The Corporate Sustainability Reporting Directive (CSRD) represents a significant change for the business world. This directive requires companies to report on their sustainability performance in terms of Environment, Social, and Governance (ESG). CSRD considers a company's impact in the broadest sense. What are the implications of the CSRD for SMEs? Read more about this in this article.
A brief explanation; what is the CSRD?
The CSRD is a directive that stems from the European Union's Green Deal, which targets the ambitious goal of Europe becoming climate neutral by 2050, thus fulfilling the Paris Agreement. The Paris Agreement aims to keep the global average temperature well below 2 degrees Celsius above pre-industrial levels, essentially limiting human impact on the climate significantly.
Sustainability reporting is not a new obligation; the CSRD builds on the Non-Financial Reporting Directive (NFRD), which already requires large (over 500 employees), publicly listed companies, banks, and insurance companies to report on aspects like social responsibility, treatment of employees, human rights, and diversity.
What is new about the CSRD is the scope of this directive and the standardized way in which companies must report. Under the NFRD, companies had the freedom to select their own reporting frameworks, but under the CSRD, strict frameworks and guidelines apply. This standardization creates uniformity in the reports delivered, allowing for better comparison between different companies.
The CSRD and NFRD reports reveal how organisations implement their sustainability strategy and ambitions. Sustainability is considered across three dimensions: Environment, Social, and Governance, collectively known as ESG indicators, derived from the European Sustainability Reporting Standards (ESRS). The ESRS is the "backbone" of the CSRD. More on this later.
When do listed SMEs need to report?
The CSRD is being phased in, giving organisations time to prepare for this major transition. The CSRD takes into account the capacity organisations can devote to this; large companies must report first, but from January 1, 2026, the CSRD will also apply to listed SMEs.
They have the fiscal year 2026 to collect all the necessary data and will then be required to publish their reports from 2027.
Simplified, less burdensome reporting guidelines will apply to listed SMEs than are currently the case for larger companies. Read more about these so-called Listed Small Medium Enterprises standards (LSME ESRS) here.
What about non-listed SMEs and the CSRD?
And what if you are a non-listed SME? There is a good chance that you will still be affected by the CSRD. All companies that collaborate with—or supply products to—CSRD-obligated companies will indirectly face the CSRD reporting obligations.
The CSRD also requires companies to report on the impact within their supply chains. If you are a supply chain partner, your CSRD-obligated partner will come to you for information.
A CSRD-obligated company must not only report on the energy consumption of its own production activities but also on that of its suppliers. This makes sense, as the production of the goods supplied also has a climate impact. Greenhouse gas emissions are categorized into three scopes (scope 1, 2, and 3). Scope 3 includes the indirect emissions in the value chain.
And even when CSRD-compliace is not mandatory for you as a non-listed SME, you might decide to report inline with the voluntary European Sustainability Reporting Standards (VSME). The VSME represent an innovative effort, designed specifically for non-listed SMEs as part of the broader EU sustainability framework.
They aim to enhance sustainability reporting among SMEs, particularly those integrated into the supply chains of larger, regulated companies with stringent sustainability reporting obligations.
Read more about the VSME on the official website of the EFRAG.
EFRAG was appointed as the technical advisor to the European Commission for the development of standards surrounding the CSRD.
What kind of information might your supply chain partners ask for?
The European Sustainability Reporting Standards (ESRS) dictate what companies must report on for the CSRD. The ESRS framework consists of ten thematic standards, divided into the three ESG categories: Environment, Social, and Governance.
A company first conducts what’s called a double materiality assessment to determine which standards they specifically need to report on. Then, they need data on how they perform against those standards. And part of that data might be requested from you, as a supply chain partner.
As a supplier or supply chain partner, you might expect to receive inquiries about your energy consumption and the origin of your materials, but also about safety protocols or how you manage your staff: regarding your policies, proofs, certificates, and data on matters like employee satisfaction, absenteeism, and accidents.
The ESRS comprises various standards, each covering a different aspect of business operations. Learn more about the relevant ESRS standards on the official website of EFRAG.
How can your small or medium-sized business prepare for the CSRD?
Whether you need to report directly or are in the supply chain of CSRD-mandated companies, your preparation should start by mapping out your own processes and operations.
What does your business operation look like in terms of environment, social, and governance? This involves both your internal processes and external operations; what do you purchase, from whom, and what do you then do with these raw materials? What do your processes look like?
Here are some steps you can take now to prepare for the CSRD:
- Conduct baseline assessments. Where are you now, what's your starting point? Measure current energy consumption, water use, waste production, and emissions. Also consider aspects like employee satisfaction and diversity within the team.
- Develop a sustainability policy. Start by creating a sustainability policy that fits your business. This could involve themes such as waste management, CO2 reduction, mobility, or employee development. Integrate sustainability into your business strategy by clearly defining where you can make a difference in terms of sustainability.
- Set concrete sustainability goals and KPIs. What does success look like for you in terms of social and environmental impact? Establish measurable goals and indicators so that you can track and assess your progress.
- Experiment with reporting. Start small, perhaps with internal reporting only, to discover what information is valuable. Later, you can use this experience to communicate externally through your website or annual report.
- Explore collaboration opportunities. Work with suppliers, customers, or even competitors to develop sustainable practices. You don’t have to do it alone; our climate crisis calls for a joint approach.
- Focus on education and awareness: Ensure your team understands how and why sustainability is implemented in your organization. This not only enhances knowledge but also strengthens the motivation to truly integrate sustainability.
Our advice; start with these steps now. Sustainability and the CSRD require a significant shift in business operations. By taking steps now, you prepare for future requirements. CSRD-mandated companies, as well as other stakeholders, will expect their supply chain partners to provide these insights. If you can't, you risk losing collaboration to a company that is prepared.
Context: Who is already affected by the CSRD?
The first companies must comply with the CSRD from the fiscal year 2025. This applies to organisations that are already subject to the NFRD; large publicly listed companies or public interest entities like banks or insurance companies.
From fiscal year 2026, the CSRD will also apply to organizations that meet 2 of the following 3 criteria:
- Have more than 250 employees
- Generate a turnover of more than €50 million
- Have a balance sheet total of more than €25 million
The CSRD applies to all companies operating in the European market, including those outside the European Union that market their products here.
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