The new EU Sustainability Reporting Directive is coming – what should SMEs know about it?
The European Union is accelerating the green transition through a range of measures, an important set of which relates to legislation and standards for sustainable finance. Channelling capital into sustainable projects and businesses requires a consistent understanding of the green credentials of companies and their sustainability efforts in the areas of environmental and social responsibility and good governance. Reporting areas are often referred to as ESG, which stands for Environmental, Social and Governance.
The EU’s Corporate Sustainability Reporting Directive (CSRD), which will enter into force from 2024, will bring many new companies under mandatory reporting obligations over the next few 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 involved in 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 stakeholders’ views 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 ESRS reporting will have an obligation to map and report the sustainability of their supply chain in accordance with essential criteria. Often, the starting point is an identification of the 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 the competition, manage climate-related risks and find new business opportunities. What is essential is not only the 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 in quick and easy manner 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!
