SMEs and the Future of European Sustainability Reporting Rules – Small Businesses deserve to get Clarity to address the Sustainability Challenge
Until now, SMEs have largely been left out from sustainability reporting. However, this will change dramatically. European banks and investors, as well as companies at the top of value chains, are rapidly realigning their strategies to avoid risks posed by the climate transition. SMEs form the majority of their clients and suppliers. It is important that small businesses understand the implications of such changes, and the role they can play in this debate, to ensure a positive contribution.
The European Commission is already proposing a new framework to simplify and better focus disclosure of sustainability data with the presentation of the Corporate Sustainability Reporting Directive (CSRD). The reform should be adopted in law in early 2022 and enter into force in 2023.
Meanwhile, the EU taxonomy, which will provide a framework to realign investments and loans to support sustainable activities will become applicable already in 2022 (estimated need of additional 500 billion EUR annually to achieve the Green Deal objectives). The public Covid-recovery programmes will also be focused on sustainable transformation determined by these tools.
The EU initiatives are meant to bring down costs and other barriers facing companies and ensure meaningful data is available for banks and investors. However, concern remains that smaller companies may be left out of the system.
“From the banks’ perspective, it is important to have sustainability data from SMEs. Mainly in the sectors that are sensitive to climate risks. It is needed to support their transition and also for our own risks assessment and compliance with regulatory disclosure requirements. The Corporate Sustainability Reporting Directive is already a major step forward, but we hope the forthcoming interinstitutional negotiations will bring an even bigger ambition in the future Directive to include SMEs from those sectors,” describes Antoni Ballabriga, Global Head of Responsible Business at BBVA. Chair of the Sustainable Finance Working Group at the European Banking Federation.
This article explains what the stakes are for SMEs, how they can engage with upcoming changes and developments in legislation, and how policymakers can also help them.
The SME case for Transparency
Economic transformation brings unparalleled market opportunities, and it is vital for SMEs to be able to harness them. The Business Commission for Sustainable Development reported that meeting the UN Sustainable Development Goals (SDGs), would create market opportunities of EUR 10 trillion per year by 2030. Similarly, as shown by a CDP study from 2020, the value of low carbon opportunities such as higher demand for electric vehicles and green infrastructure identified by 882 European companies reached €1.22 trillion, which was more than six times higher than the investment cost of €192 billion.
SMEs’ ability to work with sustainability data will be key for acquiring new customers, embracing technological changes necessary for succeeding in this rapidly evolving environment and avoiding legislative shocks.
Many SMEs do already embrace sustainability opportunities. Such outstanding businesses have a huge head start, enabling them to harness the opportunities presented by the transformation and advance their business models to the next stage. They also benefit from reduced costs through optimisation of energy and resource use, attracting and retaining talent as employers or being better placed in terms of seeking loans or investment.
An example of a smaller company that has sustainability deeply integrated in its business model is French footwear and accessories brand Veja. They work directly with the communities they source from, use cotton grown with regenerative practices, and also recycle and repair sport shoes. “When Veja considers next steps for improving its social and environmental footprint, it thinks of impacts first, economics and profitability second,” says its co-founder Sébastien Kopp. The company is profitable, and has been since its 2004 launch. It now employs a team of 200, that in 2020 brought in $120 million in annual sales, up from $78.5 million in 2019. They also “believe the only way to defeat blind spots is to calculate everything and release everything” so they are disclosing data on their emissions’ footprint including scope 3 emissions and are highly transparent about commodities and rights of employees in their supply chains.
See Frank Bold’s overview of Veja’s sustainability reporting in detail here.
Infobox: SMEs in the EU – green business opportunities and access to finance
Together, SMEs make up over 99% of all enterprises in the EU. They account for over two-thirds of total employment and contribute about 56% of the total turnover in the EU.
Only 3 % of EU start-ups go on scale up, but they are Europe’s job creation champions. While young SMEs that scale up represent just a tiny minority of all start-ups, they offer a key source of radical and disruptive innovations and disproportionately create jobs in the market. For example, while on average only 4% of micro-sized start-ups grow in this way, they contribute to the creation of between 22% (The Netherlands) and 53% (France) of jobs in their category.
There is evidence that lack of access to appropriate external finance can act as a barrier to growth and innovation in SMEs. Even more so in green business opportunities, more than a quarter of SMEs that have undertaken activities related to the circular economy claimed difficulties accessing finance in the Eurobarometer survey.
The cost of excluding SMEs
The recent European proposals already seek to involve small businesses for the first time. Previously, the EU Non-Financial Reporting Directive applied only to large listed companies, banks and insurers with more than 500 employees, thus limiting its impact to 2000 companies EU-wide (1). With the new draft on the table, reporting obligations will involve SMEs listed on stock exchanges, as well as all large companies (both private and listed) as is already the case in Denmark, Greece, Iceland, Spain and Sweden (an analysis of the key changes proposed in the reform presented in April 2021 can be found here).
