VSME Practical Guide and Competitive Double Materiality© Forethinking
Authors: Gennaro Durante, Claudio Rosito, Roberta Matteo
Introduction
With the entry into force of the Corporate Sustainability Reporting Directive (CSRD), companies, including SMEs, are faced with the need to adopt a structured and transparent approach to sustainability reporting.
In reality, the obligation exists for companies with more than 250 employees or more than 40 million in sales, however, there is a new economic and social scenario that presents risks and opportunities for all.
The reference standard for large companies is the ESRS Regulation of July 31, 2023, at the same time the European Community has realized the importance of also involving small and medium-sized enterprises (SMEs) in the transition to a more sustainable economy. For this reason, specific guidelines have been developed to help SMEs integrate sustainability into their operations on a voluntary basis; published by EFRAG on 12/17/24 the VSME (Voluntary standard for non-listed micro-small- and medium-sized enterprises) standards will soon be adopted by the same European Community that commissioned them.
Why is sustainability important for SMEs?
- Market Access: Companies that demonstrate a commitment to sustainability are increasingly valued by consumers and investors.
- Innovation: Sustainability generates traction for innovation and the development of new products and services.
- Cost reduction: Adopting sustainable practices can lead to cost reduction, such as through energy efficiency or sustainable resource management.
- Improved reputation: A sustainable company enjoys a better reputation and can attract talent.
The VSME Standard for SMEs.
The European Financial Reporting Advisory Group (EFRAG) has played a key role in the development of the Voluntary Sustainability Reporting Standard for SMEs (VSME), which are voluntary sustainability reporting standards designed specifically for small and medium-sized enterprises (SMEs). EFRAG is a technical body that advises the European Commission on accounting and financial reporting. Using its expertise, EFRAG has developed a sustainability reporting framework that, while simpler than the ESRS (European Sustainability Reporting Standards) intended for large companies, is nonetheless aligned with the general principles of sustainability reporting.
What are the main features of the VSME standard standards
- Flexibility: The VSME standards are designed to be adaptable to the different sizes and complexities of SMEs.
- Gradual: SMEs can start with a basic level of detail and then progressively deepen their reporting.
- Aligned with ESRS: VSME standards are consistent with ESRS, making it easier to move to more detailed standards in the future.
- Voluntary: Participation in VSME standards is voluntary, but can be a competitive advantage for SMEs.
What are the benefits of VSME standards for SMEs?
- Transparency: It enables SMEs to clearly and transparently communicate their sustainable practices to stakeholders such as customers, investors and suppliers.
- Improved reputation: A company that adopts VSME standards demonstrates a commitment to sustainability by improving its image.
- Access to financing: More and more financial institutions and investors are considering ESG (environmental, social and governance) factors when assessing credit risk.
- Alignment with future regulations: Adopting VSME standards helps SMEs prepare for future sustainability reporting requirements.
VSME standards are a valuable tool for SMEs wishing to embark on a sustainability journey. Through their flexibility and alignment with general sustainability reporting principles, VSME standards enable SMEs to effectively communicate their commitment to a more sustainable future.
EFRAG Guide to VSME Standards
During 2024, the European Financial Reporting Advisory Group (EFRAG) launched a public consultation, which ended on May 21, 2024, resulting in two documents on sustainability reporting standards for listed SMEs (to come into force by delegated act in January 2026) and voluntary regulatory standards for unlisted SMEs. The outcome of the latter working group is a regulatory reference (VSME Standard) drafted consistent with the ESRS for large companies and including requirements proportionate to the size of SMEs.
Unlike the ESRS for large enterprises, the VSME Standard does not have legal force, but they are a reference for the adoption of a voluntary and “referenced” approach for stakeholders of small and medium-sized enterprises, particularly customers and banks that are obliged to integrate sustainability principles into credit assessment criteria.
What do these VSME standard guidelines contain?
The Sustainability Guidelines for SMEs offer a number of practical tools and guidance, including:
- Setting sustainability goals: How to set realistic and measurable goals in line with business strategy.
- Identifying environmental and social impacts: How to assess the impacts of your business on the environment and society.
- Choosing sustainability indicators: Which indicators to use to monitor progress toward goals.
- Integrating sustainability into business processes: How to integrate sustainability into the day-to-day operations of the company.
- Communicating sustainability: How to effectively communicate one’s sustainability actions and achievements.
The Modules of the VSME Standard
The VSME standard includes a choice of two Reporting Modules:
“Basic” Module; includes reference to basic metrics related to all environmental, social and governance issues. With the Basic Module, the company basically commits to reporting on its conduct in relation to ESG issues and its policy, initiatives and investments for the future towards a more sustainable economy.
“Comprehensive” Module; includes, in addition, to the information in the Basic Module, more timely data collection, which is likely to be included in requests from the company’s lenders, investors and corporate clients.
Forethinking, VSME standards and dual materiality
Forethinking participated in the EFRAG VSME Consultation Group, which commented on voluntary sustainability reporting for small and medium-sized enterprises whose securities are not listed on the stock exchange. The working group’s experience enabled Forethinking to develop its own guidance model for SMEs that also includes dual materiality analysis and an analysis of the company’s competitive landscape.
