Application of reporting obligations for sustainability in SMEs

For many companies, their stakeholders and the interested public, the 1920s will be remembered as a decade of greater transparency on corporate sustainability. The new European regulations on reporting obligations also place an obligation on small and medium-sized enterprises. The regulations with their more than 200-page annexes can quickly become overwhelming. We would like to provide some tips to help you get started and encourage you to see the new regulations as an opportunity. As an opportunity to show how far many SMEs have already come in terms of sustainability aspects in accordance with uniform standards. As an opportunity to use the process of mandatory reporting to develop their own sustainability strategy.

Note: All of the following explanations refer to the report published at the end of the Overview table legal status.

Contents

• Introduction to the NFRD, CSRD and EU taxonomy
• Tips for SMEs on the CSRD reporting obligations for sustainability
• Tips for SMEs on the taxonomy reporting obligations for sustainability
• CSRD and EU taxonomy at a glance

Introduction to the NFRD, CSRD and EU taxonomy

According to current legislation, only a few hundred companies in Germany are subject to sustainability reporting requirements. The User growth of the German Sustainability Code shows impressively, however, that many hundreds of other companies, especially SMEs, voluntarily prepare sustainability reports. For a better understanding of the new reporting requirements for sustainability in SMEs, we will differentiate between the old regulations (NFRD) and the new requirements with the CSRD and taxonomy below.

• NFRD, Non-Financial Reporting Directive: The EU regulation transposed into the German Commercial Code in 2017 regulated mandatory non-financial reporting on sustainability issues for the first time. The obligation only applies to a very limited number of large, capital market-oriented companies as well as banks and insurance companies. The NFRD will continue to apply until the CSRD is transposed into German law.
• CSRD, Corporate Sustainability Reporting DirectiveCSRD came into force in January 2023 and was to be transposed into the German Commercial Code by July 2024. This implementation had not yet taken place by 4 February 2025. So far, only the Synopsis from July 2024 on integration into German law before. The new reporting obligation replaces the provisions of the NFRD. The CSRD also extends the reporting obligations for sustainability to SMEs. There is a gradual introduction process, which is accompanied by detailed additional information in the Overview table is presented. Sustainability reporting obligations can arise both directly and indirectly for SMEs. We describe our recommendations and tips on this in the following section.
  The CSRD includes 3 different reporting standards (links and information in the Overview table):
  • The ESRS (European Sustainability Reporting Standards) represent the reporting standard for all large, reportable companies.
  • The LSME-ESRS (Listed Small & Medium Enterprises - ESRS) represent the reporting standard for all capital market-orientated small and medium-sized companies.
  • The VSME-ESRS (Voluntary Sustainability Reporting Standard for Non-Listed Small & Medium Enterprises) represent a reporting standard for voluntary sustainability reporting by small and medium-sized enterprises.
• EU taxonomy: The EU taxonomy came into force in January 2022 and is in a continuous development process, which is described in detail with additional information in the Overview table is presented. The taxonomy creates a standardised classification system for environmentally sustainable economic activities. Here too, small and medium-sized enterprises may be subject to both direct and indirect reporting obligations on sustainability issues. We describe our recommendations and tips on this in the following section.

Tips for SMEs on the CSRD reporting obligations for sustainability

Small and medium-sized enterprises can be affected both directly and indirectly by the CSRD reporting obligations for sustainability. The Direct reporting obligation results from the size indicators. If a company exceeds 2 out of 3 criteria (€25 million balance sheet total, €50 million turnover, 250 employees), it must supplement its management report with sustainability information for the 2025 reporting year from 2026. Early reporting for companies already subject to the NFRD has been cancelled due to the lack of integration of the CSRD into German law. From 2027, the obligation will apply if the company falls below the size criteria but is capital market-oriented (see overview table). The Indirect reporting obligation results from the requirements of business partners. These arise when a business partner is itself subject to CSRD reporting requirements and needs the information to analyse the value chain. Alternatively, business partners such as banks may also be reliant on CSRD data points due to other regulations. The situation is therefore similar to the indirect obligations for SMEs under supply chain legislation (Further information can be found here). In the following, some steps are explained to approach the direct and indirect obligation.

