Navigating the Future of Sustainability Reporting: What the CSRD Means for SMEs

Sustainability has evolved from a trend to a fundamental aspect of modern business strategy. As businesses face growing pressure to act responsibly, understanding sustainability regulations is key to long-term success. The introduction of the Corporate Sustainability Reporting Directive (CSRD) by the European Union is a significant step forward in promoting transparency and accountability in corporate sustainability efforts. If you’re a small or medium-sized enterprise (SME) operating in the EU or with ties to the EU market, understanding the CSRD may be crucial for your future success.

In this article, we’ll break down the essentials of the CSRD, what it means for your business, and how you can stay ahead of the curve by preparing now.

What is the CSRD and What Are Its Objectives?

The CSRD is an EU regulation that mandates companies to disclose information on their environmental, social, and governance (ESG) performance. It builds upon the earlier Non-Financial Reporting Directive (NFRD), expanding its scope, improving data quality, and making audits mandatory.

At its core, the CSRD requires companies to report not only on the impact of their activities on the environment and society but also on how sustainability issues affect their financial performance. This is called the “double materiality” approach and it is designed to provide a comprehensive view of a company’s sustainability practices, giving investors, regulators, and other stakeholders a complete picture of corporate responsibility.

The CSRD’s primary aim is to make sustainability reporting as essential and reliable as financial reporting. It supports the EU’s ambitious goal of achieving climate neutrality by 2050 and aligns with broader initiatives such as the Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy.

Who is Affected by the CSRD?

One of the key changes introduced by the CSRD is the expanded scope of companies required to report. Under the previous NFRD, large public interest companies with more than 500 employees were the primary targets. The CSRD’s reach is far broader. Some SMEs, particularly those listed on EU stock exchanges, will now need to comply.

Thresholds for Coverage

Timeline: Key Deadlines for SMEs and Other Businesses

The CSRD introduces phased implementation to allow businesses time to adapt:

1. Fiscal Year 2024 (First reports due in 2025):
   • Applies to large public-interest entities already subject to NFRD requirements.
2. Fiscal Year 2025 (First reports due in 2026):
   • Covers other large companies meeting the size thresholds.
3. Fiscal Year 2026 (First reports due in 2027):
   • SMEs listed on EU stock exchanges and small financial institutions. (SMEs may opt out until 2028, delaying compliance)
4. Fiscal Year 2028 (First reports due in 2029):
   • Includes non-EU companies meeting the turnover threshold.

What SMEs Need to Know About Reporting Requirements

The CSRD brings a new level of detail to sustainability reporting. Relevant SMEs must prepare for:

1. EUROPEAN SUSTAINABILITY REPORTING STANDARDS (ESRS)

The CSRD mandates compliance with European Sustainability Reporting Standards (ESRS) developed by the European Financial Reporting Advisory Group (EFRAG). These standards ensure uniformity and comparability of ESG disclosures across industries.

2. THIRD-PARTY ASSURANCE

Sustainability reports will require independent assurance, starting with limited assurance and moving toward more stringent reasonable assurance. This ensures the reliability of disclosures.

3. DOUBLE MATERIALITY PRINCIPLE

Reports must address:

• Inside-out impacts: How the business affects the environment and society.
• Outside-in impacts: How ESG issues affect the company’s financial performance and risk profile.
  • Example: For instance, inside-out impacts include how your manufacturing processes contribute to carbon emissions, while outside-in impacts involve how climate change might disrupt your supply chain.

4. INTEGRATION WITH FINANCIAL REPORTING

Sustainability disclosures will form part of annual management reports, embedding ESG considerations into the core of business reporting.

Key Content Areas of the Reports

Under the CSRD, covered SMEs must disclose information on three key pillars:

1. Environmental Factors:
   • Greenhouse gas (GHG) emissions (Scope 1, 2, and 3),
   • Climate adaptation and mitigation strategies,
   • Biodiversity, pollution control, and circular economy measures.
2. Social Factors:
   • Workforce diversity and inclusion,
   • Respect for human rights and labor conditions.
3. Governance Factors:
   • Anti-corruption measures,
   • Corporate governance structures and practices.

Why the CSRD Matters for SMEs—Even If You’re Not Covered (Yet)?

While the CSRD is primarily aimed at larger companies, the implications for SMEs are far-reaching. The regulation will significantly impact businesses in the following ways:

• Supply Chain Pressure: Large corporations covered by the CSRD will likely expect their suppliers (including SMEs) to meet sustainability standards. If you’re part of a supply chain, your customers may require proof of your sustainability efforts through the data disclosed in your sustainability reports.

• Investor Expectations: Investors are increasingly looking for transparency when it comes to sustainability. Meeting the CSRD’s reporting standards will help position your business as an attractive and trustworthy investment opportunity.

• Reputational Benefits: Being proactive about sustainability reporting is an excellent way to differentiate your business in the marketplace. Customers are more likely to trust and engage with businesses that can show they are genuinely committed to social and environmental causes.

• Financing Opportunities: Financial institutions are placing more weight on sustainability in their lending decisions. Complying with the CSRD can make your business more appealing to banks and investors looking for companies that align with sustainable practices.

Preparing for CSRD Compliance: Challenges and Opportunities

As SMEs navigate the complexities of the CSRD, they will encounter both challenges and valuable opportunities. Understanding these can help businesses make informed decisions and better prepare for the upcoming changes.

This shift is not without its challenges, as businesses will need to integrate sustainability reporting into their existing processes. However, those who invest in tracking and reporting ESG data effectively will not only ensure compliance but also position themselves to capitalize on the increasing demand for transparent, responsible businesses.

Voluntary Reporting: Getting Ahead of the Curve

While the CSRD will become mandatory for many SMEs in the near future, there is an option for voluntary reporting for non-listed SMEs, for example using the EU VSME (Voluntary Sustainability Reporting for SMEs) standard. This standard, which is based on the same principles as the CSRD but is optional, can be a valuable tool for SMEs looking to gain an early advantage in the sustainability space.

Adopting voluntary reporting now, or at least having a plan in preparing for the obligatory reporting in the future, can help your company build a solid foundation for when the CSRD becomes mandatory, demonstrating your commitment to sustainability and potentially improving relationships with investors, customers, and other stakeholders.

For more detailed insights on the VSME check out our upcoming blog post, where we’ll take a look at this voluntary standard and its benefits.

The Path Forward

The CSRD represents a major step forward in the EU’s efforts to build a sustainable economy. While it introduces new reporting obligations for SMEs, it also opens up a host of opportunities for businesses that are willing to invest in sustainability and transparency.

For SMEs, getting ahead of the curve by adopting sustainability reporting practices now—whether voluntarily or in anticipation of future regulations—will ensure that they are well-positioned to compete in an increasingly sustainability-conscious market. The road to compliance may seem daunting, but with the right tools, systems, and mindset, SMEs can turn these challenges into opportunities for growth, innovation, and long-term success.