Last month saw the arrival of some good news for UK SMEs from Brussels. No, Ursula von der Leyen did not announce fast track British reentry into the European Union (too soon?). But her European Commission did provide a welcome degree of certainty for smaller UK firms over the level of sustainability-related information they need to supply to the larger European companies in their value chains.
At a time when the business environment is throwing up challenges daily – from input costs to economic instability to tax levels to talent scarcity – some extra predictability counts for a lot. In this case, it will help firms and their advisors to deal quickly and simply with sustainability reporting requirements, allowing more time to focus on the strategies that will deliver green growth opportunities.
A clear path for SMEs
The commission’s efforts to streamline its sustainability reporting requirements for corporates – in the first of a series of ‘omnibus’ reform packages – have faced considerable opposition and must still overcome a number of hurdles before they are finalised. This means there is some uncertainty for listed firms of all sizes to deal with – but for non-listed SMEs the path ahead seems clear and comparatively simple.
Most chief executives will have kept up with the headlines prompted by the streamlining of Europe’s sustainability reporting framework – particularly the omnibus’s scaling back of the Corporate Sustainability Reporting Directive (CSRD).
Commission proposals slash the number of firms in scope of CSRD by around 80%, meaning reporting via a simplified version of European Sustainability Reporting Standards (ESRSs) applies largely to firms that were already disclosing under the Non-Financial Reporting Directive.
Not only do the revisions keep unlisted SMEs – i.e. those with less than 1,000 employees and below €50 million turnover – outside the scope of CSRD, they also limit the information they must supply to those bigger corporates and banks in their value chains that are still obliged to report, effectively creating a ‘value chain cap’.
By way of a delegated act, the Commission will ensure SMEs can only be asked to report in line with a voluntary reporting standard for SMEs (VSME) that was published last December by EFRAG, its financial reporting advisory body.
The Commission says it is providing a ‘shield’ for SMEs, protecting them from the “trickle-down” effect that could otherwise arise from bigger firms passing on their reporting burdens via excessive information requests. This unexpectedly throws the VSME into the spotlight – making the ‘V’ in voluntary somewhat redundant – as a mainstay of Europe’s future sustainability reporting landscape.
‘One and done’
The further good news is that the VSME’s fundamental reporting requirements have already been developed, consulted on and refined, resulting in an easy-to-use format that is straightforward to complete and universal in its application. It’s ‘one and done’ nature should mean one less compliance headache for CEOs seeking to focus on sustainable growth opportunities.
The VSME – or, to give its full title, the Voluntary Sustainability Reporting Standard for non-listed Small and Medium-sized Enterprises – has basic and comprehensive modules, both aligned with the ESRS’s, guiding bigger firms’ disclosures. The former consists of 11 fundamental disclosures, covering air, water and soil pollution, biodiversity, energy and greenhouse gas emissions, as well as several focused on social factors.
The comprehensive module comprises nine disclosures providing more detail and insights on policies, emission reduction efforts, climate risks, human rights, and workforce considerations; it also asks firms to describe practices, policies and future initiatives for transitioning towards a more sustainable economy.
For the vast majority of SMEs, the basic module will be the main focus for now, as this carries all the information that will be required by bigger firms in their value chains, effectively serving as a sustainability passport for UK firms.
Monitor and engage
The even better news for sustainability consultants is that you don’t even need to develop your new tools and templates to help clients to integrate and leverage the VSME into their business processes. The Disruption House (TDH) has already incorporated the basic and comprehensive modules into its suite, meaning our tools already generate the information needed to populate its fields.
As a standards-based supplier of sustainability and resilience reporting solutions for firms large and small, TDH has kept a close eye on the development of the VSME, fully integrating it into our assessments and benchmarking tools.
Because our automated solutions include VSME as a primary disclosure reference framework, TDH can help firms ensure they are capturing and supplying the sustainability information they will need to complete the VSME’s basic template and share it cost-effectively along their supply chains.
Further, our VSME reporting capabilities form part of a comprehensive suite of sustainability-focused benchmarking, assessment, screening and reporting tools that help firms to provide transparency and manage risks across value chains.
Working in concert, these tools can ensure firms have all the information they need to monitor and engage on sustainability issues as they forge long-term strategic partnerships with suppliers and customers. Further, they can be plugged seamlessly into the sustainability offerings of consulting firms, regardless of size or sector of their client base, providing the insights that accelerate the path to their value-add.
Passport to supply chain sustainability
It has long been recognised that the largest firms bear the brunt of responsibility for reducing their emissions on the path to net zero. That’s why they face the biggest sustainability reporting requirements via rules like CSRD, enabling them to monitor and demonstrate their transition to investors, regulators and other stakeholders.
But they will not make sufficient progress if they do not bring their smaller suppliers and customers with them. AT TDH, we have always placed supply chains at the heart of the sustainability challenge, due to their power to make business practices more effective, sustainable and resilient, through engagement and partnership.
A few short months ago, VSME was already a relevant and proportionate tool for SMEs, but the call for more streamlined regulation from former European Central Bank Mario Draghi has thrust it centre stage. Like a traditional passport, it offers access; to markets, but also to finance and investment.
The Commission’s future plans for the VSME suggest that it will become a familiar part of the business landscape, a necessary but not burdensome aspect of doing business. As such, UK SMEs with European business relationships should incorporate it into sales, procurement and related processes sooner rather than later.
If you would like to learn more about how The Disruption House can help you – or your clients – get ready for VSME reporting, get in touch with our team.
