As the ink of the final text of the CSRD dries, SMEs still have cold sweats as to how the directive is going to impact them.
Salvador Marin, president of EFAA for SMEs, says the current ESRS, which are under consultation, are "technically perfect" but "SMEs are in no position to comply with them and won't be able to any time soon".
The main concern is around the trickle-down effect of the rules. Indeed, while listed SMEs are in the scope of the regulation and will have to report under CSRD, non-listed SMEs and smaller entities are not. However, they will be indirectly impacted as larger companies turn to their supply chains to find the information they need to comply with the reporting requirements.
2024 - Entities that are already subject to NFRD will have to work through requirements for first report published in 2025.
2025 – Other large companies come into scope.
2026 – Listed SMEs come into scope, with an option to postpone reporting until 2028.
2028 – Non-EU companies subsidiaries come into scope.
SMEunited's Hendrickx noted that while listed SMEs are allowed to defer the reporting by two years to 2028, other SMEs that are in the supply chain of large companies will probably be asked by those large companies to provide information from day one in 2024, which didn't make much sense.
Luc Hendrickx, director at SMEunited, laments that the Commission has lost sight of the trickle-down effect along the way. Back when the NFRD was being drafted and discussed, he remembers the commission asking him to warn them as soon as the NFRD started to burden SMEs that were out of scope. Now, with CSRD, the legislative language has changed and there is a sense that SMEs have to get on board the sustainability reporting train.
At a recent outreach event organised by EFRAG, Tom Dodd, team leader for sustainability reporting at the European Commission, said the issue around SME reporting is often presented simply as a question of 'how do we avoid the knock-on effects and the indirect burden landing on SMEs?'.
"That is of course a very important consideration," he said. "But at the same time, we mustn't lose sight of the fact that we are moving to a sustainable economy and in that sustainable economy, all companies to some extent, whether or not they are required by law, will almost certainly have to share some sustainability information."
Hendrickx doesn't buy that 'opportunity for SME argument'. The CSRD will not result in SMEs producing sustainability reports and getting better at sustainability reporting, he argues. "There are no guarantee that the big companies will accept a lighter version of the standards for SMEs and thus will most likely ask for the information they need in long questionnaires for the SMEs to fill."
Marin stays pragmatic, arguing that SMEs can contribute but they need better tools.
"We need to clarify what proportionality and materiality mean for SMEs and it's very important to clarify what standards they should apply when the value chain request this information. And this should be clarified before SMEs are asked to prepare this report," Marin says. "We need the right tool for SMEs, and SMPs helping SMEs to prepare this information."
On the bright side, the final text, agreed in trialogue by the EU institutions in June, includes a number of amendments which, on the face of it, are favorable to SMEs.
First, listed SMEs who are under scope, will be able to report according to proportionate, simpler standards than the large companies if they want to. The Commission also has the option to publish, outside of the legislative framework, other standards or guidelines for non-listed SMEs.
The CSRD include a provision that allows a large company, who can't obtain the necessary information from its value chain in the first three years, to explain why it wasn't able to obtain the information. Another provision states that the reporting standards for large companies should not require the large company to obtain more information from SMEs in its supply chain than would be required to be reported in the standards for listed SMEs.
Paul Thompson, director at EFAA, says: "The critical issue right now is to what extent is EFRAG now going to modify its draft ESRS to accommodate this requirement to have proportionality built into the standards. It's just not clear to us. Obviously, this is early days and the ink is barely dry but this is clearly a very important issue for us as to how this is going to be put into effect."
Auditioned by the parliament for the role of chair of EFRAG's sustainability board, Patrick de Cambourg, who was later voted in as their preferred candidate, told MEPs: "In line with the latest CSRD amendments, SME sustainability reporting shall be designed for SMEs and not as a downgraded version of the standards applicable to large undertakings. It is key not to overburden them and not to impair their capacity to develop and complete successfully. It must be a virtuous circle for them, not one more obligation."
There is an historical precedent that went wrong, Thompson and Hendrickx note: IFRS for SMEs. After decades developing the IFRS standards the international standard setter realised the burden on SMEs and decided to come up with a lighter version of the standards, Thompson explains.
"I'll go further than Paul," Hendrickx said. "We dealt with the IFRS for SMEs and this does not work, you cannot have something that is developed for the big ones, then start to cut it and try to apply it to the small ones. This does not work."
In an ideal world, we start with a blank sheet of paper and we develop a standard that is very simple and is targeted very much at the smallest simplest organization in the first instance and then you build in layers or modules on top of that, Thompson concedes. "That is an ideal approach. Unfortunately, we have this legacy of having started by catering to the most complex and largest organizations in the first instance, and then trying to simplify it for the SMEs and it is a very difficult task to do."