The VSME standards do not mandate the analysis of “Double Materiality,” however, the latter, we believe, is one of the central aspects of the process of developing a new awareness of the risks and opportunities of the new sustainability paradigm.
Double Materiality is a pillar for identifying and managing a company’s economic, environmental and social impacts. Understanding how to effectively conduct this analysis and recognizing its specific benefits can make all the difference for SMEs that want to stand out in the marketplace. Dual materiality is based on two closely related dimensions. On the one hand, it considers financial materiality (relevance), that is, how environmental, social, and governance (ESG) factors affect economic performance and business resilience. On the other, it analyzes impact materiality (relevance), i.e., the effects that corporate activities have on the environment, society, and stakeholders. This integrated view enables the mapping of risks and opportunities, improving strategic management and effective decision-making.
Double materiality analysis is developed through several well-defined steps. First, it is essential to analyze the context in which the company operates, considering the regulatory landscape, industry dynamics, and global trends, such as climate change and technological evolution. Next comes the identification of impacts, risks and opportunities. This activity requires structured data collection, often through tools proper to the “toolbox” of strategic analysis, integrating the information with that already present in the company’s management systems.
At this stage it is possible to define a threshold of significance, not only in line with international standards, to focus attention on the most relevant aspects for the company in terms of market opportunities and the improvement of the relationship with its stakeholders (customers, employees, banks, suppliers and other partners).
The benefits of double materiality for SMEs
The benefits of implementing a double materiality analysis are many. For SMEs, this activity can become a real driver for sustainability, helping to identify areas on which to focus efforts and resources to maximize positive impact. Aligning with the Sustainable Development Goals (SDGs) and responding effectively to stakeholder expectations can accelerate the adoption of concrete and valuable initiatives.
An additional benefit relates to attracting capital. Companies that demonstrate commitment to sustainability and transparent reporting are more likely to access concessional funds and green financial instruments. In addition, dual materiality analysis improves risk management, enabling SMEs to anticipate and mitigate potentially damaging situations in a timely manner, such as rising energy costs or regulatory penalties. This strategic approach increases business resilience, making the company more prepared to deal with crises and market changes.
In conclusion, double materiality analysis should not only be seen as a regulatory requirement. It is a unique opportunity for SMEs to stand out in the competitive landscape, innovate and build stronger relationships with stakeholders.
Investing in it means not only complying with regulations, but also laying the foundation for a sustainable and successful future.
The Competitive Double Materiality Model © Forethinking
Forethinking, thanks to its expertise in strategy, has chosen to create a new reference model for SMEs including VSME standards (Basic and Comprehensive Modules) and the Competitive Double Materiality © Module that includes the assessment of the real impact of sustainable innovation strategies of SMEs in terms of competitive advantage and development.
The key points of the Competitive Double Materiality © analysis process are:
- FSINDEX© Forethinking assessment to identify strengths and weaknesses of SME management in relation to E (Environment), S (Social), G (Governance) and Sustainable Innovation.
- Definition of SME’s competitive factors; analysis of the company’s current competitive advantages and market trends
- Stakeholder matrix; this is a matrix built on Cartesian axes that relates the level of stakeholder interest and their ability to influence the company.
- Double materiality analysis
Conclusions
The CSRD obligation affects all large, listed and non-listed companies with more than 250 employees or a turnover of more than 50 million euros, while for small and medium-sized companies there are many reasons why they must also integrate sustainability principles on a voluntary basis:
- Banking; banks are obliged by European legislation to integrate sustainability principles in their credit assessment of companies, new lines of financing are dedicated only to environmental transition investments.
- Customer relations; all large distribution and/or manufacturing companies demand sustainability data and commitments from suppliers, not integrating the “language” of sustainability into one’s strategy can result in the risk of exclusion from entire production chains.
- Competitive advantage; understanding the market opportunities of sustainability generates a natural pull to innovation for new market segments. Methodical dual materiality analysis ensures the development of a strategic plan useful for corporate competitiveness.
The CSRD requirement relates to the information that companies must report on ESG issues, but while recognizing the importance of the CSRD reporting obligation or commitment, companies should go beyond simply reporting data. The call is for companies to integrate strategic assessments within their operations in order to promote sustainable innovation.
In other words:
CSRD forces companies to talk about sustainability, but the real challenge is to make sustainability an integral part of business strategy, driving innovation and sustainable growth.
Forethinking Panel “SMEs – ESRS & SUSTAINABLE INNOVATION”
We have created the “SME – ESRS & SUSTAINABLE INNOVATION” Panel, a utility program for companies with the goal, in addition to reducing the number of uncoordinated inquiries about sustainability, of producing the first sustainability report according to the VSME ESG EFRAG standard for unlisted SMEs.
The panel is an initiative of Forethinking and the working group promoting the Short Master’s Program “THE RESPONSIBLE BUSINESS: NEW TOOLS AND COMPETENCES FOR SUSTAINABILITY” by the Department of Economics, Management and Business Law, University of Studies “A. Moro” Bari and Forethinking Srl Società Benefit.
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