Sustainability reporting and SMEs

How to prepare for CSRD and the new reporting obligation

by Alessandro Malerba

The preparation of a sustainability report presupposes that the organisation, a company but also a non-commercial entity (public or private), has already undertaken a process of adopting a sustainable business system or model - even if this often happens unconsciously.

The process that leads to being able to report on the objectives and intermediate goals already achieved by the Organization is the result of activities and methodologies, sometimes complex, to be applied in a similar way to what we have been used to doing with financial reports for years. The application of these methodologies and activities requires, however, to immediately pay attention to some mandatory steps:

• the identification of the objectives for which the company can define itself as sustainable in relation to its industry and the SDGs (the 17 Sustainable Development Goals of the United Nations);
• the definition of its business model from a sustainable perspective, functional to pursuing the SDGs;
• the implementation of the connected operational strategies which must permeate governance of the Organization;
• the lines of action, activities and intermediate goals necessary to achieve a real cultural change within the company in the medium term.

Today, talking about these methodologies and activities is particularly important given the attention paid to these issues: not only an increasingly pressing demand from the market (financial institutions, large corporations and stakeholders) but also the adoption of specific regulations. At a European level, for example, the EU Council CSRD directive relating to corporate communication on sustainability was adopted on 28 November 2022. According to the statements of the EU Minister of Industry and Trade Jozef Síkela "the new rules will make a greater number of companies responsible for their impact on society and will guide them towards an economy that benefits people and the environment". What does this mean for organizations? In practical terms, they will have to communicate information on the ways in which their business model impacts on sustainability, also considering external factors such as, for example, climate change or human rights issues that influence their activities.

Entrepreneurs and administrators, that is, can no longer ignore sustainability and underestimate the importance of a timely mapping of risks and opportunities connected to ESG issues, since this short-sightedness will have negative effects on the Organization's positioning within the reference market (for example, relationships with customers, suppliers and relations with the credit market) and on its own business continuity.

 CSRD - organizations involved and implementation times

The European Financial Reporting Advisory Group (EFRAG “European Financial Reporting Advisory Group” – body responsible for providing technical advice to the European Commission in the drafting of the ESRS “European Sustainability Reporting Standards”) is responsible for developing European standards (ESRS regulation-standards), subject to the technical opinion of various European agencies.

The new rules on sustainability communication will apply to large public interest companies with more than 500 employees, to alllarge companies with more than 250 employees and a turnover of 40 million euros (the threshold for defining a company as "large" is that set by Accounting Directive no. 34/2013) and to all companies listedon regulated markets, with the exception of micro-companies. These companies are also responsible for the evaluation of information applicable to subsidiary companies.

But what will be the path (indicated in the Directive) for the application of these rules?

• 2025: communication on the financial year 2024 for companies already subject to the Directive on the disclosure of non-financial information (DNF-2016);
• 2026: communication on the financial year 2025 for companies currently not subject to the Directive on the disclosure of non-financial information financial year;
• 2027: communication on the financial year 2026 for listed SMEs, small and non-complex credit institutions and captive insurance companies;
• 2029: communication on the financial year 2028 for third country companies.

As can be seen, the Directive will be a complex process that will extend over the medium-long term, progressively expanding the list of organizations impacted by these innovations. For this reason, beyond the application roadmap, it is essential that companies immediately start a sustainability path, to avoid the risk of arriving unprepared for the regulatory obligation. sustainability reporting must be implemented today, even if for the moment only on a voluntary basis, to give a signal of openness to the market, of reliability and above all the ability to look to the future (which presupposes the desire for continuous growth).

Reporting standards

Today, officially, the European ESRS regulatory standard cannot yet be adopted (but it will be adoptable in time for the entry into force of the effects of the CSRD directive, i.e. 1 January 2024).

