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ESRS LSME ED: Sustainability Reporting for Listed Small and Medium Enterprises (SMEs)

Updated: Apr 2

ESRS LSME ED golden checkmark trophy against a blue background.

The European Financial Reporting Advisory Group (EFRAG) has been at the forefront of corporate sustainability, establishing a foundational milestone with the launch of the European Sustainability Reporting Standards (ESRS) for large listed enterprises under the Corporate Sustainability Reporting Directive (CSRD) back in 2022. Building on this foundation, EFRAG has introduced two groundbreaking drafts aimed at furthering this mission for small and medium-sized enterprises (SMEs).

These latest drafts present a tailored standard for listed SMEs (LSMEs) and a flexible, voluntary framework for non-listed SMEs (VSME), aligning seamlessly with the CSRD's objective to promote transparency and sustainability in business practices. Such an initiative offers SMEs, irrespective of their market listing status, a robust framework to navigate the complexities of sustainability reporting.

Launched in January 2024, these innovative drafts are currently open for public consultation until May 2024, heralding a transformative phase in EU sustainability reporting. EFRAG's proactive approach in crafting these standards signifies a dedicated effort to ease SMEs into the sustainable economic transition, underscoring the standards' relevance and potential for widespread acceptance.

As EFRAG invites stakeholders to participate in a unique field test, with submissions, the ESRS LSME is set to become effective from January 1, 2026, offering an optional two-year delay. The VSME ED, in contrast, aims to simplify sustainability reporting for non-listed SMEs, facilitating access to sustainable finance and streamlining data requests.

Are you navigating the complexities of adapting to these new ESG standards for SMEs? Share your concerns in our 'ESG Basics' forum category.

For ease of navigation and to focus on topics of particular interest, please refer to the table of contents below and jump directly to the section you wish to explore in more detail.

Table of Contents


Who Will the ESRS LSME ED Impact?

EU's Criteria for Enterprises

The European Union's criteria for business classification play a pivotal role in the application of the new ESRS LSME and VSME standards.

These criteria distinguish businesses based on their size, determined through a set of specific financial and employment thresholds.

The classification system categorizes enterprises into micro, small, medium, and large categories, each with distinct criteria:

  • Micro Enterprises: Entities not exceeding two of these thresholds: €350,000 balance sheet total, €700,000 net turnover, and 10 employees.

  • Small Enterprises: Businesses falling below two of these limits: €4 million balance sheet total, €8 million net turnover, or 50 employees on average.

  • Medium Enterprises: Firms not surpassing two of the following: €20 million balance sheet total, €40 million net turnover, and 250 employees.

  • Large Enterprises: Entities exceeding at least two thresholds of the medium enterprise criteria: over €20 million in balance sheet total, over €40 million in net turnover, or more than 250 employees.

This system ensures that the reporting standards are appropriately applied, reflecting the diverse nature and capabilities of businesses across the EU.

ESRS LSME Framework: A Section-by-Section Breakdown

The draft ESRS LSME standard is divided into cross-cutting* sections (Sections 1 and 2)  and topical sections (Sections 3 to 6), applicable across all sectors.

*("cross-cutting" refers to elements or principles that intersect and are relevant across various sections of the standard, highlighting interdependencies and consistent themes applicable to multiple aspects of sustainability reporting.)

It outlines specific reporting requirements for listed Small and Medium-sized Enterprises (SMEs) in each section:

Section 1: General Requirements

Section 1 of the ESRS LSME ED provides the groundwork for sustainability reporting, defining the scope and establishing the general requirements for listed SMEs. It begins with an outline of the objective and scope, emphasizing the need for clear, relevant disclosures. The section then details the categories of disclosures, reporting areas, and drafting conventions, which guide SMEs in complying with the new standards.

Underpinning the framework is the principle of double materiality, which requires SMEs to consider both the impact of sustainability matters on their financial performance and the consequences of their actions on society and the environment. This principle is fleshed out through discussions on stakeholder relevance, the materiality of information, and the necessity of disclosing material impacts or risks related to sustainability matters.

The section also touches upon the concept of the value chain, urging SMEs to report on their operations as well as their broader industry ecosystem. This includes guidance on using sector averages and proxies for estimation when precise data is not available.

Time horizons are another critical component, with the standards specifying how to link past, present, and future reporting and define short-, medium-, and long-term periods for reporting purposes. The preparation and presentation of sustainability information are addressed in detail, covering comparative information, estimation sources, and the treatment of events after the reporting period.

Finally, Section 1 concludes with transitional provisions, offering SMEs guidance on phased implementation and the list of future disclosures that will be required. This approach allows SMEs to gradually adapt to the comprehensive reporting framework, aligning their reporting practices with the evolving landscape of corporate sustainability.

