Omnibus Intensifies Need for Voluntary SME Disclosures

New EFRAG working group member Martina Macpherson stresses need for alignment of forthcoming VSME reporting standard with SFDR and ESRS.

The European Commission’s (EC) omnibus package proposal has heightened the importance and relevance of the European Financial Reporting Advisory Group’s (EFRAG) Voluntary Sustainability Reporting Standard for non-listed Small and Medium-sized Enterprises (VSME).

Published last week, the omnibus reduces the number of companies in scope of the Corporate Sustainability Reporting Directive (CSRD) by approximately 80%, significantly cutting the number of firms that are mandated to produce reports on both their ESG-related enterprise value risks and impacts on society and the environment.

As part of the omnibus, the EC stated that it will adopt a voluntary standard for all companies out of scope, including SMEs, based on the VSME developed by EFRAG. This would be adopted via a delegated act.

The EC tasked EFRAG with developing the VSME in late 2023, with the group publishing its technical advice on the standard in December. The VSME offers a sustainability reporting framework, closely aligned with the European Sustainability Reporting Standards (ESRS), while accommodating the business models and constraints of SMEs. The ESRS standards which underpin the CSRD, were also developed by EFRAG.

EFRAG has since started a VSME community. It currently has nearly 400 members, comprising non-listed SMEs, banks and investment managers, large companies, rating agencies, public sector actors, consultants and others. The group’s aim is to support and guide VSME’s disclosure efforts.

EFRAG’s latest deadline for applications to join the VSME Community closed on 14 February, with Martina Macpherson, Head of Product Strategy and Management – ESG at financial information provider SIX, being appointed to the group. SIX operates the Swiss and Spanish Stock Exchanges. Macpherson is also a board member of the Future of Sustainable Data Alliance (FoSDA) and a working group member of the European Securities and Markets Authority’s Sustainability Standing Committee.

“We have been asked help to shape the VSME framework further, alongside developing support guides for the standard’s Basic Module and Comprehensive Module,” Macpherson told ESG Investor, adding that investors should keep an eye out for a “clearer picture” of EFRAG’s progress on VSME after the summer.

“The omnibus has now pushed back the timelines somewhat and this is now becoming a concrete standard for everyone out of scope of CSRD and ESRS,” said Macpherson. “I think Q3 this year there will probably be some further announcements and outlining of concrete actions around standards, guidance documents and training modules.”

Slimmer scope, fragmentation risks

EFRAG’s VSME comprises a basic module and comprehensive module. The basic module consists of 11 disclosures focused on fundamental disclosures, including 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 greater detail and insights on policies, emission reductions, climate risks, human rights, and workforce considerations.

Macpherson said that EFRAG’s VSME community is currently looking at the comprehensive module’s C2 category, which focused on the description of practices, policies and future initiatives for transitioning towards a more sustainable economy, with an online survey running for group members until later this month.

EFRAG is in the process of developing a VSME template, which is expected to be released sometime in Q2 or Q3 this year. The group acts as an advisory body to the EC on financial reporting.

EFRAG is also due to undertake a series of initiatives to further develop and complement the VSME, including the issuance of support guides and educational material, outreaches, awareness raising events and the monitoring of emerging tools and platforms.

The VSME is expected to standardise multiple ESG data requests, representing a significant cost of preparation for non-listed SMEs, by reducing the number of uncoordinated requests received. This aims to support SMEs in having better access to lenders, investors and clients.

The scope and impact of EFRAG’s VSME standard has since shifted as a result of the EC’s omnibus package published last week. Technology provider have responded to the increased importance of VSME, with sustainability platform Esgrid releasing a new ESG reporting tool for SMEs to support reporting under the VSME standard.

The EC’s efforts at simplification and reducing administrative burdens by 35% for SMEs has resulted in approximately 80% of companies being removed from the scope of CSRD. The EC argued that this focuses the sustainability reporting obligations on the largest companies, which are more likely to have the biggest impacts on people and the environment, ensuring that sustainability reporting requirements “do not burden smaller companies in their value chains”.

The change in scope means that reporting will now only be mandatory for companies with more than 1000 employees and either a turnover of more than €50 million (US$52 billion) or a balance sheet surpassing €25 million. An estimated 40,000 medium-sized enterprises previously subject to CSRD will now report under VSME as a result of the omnibus proposal.

“On the investor side it is of the utmost important to support the development of VSME, even though it is voluntary, to sit side-by-side with the mandatory risk reporting requirements for the large-cap companies under CSRD,” said Macpherson.

However, she noted that the changes proposed by the omnibus have been “a bit confusing and frustrating for many”. Macpherson added that the omnibus raises questions for the EU’s Sustainable Finance Disclosure Regulation (SFDR), including the risk of fragmentation.

“There have to be implications for SFDR, as the CSRD will now cover a much smaller scope, but investors have already committed to higher disclosure levels and standards,” said Macpherson. “Investors should be watching these developments very closely, as ultimately the sets of criteria between SFDR, ESRS and now VSME need to be closely aligned in the near future.

“Multiple stakeholders across the value chain, including investors, the corporate community, NGOs and others, have stressed the necessity to ensure that the VSME is interoperable and is aligned with other reporting frameworks.” she added.

Macpherson also highlighted that a meeting on the ESMA Sustainability Standards Committee meeting this week underlined the need to align the interoperability between ESMA and other EU efforts. “This will also mean a closer alignment between SFDR and VSME developments,” she said.

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