Discover how the European Sustainability Reporting Standards (ESRS) VSME and LSME frameworks are transforming sustainability reporting for SMEs.
The European Union's commitment to advancing sustainable business practices has led to the establishment of the European Sustainability Reporting Standards (ESRS).
This comprehensive framework, developed by the European Financial Reporting Advisory Group (EFRAG), plays a central role in the regulatory landscape with the advent of the Corporate Sustainability Reporting Directive (CSRD), aiding the EU's efforts to standardize corporate sustainability reporting.
Within this broader initiative, two specific standards have been crafted to address the needs of Small and Medium-sized Enterprises (SMEs): the Voluntary Sustainability Reporting Standard for non-listed SMEs (VSME) and the mandatory standard for listed SMEs (LSME).
These standards are poised to transform how SMEs disclose and integrate sustainability into their business operations, with significant implications for their growth, transparency, and resilience.
Let’s have a look at what ESRS is and what its impact is on VSME and LSME.
The European Sustainability Reporting Standards (ESRS)
The ESRS framework mandates businesses to disclose their ESG performance, impacts and risks.
With its comprehensive coverage of ESG factors and its emphasis on double materiality, the ESRS requires companies to assess not only how sustainability issues affect their financial performance but also how their operations impact society and the environment.
On a high level, the standards can be divided into three main categories:
- General Crosscutting standards: sector-agnostic general requirements applicable to all companies, regardless of their industry.
- Topic-specific Crosscutting standards: sector-agnostic requirements on specific ESG Topics
- Sector-specific standards: Tailored requirements for companies in particular industries
As of today, EFRAG is developing sector-specific and SME-proportionate standards, initially expected to be ready in 2026.
Key Characteristics
Structured to provide comprehensive guidance across a variety of ESG metrics, the ESRS standards are organized as follows:
General Standards
- ESRS 1: General Requirements
Establishes the foundational principles for reporting, including double materiality, value chain boundaries, and stakeholder inclusiveness.
- ESRS 2: General Disclosures
Outlines company-wide information, including governance, strategy, and risk management practices related to sustainability.
Environmental Standards
- ESRS E1: Climate Change
Focuses on greenhouse gas (GHG) emissions, energy transition plans, climate adaptation strategies, and alignment with the EU’s climate goals.
- ESRS E2: Pollution
Covers disclosures on emissions to air, water, and soil, as well as mitigation of pollution impacts.
- ESRS E3: Water and Marine Resources
Addresses water consumption, water stress management, and marine ecosystem impacts.
- ESRS E4: Biodiversity and Ecosystems
Requires reporting on biodiversity-related risks, opportunities, and conservation efforts.
- ESRS E5: Resource Use and Circular Economy
Focuses on sustainable resource management and circular economy practices.
Social Standards
- ESRS S1: Own Workforce
Covers workforce-related topics, including diversity, working conditions, and employee well-being.
- ESRS S2: Workers in the Value Chain
Addresses social issues affecting workers in the company’s supply chain.
- ESRS S3: Affected Communities
Requires disclosures on the company’s impact on local communities.
- ESRS S4: Consumers and End-Users
Focuses on consumer rights, product safety, and ethical marketing practices.
Governance Standards
- ESRS G1: Business Conduct
Covers governance-related topics, including anti-corruption measures, lobbying activities, and board diversity.
Timeline
The timeline for implementing ESRS is closely linked to the Corporate Sustainability Reporting Directive (CSRD).
The first set of ESRS was adopted by the European Commission on July 31, 2023, and published in the Official Journal on December 22, 2023.
Concerning the implementation phase, ESRS will roll out according to the following timeline to ensure a smooth transition for companies of various sizes.
From January 1, 2024, companies already subject to the Non-Financial Reporting Directive (NFRD)—including large public-interest entities with over 500 employees like listed companies, banks, and insurance companies—must apply the ESRS for the 2024 financial year, with reports due in 2025.
Starting January 1, 2025, large companies not previously under the NFRD will begin reporting under the ESRS for the 2025 financial year, with reports due in 2026. This includes companies meeting at least two of the following criteria: over 250 employees, a net turnover exceeding €50 million, or total assets over €25 million.
