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The Voluntary Sustainability Reporting Standard for Non-listed SMEs (VSME), published by the European Financial Reporting Advisory Group (EFRAG) on December 17, 2024, offers a comprehensive framework for non-listed small and medium-sized enterprises (SMEs) to report on sustainability factors. Designed with the aim of reducing complexity and aligning with the capabilities of smaller businesses, the VSME is part of a broader European Union initiative to enhance sustainability reporting across all sectors. This standard is voluntary but serves as a crucial step towards standardising environmental, social, and governance (ESG) disclosures for SMEs that are not publicly listed.
The VSME aims to address the growing demand for transparency around the sustainability practices of SMEs, which have increasingly come under scrutiny by stakeholders such as investors, banks, customers, and regulators. As sustainability considerations gain prominence in business and investment decision-making, SMEs often face challenges in meeting these expectations, largely due to their limited resources and the complexity of existing reporting standards.
The VSME, therefore, focuses on creating a proportional, flexible framework tailored to the scale and capacity of SMEs. The guidelines seek to make sustainability reporting more accessible while still providing meaningful and comparable ESG data. EFRAG’s approach is to encourage SMEs to disclose relevant sustainability information without burdening them with overly complex requirements, allowing them to focus on the most material issues for their business.
One of the standout features of the VSME is its modular structure, designed to accommodate different levels of reporting based on the size and maturity of the SME. The standard is divided into two main modules:
The modularity allows SMEs to start with the Basic Module and scale up their reporting as their sustainability efforts mature. This approach ensures that the VSME can be used by micro-enterprises with fewer than 10 employees as well as larger SMEs with up to 250 employees.
In response to feedback from stakeholders, the VSME has been developed with simplified language and a clear, user-friendly structure. One of the most common concerns from SMEs during consultations was the complexity of previous reporting standards, which often used technical jargon or intricate requirements that were difficult for smaller businesses to understand.
To address these concerns, the VSME prioritizes clarity and simplicity in its instructions. The language is designed to be easily understood by SMEs, with specific focus on removing ambiguous terms and providing clear examples. The modular approach further supports flexibility, ensuring that SMEs can choose the level of reporting appropriate for their resources.
Another major change from earlier drafts of sustainability reporting standards is the removal of the materiality analysis. Typically, materiality analysis involves identifying which ESG factors are most important to a company’s operations and stakeholders. However, feedback from SME preparers highlighted that this process was overly complex and resource-intensive for smaller businesses.
To replace this, the VSME introduces the “if applicable” principle. Rather than requiring a formal materiality assessment, SMEs are guided by predefined circumstances that trigger specific disclosures. This simplified approach allows SMEs to focus on the most relevant sustainability issues for their business while maintaining consistency with broader sustainability reporting standards, such as the European Sustainability Reporting Standards (ESRS).
EFRAG’s vision for the VSME includes a strong digital component. A key recommendation is to develop an online platform that SMEs can use to easily input their sustainability data. This platform would allow businesses to complete the required disclosures in a standardised format, streamlining the reporting process.
The platform should be designed to integrate with other business systems, such as banking institutions and corporate supply chains. For example, large corporates could access SME sustainability data through the platform, improving transparency and enabling more informed decision-making. The platform would also support the use of digital tools such as online calculators (e.g., for greenhouse gas emissions) and geolocation-based databases, which can simplify and automate some aspects of sustainability reporting.
EFRAG encourages the European Commission and Member States to support the development of such platforms to ensure interoperability and ease of use. The standard also suggests that EFRAG play a coordinating role to ensure that platforms and tools are consistent and widely adopted.
EFRAG recognises that confidentiality is a significant concern for many SMEs, particularly when it comes to the public disclosure of sensitive business information. As such, the VSME emphasises that the primary function of the sustainability report is to facilitate bilateral exchanges of information between SMEs and their key counterparties, such as banks, investors, and business partners.
While SMEs are encouraged to publish their sustainability reports, doing so is entirely voluntary. The flexibility allows SMEs to tailor their disclosures based on their business relationships and strategic priorities. This approach balances the need for transparency with the protection of proprietary or confidential information.
To facilitate the uptake and effectiveness of the VSME, EFRAG envisions the creation of a VSME Ecosystem. This ecosystem would consist of a range of complementary initiatives aimed at promoting awareness, providing educational resources, and encouraging market acceptance of the VSME. Key initiatives include:
The VSME standard represents a major step forward in making sustainability reporting accessible and manageable for non-listed SMEs. By removing complex requirements, offering modular reporting options, and embracing digital tools, the VSME offers a practical solution to the challenge of ESG disclosures for smaller businesses. With continued support from European institutions and stakeholders, the VSME has the potential to significantly improve the transparency and sustainability practices of SMEs across Europe, while promoting consistency and comparability in the ESG data used by investors, banks, and supply chain partners.
With this final article of 2024, Sustainability Economics wishes our readers a warm and joyful holiday. We look forward to continue to engage with you in the new year on evolving sustainability and nature topics.