EU regulator urges enhanced sustainability reporting for SMEs

In response to a consultation by the EFRAG on the proposed ESRS for SMEs under the EU’s CSRD, the ESMA has issued recommendations to adjust the proposed sustainability reporting requirements.

According to ESG Today, ESMA’s recommendations aim to address the balance between proportionality concerns and the need for transparency and reliability of information to investors. One of the key proposals by ESMA is to enhance reporting obligations for SMEs regarding sustainability-related positive impacts and opportunities. While all entities are required to report on risks and adverse impacts, ESMA notes that disclosure requirements on opportunities are greater for larger entities, posing a risk of greenwashing for SMEs.

The main concern highlighted by ESMA is that reporting on positive impacts and opportunities may occur outside of the CSRD structure, without the assurance safeguards of sustainability reporting rules, thus increasing the risk of greenwashing. To mitigate this risk while maintaining proportionality, ESMA suggests a compromise approach, including a concise depiction of material positive impacts in the materiality assessment and aggregated disclosure of opportunities, with the option for more detailed information on a voluntary basis.

ESMA also recommends further assessment by EFRAG on the interoperability of ESRS for SMEs with international sustainability reporting standards, particularly those of the International Sustainability Standards Board (ISSB) and the Global Reporting Initiative (GRI). Limiting the efforts required by SMEs to explain any divergence with international standards is seen as crucial for ensuring proportionality.

In conclusion, ESMA’s recommendations aim to strike a balance between proportionality concerns and investor protection considerations, while addressing the risk of greenwashing in sustainability reporting by SMEs. These proposals are part of a broader effort to enhance sustainability reporting standards in line with evolving regulatory frameworks.

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