Get it together: The Exposure Draft Voluntary Standard for Non-Listed SMEs: Empowering Sustainable Growth

The European Financial Reporting Advisory Group (EFRAG) has recently published an exposure draft of the Voluntary Standard for Non-Listed Small and Medium-Sized Enterprises (VSME ED). This groundbreaking standard aims to support micro-, small-, and medium-sized undertakings in contributing to a more sustainable and inclusive economy while improving their management of sustainability issues. By providing a framework for reporting on environmental, social, and governance (ESG) matters, the VSME ED seeks to help these enterprises attract financing, satisfy data demands from stakeholders, and ultimately enhance their competitive growth and resilience.

One of the key features of the VSME ED is its modular approach, which allows undertakings to choose the level of reporting that best suits their needs and capabilities. The Basic Module, targeted at micro-undertakings, focuses on essential disclosures related to the basis of preparation, practices for transitioning towards a more sustainable economy, and a set of basic metrics covering environmental, social, and business conduct matters. The Narrative-PAT Module and Business Partners Module build upon the Basic Module, incorporating materiality analysis and additional disclosures to provide a more comprehensive picture of an undertaking's sustainability performance and impacts.

The concept of double materiality is central to the VSME ED, requiring undertakings to consider both the impact of their activities on people and the environment (impact materiality) and the financial risks and opportunities that sustainability matters pose to the undertaking (financial materiality). This approach ensures that the reported information is relevant and useful to a wide range of stakeholders, including investors, lenders, business partners, and civil society organizations.

In terms of environmental matters, the VSME ED requires undertakings to disclose information on their energy consumption and greenhouse gas emissions, pollution of air, water, and soil, impacts on biodiversity, water consumption and withdrawal, and resource use and waste management practices. These disclosures provide valuable insights into an undertaking's environmental footprint and its efforts to mitigate negative impacts and transition towards more sustainable practices.

Social matters are equally important in the VSME ED, with disclosures covering workforce characteristics, health and safety, remuneration, collective bargaining, and training. The standard also addresses impacts on workers in the value chain, affected communities, consumers, and end-users, promoting transparency and accountability in an undertaking's social performance.

Governance-related disclosures in the VSME ED focus on business conduct, including anti-corruption and anti-bribery measures, protection of whistleblowers, and the management of relationships with suppliers. These disclosures help stakeholders assess an undertaking's commitment to ethical business practices and responsible corporate governance.

The VSME ED provides detailed guidance on how to calculate and report on various sustainability metrics, ensuring consistency and comparability across reporting entities. The standard also includes a comprehensive list of defined terms and a list of sustainability matters to guide undertakings in identifying and reporting on material issues.

One of the most significant aspects of the VSME ED is its alignment with the European Sustainability Reporting Standards (ESRS) for large undertakings. By covering the same sustainability issues and maintaining consistency with the ESRS, the VSME ED enables smaller enterprises to be part of the larger ecosystem of sustainability reporting, facilitating their integration into sustainable supply chains and attracting investors and lenders who prioritize ESG considerations.

The exposure draft also includes an appendix dedicated to financial market participants, highlighting the Sustainable Finance Datapoints present in different modules of the standard. This appendix demonstrates how the disclosures relate to various regulations relevant to users of the sustainability report, such as the Sustainable Finance Disclosure Regulation (SFDR), the EU Taxonomy, and the Benchmark Regulation. By aligning with these regulations, the VSME ED supports the growing demand for sustainable finance and helps smaller enterprises access capital from ESG-focused investors.

The publication of the VSME ED marks a significant milestone in the journey towards a more sustainable and inclusive economy. By providing a proportionate and flexible framework for sustainability reporting, the standard empowers micro-, small-, and medium-sized undertakings to contribute to the achievement of the European Union's sustainability goals, such as the European Green Deal and the Paris Agreement on climate change.

The voluntary nature of the VSME ED allows undertakings to adopt the standard at their own pace, considering their specific circumstances and resources. However, as sustainability becomes increasingly embedded in the fabric of the global economy, it is likely that more and more smaller enterprises will recognize the benefits of sustainability reporting and choose to adopt the VSME ED.

The exposure draft is open for public consultation until 21 May 2024, allowing stakeholders to provide feedback and shape the final version of the standard. This inclusive approach ensures that the VSME ED reflects the needs and expectations of a wide range of users and preparers, fostering broad acceptance and adoption of the standard.

As the VSME ED moves closer to finalization and implementation, it is essential for micro-, small-, and medium-sized undertakings to familiarize themselves with the standard and start preparing for the transition towards sustainability reporting. This may involve assessing their current sustainability performance, identifying material issues, engaging with stakeholders, and setting up the necessary processes and systems to collect and report on relevant data.

The journey towards a sustainable future is a collective effort, and the VSME ED represents a crucial step in enabling smaller enterprises to play their part. By embracing sustainability reporting and the principles of the VSME ED, these undertakings can not only contribute to a more resilient and inclusive economy but also secure their own long-term success in a rapidly changing business landscape.

In conclusion, the Exposure Draft Voluntary Standard for Non-Listed SMEs is a game-changer in the world of sustainability reporting. It provides a much-needed framework for smaller enterprises to measure, manage, and communicate their sustainability performance, while aligning with the broader ecosystem of European sustainability standards and regulations. As the standard moves towards finalization and adoption, it is poised to unlock the potential of micro-, small-, and medium-sized undertakings in driving the transition towards a more sustainable and prosperous future for all.

the complete EFRAG's draft: https://encr.pw/L1UdG