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  • Studio Paci

Sustainability Standards for SMEs: Introduction to the Basic Module and Exclusion of Mat. Assessment

🌟 Introduction

In a context where sustainability is increasingly pivotal in corporate strategies, European Small and Medium-sized Enterprises (SMEs) are facing significant changes in sustainability reporting.

The European Financial Reporting Advisory Group (EFRAG) has recently introduced a new approach for SMEs, proposing a "base-module" model that greatly simplifies the sustainability reporting process.

This new model moves away from the traditional materiality analysis, a key element of sustainable reporting until now.

🌍 New Directives and the Role of CSRD

The Corporate Sustainability Reporting Directive (CSRD) has expanded the number of companies required to report on environmental, social, and sustainability risks, from the current 11,700 to almost 50,000 businesses in the European Union.

This regulatory shift introduces detailed transparency obligations, including environmental impact, human rights adherence, and social standards.

The new rules, to be applied gradually between 2024 and 2028, aim to make sustainability less abstract for smaller entities, providing them guidance in a previously lacking regulatory framework.

🔍 Exclusion of Materiality Assessment

The innovative base-module model excludes materiality analysis, allowing SMEs to bypass a process often complex and costly.

Traditionally, companies had to identify and focus on sustainability issues relevant to their stakeholders.

With this new model, SMEs can avoid this phase, significantly simplifying the reporting process.

🔄 New Framework: Narrative Module and Business Partners

The framework consists of two main modules:

  1. the narrative module

  2. the business partners module

The former pertains to the company's sustainability policies, actions, and goals, while the latter focuses on relationships with commercial partners.

This modular approach enables SMEs to provide relevant information without the need to assess every aspect of their operations from a sustainability standpoint.

🗓️ Public Consultation and Next Steps

EFRAG's document is currently in a public consultation phase, a critical period for gathering feedback from businesses and stakeholders, to refine the document and ensure it effectively meets the needs of SMEs.

🔎 Implications for Listed and Unlisted SMEs

While listed SMEs are subject to more stringent sustainability standards, the new base-module model provides a starting point for all SMEs, regardless of their stock market listing, promoting greater uniformity and accessibility in sustainability reporting.

🌐 Conclusions

The introduction of the base-module and the exclusion of materiality analysis mark a turning point for sustainability reporting of SMEs in Europe.

This new approach could not only reduce administrative burdens but also encourage more businesses to actively engage in sustainable practices.

Parallel to these developments, it is important to note that there are no simplifications regarding the complexity of the due diligence process and double materiality, which remain the cornerstones of the ESRS.

The European Commission has also foreseen gradual applications of ESG disclosure for the first three years of reporting, in cases where not all information is available, to alleviate the efforts of businesses in gathering information and not overburden SMEs with administrative tasks.


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