This post is continuing a text posted last week.
We have discussed the draft European Sustainability Reporting Standards in earlier texts. Ever since their publication a year ago in November 2022, sustainability experts all over have offered help to companies on how to implement them. Small and medium-sized enterprises (SMEs) that do not meet the prerequisites to be legally required to implement the CSRD and ESRS were and are pretty much left to do what they deem most appropriate. We discussed some of their numerous options in last week’s post. Now, EFRAG has published a draft ESRS for SMEs that expands these options even further. For any SME worried about sustainability reporting, it is important to emphasise this optionality. The draft ESRS for SMEs will be no more binding for companies not meeting the scope of the CSRD than the “big” ESRS. Due to possible future transparency demands from larger business partners legally obliged by the CSRD to use the ESRS, though, it makes sense to have a closer look at the draft ESRS for SMEs.
The first thing one notices when looking at the new draft ESRS for SMEs is their modular nature. This should complement well with SME discretion to use them or not, meaning if a business does not intend to implement them in full it might still find reason to use a slimmed-down combination of modules. There are three modules overall: a Basic Module, a Narrative-Policies, Actions and Targets (PAT) Module, and a Business Partners (BP) Module. These are not meant to be used in any combination. The Basic Module is, as the name implies, the basis of any implementation. Businesses may use it on its own and without any of the other modules, with either of the Narrative-PAT Module and BP Module, or with both. Let us have a closer look at them.
The Basic Module is intended as the target for micro-undertakings and the minimum for any larger size of business. There is no materiality assessment involved in implementing the Basic Module. Beyond its fundamental parts – B1 Basis for Preparation, and B2 Practices for transitioning towards a more sustainable economy – the Basic Module nevertheless covers a broad range of topics in three groups, namely Environment, Social matters, and Business conduct. As such, these relate closely to the three standard groups of the “big” ESRS, Environment, Social, and Governance. A closer look reveals, however, that congruence with their topics is more lopsided:
- Environmental metrics cover Energy and Greenhouse Gas Emissions, Pollution of Air, Water and Soil, Biodiversity, Water, as well as Resource Use, Circular Economy, and Waste Management. These five metrics indeed correspond closely to the standards E1 to E5 of the ESRS, albeit with less rigorous detail.
- Social metrics remain limited to the business’ own workforce, addressing General Characteristics, Health and Safety, as well as Remuneration, Collective Bargaining, and Training. This limitation to a business’ own workforce is indeed a noticeable difference to the ESRS where one’s Own workforce is only standard S1 out of four different social standards. The prioritisation of one’s own workforce does align with the fact though that the ESRS obliges certain businesses covered by the CSRD to report on parts of S1 regardless of the outcome of their materiality assessment, with the latter otherwise preceding all other Social disclosures.
- Business conduct metrics in the ESRS for SMEs are, similarly to the social metrics, noticeably limited when compared to the ESRS. This finding holds even though the ESRS contain only one governance standard overall. The only disclosure concerns Conviction and Fines for Corruption and Bribery. Effectively, governance disclosures for micro-undertakings thus do not go beyond criminal behaviour. It does not need explaining why this really should be the bare minimum of business behaviour and any disclosure.
The Narrative-PAT Module is a very interesting case. The term “narrative” in the name suggests disclosures that are rather qualitative than quantitative – and thus less concise. The description of the five different disclosures N1 to N5, however, ironically takes up a mere two pages in this draft version of the ESRS for SMEs. We can probably expect EFRAG to elaborate on these a bit more in any future, more advanced version. The Module equally briefly introduces SMEs to materiality assessments that, as we have discussed in an earlier text, play a central role in the ESRS and also form the basis of this Module. The five disclosures address Strategy, Material sustainability matters, Management of those matters, Key stakeholders, as well as Governance responsibilities in relation to sustainability matters. The wide-ranging titles are made only somewhat more precise in their brief elaborations and indeed leave much room for SMEs to narratively discuss their Policies, Actions, and Targets. Given that the entirety of the draft ESRS for SMEs is voluntary, this should not scare off SMEs which may be more familiar with quantitative disclosures or find them to be more accessible. Instead, businesses should conceive of the Narrative-PAT Module as a chance to explain themselves, learn, and elaborate on successes and challenges.
The BP Module presents a range of disclosures that EFRAG suggests SMEs to make less for the direct benefit of the latter but in support of their relationships with business partners. As we have discussed before, larger businesses covered by the CSRD are obliged to make disclosures extending beyond their own core operations into their business relationships. Due to this, they partially depend on data provided by business partners. The BP Module is EFRAG’s attempt to facilitate this exchange of information from the other side – that of the smaller business partners. In the draft ESRS for SMEs, the BP Module includes two Governance disclosures and five Environment and Social disclosures each.
In short, the draft ESRS for SMEs are an intriguing piece of support for SMEs not directly and legally covered by the CSRD. They are an invitation to become familiar with business sustainability work or to revise existing ways in preparation of the CSRD’s future impact.
Now that you’ve gained insights into ESRS and CSRD, it’s time to take the next step towards a sustainable future. At MorrowX, we’re passionate about simplifying sustainability for you. Whether you’re a business organisation looking to enhance your environmental and social impact or an SME eager to begin your sustainability journey, we’re here to guide you.
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