ESG for SMEs
The ESG requirements that are currently affecting large companies are having an impact on the SMEs they interact with. Therefore, it makes sense to get started with ESG work – legal requirement or not.
Omnibus proposal
The article is continuously updated based on the EU Commission's omnibus proposal, which may change deadlines and rules for sustainability reporting.
Why it makes sense
Small and medium-sized enterprises (SMEs) that are not listed on a stock exchange are not required to report on their ESG efforts. But that does not mean that they can just as well not do it. More and more of the SME’s primary stakeholders (investors, banks and customers) will be affected by the ESG agenda and therefore make different demands on the reporting from the SME.
We can already see that there is a demand for SME ESG work. Therefore, SMEs now have a need to get a handle on data and be able to report on it.
What's in this article
- Who is covered?
- The indirect impact of CSRD on SMEs
- ESG reporting: What SMEs should expect
- The challenges of ESG reporting for SMEs
- How to get started as an SME
1. Who is covered?
There are almost 300,000 SMEs in Denmark, employing over 1 million full-time equivalents. They are therefore a cornerstone of the Danish economy, and 2/3 of all jobs in the private sector are in an SME.
The vast majority will not be subject to the new reporting requirements in CSRD, as they do not fall under the EU definition of companies. However, many will be indirectly affected because they are part of the value chain of the companies that are or will be subject to the new requirements.
See when large companies will be subject to CSRD requirements (in Danish)
The EU has developed a voluntary standard for SMEs that are not required to report under the CSRD. It is intended to enable them and their partners to ask and answer questions in a uniform and efficient way when sharing ESG data between companies.
The voluntary standard has not yet been adopted, but is expected to be adopted in the course of 2025. However, SMEs can already start working with the data points recommended in the draft standard.
Read more about the voluntary standard on the Danish Business Authority’s website (in Danish)
2. The indirect impact of CSRD on SMEs
GRAPHIC ONLY IN DANISH FOR NOW
Although not all companies are or will be subject to the new reporting requirements, it should be borne in mind that the vast majority of companies are expected to feel the consequences of CSRD.
Large companies have already started asking suppliers for insight into their ESG efforts so that they can report adequately in relation to their own value chain and meet the reporting requirements to which they are subject. The same applies to banks and investors, who are bound by their reporting obligations and ESG strategies and therefore demand ESG data.
At the same time, consumers are increasingly looking towards companies that produce and sell products and services with sustainability in mind. The increasing public attention is causing banks and investors to integrate ESG risks into their portfolio assessments so that they do not finance companies that cannot account for their sustainability efforts.
The public sector is also demanding sustainability efforts and reporting for companies that receive grants or subsidies.
3. What should SMEs expect in relation to ESG requirements?
Specifically, SMEs can expect to receive multiple ESG questionnaires from stakeholders such as banks, investors, customers and government agencies. Each request is likely to vary in both content and format, making the task of providing the requested answers a major undertaking.
While questions and requirements from suppliers may vary widely, SMEs are likely to be asked to:
- Describe existing sustainability policies
- Describe both actual and potential significant adverse impacts on people and the environment, and the actions taken to monitor, prevent, mitigate or address these impacts
- Identify the most significant ESG-related risks that could affect or are already affecting the business, and explain how these risks are being managed.
- Report specific key performance indicators (KPIs) in relation to the areas above
Over time, there will be a convergence and the framework for reporting will become more standardized, for example through the voluntary standard for SMEs. With it, SMEs and their partners will be able to ask and answer in a uniform and efficient way when sharing ESG data between companies.
In addition, the market is also starting to adapt, and more companies are specializing in assisting SMEs to navigate the new ESG reality, and various tools are being developed that can facilitate the work with reporting and dual materiality analyses. For example, we have developed ESG Navigator, an online tool for ESG Reporting.
Contact us, if you want to know more about ESG Navigator
The end result will be that more and more companies that are subject to CSRD requirements will start to prioritize doing business with suppliers who have control over their ESG work and can report on it, because in this way they also improve their own ESG efforts and
reporting.
This means that good management of ESG work indirectly becomes a license to operate, but for even more, targeted ESG efforts can translate into improved competitiveness and strengthened business.
4. The challenges of ESG for SMEs
Too few resources
As reporting requirements – both direct and indirect – increase for SMEs, so does the need for dedicated ESG resources. This makes a huge difference in how large companies with departments dedicated to ESG and SMEs that have to pull staff and finances out of their daily operations to keep up can approach the task.
This also means that there will be differences in the quality and scope of the data that can be provided by companies at either end of the spectrum.
Fortunately, a number of tools that can facilitate ESG reporting for SMEs are starting to appear on the market. One of them is our tool ESG Navigator.
Lack of motivation
It can be difficult to see the good reasons to get involved with ESG. The resource-intensive challenge is therefore often met with the question: “We are not covered by the new EU requirements, so why should we spend so much effort on it?”.
Those who answer this overlook the competitive advantages of working with ESG. As reporting requirements begin to trickle down into the value chains of large companies, it is an advantage to be at the forefront.
Similarly, a solid reporting foundation can also make SMEs more attractive in terms of attracting investments or buyers.
Too little knowledge
For many companies, ESG is still just 3 letters that stand for a confusing reporting process and a lot of intangible concepts.
Many lack what it takes to understand, collect, systematize and share the relevant data in a way that provides value for the company while also meeting EU standards. If a responsible person is not appointed, resources are allocated to the reporting process and employees are not trained, the effort risks falling flat.
No data
Collecting data on ESG is a complex and resource-intensive process, especially if there is no data at all and the whole thing has to be worked out from scratch.
5. How to get started as an SME
The B2B market and financial players will in the future prioritize sustainability, which can be supported by data and reporting. Therefore, as an SME, you might as well start exploring the opportunities rather than seeing the development as a problem.
The first step on the way is – if there is not already one in the company – to appoint a person responsible for sustainability work.
This person can start with the following steps:
Consider where your ESG work should take you
It is important to involve management in this part of the considerations, because the direction must be consistent with the company's overall business goals. It is crucial that you find out what sustainability means for your business, and what is important to work on in the areas of environment (E), social conditions (S) and corporate conditions (G). In this way, you will identify the commercial opportunities created by ESG that allow the efforts to be converted into a strengthened bottom line.
Consider what is needed
Make a realistic assessment of what it will take to achieve your data collection, reporting and objectives in the different areas. This could include asking the following questions:
- Which employees will do what, and how many resources will it require?
- How will the relevant employees be trained for the tasks they will be carrying out?
- Does the work require special reporting tools or data collection?
- How long will it take before you can expect to see results from the effort?
Set the team and train them
It will almost always be necessary for employees from different departments to contribute to the work. Therefore, it is a crucial step to identify and involve the right people before you seriously start the ESG journey.
It is always a good idea to onboard thoroughly so that everyone understands the goal and importance of working with ESG. Inform them about the business opportunities that lie in working purposefully with ESG, and make sure they understand the ESG concepts that are relevant to them.
Report!
Once all of the above is done, you can begin the reporting work. The first step in this process is to collect data from the various sources. Working with data can be difficult and requires an employee who is good at collecting, handling and understanding data. An investment in software, auxiliary tools or an external consultant may prove necessary.
