Statement
EFRAG Sustainability Reporting Board Exposure Draft
EFRAG Public Consultation – January 2024 - Questionnaire VSME
ESG-Reporting
Federation of German Industry (BDI)
Status: 31.05.2024
The objective of this ED is to provide a simple reporting tool, that can credibly replace a substantial part of the questionnaires used by business partners (lenders, investors and corporate clients) in requesting ESG data from SMEs and that can support SMEs in monitoring their sustainability performance. While the ED has been built mainly on the basis of questionnaires from business partners, the resulting information is expected toalsobenefitSMEsbyimprovingtheirmanagementofsustainabilityissues and, in this way, contribute to a more sustainable and inclusive economy.
1. Do you agree with this standard setting objective?
Yes
Please explain your answer:
In future, banks and large companies will also increasingly request data from SMEs as part of the CSRD. However, the SMEs covered by voluntary reporting are very heterogeneous in terms of their size or structure. As a result, the extent and type of requests from their business partners or lenders also vary greatly and SMEs are confronted with numerous different requirements for their sustainability information. In order to fulfil these different reporting requirements, SMEs currently have to devote considerable resources to dealing with these requests. In this respect, the BDI welcomes the VSME ED as an instrument that can standardize this flood of different questionnaires to unlisted SMEs.
The VSME ED could harmonize sustainability reporting for SMEs, ensuring better comparability of information and reducing the burden on SMEs. It is very important for SMEs to have a reporting tool with which they can fulfil requests from the downstream value chain regarding sustainability reporting. It is therefore essential that the VSME ED is designed to be practicable and generally accepted by both preparers and users. Above all, the needs of users of SME sustainability information must not be neglected to ensure broad market acceptance. For this acceptance, it is important that the information is consistent with what large companies usually require from their suppliers.
The standard also appears to support SMEs in monitoring and managing their sustainability performance, contributing to the overall goal of a more sustainable economy. For these developments, it is important that obtaining the information does not represent a disproportionate burden for SMEs. Larger SMEs have fewer challenges in applying the standard, but for small SMEs even the basic module is a major challenge. SMEs have fewer resources, so only a simple reporting tool will motivate them to monitor and develop their sustainability goals. As a voluntary standard, the VSME ED needs to
be workable for small businesses to gain real credibility with SMEs, as it will be a new burden and cost in the short term. Furthermore, some SMEs may wish to publish a separate report outside of the annual report. This is because if the sustainability information is part of the management report, it will also be subject to audit by the auditor. Therefore, to make the standard attractive and flexible for SMEs, a reporting company should have the option of presenting the voluntary sustainability information outside of the statutory management report. Other companies may not have the necessary resources to present the sustainability report at the same time as the annual financial statements. A certain degree of flexibility would therefore be desirable.
Finally, the BDI is of the opinion that the VSME ED should represent the upper limit for reporting requirements of business partners. The VSME standard should generally become the starting point for large companies when requesting data from SMEs in their value chain. The LSME ED should be developed on the basis of the VSME ED and at most be supplemented by a limited number of disclosure requirements that are absolutely necessary to comply with the CSRD provisions. This could facilitate sustainability reporting for SMEs while avoiding the complexity of the provisions in the LSME value chain cap. At the same time, large companies must be able to fulfil their own reporting obligations.
2. Module based approach
Do you agree that these alternatives are appropriate to deal with the diversified undertakings in scope (both number of employees and economic sectors) in the context of the objective as stated in Q1 of this questionnaire?
Yes
Please explain your answer:
Overall, the module-based approach of the voluntary standard appears appropriate, as it allows a large number of heterogeneous companies to be offered suitable reporting. The approach represents a good basis for SMEs to start with their sustainability reporting and can thus contribute to the objectives stated in Q1.
SMEs can start their ESG reporting at an entry level in the form of the basic module to fulfil the specific needs of their stakeholders and at the same time have the opportunity to continuously expand it. The different options for individual reporting appear to be useful for the acceptance of the sustainability standard. It is essential that the great flexibility granted by the modular approach and the options contained in
paragraphs 11 and 19 is also guaranteed in practice in order to facilitate and promote reporting by SMEs as much as possible.
As mentioned in Q1, there appear to be large differences between the sustainability information needs of different SME business partners. The basic module is widely accepted and considered helpful, but many business partners require different additional sustainability information. Further investigation into the needs of users of sustainability information for SMEs is therefore useful and necessary. Within the business partner module, a differentiation could be made between the various user needs. Banks need sustainability information to support them in their lending decisions (assessment of the credit risk of a particular SME). Corporate customers, on the other hand, need relevant information to assess risks along their value chains and to check compliance with environmental and social standards. The focus here is often on the product level and not on company-related sustainability information such as energy consumption or greenhouse gas emissions, which are of more interest from a bank's perspective.
The Basic Module is written in simplified language to make it easily understandable for micro and SME undertakings, while ensuring clarity in terms defined by the ESRS with 12 disclosures to be reported. There is no need for a materiality analysis. Certain disclosures are required only if the undertaking considers them "applicable".