8 steps for SMEs towards the CSRD reporting obligation

The aim of the following steps is to use the year 2025 as a learning year in order to acquire competences and test specified CSRD methods. Furthermore, the first steps serve to identify the actual need for external support. At the end of the learning year, the long-term organisational anchoring is then developed in line with the company's own organisational structure.

• Step 1: The start of the learning year (year 2025) with the test reporting year 2024. We recommend the formation of at least 3 working teams on the topics of environment, social affairs and governance.
• Step 2: Each work team familiarises itself with the respective ESRS specifications (European Sustainability Reporting Standards). All teams in ESRS 1 and 2, the environmental team in ESRS E1-5, those responsible for social matters in ESRS S1 - 4 and those responsible for governance in ESRS G1.
• Step 3: The level of knowledge in all work teams is evaluated. This can be done with a short survey based on the sub-topics of the ESRS or in a small workshop with skills mapping. The evaluation serves to identify further training needs and the targeted need for external support.
• Step 4: Limits of analysis are defined for the learning year, e.g. "We practise a double materiality analysis along the entire value chain of our 2 core business areas / main products. We initially limit ourselves to the requirements from ESRS E1 (Climate protection and climate change), S1 (Own employees), S2 (Employees in value creation) and G1 (Governance).". The limits are set in order to focus on testing the methods specified by the reporting standards.
• Step 5: The team carries out an initial materiality analysis including the necessary data collection within the defined analysis boundaries.
• Step 6: All work teams jointly create a comprehensive overview of lessons learnt (e.g. on a digital whiteboard). Based on the overview, the processes and procedures are derived that are necessary for long-term fulfilment of the CSRD requirements without regular external support.
• Step 7: The organisational anchoring, including responsibilities, is defined (e.g. appointment of a Head of Sustainability, responsibilities in all areas - purchasing, controlling, etc., process of data and content consolidation).
• Step 8: The second learning year (2026) begins with the first CSRD report in 2025, in which the entire process is carried out for the first time. 2026 can still be regarded as a learning year, because the information provided in ESRS 1 Appendix C The disclosure requirements described above provide for various simplifications, particularly for companies with fewer than 750 employees.

With steps 1 to 8, the years 2025 and 2026 can be used as learning years. Such a learning process may seem long, but our project practice has shown that this approach places less strain on the company's human resources.

In further blog posts over the coming months, we will go into the content requirements of the CSRD in more detail, step by step.

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5 steps for companies not subject to CSRD towards the indirect reporting obligation

As an SME, there may also be an indirect obligation to report on sustainability via business partners. This may be the case, for example, if companies subject to CSRD are among their own customers. The following steps are intended to help you recognise indirect reporting obligations at an early stage.

• Step 1: An internal working team is formed, consisting of employees interested in sustainability and employees from customer-related areas.
• Step 2: The existing customer base is searched for companies that fulfil at least 2 of the 3 criteria: more than 250 employees, more than €50 million in turnover, more than €25 million in total assets. All resulting customers are sorted according to their relevance for annual turnover.
• Step 3: Representatives of the work team proactively enter into dialogue with the highest-ranking customers from step 2. The aim of the dialogue is to find out what requirements the business partners place on their own company based on their CSRD obligation.
• Step 4: (This step is only necessary if a form of external financing, e.g. from credit banks, investors, etc., is used). In this case, dialogue should also be proactively sought with the providers of capital. The background to this is that it is highly likely that they all fall under regulatory requirements for sustainability reporting.
• Step 5: If no satisfactory information on external requirements is available, but customers were identified in step 2 or investors in step 4, then it is advisable to start by creating a data room. We recommend a Data room according to the structure of the ESRS for capital market-oriented, small and medium-sized enterprises (LSME-ESRS).

Why is the Recommendation for the data collection of non-reporting SMEs standards for capital market-orientated, reporting SMEs? (In the following, we look at non-reporting SMEs in the value chain of a reporting company from the perspective of a reporting company).