But is this sufficient to properly involve small businesses within our economy?
Even if the change in scope appears to be significant, it still affects fewer than 1% of companies in the EU. Left out of the scope is another 6%, which are considered private SMEs (and then 93% of microenterprises that are too small to be subject to reporting legislation). Investors, accounting organisations and NGOs raised two concerns in this area.
- Significant impacts of companies on the environment and society do not depend on their size or legal status.
- Redirection of investments to support the transition to a low-carbon economy is not limited to assets listed on stock exchanges.
If this situation is not addressed, SMEs that are not covered by the legislation will be disadvantaged compared to larger competitors and listed SMEs that will instead be covered by the new rules. Needless to say, it is important to have a level playing field for SMEs for the whole of Europe going forward.
Meanwhile, there are many SMEs who find themselves in sectors facing major technological and regulatory changes and needing to secure finance for transformation, including in energy, construction, metallurgy, and agriculture. To be competitive and secure future funding, SMEs understand that they will need to invest into their own transformation. The EU plans to mobilise 1 billion EUR public investments annually for this purpose. Yet, harnessing these opportunities will also depend on SMEs’ ability to provide the right data on sustainability.
Any divergence of rules between listed and non-listed companies also risks adding another barrier to small businesses seeking to expand – companies who are considering raising capital by listing their shares or bonds on stock exchanges. It is important to avoid introducing such disincentives – both for SMEs themselves and for the operation of our capital markets.
How can the EU standardisation of corporate sustainability reporting help reduce the burden
Data by the Global Reporting Initiative (the most widely used amongst the many voluntary reporting standards) shows that only 10-15% of companies using their standards are SMEs. This is understandable, given the complexity of existing reporting frameworks – which combined propose over 5000 KPIs – and competing demands for data from customers and financial institutions. All of this makes sustainability data gathering extremely challenging and costly for SMEs with limited financial and human resources for such overheads.
The EU initiative rightly seeks to address this problem by providing clear reporting standards that identify which data companies – and banks and investors – should focus on. More broadly, standards will provide a map and compass allowing companies to understand and navigate through the storm of technological development, market demand and regulatory changes on the horizon. Small businesses stand to benefit most.
As pointed out by Sara Foršek, Sustainability officer from Raiffeisenbank Austria d.d.: “SMEs and those not supported by international parent companies do not have a clear understanding of what is expected from them concerning sustainability data. A resulting common problem is that disclosed information is often not standardised and thus not comparable.”
Proposals for simplified standards for SME:
The European Commission proposed that a simplified standard for SMEs should be developed. Such a standard will go a long way in making it easier for SMEs to report on sustainability and reduce administrative costs.
To achieve this goal, the standards should specify essential sustainability indicators that can be reasonably reported by SMEs, and – critically – supporting methodologies and tools allowing their easy calculation. This concerns in particular:
- greenhouse gas emissions,
- energy intensity,
- information concerning activities and use of resources linked to heightened risks of impacts on climate, biodiversity and deforestation,
- clear guidance for reporting on climate transition plans and sustainable activities,
- human rights due diligence,
- meaningful workforce indicators (large companies often require a plethora of social data and confirmations on compliance with fundamental labor rights from their suppliers, but the requested information is often of questionable value).
SME standards are indispensable to ensure proportionality of reporting requirements to contain the risk that companies at the top of supply chains will simply pass on the costs and data gathering requirements concerning the deeper level of the supply chain to their next-in-line suppliers.
However, due to their non-binding status, standards alone will not be sufficient to provide safeguards against such externalisation of costs of reporting by large companies. Such safeguards can be only achieved if the standards are supported by a legislative mandate for SMEs, clarifying their reporting obligations vis-a-vis the obligations of large companies.
A tipping point has now been reached from an older approach of simply exempting small business from sustainability reporting rules, to one today which recognises the positive advantages of ensuring SMEs are not left behind. Small business cannot avoid the major forces transforming our economies towards a low carbon future – and needs to embrace them or risk disappearing altogether. The cost of sustainability reporting is seen to pay itself back to the company by up to six times. Sustainability data is already essential for companies to benefit from a sharply rising proportion of all investment funds, including Covid recovery finance around the world. Without relevant sustainability reporting, small businesses find themselves at a competitive disadvantage, missing new market opportunities, and being prevented from accessing resources for development of new technological solutions. Only by becoming part of the sustainability transition, will SMEs be the source of sustainable growth for the future.
The European Union’s new Corporate Sustainability Reporting Directive has recognised these arguments, involving small business for the first time, but ensuring that only simplified standards would apply to SMEs. Following the reasons outlined in this article, it is right to argue that the interest of small business would be better served by extending the scope of the Directive and providing them with certainty vis-a-vis larger companies by laying down safeguards and clear simplified standards.
For every small business owner across Europe today, it is important to recognise how many of your fellow SMEs are adopting these practices and are succeeding by doing so. You have won the argument that new EU requirements must be proportionate to your ability to meet them – but it is time to add your own voice to ensure all small businesses can be included, to secure your own place in a sustainable future.