Section 2: General Disclosures

Section 2 of the ESRS LSME ED provides a detailed framework for general disclosures, focusing on transparency and accountability in SME reporting. This section lays out a systematic approach, beginning with the objective of disclosures and establishing a solid foundation for preparation.

This sets the stage for consistent and comprehensive reporting. Disclosure Requirements 1 and 2 (BP-1 and BP-2) cover general and specific circumstances for preparing sustainability statements.

Governance is a key focus with Disclosure Requirements 3 and 4 (GOV-1 and GOV-2), defining the role of governing bodies in managing sustainability initiatives. These requirements highlight the importance of due diligence processes and the integration of governance structures into sustainability efforts.

The strategy is closely linked with sustainability. Disclosure Requirements 5, 6, and 7 (SBM-1, SBM-2, and SMB-3), along with Disclosure Requirement 8 (SBM-4), delve into how a company’s strategy, business model, value chain, and due diligence align with sustainability objectives and stakeholder interests. This includes exploring material impacts, risks, their relation to business strategies, and the opportunity for voluntary disclosure on positive impacts and financial opportunities.

Impact and risk management are comprehensively addressed in Disclosure Requirements 9 and 10 (IR-1 and IR-2), which detail the processes for identifying and assessing material risks and the topics covered in the company’s sustainability statements.

The section concludes with Appendix A, providing application requirements for general disclosures, and Appendix B, listing data points that intersect with other EU legislation. This thorough detailing in Section 2 equips SMEs with essential guidance for creating sustainability statements that not only meet regulatory standards but also reflect their commitment to sustainability.

Section 1 (General Requirements) and Section 2 (General Disclosures) are cross-cutting and mandatory for all undertakings, irrespective of the sector they operate in. These sections establish the foundational principles and general disclosure requirements that apply universally.

Section 3: Policies, Actions, and Targets

Section 3 of the ESRS LSME ED is integral to understanding the expected disclosures regarding the sustainability policies, actions, and targets of SMEs. The section begins by stating its objective: to provide stakeholders with clear insights into the SME's commitments to sustainability and the steps taken to fulfill these commitments.

Disclosure Requirement 11 (IR-3) calls for SMEs to articulate their sustainability policies and the actions they are taking in response to sustainability matters. This is a detailed account of the measures being implemented to address environmental, social, and governance issues. SMEs must demonstrate how their policies are integrated into business operations and the impact these policies have on sustainability matters.

Next, Disclosure Requirement 12 (IR-4) mandates that SMEs set out their targets related to sustainability matters. This disclosure goes beyond current practices, asking businesses to present forward-looking objectives and the strategies devised to achieve these goals. Targets should be measurable and time-bound, providing a clear benchmark for assessing the SME's progress in its sustainability journey.

Appendix A supplements this section with application requirements for Policies, Actions, and Targets, giving further clarity on the expectations for IR-3 and IR-4 disclosures. This guidance ensures that SMEs provide disclosures that are not only comprehensive but also aligned with the best practices in sustainability reporting.

By fulfilling the requirements of this section, SMEs can convey their proactive stance on sustainability, highlighting the concrete steps they are taking to make a positive impact, which is a critical component of their contribution to a sustainable future.

Section 3 (Policies, Actions, and Targets) also applies universally to all sustainability matters covered in the topical sections.

Section 4: Environmental Disclosures

Section 4 of the European Sustainability Reporting Standards (ESRS) for Listed Small and Medium Enterprises (LSMEs) is devoted to comprehensive environmental disclosures. It underlines the critical areas SMEs must address to provide a transparent account of their environmental impact and sustainability efforts.

Climate Change Disclosures (E1)

The objective is to bring clarity to an SME's energy usage patterns and greenhouse gas emissions, crucial for understanding their climate impact.

The Disclosure Requirements within this category (E1-1 to E1-4) focus on energy consumption and mix, gross Scopes 1, 2, 3, and total greenhouse gas (GHG) emissions, and the role of SMEs in GHG removals through mitigation projects or carbon credits.

There is also an emphasis on the anticipated financial effects of physical and transition risks associated with climate change, along with potential opportunities that could arise.

Pollution-Related Disclosures (E2)

This sub-section demands SMEs report on the pollution they cause, covering air, water, and soil (E2-1), as well as their management of substances of concern (E2-2). These disclosures are vital for assessing the SMEs' contribution to environmental degradation and their efforts to minimize their ecological footprint.

Water and Marine Resources (E3)

Water is a precious resource, and SMEs must disclose their water consumption (E3-1), providing data that can indicate their water conservation efforts and impact on local water resources.

