Description of Characteristics:
- Tailored for SMEs: These exposure drafts (EDs) propose simplified and proportionate sustainability reporting standards specifically designed for small and medium-sized enterprises (SMEs) within the European Union (EU).
- Aligned with ESRS: The standards aim to be consistent with the broader European Sustainability Reporting Standards (ESRS) while recognizing the specific needs and capacities of SMEs.
- Double Materiality: Both standards maintain the focus on double materiality, requiring SMEs to consider both their impact on the environment and society, and the impact of sustainability issues on their financial performance.
- Proportionality: The standards introduce a simplified and proportionate approach to reporting, reducing the reporting burden for SMEs.
- Flexibility: SMEs can choose between a mandatory and voluntary set of disclosure requirements based on their specific circumstances.
Targeted Audience:
- ESRS LSME ED: Listed SMEs in the EU that meet the CSRD’s criteria.
- VSME ED: Non-listed SMEs in the EU seeking to demonstrate their sustainability performance and access sustainable finance.
Specific Criteria:
- ESRS LSME ED:
- General Requirements: Outline the overall principles and scope of sustainability reporting for listed SMEs.
- General Disclosures: Cover essential information about the organization, its strategy, and governance related to sustainability.
- Topical Standards: Address environmental, social, and governance topics in a simplified manner compared to the full ESRS.
- VSME ED:
- Similar Structure to ESRS LSME ED: Adopts a comparable structure but allows for even greater flexibility and adaptation for non-listed SMEs.
- Focus on Key Performance Indicators (KPIs): Encourages the use of KPIs to track and report on sustainability performance.
Reporting Principles:
- Materiality: Both frameworks emphasize focusing on material ESG topics that have a significant impact on the company’s business and stakeholders.
- Proportionality: Reporting requirements are tailored to the size and complexity of SMEs.
- Comparability: While allowing for flexibility, the frameworks promote consistency in reporting to enable comparison across SMEs.
- Understandability: Disclosures should be clear and concise.
- Reliability: Information should be based on reliable data and processes.
Reporting Process:
- Identify Material Sustainability Matters: SMEs conduct a double materiality assessment to identify sustainability matters that are material to their business and stakeholders.
- Select Disclosure Requirements: SMEs choose between the mandatory disclosures (ESRS LSME) or the voluntary disclosures (VSME) based on their circumstances.
- Collect and Analyze Data: Gather and analyze data related to the identified material sustainability matters.
- Prepare Disclosures: Prepare sustainability disclosures in accordance with the chosen standard, addressing both impact and financial materiality.
- Obtain External Assurance: External assurance is not mandatory for SMEs under these standards, but it can be beneficial for enhancing credibility.
- Publish and Communicate: Publish the sustainability report and communicate it to stakeholders.
Connections to Other Frameworks:
- Alignment with ESRS: Both frameworks are based on the overarching ESRS, ensuring consistency and compatibility.
- Connection to EU Regulations: ESRS LSME ED is directly linked to the CSRD, while VSME ED supports the EU’s objective of facilitating access to sustainable finance for SMEs.
Challenges:
- Emerging Frameworks: Both frameworks are still under development, and the final requirements are not yet finalized.
- Resource Constraints: SMEs may face challenges in allocating resources for data collection, analysis, and reporting.
- Capacity Building: SMEs may require additional support and training to implement the standards effectively.
Compliance Guidance:
- ESRS LSME ED and VSME ED Exposure Drafts: The European Financial Reporting Advisory Group (EFRAG) has published exposure drafts for both frameworks, providing initial guidance on the reporting requirements.
- Future Implementation Guidance: EFRAG is expected to provide more detailed implementation guidance once the standards are finalized.
Usability Evaluation:
- Level of Global Adoption: Adoption of ESRS LSME ED will be mandatory for listed SMEs in the EU from 2026 (with an opt-out option). VSME ED adoption is expected to grow as more SMEs seek access to sustainable finance.
- Ease of Use: Both frameworks aim to be user-friendly and proportionate for SMEs, but some complexity may remain, especially for those new to sustainability reporting.
- Focus Areas: Cover a range of environmental, social, and governance topics, with a focus on materiality and proportionality.
- Data Availability: Data availability may be a challenge for SMEs, especially for those without established ESG data management systems.
SyncFrame Compatibility:
- Strong Alignment: SyncFrame can support SMEs in navigating these standards through its materiality assessment tools, data collection and analysis capabilities, and expert guidance. Flexible Reporting: SyncFrame’s reporting templates can be adapted to meet the specific requirements of ESRS LSME and VSME.
- Impact Measurement: SyncFrame’s focus on impact measurement aligns with the double materiality approach of these standards.
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