ESG – new obligations for companies
You are an SME and want to start your adventure with sustainability reporting. We can support your sustainability journey by connecting you with our network of SPCleantech member partners who provide diverse knowledge, solutions and tools tailored to your business needs.
In the current era, characterized by increasing awareness of the challenges related to climate change and growing attention of society and business in the area of sustainable development, ESG (Environment, Sustainability, Governance) reporting is becoming of key importance. The new EU CSRD directive and new ESRS standards require comprehensive reporting in this respect by public interest companies, issuers of securities, large enterprises and listed entities from the SME sector. Unlisted small and medium-sized enterprises are currently outside the direct scope of this directive. However, although reporting is voluntary for them, in practice it may prove necessary.
CSRD and unlisted SMEs
The CSRD (Corporate Sustainability Reporting Directive) on reporting on the sustainable development of enterprises has been in force since January 2023 and does not yet impose reporting obligations on the above-mentioned group. However, business partners and investors can enforce reporting.
- Let’s start with the supply chain: large entities, in order to analyze the entire supply chain and life cycle of their products, will expect detailed information from their contractors regarding the origin of products, their carbon footprint and other often comprehensive information in the ESG area. Unlisted SMEs will therefore be under indirect pressure to monitor and make such data available. Imagine a clothing manufacturer sourcing fabrics from a small, family-owned textile manufacturer. The manufacturer’s customers, the largest retail chains, ask about working conditions in the factory and its impact on the environment. Our fabric factory, although not legally obliged to do so, in order to secure its place in the supply chain will have to report, for example, its water consumption, waste production, emissions and other practices related to sustainable development.
- Attractiveness to investors: Investors are increasingly willing to take into account non-financial aspects when assessing entities, and therefore I will increasingly select companies with developed ESG strategies for my investment portfolios. Unlisted SMEs seeking capital will have to respond to new investor expectations. ESG factors will also affect creditworthiness. An SME with a solid sustainability report appears less risky, signals a commitment to responsible practices, increases trust, attracts investment and/or has easier access to credit.
Strategic importance
- Trust and image: Society, investors, customers and employees are increasingly interested in companies’ activities in the area of sustainable development. ESG reporting allows companies to provide comprehensive information on their activities in the areas of environmental, social and corporate governance, increasing stakeholder trust and improving the company’s image.
- Market competitiveness: Companies that have implemented ESG reporting can gain a competitive advantage. SMEs that report proactively demonstrate forward thinking. This competitive advantage can convince potential customers and partners. Imagine an unlisted SME competing for a contract with a multinational corporation. Both companies offer similar products, but one has a transparent sustainability report highlighting its efforts to reduce carbon emissions, promote diversity and engage in ethical supply chain practices. The choice becomes clear – responsible SMEs gain a competitive advantage. Sustainable practices are gaining recognition among more and more consumers. As awareness grows, consumers are increasingly looking for products and services from companies that are consistent with their values. Unlisted SMEs that communicate their sustainability efforts position themselves as a responsible and ethical choice. This can open doors to new customer segments and markets.
So is it a necessity?
Conclusions
Under the regulations, unlisted SMEs are not yet obliged to introduce ESG reporting. And although reporting in this area is currently voluntary, its implementation can bring many strategic benefits. Sustainability activities can help companies build a sustainable competitive advantage and achieve long-term success.
To strike a balance between proportionality and transparency, enabling SMEs to provide relevant information without unnecessary burdens, the European Financial Reporting Advisory Group (EFRAG) is developing voluntary sustainability reporting standards specifically tailored to the needs of unlisted SMEs.
Are you an enterprise from the SME sector and the CSRD directive does not apply to you yet, but you want to start your adventure with sustainability reporting?
Contact us. We can support your sustainability journey by connecting you with our network of SPCleantech member partners who provide diverse knowledge, solutions and tools tailored to your business needs.