Biodiversity and Ecosystems (E4)

Here, SMEs are called to disclose impact metrics related to biodiversity and ecosystem changes (E4-1). This reflects their direct and indirect impact on ecosystems, which is increasingly significant in the context of global biodiversity loss.

Resource Use and Circular Economy (E5)

The focus shifts to resource inflows and outflows (E5-1 and E5-2), highlighting the SMEs' role in the circular economy. These requirements aim to understand how resources are sourced, used, and disposed of, encouraging more sustainable resource management practices.

Financial Effects from Environmental Matters (E6)

Beyond climate, SMEs must disclose the anticipated financial effects of material environmental-related matters (E6). This broader perspective encompasses all environmental aspects that could impact the financial standing of an SME.

Appendix A provides application requirements for each of these areas, ensuring SMEs have a clear understanding of how to report their environmental data effectively.

In sum, Section 4 mandates a range of environmental disclosures that are designed to ensure SMEs report on their environmental performance in a manner that is both comprehensive and insightful.

Section 5: Social Disclosures

Section 5 of the European Sustainability Reporting Standards for Listed Small and Medium Enterprises (ESRS LSME ED) sets out a comprehensive framework for reporting on workforce-related matters. This section is designed to ensure that SMEs provide stakeholders with a transparent account of their social responsibilities, particularly about their workforce.

Objectives and Metrics for Workforce Reporting

The objective of this section is to highlight the importance of the workforce in the sustainability performance of an SME. It aims to establish clear expectations for reporting on various workforce characteristics, labor practices, and impacts.

Detailed Disclosure Requirements for the Workforce

Disclosure Requirements S1-1 through S1-10 encompass a wide range of workforce metrics:

  • S1-1 and S1-2 focus on detailing the characteristics of employees and non-employees within the SME’s workforce, such as contract types and working hours.

  • S1-3 delves into the extent of collective bargaining coverage, reflecting the company's labor relations.

  • S1-4 addresses the provision of adequate wages, ensuring fair compensation.

  • S1-5 mandates reporting on social protection mechanisms in place for the workforce.

  • S1-6 outlines the need for reporting on training opportunities, vital for workforce development.

  • S1-7 requires health and safety metrics, key indicators of workplace wellbeing.

  • S1-8 discusses remuneration metrics, including pay gaps and total remuneration, to address issues of pay equity.

  • S1-9 focuses on incidents and severe human rights impacts, underscoring the importance of respecting workers' rights.

  • S1-10 covers diversity metrics, promoting an inclusive workplace environment.

In addition to these mandatory disclosures, there is Voluntary Disclosure S1-11, which invites SMEs to provide metrics on work-life balance, an increasingly significant aspect of modern employment practices.

Comprehensive Application Requirements

Appendix A provides the application requirements for these disclosures, ensuring that SMEs understand how to apply these standards effectively. It includes detailed instructions for reporting on the characteristics of the workforce, collective bargaining, wages, and social protections, among others.

The appendices also cover related disclosures from Section 2 and policies concerning the workforce, offering guidance on how to manage material impacts and risks.

By complying with the disclosure requirements of Section 5, SMEs can demonstrate their commitment to social aspects of sustainability, particularly those affecting their workforce.

Section 6: Business Conduct Disclosures

Section 6 of the European Sustainability Reporting Standards for Listed Small and Medium Enterprises (ESRS LSME ED) addresses the vital aspect of business conduct. It emphasizes the importance of ethical practices in maintaining sustainability and upholding the integrity of SMEs in the market.

The Central Objective of Business Conduct Reporting

The primary goal of this section is to ensure SMEs conduct business ethically and responsibly. This involves maintaining fair and transparent dealings with suppliers, actively preventing corruption and bribery, and responsibly managing political influence and lobbying activities.

Disclosures on Supplier Relationships and Anti-Corruption

  • Disclosure Requirement G1-1 mandates SMEs to detail how they manage relationships with their suppliers, promoting fair business practices and supply chain sustainability.

  • Disclosure Requirement G1-2 places a strong emphasis on anti-corruption and anti-bribery measures, requiring SMEs to disclose their policies and actions to prevent corruption in all its forms.

Metrics for Political Influence and Lobbying Activities

  • Disclosure Requirement G1-3 compels SMEs to report on their political influence and lobbying activities, ensuring transparency and accountability in their interactions with governments and public institutions.

Application Requirements for Ethical Business Conduct

Appendix A outlines the application requirements for these disclosures, providing SMEs with detailed guidance on how to report their business conduct. This includes the management of supplier relationships and anti-corruption measures, which are crucial for building trust with stakeholders and aligning with global ethical standards.