From January 1, 2026, listed small and medium-sized enterprises (SMEs), small and non-complex credit institutions, and captive insurance undertakings are required to start reporting for the 2026 financial year, with reports due in 2027. SMEs have the option to delay their reporting obligations until 2028 if they choose.
From January 1, 2028, non-European companies with significant activities in the EU must report on their sustainability impacts under the ESRS. This applies to companies generating a net turnover of more than €150 million in the EU and having at least one subsidiary or branch in the EU exceeding certain thresholds.
The LSME and VSME Standards
Recognizing the unique characteristics of SMEs, the ESRS has been adapted to their specific needs and capacities with the creation of two tailored standards: Listed SME Standard (LSME) and Voluntary SME Standard (VSME).
The mandatory ESRS Listed SME standard (LSME), effective January 1, 2026, applies to listed SMEs and other small, non-complex institutions with a two-year opt-out period that has been included to give businesses time to adjust to the new requirements.
Meanwhile, the Voluntary SME standard (VSME) offers a voluntary reporting framework for non-listed SMEs, enabling them to meet growing demands for ESG data from stakeholders without mandatory obligations.
LSME
The ESRS Listed Small Medium Enterprise (LSME) standard has been designed to simplify and streamline reporting for listed SMEs.
The standard focuses on essential sustainability topics relevant to smaller enterprises while reducing the complexity associated with larger corporations' reporting frameworks thanks to a proportional approach that aims to balance the benefits of transparency with the practical limitations of SMEs in terms of resources and expertise.
Specific simplifications for LSMEs include:
- Reduced Disclosure Requirements
Only the most relevant sustainability matters are mandatory, minimizing the reporting burden.
- Simplified Reporting Templates
Standardized formats make it easier for SMEs to compile and present information.
- Extended Compliance Deadlines
Listed SMEs have until January 1, 2026, to start reporting, with the first reports due in 2027, providing additional time to adapt.
- Materiality Assessment Flexibility
SMEs can omit certain disclosures if they are not material to their business operations.
VSME
For non-listed SMEs, the ESRS Voluntary Simplified Sustainability Reporting Standard (VSME) offers a pathway to align with evolving sustainability expectations without mandatory obligations thanks to a framework that equips businesses with tools to meet the information needs of banks, investors, and value chain partners by:
- Providing Simplified Reporting Guidelines
Focuses on key sustainability topics relevant to SMEs, such as environmental impact, social responsibility, and governance practices.
- Offering Flexible Application
Allows SMEs to choose the extent of disclosures based on their specific circumstances and stakeholder demands.
- Including Support Materials
Offers guidance to help SMEs understand and implement sustainability reporting effectively.
Both standards include mechanisms to minimize administrative burdens.
For example, the ESRS introduces a "value chain cap," limiting the data that large companies can demand from SMEs ensuring that reporting obligations for SMEs are proportionate and do not extend beyond what is mandated under the LSME framework.
Impacts on SMEs
The introduction of these standards is expected to have far-reaching impacts on SMEs.
On the one hand, complying with the ESRS will enhance transparency and accountability, which are increasingly valued and requested by investors, customers, and regulators.
Standardized sustainability reporting can improve SMEs' access to finance, as financial institutions increasingly incorporate ESG criteria into lending and investment decisions.
Moreover, these frameworks provide SMEs with an opportunity to identify and mitigate sustainability-related risks, improving resilience and long-term competitiveness.
On the other hand, the transition to ESRS compliance is not without challenges.
Collecting and reporting sustainability data can be resource-intensive, particularly for smaller enterprises with limited capabilities.
However, EFRAG has addressed these concerns by tailoring the ESRS requirements to the scale of SMEs, ensuring that compliance remains achievable.
Simplified language, proportional reporting obligations, and focus on key sustainability metrics are some of the ways these standards have been designed to accommodate SMEs.
Conclusions
The ESRS framework, particularly through the VSME and LSME standards, represents a significant milestone in integrating sustainability into the business operations of SMEs.
While the adoption of these standards entails challenges, such as resource demands and capacity-building needs, the potential benefits—enhanced transparency, better access to finance, and improved risk management—far outweigh the drawbacks.
SMEs that embrace these standards can position themselves as forward-thinking enterprises, ready to thrive in a more sustainable and accountable corporate landscape.
As the global business environment increasingly prioritizes sustainability, the ESRS provides SMEs with a valuable roadmap to align with the evolving economy and society.