3. Basic Module
Do you agree that the Basic Module is proportionate, understandable (in terms of language), and has a reasonably complete set of disclosures to be used as a starting point?
Yes
Please explain your answer:
It makes sense to provide a basic module that is as comprehensible and manageable as possible in order to encourage SMEs to implement practicable sustainability reporting at a meaningful basic level that is relevant to their business partners. This will enable SMEs to prepare information without external support. However, the complexity and time required to apply the basic module still depend heavily on the prior knowledge and experience of the company in question. Overall, the basic module in its current form is a suitable starting point for sustainability reporting by SMEs. However, further explanations and examples (e.g., B 2 or B 10), more specific wording (e.g., B 7), and clearer statements (e.g., para. 69) should be considered in several
places so that SMEs can benefit from an even greater reduction in the complexity of the basic module. The text is sometimes very confusing due to various references. Different designations of the individual information topics also mean that it is not clear in which section the relevant information can be found (see the designations module, basic module and basic module).
Therefore, even though the basic module as a whole is a suitable approach for ESG reporting of SMEs, EFRAG should consider further possible changes to take into account the specific characteristics of SMEs as well as their imposed legal restrictions (for example regarding the storage of sensitive data or access to data of rented buildings). Data points that are not part of ESRS Set 1 (e.g., B 10 (a)) should not be included in the VSME.
The Narrative-Policies, Actions and Targets (PAT) Module is suggested in addition to disclosures in the Basic Module, to undertakings that have formalized and implemented PAT. Materiality analysis is required to determine and disclose the sustainability matters that which sustainability matters are relevant for the undertaking.
4. Narrative-PAT Module
Do you agree with the content of and approach to the Narrative-PAT Module, which is reserved to undertakings that have Policies,Actions and Targets (PAT) in place?
Please explain your answer:
The PAT module could represent the greatest challenge for SMEs, while the benefits for banks or large companies appear rather questionable. It is likely that only larger SMEs will report on the PAT module in its entirety. For these, the module offers a good basis, as long as some adjustments are made to it. In some places, the requirements for the content of an SME's narrative PATs are too detailed. At the same time, SMEs are not given any guidance on how to prepare such a report based on the criteria.
For smaller SMEs, the materiality analysis could be too complex and time-consuming anyway. For larger SMEs, on the other hand, it could be a necessary basis for their sustainability report and a source for identifying potential for improvement within the company. It can also provide valuable information such as sustainability risks and how to monitor and manage them for stakeholders, so that risks can be better
assessed by banks or large companies when doing business with this SME. However, additional guidance is needed for SMEs to carry out the materiality analysis. The materiality analysis required under the PAT module should be explained as simply as possible and assessed based on the information provided by each data point in the PAT module (materiality should be assessed based on the information provided by each disclosure).
TheBusinessPartners(BP)Modulesetsdatapointstobereportedinaddition to disclosures in the Basic Module, which are likely to be included in data requests from lenders, investors and corporate clients of the undertaking. Materiality analysis is required, in order to determine and disclose the sustainability matters that are relevant for the undertaking.
5. Business Partners (BP) Module
Do you agree with the content and approach to the Business Partners (BP) Module as a replacement and standardization of information requests by business partners, being a proportionate but complete set of ESG disclosures?
Please explain your answer:
In principle, the BP module is to be welcomed, as it could likely be accepted by large companies and banks as a suitable supplement to the basic module. Nevertheless, in its current form, it appears too complex and time-consuming for SMEs to be able to use it without external help. The balance between the need to respond appropriately to requests from business partners and the need to require only simplified and manageable data from SMEs has not yet been found. The BP 1-BP 11 disclosure requirements do not necessarily address the need for sustainability information from SME counterparties that need to assess credit risk or risks along the value chain. At the same time, these disclosure requirements can be very burdensome for SMEs. Therefore, a thorough review of the information needs of users should be carried out again, taking into account the burden on SMEs.
In order to ensure the proportionality of the VSME standard, the BP module should by no means be turned into a kind of mandatory add-on module to the basic module, should not impose additional obligations on SMEs and should allow for even greater synthesis. The flexibility offered by paragraphs 11 and 19 (adoption of the basic module with topic-specific extensions from the PAT module or the BP module) should be further emphasized. The option to report only on climate
related policies, for example, in accordance with paragraphs 11 and 19, allows SMEs to improve and expand their reporting where relevant and necessary. A better explanation of this option and how it can be used properly would be of great value for SMEs that do not intend to report the full disclosures of the PAT module and the BP module.
6. Sector ESRS for KMU
Sustainability matters may be highly dependent on the specificities of the relevant sector(s) that the reporting undertaking operates in.
Please select your recommended course of action for standard setting and guidance purposes on this matter.
Undertakings applying VSME ED should apply on a voluntary basis sector specific guidelines and disclosures designed for non-listed SMEs, to be issued by EFRAG as a non-authoritative annex to the future sector-ESRS.
Please provide your comments, if any:
Sector-specific guidance for SMEs developed by EFRAG would be very helpful. A short, separate VSME sector standard issued by EFRAG as a non-authoritative annex to the future sector specific ESRS (option 3) seems most appropriate for this purpose. However, it is difficult to give a definitive answer to this question as long as there is no clarity on the sector specific ESRS standards and their structure.