• All general basic information for companies subject to reporting requirements is governed by the ESRS 1 standard. This also sets out the requirements for information by SMEs in the upstream and downstream value chain.
• In the first 3 years of a reporting obligation, the obligated company does not yet have to request any information from the SMEs in the value chain. The obligated company can "limit itself to internally available information, such as data already available to the company and publicly available information" (according to ESRS 1, 10.2, paragraph 133).
• From the 4th year of the reporting obligation, the obligated company must obtain information from SMEs if they are a significant part of the value chain. However, the scope of the information to be obtained is limited to the reporting standard for capital market-oriented, small and medium-sized enterprises (LSME-ESRS) is limited. In ESRS 1, 10.2, margin number 135 "In this context, the information required under the ESRS to be obtained by SMEs in the company's upstream and/or downstream value chain does not go beyond the content of the future ESRS for listed SMEs."

Tips for SMEs on the taxonomy reporting obligations for sustainability

As with the CSRD reporting obligations, the EU taxonomy can also result in a direct and an indirect reporting obligation. The Direct commitment arises if an SME is subject to the reporting obligations for sustainability on the basis of the CSRD (see overview table). The Indirect reporting obligation is to be expected if the company uses a form of organised external financing (credit banks, investors, etc.). Some steps are explained below to approach the direct and indirect obligation.

For a better understanding of the procedure, here are two basic terms in connection with the EU Taxonomy Regulation:

• Taxonomy-compliant economic activityAll economic activities specified in the Taxonomy Regulation are considered taxonomy-eligible.
• Taxonomy-compliant economic activityAll taxonomy-compliant economic activities that fulfil the technical assessment criteria for an environmental objective and do not "harm" any other environmental objective are considered taxonomy-compliant. With the distinction between compliant and non-compliant, for example, the turnover in connection with an economic activity can be divided into a taxonomy-compliant and a non-taxonomy-compliant amount. In simple terms, this results in the turnover with a "sustainable" (taxonomy-compliant) business activity.

5 steps for SMEs subject to CSRD towards the taxonomy reporting obligation

The following steps show how a CSRD-compliant medium-sized company combines the CSRD and taxonomy process from the outset. The content of the steps can be adopted by the environmental team from the CSRD steps.

• Step 1: If not already available, determine the corresponding NACE codes for all activities performed (= Coding of economic activities by the European statistical authorities). Our experience shows that the chambers of industry and commerce are a great help in determining this.
• Step 2: Search the taxonomy specifications for technical assessment criteria by the respective NACE codes. The technical assessment criteria for the 6 environmental objectives of the taxonomy can be found in the respective annexes of the Taxonomy Regulation (see overview table). If there are positive hits, this means that the activity carried out is taxonomy-capable.
• Step 3: If step 2 produces no hits, the process ends at this point. This means that no activity carried out is taxonomy-compliant and therefore no further check for taxonomy conformity needs to be carried out.
• Step 4: If step 2 leads to a result, the taxonomy conformity must now be checked for the respective activity. From this point onwards, we recommend linking to the CSRD work team process. Start by carrying out the entire taxonomy check with one activity in order to test the process. We recommend using the Taxonomy Compass. For conformity, it is first checked whether a significant contribution is made to an environmental objective. It is then checked whether the activity has a significant negative impact on another environmental objective. Finally, it is checked whether the activity is compatible with the minimum social standards defined in the taxonomy.
• Step 5: Three key figures are determined for all taxonomy-compliant activities - share of turnover, operating expenditure and investments of the company.

2 Steps towards indirect taxonomy reporting for small and medium-sized enterprises not subject to the taxonomy

Our consulting assignments have shown that indirect taxonomy reporting obligations arise in particular from enquiries or requirements from investors. In contrast, enquiries from customers and suppliers about specific taxonomy figures are rather rare. However, this may change from 2024 and especially from 2025, when the EU taxonomy is extended to all companies subject to CSRD. The following steps are intended to help recognise future requirements at an early stage and approach the topic.

• Step 1: Carry out the taxonomy eligibility check as described in steps 1 and 2 for companies subject to taxonomy.
• Step 2: If the steps lead to a positive result and one or more of the activities carried out are taxonomy-compliant, we recommend a proactive dialogue with your own investors. The aim of the dialogue is to find out the requirements of the investors at an early stage. If the investors require the key business figures for taxonomy-compliant activities, please follow steps 4 and 5 for companies subject to taxonomy.

CSRD and EU taxonomy at a glance

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