresholds

Much like the CSRD, the VSME Standard outlines requirements enabling non-listed SMEs to disclose relevant information about the negative impact of their business on people and the environment, as well as how environmental and social issues might affect their financial status, performance, and cash flows.

The standard is built around three modules: Basic module, Narrative-Policies, Actions and Targets (PAT) module, and the Business Partners module. Based on the non-listed SME-specific activities, extra information (metrics and narratives not specified in the standard) will be necessary to address common sector-specific issues. Finally, the sustainability report should offer information that is relevant, faithful, comparable, understandable, and verifiable.

Basic module

The basic module outlines relevant requirements and metrics that focus on environmental, social and business conduct aspects of the non-listed SME business. Comparative information in respect to the previous year is demanded and will begin from the second year of reporting. Notably, no materiality analysis is needed to disclose these requirements. Below you’ll find a detailed list of disclosures and metrics mandated by the Basic Module.

Disclosures for the Basic Module

Disclosure B 1 – Basis for Preparation
Disclosure B 2 – Practices for transitioning towards a more sustainable economy

Basic Metrics - Environment

B 3 – Energy and greenhouse gas emissions
B 4 – Pollution of air, water and soil
B 5 – Biodiversity
B 6 – Water
B 7 – Resource use, circular economy, and waste management

Basic Metrics – Social matters

B 8 – Workforce – General characteristics
B 9 – Workforce - Health and Safety
B 10 – Workforce – Remuneration, collective bargaining, and training

Basic Metrics - Business Conduct

B 11 – Convictions and fines for corruption and bribery

Narrative-PAT (Policies, Actions, and Targets) Module

This module defines narrative disclosures in relation to Policies, Actions and Targets (PAT), to be reported in addition to disclosures in the basic module, if the undertaking has them in place. This module is suggested for undertakings that have formalised and implemented PAT.

Materiality analysis is required to disclose which of the sustainability matters are relevant for the undertaking’s business and organisation in addition to a brief description of how the sustainability matters are managed in terms of existing or future policies, actions, and/or targets. Engagement with key stakeholders is also a requirement. Here are the Narrative-PAT disclosures.

Disclosures for the Narrative-PAT Module

Disclosure N 1 – Strategy: business model and sustainability related initiatives
Disclosure N 2 – Material sustainability matters
Disclosure N 3 – Management of material sustainability matters
Disclosure N 4 – Key stakeholders
Disclosure N 5 – Governance: responsibilities in relation to sustainability matters

Business Partners Modules

This module sets data points to be reported in addition to disclosures in the basic module, that are likely to be included in data requests from lenders, investors, and corporate clients of the undertaking. Materiality analysis is required, to disclose which of the sustainability matters are relevant for the undertaking’s business and organisation.

For instance, the more general sustainability matters such as climate change adaptation, air pollution, and water consumption to the more niche like desertification, extraction of marine resources, and soil sealing. If the undertaking also prepares the Narrative (PAT) module, the material matters are disclosed only once. Below you’ll find the disclosures required to complete the Business Partners module.

Disclosures for the Business Partners Module

Disclosure BP 1 – Revenues from certain sectors
Disclosure BP 2 – Responsibilities in relation to sustainability matters
Disclosure BP 3 – GHG emissions reduction target
Disclosure BP 4 – Transition plan for climate change mitigation
Disclosure BP 5– Physical Risks from climate change
Disclosure BP 6 – Hazardous waste and radioactive waste ratio
Disclosure BP 7: Alignment with internationally recognized instruments
Disclosure BP 8: Processes to monitor compliance and mechanisms to address violations
Disclosure BP 9 – Violations of OECD Guidelines for Multinational Enterprises or the UN Guiding Principles
Disclosure BP 10 – Work-life balance
Disclosure BP 11 – Number of apprentices

What is VSME standard, summary VSME standard, VSME explained

Customisation of VSME Modules

Non-listed SMEs are given the ability to shape their sustainability reporting under the VSME Standard by choosing specific modules aligned with their strategic objectives. Four distinctive options unfold for these enterprises:

  • Option A: This streamlined choice centres on the Basic Module
  • Option B: For a more comprehensive narrative, this option combines the Basic Module with the Narrative Module, delving into policies, actions, and targets. Notably, this option introduces a Double Materiality Assessment
  • Option C: Focused on cultivating transparent business relationships, this option includes the Basic Module with the Business Partners Module. It also integrates a Double Materiality Assessment.
  • Option D: The most inclusive choice encompasses all modules — Basic, Narrative, and Business Partners. Enhanced by the Double Materiality Assessment, this option offers a thorough and well-rounded approach to sustainability reporting.

Additionally, under the VSME, non-listed SMEs must also specify if their sustainability report includes information from subsidiaries (consolidated) or if it is prepared individually.

Carbon accounting three scopes of emissions

It is noteworthy that the current reporting framework for the basic and narrative modules does not cover Scope 3 GHG emissions, which are exclusively addressed as entity-specific within the business partners module. Furthermore, EU Taxonomy KPIs are currently also excluded. Additionally, it is important to highlight that all official EU languages are accepted for disclosures.

VSME Framework: Go One Step Further

Curious about delving deeper into the intricacies of VSME? Uncover the secrets of this framework by enrolling in our VSME e-course available on the Greenomy Academy. This free educational platform is designed specifically for professionals seeking to gain a deep understanding of ESG reporting and related disclosures. Sign up today and earn your Greenomy Academy certificate to showcase your expertise.


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