The European Commission adopted a recommendation on voluntary sustainability reporting for small and medium-sized companies (SMEs) that it said will help these companies answer questions about their sustainability for larger corporates in their value chain as well as financial institutions.
The EU’s intention of creating robust sustainability standards clashed with reports showing the bloc needed to reduce regulation in order to be competitive, as well as with the current sustainability-free U.S. administration. The Commission adopted the Omnibus I simplification package which proposed to limit mandatory sustainability reporting under the CSRD to large companies with more than 1,000 employees. Smaller companies were to be subject to much simpler sustainability standards that are primarily self-reported.
The less stringent standards remove complexity for companies that may not have resources to carefully monitor and track their environmental impact but also could lead to less sustainability up the chain, since larger companies and financial institutions rely on data from their suppliers to report their own emissions and impacts on biodiversity and ecosystems. This future voluntary reporting standard will act as a “value-chain cap” to protect SMEs and other companies not subject to mandatory reporting under the CSRD from excessive information requests from their value chain partners.
The Commission said it has encouraged large corporates and financial intermediaries to apply the principle of proportionality when engaging with SMEs and to exercise restraint when requesting information from SME value chain partners. Following the adoption of this recommendation, large corporates and financial intermediaries should limit, as far as possible, such requests to information that is coherent with the disclosures included in the voluntary sustainability reporting standard for non-listed micro, small and medium enterprises (VSME).
Through this Recommendation, the Commission recommends that non-listed SMEs and micro-undertakings that wish to voluntarily report sustainability information should do so in accordance with the VSME standard developed by The European Financial Reporting Advisory Group (EFRAG), the Commission’s technical advisory body for sustainability reporting. This means that there is no obligation to provide assurance to the information reported by non-listed SMEs and that a self-declaration by the SME is sufficient. Non-listed SMEs and micro-undertakings may also refer to the practical guidance developed by EFRAG which accompanies the voluntary standard and facilitates the practical application of the voluntary standard.
The voluntary standard for SMEs (VSME) was developed by The European Financial Reporting Advisory Group (EFRAG), the Commission’s technical advisory body for sustainability reporting. The Commission encourages large companies and financial institutions that seek sustainability information from SMEs to base their requests on the voluntary standard as far as possible. SMEs may also wish to voluntarily report sustainability information to improve their access to sustainable finance and better understand and monitor their own sustainability performance, thereby improving their resilience and competitiveness.
The commission said that, in line with the objective of a green and digital transition of SMEs, it is important to use digital solutions and tools to facilitate sustainability reporting for SMEs. To this end, the Commission is exploring the use of eInvoicing to automatically extract relevant data for sustainability reporting. The Commission has also launched the 2025 Technical Support Instrument (TSI) Flagship project ‘Improving sustainability reporting for businesses’, which aims to provide technical assistance to Member States to develop digital support and capacity building at national level for undertakings’ sustainability reporting.
In the future, it said, small businesses may want to make their sustainability information publicly accessible on the European Single Access Point (ESAP) in order to become more visible to potential investors, thereby increasing and diversifying funding opportunities. To this end, small businesses would need to provide certain metadata and use a certain format for submitting such information. For the purposes of providing sustainable lending or making sustainable investments, lenders or investors might ask SMEs for other types of sustainability information than what is covered in the VSME standard. The Commission will follow up separately on the commitment made in the SME Relief Package to scale up sustainable finance to SMEs, based also on the report of the Platform on Sustainable Finance on Streamlining Sustainable Finance to SMEs and building on existing frameworks, such as the InvestEU Sustainability guarantee use case document and the European Investment Bank Green Checker.
The voluntary sustainability reporting standard may also be used by SMEs and micro-undertakings in third countries which wish to provide sustainability information on a voluntary basis.
The recommendation an intermediary solution to address market demands until the delegated act on a voluntary standard is formally adopted. The content of the delegated act could vary compared to this recommendation. The timing of adoption will depend on the pace and conclusion of negotiations between the co-legislators on the Omnibus I proposal.