Currently, among the internationally recognized and most widespread standards for the preparation of the sustainability report (or sustainability reporting), there are the GRI (Global Reporting Initiative standards), recently revisited and expanded in 2021 and which will be adopted compulsorily from 1 January 2023. Therefore, an SME that on a voluntary basis wishes to report its sustainability, already for the 2022 financial year, will be able adopt the GRI standard.

It should be considered that the current EFRAG draft of the ESRS, compared to the GRI  2021, in fact expands the reporting requirements and introduces more stringent and complex concepts (such as, for example, double materiality) with the aim of creating standardized and comparable sustainability information, raising its quality. In this way, information sets will be created with a more rigid structure and with mandatory minimum requirements

It is clear that this will result in a significant effort for the companies involved who will in the future have to equip themselves with processes and a reporting system adequate to publish an integrated document within the time required in order to obtain the certification required by the Directive.

We are not going into, here, the discussion currently underway among those involved in ESG reporting (Standard setters, consultants, large companies, other stakeholders): the main theme of this discussion is the danger - for some it exists, for others it does not - of harnessing thecounting of sustainability in too rigid schemes and boundaries, albeit in favor of comparability, both over time and between the various industries. This, according to some, would place limits to the variety and breadth of information (which the matter itself imposes)

It is sufficient to read some 2021 sustainability reports to understand how the approach taken by organizations up to now, although adopting the same standards (GRI mostly in core mode), is to produce documents with a strong identity, extensive descriptions and insights aimed at highlighting their mission, often not easily comparable to other reports.

A sustainability path for SMEs

To outline a path suitable for SMEs, we can draw inspiration from the methodology adopted by our Partner, EFTILIA Srl STP Benefit, one of the main advisory companies on a national basis, on the subject of sustainability.

The declination of the so-called EFTILIA method for SMEs places the task of undertaking a path aimed at sustainability reporting on the highest governing body of the Organization. It is a method, a roadmap, which includes some steps.

1. Understand the degree of attention and awareness of the SME, through:

• analysis of the current business model with a comparison between the Entrepreneur/Management and the consultants, to arrive at abusiness modeloriented towards ESG sustainability;
• analysis of business processes and collection of existing data regarding risk analysis (preliminary assessment);
• Identification, examination and analysis of the needs of present and future stakeholders (stakeholders engagement) such as workers and collaborators, customers and suppliers and impact on the territory.

1. Definition of the sustainability policy and adaptation of the business model from an ESG perspective

• adoption of ethical principles to guarantee business continuity;
• planning of training and communication for the diffusion of the culture of ESG sustainability, through the training of governance but also of workers and collaborators and effective communication to customers, suppliers, territory and responsible marketing;
• assessment of environmental impacts on the SME's ecosystem;
• risk mapping (risk assessment) in the ESG;
• definition of material topics;
• measurement of impacts with reference to the identified topics (material assessment);
• definition of an ESG Action Plan, which determines, by functional operational steps, the paths aimed at pursuing the ESG objectives inherent in the business model adopted;

1. Reporting sustainability

• inform stakeholders, in compliance with the chosen standard, about its ESG mission and the results achieved;
• explain the objectives and activities undertaken and to be undertaken to achieve the subsequent goals.

What is mentioned in this article is a first analysis of a topic that deserves to be studied in depth, technically studying the regulatory changes that will have the greatest impact on the future of our businesses.

On the blog of our partner EFTILIA we will publish many contributions in this regard, delving into the Method and the applicable roadmap: from the definition of the material ESG topics to be reported to the reporting perimeter up to the actual drafting of the reportort.

However, it is worth anticipating one question right now: it is not necessary to be a large company to undertake a path aimed at bringing out sustainability and your own business model in an ESG perspective. To do this you need to be great entrepreneurs, that is, people capable of grasping and anticipating what will inevitably affect everyone.

Starting a sustainability path today will allow you to implement the regulatory obligation prepared and with a competitive advantage compared to other less sensitive players on the market; by doing so, you will be able to implement those policies sooner and more effectively that will guarantee the continuity and growth of your business over time.