Navigating ESG reporting for SMEs: Strategies and challenges

Navigating ESG reporting for SMEs: Strategies and challenges

Currently, non-listed small and medium-sized enterprises (SMEs) in the EU are not required to report on their environmental, social, and governance (ESG) practices under the EU Green Deal directives like CSRD/EU Taxonomy/CSDDD. However, market realities are such that SME stakeholders, including investors, banks, and customers, are already imposing these reporting requirements.

Greenomy, a provider of ESG and sustainability reporting software recently explored why ESG reporting is important for SMEs even when it is not mandatory and the urgency of implementing robust sustainability strategies.

Large corporations in Europe have long since moved sustainability from a societal response to a central strategic concern, with executives now recognizing its importance. Verdantix’s study indicates that 33% of companies see the CEO’s vision as a primary driver for sustainability commitments.

The emerging ESG frameworks, including the Corporate Sustainability Reporting Directive (CSRD) and the EU Taxonomy, encourage greater ESG data transparency and comparability. This goes beyond mere compliance, as ESG performance is becoming a significant factor in accessing future finance options.

For SMEs, there’s still some uncertainty about the importance of sustainability performance. A small fraction of SMEs are required to adhere to Sustainable Finance standards like the simplified ESRS, the Voluntary SME ESRS (VSME), or any simplified ESG reporting framework. Despite this, most SMEs delay their ESG reporting, focusing instead on daily operations. However, beginning ESG strategies and reporting early can be highly beneficial for SMEs.

In the EU, an SME is defined by staff headcount, turnover, or balance sheet total, representing 99% of all enterprises and employing nearly 100 million people. The CSRD and EU Taxonomy will apply from 2026 to listed SMEs meeting certain criteria, including a balance sheet total of EUR 5 million or above, a net turnover of EUR 10 million or above, or an average of 50 or more employees during the financial year.

While legally, only listed SMEs need to comply with the CSRD, all market players feel its impact. Banks and investors now require ESG data from portfolio companies, including SMEs. Consumers are increasingly favoring sustainable companies, prompting banks and investors to avoid financing unsustainable SMEs and larger corporates to choose sustainable suppliers.

ESG reporting for SMEs is still nascent, with multiple frameworks in existence. SMEs must navigate these to provide data on sustainability policies, adverse impacts, ESG risks, and related KPIs. However, the industry is expected to standardize reporting frameworks eventually.

The challenge for SMEs lies in financial constraints, lack of expertise, absence of existing data, and unclear incentives. However, starting a structured ESG reporting strategy is crucial for SMEs to leverage sustainability as a competitive advantage. For SMEs, the journey begins with assessing ESG goals, defining needs, creating an ESG reporting team, initiating reporting, and improving sustainability practices.

Although only listed SMEs will be legally bound to report their ESG performance soon, transparency in ESG practices is becoming indispensable for all SMEs. To support this transition, Greenomy offers comprehensive solutions for businesses of all sizes, from automated ESG data collection to AI-driven tailored recommendations.

Greenomy’s article covers various aspects, including the role of SMEs in Sustainable Finance, the indirect impact of CSRD on SMEs, what SMEs should expect from ESG reporting, the challenges they face, and the intersection of sustainable and financial performance.

Read the full story here.

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