Interview with Spanish SME A&B Innovative Solutions
“The key factor to achieve our sustainability goals is to integrate them in the highest policies and strategies of the organization”
To complement the article, we interviewed Isabel Acevedo from A&B Innovative Solutions, a Spanish SME supplying biotech products for cleaning and maintenance. With just over 30 employees, the company welcomes the proposal for new simplified EU sustainability standards for small businesses, highlighting their relevance to compete more effectively with larger businesses. Read the article to find out how A&B Innovative Solutions reports sustainability-related information.
Is sustainability an important issue for you personally and your company – and in which ways?
Sustainability for us is the only way we understand businesses. A&B was born in 2001 to provide solutions based on product stewardship, Biotechnology and Green Chemistry in substitution of hazardous traditional products. Since then, the chemical sector has deeply changed with new regulations such as REACH, CLP, Biocides. The application of these regulations has led to more knowledge of toxicological and ecotoxicological behaviour of chemicals and transfer of more of this information along the supply chain. Also, due to these changes, high risk chemicals were detected and substituted. Since 2001 we have been working hard looking for new alternatives of our raw materials in our formulas and products. We consider environmental and safety factors in the phase of design of our products in addition to other economical or technical factors.
We integrate Ecolabel requirements and the study of the environmental and safety impact in the life cycle of our products in our management system under Ecolabel Decisions and ISO 14006 Standard.
And there is no way back. In 2020 the Commission published the Chemicals Strategy for Sustainability towards a toxic-free environment according to The European Green Deal where the EU was set on a course to become a sustainable climate neutral and circular economy by 2050. This is the great and exciting challenge we must face.
Has your company been able to take any actions to make itself more sustainable, and what have these been?
We are always thinking about how we can reduce our environmental impact. For example, in 2021 we have installed a photovoltaic system to take steps to become more energetically independent using renewable energy.
Do you publicly commit to sustainability on your website, in your reporting or in other ways – and how do you do this?
Our Statement of intents is set in a document called Sustainability Commitment Policy. In this document different environmental, quality, social and safety issues are integrated. We also inform about how our activity contributes to achieve the SDGs. Also, we inform about our environmental behaviour on our sustainability report.
We understand communication as part of our responsibility. We try to inform downstream along our supply chain about environmental and safety data in order to ensure that our products are transported, used and disposed of the way they were designed for.
In addition, we take part in meetings and conferences with different stakeholders such as customers, suppliers, competitors, society in general to share our good practises and try to be an inspiration to others.
Are you concerned about your ability to meet sustainability requirements from banks, investors or larger companies who you supply and why?
Up to date we have not been concerned because our standards have most of the time been higher than what we were required. We have met Ecolabel and Ecodesign standards, and we have been certified by third parties in these requirements. We have always considered as an asset these extra requirements from other costumers to improve our system.
What would enable you to undertake more sustainability actions in the company in the future?
Being a small company, we are in need of a bigger framework that would make us have a stronger impact on our stakeholders. We work in different working groups with other public and private agents like Alianza Alavesa de Desarrollo Sostenible, Izaite, Ihobe, Euskalit, etc. This let us move forward and raise our game in the actions we take to be more sustainable.
We think that Public Administrations have a lot of responsibility on this. They can lead the sustainability policies in areas such as Green Public Procurement, tax benefits, new regulations with different strategies for sustainability. All this would enable us to undertake more sustainability actions.
Are you satisfied that the European Union has said any requirements for reporting on sustainability will be simplified for small businesses?
Standards on reporting were usually difficult to meet for small businesses due to the complexity of the structure and the lack of resources we usually have. Any simplification and clear guidance is always welcome and makes us be more competitive against the bigger companies.
Do you see yourself and your company being able to operate in ten years time, in an economy based on a low carbon model? How can you achieve this?
Yes, we can see us in ten years in a low carbon model world. We have laid the basis to achieve this during the last 20 years and always look for creating products that meet with the requirement of a new greener model of businesses and economy and with the stricter regulations and customer requirements such as low VOC products, biocides or substitution of hazardous chemicals. We think that the key factor to achieve our sustainability goals is to integrate them in the highest policies and strategies of the organizations.
Spain SME A&B Innovative Solutions focus on Biotechnology and Green Chemistry with two commercial brands, A&B for professional users and Befree home for household users. The company employs 34 people and brought in 6 million EUR in sales in 2020. Aitor Pérez Acero, Product Stewardship Responsible, also contributed to the interview.
(1) In practice, and taking account of how the NFRD has been transposed in different Member States, approximately 11 700 companies were subject to the reporting requirements of the NFRD in the EU-28. This figure takes account of how Member States have transposed the Directive. Not taking account of national transposition, about 2 000 companies are under scope of the NFRD.
This is the fifth article by Frank Bold as part of the series of monthly briefings on sustainability reporting in 2021.