Introduction to the Voluntary Standards for Non-Listed SMEs (‘VSME’)

The Voluntary Standards for Non-Listed SMEs (VSME) framework was developed by EFRAG with non-listed SMEs in mind, specifically, companies with fewer than 250 employees that are not listed on an EU-regulated market. These companies fall outside the scope of the Corporate Sustainability Reporting Directive (CSRD).

The objective of the VSME framework is to provide a standardised approach for voluntary sustainability reporting across the EU. This allows SMEs to benefit from ESG disclosures and improve their internal management of sustainability risks in a manner proportionate to their size and adaptable to their level of ambition.

With the release of the Omnibus Proposal, which significantly reduces the scope of the CSRD, these standards have gained renewed interest. The European Commission has recommended the VSME framework as the preferred approach for companies that will no longer be subject to mandatory reporting under the reformed CSRD. However, this move has faced criticism, as some experts argue that the LSME standards may be better suited for the task, a topic we explored in a separate article.

Why Voluntary Reporting?

We recommend voluntary sustainability reporting for companies that:

• Seek a competitive advantage, such as improved access to financing, enhanced reputation, better risk management, or cost savings, through sustainable business improvements; or
• Are already required to report sustainability information through their business partners and/or investors (under CSRD or SFDR) and want to strategically leverage the data they gather for these disclosures.

We previously wrote about the concept of "killing two birds with one dataset", leveraging SFDR data for CSRD disclosures and vice versa. The VSME framework simplifies this process further, as it intentionally overlaps with both regulatory frameworks. Our tool is designed to collect both Principal Adverse Impact (‘PAI’) and VSME indicators, reducing redundant data submissions and ensuring methodological consistency.

The VSME framework consists of three separate modules:

Basic Module

This module establishes the minimum standards for voluntary sustainability reporting. It does not require a Double Materiality Assessment (‘DMA’), meaning that companies disclose the listed indicators regardless of their specific relevance. While this simplifies reporting, it also has drawbacks, companies derive the most value from ESG reporting when they understand the financial implications of sustainability factors and vice versa. Without this understanding, businesses may struggle to prioritise actions effectively and allocate resources wisely.

The indicators in the Basic Module are largely identical to those found in the PAI Indicators Framework under the SFDR, with some exceptions and additions.

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Comprehensive Module

This module builds upon the Basic Module rather than serving as an alternative. It provides greater flexibility and a more exhaustive approach to reporting, incorporating corporate strategy and a thorough assessment of the company’s impacts, risks, and opportunities (‘IROs’). The company may report only on aspects it deems material and link them to a tailored action plan suited to its business context.

The Comprehensive Module requires more effort, particularly in value chain and climate risk assessments, which often necessitate external consultancy. However, it remains significantly simpler than the European Sustainability Reporting Standards (ESRS) under the CSRD. It also includes a streamlined version of the DMA required under the CSRD. As a result, this module is not only beneficial for sustainability objectives but also supports value creation through ESG performance. Despite the higher initial investment, we recommend this module for companies aiming to maximise the strategic benefits of their ESG initiatives.

The additional indicators in this module primarily consist of narrative data points, covering descriptions of policies, initiatives, and climate transition plans, as well as sustainability-related business model considerations, market trends, and value chain impacts. These disclosures align closely with the aggregated responses required of financial entities under the periodic and prospectus disclosures for Article 8 and 9 funds under the SFDR.

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