Corporate sustainability reporting is set to undergo significant changes in Europe with the introduction of the Sustainability Reporting Directive, and many Finnish companies are wondering whether the new requirements apply to them as well. Small and medium-sized enterprises, in particular, are uncertain about whether they will have to comply with the new reporting requirements. In this comprehensive overview, we explain which SMEs fall under the scope of the directive and when they must begin sustainability reporting in accordance with the new rules.
Are small and medium-sized enterprises required to comply with the CSRD Directive?
Not all SMEs automatically fall within the scope of the CSRD. The directive primarily applies to listed SMEs whose securities are traded on regulated markets. Other SMEs are generally excluded from the directive but may report voluntarily.
The threshold for the application of the Directive is based on three criteria: total assets (over €20 million), turnover (over €40 million), and the number of employees (over 250). A company falls within the scope of the Directive if at least two of these thresholds are exceeded in two consecutive financial years.
SMEs operating within the value chains of large companies may also face indirect reporting obligations, as large companies require information from their supply chains for their own reporting purposes. This creates practical pressure on smaller companies as well to collect sustainability data.
What is the CSRD Directive, and how does it differ from the previous NFRD Directive?
The CSRD, or Corporate Sustainability Reporting Directive, is a European Union directive that requires companies to report comprehensively on their sustainability performance. Its main objective is to improve the transparency and comparability of companies’ sustainability information and to promote the green transition.
The previous NFRD (Non-Financial Reporting Directive) applied only to the largest companies with more than 500 employees. The CSRD expands the reporting obligation to cover a significantly larger group of companies, including certain small and medium-sized enterprises. The new directive also sets significantly more detailed requirements for reporting.
The CSRD requires companies to adopt standardized reporting in accordance with the European Sustainability Reporting Standards (ESRS), whereas the NFRD gave companies more flexibility in how they carried out their reporting. External assurance will also become mandatory under the CSRD, which was not required under the NFRD.
When do small and medium-sized enterprises need to start complying with the CSRD Directive?
The CSRD Directive is being implemented in phases, and SMEs have been granted a longer transition period. For listed SMEs, the reporting requirement begins in 2026, when data for 2025 will be reported. These companies also have the option to defer reporting by two years, i.e., until 2028, at which point the reporting would cover data from 2027.
In principle, the directive does not apply to other SMEs on a mandatory basis, but they should be prepared for potential requests for information from larger clients. Streamlined ESRS standards have been established for SMEs that choose to report voluntarily.
When choosing a reporting method, it is advisable to take into account the industry and the requirements of the customer base. For example, SMEs operating in industries with significant environmental impacts should prepare for reporting earlier.
What information must SMEs report under the CSRD?
Under the CSRD Directive, SMEs that report must cover ESG themes, namely environmental, social, and governance issues. Environmental responsibility includes, among other things, greenhouse gas emissions, energy use, and impacts on biodiversity. Social responsibility includes employee rights, diversity, and human rights issues.
The company must also report in accordance with the dual materiality principle: both the company’s impacts on society and the environment, and the impacts of climate risks on the company. This requires a thorough materiality assessment.
Streamlined reporting requirements have been developed for publicly traded SMEs compared to large corporations. Reports must be submitted in digital format and must be machine-readable. Reporting must also be integrated, meaning that sustainability information must be published as part of the board of directors’ report.
How can an SME prepare to comply with the CSRD Directive?
It’s a good idea to start preparing for the CSRD Directive with an analysis of your current situation. Identify what sustainability data your company already collects and what data is missing. Determine which sustainability issues are material specifically to your business operations and value chain.
Developing a sustainability strategy is an important step. Set clear goals and metrics that align with your business strategy. Ensure management commitment, as the CSRD requires reporting approved by management.
It is advisable to start building data collection systems early on. Many small and medium-sized enterprises do not have systems in place that can comprehensively collect data such as environmental data. New expertise is also often required for data collection and analysis.
Skills gaps can be addressed by training staff or bringing in outside experts. Partners such as HSolutions can help build the data collection processes and systems required for reporting.
What are the potential consequences of non-compliance with the CSRD?
Failure to comply with the CSRD may result in administrative sanctions, the specific form and severity of which are determined by national law. Member States must ensure that these sanctions are effective, proportionate, and dissuasive.
In addition to financial penalties, non-compliance can have significant business implications. Access to financing may be compromised as banks and investors increasingly require sustainability data to support their financing decisions. In particular, the EU’s sustainable finance taxonomy directs capital flows toward sustainable investments.
Large companies are evaluating their suppliers’ sustainability practices more closely than ever, so failing to report on these matters can result in lost business. Consumers’ growing expectations regarding corporate transparency can also affect a company’s reputation and competitiveness in the marketplace.
CSRD and SMEs – Action Plan for 2024 and Beyond
The year 2024 will be critical in terms of preparation, particularly for publicly traded SMEs. Conducting a materiality analysis is the first step in ensuring that resources are allocated appropriately. After that, it is important to develop a sustainability roadmap and begin systematic data collection.
Turn reporting requirements into opportunities by identifying the business benefits: better risk management, cost savings through resource and energy efficiency, and new business opportunities. When implemented correctly, sustainability efforts can provide a significant competitive advantage.
At HSolutions, we offer comprehensive support to help you prepare for CSRD reporting. We help you build efficient data collection processes, integrate sustainability data into your company’s systems, and leverage data in business decisions. Our Smart Data & Analytics service helps with the collection, analysis, and reporting of the data required for CSRD reporting.
In the future, sustainability reporting will play an increasingly central role in business operations, and it’s worth preparing for it well in advance—whether it’s a mandatory requirement or a strategic choice.