"SMEs and the future of European sustainability reporting rules - Small businesses deserve to get clarity to address the sustainability challenge", 18 June 2021

Until now, SMEs have largely been left out from sustainability reporting. However, this will change dramatically. European banks and investors, as well as companies at the top of value chains, are rapidly realigning their strategies to avoid risks posed by the climate transition. SMEs form the majority of their clients and suppliers. It is important that small businesses understand the implications of such changes, and the role they can play in this debate, to ensure a positive contribution...

This article explains what the stakes are for SMEs, how they can engage with upcoming changes and developments in legislation, and how policymakers can also help them...

The recent European proposals already seek to involve small businesses for the first time. Previously, the EU Non-Financial Reporting Directive applied only to large listed companies, banks and insurers with more than 500 employees, thus limiting its impact to 2000 companies EU-wide (1). With the new draft on the table, reporting obligations will involve SMEs listed on stock exchanges, as well as all large companies (both private and listed) as is already the case in Denmark, Greece, Iceland, Spain and Sweden (an analysis of the key changes proposed in the reform presented in April 2021 can be found here). 

But is this sufficient to properly involve small businesses within our economy?

Even if the change in scope appears to be significant, it still affects fewer than 1% of companies in the EU. Left out of the scope is another 6%, which are considered private SMEs (and then 93% of microenterprises that are too small to be subject to reporting legislation). Investors, accounting organisations and NGOs raised two concerns in this area.

• Significant impacts of companies on the environment and society do not depend on their size or legal status. 
• Redirection of investments to support the transition to a low-carbon economy is not limited to assets listed on stock exchanges.

If this situation is not addressed, SMEs that are not covered by the legislation will be disadvantaged  compared to larger competitors and listed SMEs that will instead be covered by the new rules. Needless to say, it is important to have a level playing field for SMEs for the whole of Europe going forward...

Any divergence of rules between listed and non-listed companies also risks adding another barrier to small businesses seeking to expand - companies who are considering raising capital by listing their shares or bonds on stock exchanges. It is important to avoid introducing such disincentives - both for SMEs themselves and for the operation of our capital markets...

The European Commission proposed that a simplified standard for SMEs should be developed. Such a standard will go a long way in making it easier for SMEs to report on sustainability and reduce administrative costs. 

To achieve this goal, the standards should specify essential sustainability indicators that can be reasonably reported by SMEs, and - critically - supporting methodologies and tools allowing their easy calculation. This concerns in particular:

• greenhouse gas emissions, 
• energy intensity, 
• information concerning activities and use of resources linked to heightened risks of impacts on climate, biodiversity and deforestation, 
• clear guidance for reporting on climate transition plans and sustainable activities,
• human rights due diligence,
• meaningful workforce indicators (large companies often require a plethora of social data and confirmations on compliance with fundamental labor rights from their suppliers, but the requested information is often of questionable value).

SME standards are indispensable to ensure proportionality of reporting requirements to contain the risk that companies at the top of supply chains will simply pass on the costs and data gathering requirements concerning the deeper level of the supply chain to their next-in-line suppliers.

However, due to their non-binding status, standards alone will not be sufficient to provide safeguards against such externalisation of costs of reporting by large companies. Such safeguards can be only achieved if the standards are supported by a legislative mandate for SMEs, clarifying their reporting obligations vis-a-vis the obligations of large companies.