11 July 2022

"SMEs are not ready to report under ESRS and won't be any time soon"

Speech by Salvador Marin, president of EFAA for SMEs, delivered at EFRAG-EFAA-SMEunited Joint Outreach on Draft ESRS EDs on 8 July

Let me start by thanking EFRAG and SMEunited for partnering with EFAA for SMEs in hosting this joint outreach event. And let me thank all the attendees for investing your Friday afternoon to be with us!

Salvador MarinIt perhaps goes without saying that this event is extremely important to EFAA, our 15 member organisations and their 370,000 members working as SMPs or in SMEs. It is also vitally important to SMEunited, the many small business associations across Europe and the millions of SMEs, many of whom stand to be impacted, directly or indirectly, by CSRD and EFRAG's ESRS.

I do not plan to say anything in detail about the 13 draft ESRS exposure drafts, although I know them very well as I have been working and discussing them as a member of EFRAG's SRB in the seat representing SMEs / SMPs. But I do plan to share a few general remarks about sustainability reporting and what it means for SMEs and SMPs.

EFAA believes sustainability - and climate change in particular - to be the most important issue and challenge of our time. We welcome the EU Green Deal. We welcome the commitment and ambition of its architects. And we welcome the CSRD's embrace of SMEs. Sustainability is not just an indulgence of the large companies. Collectively SMEs account for the majority share of private sector sustainability impact. So, they cannot, they must not, be left behind or ignored. Accordingly, EFAA welcomes the CSRD and its intent. And we welcome, in principle at least, the development of ESRS.

However, we have some significant observations to serve as context for today.

First, capacity. The rapid emergence of sustainability reporting – and the ambition to place it on par with financial reporting – is an essential enabler to the achievement of sustainability objectives such as Net Zero. But becoming sustainable and reporting on it presents enormous challenges for SMEs and the SMPs that advise them, that prepare reports for them, that provide assurance on those reports.

Right now, the capacity to become sustainable, let alone produce sustainability reports, does not exist; at least with these [proposed] requirements, details and content. And I doubt it will be anytime soon, if we don't think how [we] can help them and adapt [the requirements to] their conditions and characteristics; Above all, they need to be helped in relation to all the indirect effects that are produced from the so-called value chain or through the trickle down effect.

Second, the pace of change. Sustainability reporting has emerged from the shadows into the spotlight, from margin to mainstream, almost overnight. What took financial reporting many years of development, sustainability reporting has done in barely 3 years. And there's no sign of the pace easing. And this type of reporting is, arguably, more complex, more controversial, more contentious, than financial reporting.

Many argue that the pace of change is too fast, that the CSRD too ambitious, that the ESRS are too complex and voluminous. But then others, like the Commission and many parliamentarians, argue that certain social and environmental issues need to be tackled right now. For example, climate change will not wait for us.

Third, prioritization. All the sustainability issues addressed by ESRS are important and deserving but some might be more time sensitive than others. For example, climate change. That begs the question whether we should phase in ESRS, prioritizing some [disclosures], like the climate ones, before others. At least in terms of detail development, explanation, deepening, some prioritisation or phasing is necessary.

Fourth, proportionality. EFAA welcomes some of the most recent modifications to the CSRD, not least the additional time given before certain SMEs must start to report and the 'relief' afforded SMEs as per this paragraph:

"Standards shall specify disclosures on value chains that are proportionate and relevant to the scale and complexity of the activities, and the capacities and characteristics of undertakings in value chains, especially those of undertakings that are not subject to the sustainability reporting obligations of Articles 19a or 29a of this Directive"

I look forward to learning how EFRAG will ensure the ESRS meet this proportionality test.

In addition, I wonder whether reporting on value chain, or Scope 3, should be deferred until such time as we have an ESRS, or ESRSs, for SMEs.

Lastly, ESRS for SMEs. EFAA urges EFRAG to fast-track development of ESRS(s) for SMEs – for use, instead of the full ESRS, by listed SMEs that must report and for use by unlisted SMEs that volunteer to report.

I know that these standards are necessary, I have read the 13 standards and technically they are very good, but we have to find a middle ground between excellence and the practical needs of companies and society, that is our duty here today, mainly from the point of view of SMEs and SMPs.

We have to be realistic; and I say this from my own professional experience, SMEs are not ready to cover these standards, that is a reality whether you want to accept it or not; we have to keep working on two different but related concepts: proportionality and materiality.

Either we delimit and explain these two points well for SMEs or they will be very difficult to apply and understand, even for assurances providers.

Europe should be concerned about opening up the sustainability market, not narrowing it so that only a few survive, that is not realistic.

Please read more about EFAA's sustainability-related activities here.