Section 4 (Environmental Disclosures), Section 5 (Social Disclosures), and Section 6 (Business Conduct Disclosures) are topical sections that depend on the materiality of the sustainability matters. An undertaking must report on these matters if, as a result of its materiality assessment, a sustainability matter is deemed material.

Each section of the draft ESRS LSME Standard includes specific disclosure requirements aligned with the key reporting areas as we examine in our next section.

Share your thoughts on these general disclosure requirements in our interactive forum before moving to the next section.

ESRS LSME Reporting Areas

The Key reporting areas of the draft ESRS LSME Standard for SMEs are:

  • Governance: Documenting processes, controls, and procedures for managing impacts and risks.

  • Strategy: Analyzing the connection between the company's strategy, business model, and material impacts and risks.

  • Impact and Risk Management: Identifying and assessing the materiality of impacts and risks, managing sustainability through policies and actions, stakeholder engagement, and remediation activities.

  • Metrics: Defining metrics to measure the company's sustainability performance.

LSME's Phased-in Disclosure Requirements

"Phased-in" refers to a gradual implementation of the new sustainability reporting standards. This approach allows companies to adjust to the requirements over time. Initially, companies may not be required to report certain complex or detailed information, like specific environmental impacts or detailed workforce metrics.

As they progress, the reporting requirements become more comprehensive. This phased approach is designed to make the transition to full compliance smoother and more manageable for SMEs, acknowledging the challenges they might face in adapting to these new standards.

The phased-in disclosure requirements for the ESRS LSME ED standard can be summarized into key categories:

  • Initial Year Exemptions: In the first year, SMEs can omit information on anticipated financial effects from material impacts and energy consumption details.

  • Gradual Introduction of Complex Metrics: For up to three years, SMEs are allowed to provide qualitative disclosures instead of quantitative ones on topics such as GHG emissions and climate-related risks and opportunities.

  • Simplified Requirements for Smaller Enterprises: Enterprises with fewer than 50 employees can omit certain disclosures in the initial years, like Scope 3 emissions, biodiversity impacts, and detailed workforce metrics.

  • Sector-Specific Provisions: Different sectors have specific phased-in timelines for reporting requirements, reflecting their unique sustainability challenges and impacts.

After these phased-in periods, it is expected that SMEs will fully comply with the comprehensive sustainability reporting requirements. This means providing detailed, quantitative information on all relevant aspects, including environmental impacts, workforce metrics, and other sustainability factors.

The gradual approach aims to ensure that SMEs are well-prepared and equipped to meet these standards in their entirety, contributing significantly to enhanced transparency and accountability in corporate sustainability practices.

Challenges for SMEs in Adopting the New Standard

Adopting the ESRS LSME standard poses several challenges for SMEs. These include:

  • Resource Constraints: Many SMEs operate with limited financial and human resources, making it challenging to allocate adequate time and budget towards implementing complex sustainability reporting procedures.

  • Technical Expertise: Understanding and applying the new standards requires a level of technical expertise that may not be readily available within smaller enterprises.

  • Data Collection and Management: Gathering, managing, and reporting sustainability data in a comprehensive and standardized manner can be a daunting task for SMEs, which may lack sophisticated data management systems.

  • Adapting to a Changing Regulatory Environment: Keeping pace with evolving sustainability regulations and standards requires continuous learning and adaptability, which can be particularly taxing for smaller organizations.

  • Balancing Transparency and Competitiveness: While increased transparency is a goal of the new standards, SMEs may struggle with disclosing sensitive information that could impact their competitive position.

Addressing these challenges will be crucial for the successful implementation of the ESRS LSME standards among SMEs across the EU.

SMEs and the Path to Sustainable Reporting

In the wake of the EU's ESRS LSME and VSME drafts stand at the cusp of a transformative era in sustainability reporting. The EFRAG's proactive stance with the introduction of these standards heralds a new chapter where transparency, accountability, and ethical conduct become the pillars of small and medium-sized enterprises.

The ESRS LSME ED, set to come into effect from 2026, presents a structured yet flexible approach, allowing SMEs to gradually adapt and embrace the standards. The phased-in disclosures accommodate the diverse capacities of SMEs while maintaining the integrity and aims of the CSRD. Through these standards, SMEs are encouraged to not just report but also reflect on their role and influence within the wider ecosystem of sustainability.

As SMEs embark on this path, they do not walk alone. The field tests, consultations, and comprehensive guidelines offered by EFRAG are invaluable resources that pave the way for a smoother transition. By engaging with these processes, SMEs contribute to shaping the standards that will define the future of sustainable business in Europe.


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