The guidelines do not need to differentiate between listed and unlisted SMEs. There are only a small number of listed SMEs in Germany, so developing a sector-specific guideline only for listed SMEs could lead to a disproportionate effort. The SME-specific guidelines should therefore focus on the vast majority of unlisted SMEs. The sectorspecific standards for large companies will be a helpful source for further guidance, but should be greatly shortened for SMEs, as working with the sector standards of large companies would be too demanding and too time and capacity consuming for SMEs. Guidelines that are more specifically tailored to the particular business processes of heterogeneous SMEs would be helpful to fulfil the sustainability information required by users.
7. Do you agree with the proposed Principles for the preparation of the sustainability report in VSME ED?
Principles for the preparation of the sustainability report (Basic Module, Narrative-PAT Module, Business Partners Module
a) Complying with this Standard (paragraphs 9 and 10 in VSME ED)
b) Preparation on a consolidated basis (paragraph 12 in VSME ED)
c) Timing and location of the Sustainability Report (paragraphs 13, 14 and 15 in VSME ED)
d) Classified and sensitive information, and information on intellectual property, know-how or results of innovation (paragraph 16 in VSME ED)
8. Preparation on a consolidated basis.
Should be formulated less restrictively, as the wording does not sufficiently emphasize the important fact that the time and place are flexible. Publication (time and place) of the VMSE sustainability report is voluntary. The link to the annual financial statements could be inappropriate, as not all SMEs publish these.
The VSME ED recommends the undertakings that are parent of small and medium sized groups to prepare consolidated reports for their sustainability statement, i.e., to include data of their subsidiary/ies in the report.
Do you agree with this approach?
Yes
Please explain your answer:
A group-wide sustainability report provides more useful information when SMEs are organized as a group. In view of the current discussion on the underlying scope of consolidation for sustainability reporting in accordance with ESRS Set 1, it is important to include additional guidance on the understanding of the 'consolidated basis' in the VSME. The understanding should be consistent with ESRS Set 1.
Since non listed SMEs are outside the scope of CSRD, the subsidiary exemption (see CSRDArt. 19a9) does not apply to them. One proposal that
EFRAG could consider is to include such exemption in VSME ED, as a further incentive to apply consolidated sustainability reporting.
9. Would you consider the inclusion of a subsidiary exemption to VSME ED as pertinent and feasible?
Yes
10. Additional information component including sectors (VSME ED par. 11, applicable to all the modules).
Depending on the type of activities carried out, the inclusion of additional information about issues that are common to the undertaking’s sector supports the provision of relevant, faithful, comparable, understandable and verifiable information. While acknowledging the difficulties that this requirement may raise for SMEs, the inclusion of this additional dimension was considered an important element of VSME ED to fulfil in particularsector specific disclosures.
Do you agree with this approach?
No
Please explain your answer:
Additional sector-specific sustainability information is useful, but the conceptual approach to this aspect in the VSME ED is not yet convincing. Overall, the current wording does not make clear what is expected of SMEs to report in accordance with the requirements of the VSME.
11. Do you agree with the approach EFRAG has taken on the Value Chain Cap?
No
12. Are you willing to provide detailed feedback based on Annex 3?
No
Please explain your answer in brief.
The BDI does not support the approach taken by EFRAG to assess the value chain cap and trickle-down effect in Annex 3, implying that there
is 'no undue impact' of trickle-down of requirements from ESRS Set 1 as all information has to be provided for other purposes anyway. This seems to neglect the enormous burden that the trickle-down effect imposes on SMEs. The specification of an abbreviated standard to support SMEs is very useful for the reporting fulfilment of large companies. If further details or datapoints are needed by the users of the report that are outside the scope of consideration for the VSMEs, further agreement should be done with the specific user of the sustainability report. This could be included to it as an attachment for only the specific user.
13. Please provide other comments on the value chain cap, if any.
Finally, we would like to emphasize once again the importance of market acceptance of the VSME among banks and large companies. Only if users accept the VSME ED as a standard for sustainability information from SMEs will it effectively reduce the information requirements for SMEs and lead to a de facto limitation of requests to the value chain. However, we believe it is necessary to consider other options to ensure that the VSME is also seen as a legally binding upper limit for the value chain.
About BDI
The Federation of German Industries (BDI) communicates German industries’ interests to the political authorities concerned. She offers strong support for companies in global competition. The BDI has access to a widespread network both within Germany and Europe, to all the important markets and to international organizations. The BDI accompanies the capturing of international markets politically. Also, she offers information and politico-economic guidance on all issues relevant to industries. The BDI is the leading organization of German industries and related service providers. She represents 40 inter-trade organizations and more than 100.000 companies with their approximately 8 million employees. Membership is optional. 15 federal representations are advocating industries’ interests on a regional level.
Imprint
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www.bdi.eu T: +49 30 2028-0
Lobby register number: R000534
Contact
Julian Winkler
Tax and Financial Policy Officer
Telephone: +49 15151840811
j.winkler@bdi.eu
BDI document number: D 1964